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 QUARTER ENDED MARCH 31, 1995
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 (I.R.S. Employer Identification No.)
incorporation or organization)
2030 DOW CENTER, MIDLAND, MICHIGAN 48674
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 517-636-1000
Not applicable
(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. Yes __X__ No ____
Outstanding at
Class March 31, 1995
----------------------------- ------------------
Common Stock, $2.50 par value 275,634,060 shares
1
THE DOW CHEMICAL COMPANY
Table of Contents
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Commitments and Contingent Liabilities 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
First Quarter Earnings Announcement 10
Acquisitions and Divestitures 12
Changes in Financial Condition 13
Results of Operations
First Quarter 1995 vs First Quarter 1994 14
Part II - Other Information
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
2
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
<CAPTION>
Three Months Ended
In millions, except for share amounts (Unaudited) Mar. 31, 1995 Mar. 31, 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Net Sales $5,962 $4,541
- ------------------------------------------------------------------------------------------------------------------------
Operating Costs and Expenses Cost of sales 3,574 2,989
Insurance and finance company
operations, pretax income (13) (27)
Research and development expenses 324 305
Promotion and advertising expenses 161 148
Selling and administrative expenses 670 558
-------------------------------------------------------------------------------------
Amortization of intangibles 92 41
- ------------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 4,808 4,014
- ------------------------------------------------------------------------------------------------------------------------
Operating Income 1,154 527
- ------------------------------------------------------------------------------------------------------------------------
Other Income (Expense) Equity in earnings of 20%-50% owned companies 30 34
Interest expense (137) (138)
Interest income and foreign exchange 42 (8)
Net gain (loss) on investments 0 (18)
Sundry 37 17
-------------------------------------------------------------------------------------
Total other income (expense) (28) (113)
- ------------------------------------------------------------------------------------------------------------------------
Income before Provision for Taxes on Income and Minority Interests 1,126 414
- ------------------------------------------------------------------------------------------------------------------------
Provision for Taxes on Income 450 157
- ------------------------------------------------------------------------------------------------------------------------
Minority Interests' Share in Income 92 84
- ------------------------------------------------------------------------------------------------------------------------
Net Income 584 173
- ------------------------------------------------------------------------------------------------------------------------
Preferred Stock Dividends 2 2
- ------------------------------------------------------------------------------------------------------------------------
Net Income Available for Common Stockholders $582 $171
- ------------------------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding 276.9 274.8
- ------------------------------------------------------------------------------------------------------------------------
Earnings per Common Share $2.10 $0.62
- ------------------------------------------------------------------------------------------------------------------------
Common Stock Dividends Declared per Share $0.65 $0.65
- ------------------------------------------------------------------------------------------------------------------------
Depreciation $359 $307
- ------------------------------------------------------------------------------------------------------------------------
Capital Expenditures $203 $252
- ------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
Note A: The unaudited financial statements reflect all adjustments (consisting of normal recurring accruals)
which, in the opinion of management, are considered necessary for a fair presentation of the results for
the period covered. Certain reclassifications of prior year amounts have been made to conform to current
year presentation. These statements should be read in conjunction with the financial statements and
notes thereto included in the Company's Form 10-K for the year ended December 31, 1994.
</TABLE>
3
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
Mar. 31, Dec. 31,
In millions (Unaudited) 1995 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Assets
- ------------------------------------------------------------------------------------------------------------------------
Current Assets Cash and cash equivalents $632 $569
Marketable securities and interest-bearing deposits 549 565
Accounts and notes receivable:
Trade (less allowance for doubtful receivables-
1995, $106; 1994, $104) 3,747 3,359
Other 1,456 1,099
Inventories:
Finished and work in process 2,257 2,079
Materials and supplies 620 633
Deferred income taxes receivable-current 482 389
-------------------------------------------------------------------------------------
Total current assets 9,743 8,693
- ------------------------------------------------------------------------------------------------------------------------
Investments Capital stock at cost plus equity in accumulated
earnings of 20%-50% owned companies 940 931
Other investments 1,632 1,529
Noncurrent receivables 344 330
-------------------------------------------------------------------------------------
Total investments 2,916 2,790
- ------------------------------------------------------------------------------------------------------------------------
Plant Properties Plant properties 24,133 23,210
Less accumulated depreciation 15,311 14,484
-------------------------------------------------------------------------------------
Net plant properties 8,822 8,726
- ------------------------------------------------------------------------------------------------------------------------
Other Assets Goodwill (net of accumulated amortization-
1995, $716; 1994, $676) 4,380 4,365
Deferred income taxes receivable-noncurrent 1,172 1,132
Deferred charges and other assets 986 839
-------------------------------------------------------------------------------------
Total other assets 6,538 6,336
- ------------------------------------------------------------------------------------------------------------------------
Total Assets $28,019 $26,545
- ------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
4
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
Mar. 31, Dec. 31,
In millions (Unaudited) 1995 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------
Current Liabilities Notes payable $845 $741
Long-term debt due within one year 665 534
Accounts payable:
Trade 1,696 1,928
Other 897 634
Income taxes payable 986 664
Deferred income taxes payable-current 94 56
Dividends payable 206 202
Accrued and other current liabilities 1,963 1,859
-------------------------------------------------------------------------------------
Total current liabilities 7,352 6,618
- ------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 5,429 5,303
- ------------------------------------------------------------------------------------------------------------------------
Deferred Taxes and Deferred income taxes payable-noncurrent 776 644
Other Liabilities Pension and other postretirement benefits-noncurrent 2,028 1,987
Other noncurrent obligations 1,301 1,253
-------------------------------------------------------------------------------------
Total deferred taxes and other liabilities 4,105 3,884
- ------------------------------------------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies 2,586 2,506
- ------------------------------------------------------------------------------------------------------------------------
Temporary Equity Preferred stock at redemption value 133 133
Less guaranteed ESOP obligation 111 111
-------------------------------------------------------------------------------------
Total temporary equity 22 22
- ------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity Common stock 818 818
Additional paid-in capital 316 326
Retained earnings 9,259 8,857
Unrealized gains (losses) on investments 14 (21)
Cumulative translation adjustments (342) (330)
Treasury stock, at cost (1,540) (1,438)
-------------------------------------------------------------------------------------
Net stockholders' equity 8,525 8,212
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $28,019 $26,545
- ------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
5
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Three Months Ended
In millions (Unaudited) Mar. 31, 1995 Mar. 31, 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Operating Activities Income before cumulative effect of $584 $173
accounting change
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 461 356
Provision (credit) for deferred income tax 37 (33)
Undistributed earnings of 20%-50%
owned companies 11 (20)
Minority interests' share in income 92 84
Net gain on sales of plant properties (1) (17)
Net loss on foreign currency transactions 9 8
Changes in assets and liabilities that
provided (used) cash:
Accounts receivable (645) (246)
Inventories (159) 36
Accounts payable (23) (102)
Other assets and liabilities 167 202
-------------------------------------------------------------------------------------
Cash provided by operating activities 533 441
- ------------------------------------------------------------------------------------------------------------------------
Investing Activities Purchases of plant properties (203) (252)
Investments in unconsolidated affiliates (4) 0
Purchases of consolidated companies
(net of cash acquired) (58) (80)
Proceeds from sales of plant properties 1 18
Purchases of investments (603) (133)
Proceeds from sales of investments 663 188
Cash used in investing activities (204) (259)
- ------------------------------------------------------------------------------------------------------------------------
Financing Activities Changes in short-term notes payable 31 238
Proceeds from issuance of long-term debt 137 90
Payments on long-term debt (80) (20)
Purchases of treasury stock (149) (2)
Proceeds from sales of common stock 23 31
Distributions to minority interests (48) (45)
Dividends paid to stockholders (180) (176)
-------------------------------------------------------------------------------------
Cash (used in) provided by financing activities (266) 116
- ------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash 0 0
- ------------------------------------------------------------------------------------------------------------------------
Summary Increase in cash and cash equivalents 63 298
Cash and cash equivalents at beginning of year 569 407
-------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $632 $705
- ------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
6
COMMITMENTS AND CONTINGENT LIABILITIES
In January 1994, Dow Corning Corporation (Dow Corning), in which
Dow is a 50 percent shareholder, announced a pretax charge of
$640 million ($415 million after tax) for the fourth quarter of
1993. In January 1995, Dow Corning announced a pretax charge of
$241 million ($152 million after tax) for the fourth quarter of
1994. These charges included Dow Corning's best estimate of its
potential liability for breast implant litigation based on the
settlement approved by Judge Sam C. Pointer, Jr. of the U.S.
District Court for the Northern District of Alabama (the Court);
litigation and claims outside of this breast implant settlement;
and provisions for legal, administrative and research costs
related to breast implants. The charges for 1993 and 1994
included pretax amounts of $1,240 million and $441 million,
respectively, less expected insurance recoveries of $600 million
and $200 million, respectively. The 1993 amounts reported by Dow
Corning were determined on a present value basis. On an
undiscounted basis, the estimated liability above for 1993 was
$2,300 million less expected insurance recoveries of $1,200
million.
As a result of the Dow Corning actions, the Company recorded its
50 percent share of the charges, net of tax benefits available to
Dow. The impact on the Company's net income was a charge of $192
million for 1993 and a charge of $70 million for 1994.
In March 1994, Dow Corning signed a Breast Implant Litigation
Settlement Agreement (the Settlement Agreement) which was
preliminarily approved by the Court in April 1994. The
Settlement Agreement received final approval by the Court on
September 1, 1994. The Company is not a signatory to the
Settlement Agreement and is not required to contribute to the
settlement. In certain circumstances, if any defendant who is a
signatory to the Settlement Agreement considers the number of
plaintiffs who have opted out and maintained lawsuits against
such defendant to be excessive, such defendant may withdraw from
participation in the Settlement Agreement.
Various preliminary estimates of the aggregate number of
plaintiffs who have indicated an intent to opt out of the
settlement (the Opt Out Plaintiffs) have been made public. Dow
Corning has reported that, since July 1, 1994, many former Opt
Out Plaintiffs have rejoined the settlement. The Court is
continuing to collect information relating to the number of Opt
Out Plaintiffs. Dow Corning will continue to evaluate the nature
and scope of the current or potential future claims of these Opt
Out Plaintiffs. Opt Out Plaintiffs were able to rejoin the
settlement until the March 1, 1995 date established by the Court.
The Court has indicated that Opt Out Plaintiffs may be allowed to
rejoin the settlement even after March 1, 1995, on a
case-by-case basis.
The date by which Dow Corning was required to decide whether to
remain as a participant in or to exercise the first of its
options to withdraw from the Settlement Agreement was extended to
September 9, 1994. On September 8, 1994, Dow Corning's Board
of Directors approved Dow Corning's continued participation in
the Settlement Agreement. Initial claims were required to be
filed with the Court by September 16, 1994. After these claims
and the supporting medical records have been evaluated by the
Court for validity, eligibility, accuracy, and consistency, the
Court will determine whether contributions to the settlement are
sufficient to pay validated claims. On May 1, 1995, the Court
stated that its initial review of a sample of the claims
indicated that the total amount of current claims likely to be
approved for payment would substantially exceed the amount of
contributions committed to pay such claims. If contributions are
not sufficient, claimants with validated claims may become Opt
Out Plaintiffs during another specified period. In that event,
if any defendant who is a signatory to the Settlement Agreement
considers the number of new Opt Out Plaintiffs to be excessive,
such defendant may decide to exercise a second option to withdraw
from participation in the Settlement Agreement. There can be no
assurance that Dow Corning will not withdraw from participation
in the Settlement Agreement.
On May 15, 1995, Dow Corning announced that it had voluntarily
filed for protection under Chapter 11 of the United States
Bankruptcy Code. As a result of this action, the Company has
decided to establish a reserve for the full amount of its
investment of $374 million in Dow Corning and to discontinue
recording any proportional share of future equity earnings. The
charge will impact the Company's second quarter of 1995 earnings
by approximately $1.25 per share.
The Company's maximum exposure for breast implant product
liability claims against Dow Corning is limited to its investment
in Dow Corning which, after the second quarter charge above, will
be zero. As a result, any future charges by Dow Corning related
to such claims or as a result of the Chapter 11 proceeding would
not have an adverse impact on the Company's consolidated
financial statements.
7
COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
The Company is separately named as a defendant in many of the
breast implant claims and lawsuits. It is the opinion of the
Company's management that the possibility is remote that
plaintiffs will prevail on the theory that the Company should be
liable in the breast implant litigation because of its
shareholder relationship with Dow Corning. The Company's
management believes that there is no merit to plaintiffs' claims
that the Company is liable for alleged defects in Dow Corning's
silicone products because of the Company's alleged direct
participation in the development of those products, and the
Company intends to contest those claims vigorously. Management
believes that the possibility is remote that a resolution of
plaintiffs' direct participation claims, including the vigorous
defense against those claims, would have a material adverse
impact on the Company's financial position or cash flows.
Nevertheless, in light of Judge Pointer's April 25 ruling (see
Legal Proceedings), it is possible that a resolution of
plaintiffs' direct participation claims, including the vigorous
defense against those claims, could have a material adverse
impact on the Company's net income for a particular period,
although it is impossible at this time to estimate the range or
amount of any such impact. Finally, it is impossible to predict
the impact of Dow Corning's Chapter 11 filing on the
outcome of the direct participation claims against the Company.
Numerous lawsuits have been brought against the Company and other
chemical companies alleging that the manufacture, distribution or
use of pesticides containing dibromochloropropane (DBCP) has
caused, among other things, property damage, including
contamination of groundwater. To date, there have been no
verdicts or judgments against the Company in connection with
these allegations. It is the opinion of the Company's management
that the possibility is remote that the resolution of such
lawsuits will have a material adverse impact on the Company's
consolidated financial statements.
The Company has accrued $236 million at March 31, 1995, for
probable environmental remediation and restoration liabilities,
including $29 million for the remediation of Superfund sites.
This is management's best estimate of these liabilities, although
possible costs for environmental remediation and restoration
could range up to 50 percent higher. It is the opinion of the
Company's management that the possibility is remote that costs in
excess of those accrued or disclosed will have a material adverse
impact on the Company's consolidated financial statements.
In addition to the breast implant, DBCP and environmental
remediation matters, the Company and its subsidiaries are parties
to a number of other claims and lawsuits arising out of the
normal course of business with respect to commercial matters,
including product liabilities, governmental regulation 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.
Except for the effect on the Company's net income for
breast implant litigation described above, it is the opinion of
the Company's management that the possibility is remote that the
aggregate of all claims and lawsuits will have a material adverse
impact on the Company's consolidated financial statements.
On behalf of Destec Energy, Inc. (Destec), a 77 percent owned
subsidiary, the Company has guaranteed the lease payments of a
Destec subsidiary which leases the Lyondell cogeneration facility
near Houston, Texas. The guarantee, which is cancelable upon
proper notice on any anniversary date of the guarantee, amounted
to $151 million at March 31, 1995.
Destec entered into an agreement with the U.S. Department of
Energy, PSI Energy Inc. (PSI), and a third party owner to design,
construct, and operate a 262 megawatt syngas facility which will
repower an existing PSI turbine. Destec will provide coal
gasification services under a 25-year contract. Associated with
the above agreement, Destec assumed a construction performance
obligation of $166 million with project completion scheduled for
third quarter 1995, at which time Destec will lease the plant.
The lease commitments are included in Note H to the Financial
Statements of the Company's Form 10-K for the year ended
December 31, 1994.
Destec contracted to design, engineer, build and operate a
cogeneration facility in central Florida for a partnership in
which Destec owns approximately 50 percent. Commercial
operations commenced in January 1995 as planned. Destec has
guaranteed $33 million to fund its equity contribution.
Destec contracted to design, engineer and build a 424 megawatt
cogeneration facility in Freeport, Texas and is a 50 percent
partner in Oyster Creek Limited which owns the facility. Destec
has guaranteed $36 million to fund its equity contribution. The
Company has agreed to purchase steam and power from the facility
and estimates that its minimum annual obligation to outside
parties is $20 million, increasing 3 percent annually through 2014.
8
COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Eli Lilly and Company (Lilly) is a 40 percent partner with the
Company in DowElanco, a global agricultural products joint
venture. Lilly holds a put option requiring the Company to
purchase Lilly's interest in DowElanco at fair market value.
Lilly notified the Company in September 1994 that it did not plan
to exercise the put option at that time. No subsequent
notification has been received.
A Canadian subsidiary has entered into two 20-year agreements to
purchase 89 percent of the output of an ethylene plant (Plant No. 1)
and 40 percent of the output of a second ethylene plant (Plant No. 2).
The purchase price of the output is determined on a cost-of-service
basis which, in addition to covering all operating expenses and debt
service costs, provides the owner of the plants with a specified return
on capital. Total purchases under the agreements were $252 million,
$237 million and $236 million in 1994, 1993 and 1992, respectively.
The contracts related to Plants No. 1 and No. 2 expire in 1998 and
2004, respectively.
DCS Capital Corporation (the Corporation) is 100 percent owned by
DCS Capital Partnership. The Corporation was organized to assist
DCS Capital Partnership in raising funds to finance construction
of an ethylene plant. DCS Capital Partnership is owned by Shell
Canada, Union Carbide and Dow through its 100 percent owned
subsidiary, Dofinco, Inc. As part of the ownership agreement,
Dofinco indirectly guarantees approximately 52 percent of the
debt of the Corporation. Dofinco's indirect guarantee amounted to
$65 million at March 31, 1995.
At December 31, 1994, the Company had various outstanding
commitments for take or pay and throughput agreements, including
the Canadian subsidiary's take or pay ethylene contract, for
terms extending from one to 20 years. In general, such
commitments were at prices not in excess of current market
prices. The table below shows the fixed and determinable portion
of the take or pay and throughput obligations:
Fixed and Determinable Portion of Obligations (in millions)
- -----------------------------------------------------------
1995 $200
1996 168
1997 155
1998 142
1999 73
2000 through expiration of contracts 197
- ------------------------------------------------------------
Total $935
In addition to the take or pay and throughput obligations, the
Company had other outstanding commitments at December 31, 1994,
including ship charters, purchase commitments for materials and
property, and other purchases used in the normal course of
business. Total purchase obligations under the agreements were
$244 million. In general, such commitments were at prices not in
excess of current market prices.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER EARNINGS ANNOUNCEMENT (April 27, 1995)
Dow Sets Quarterly Sales Record And Achieves Higher Earnings
First Quarter of 1995 Highlights
- Sales increased 31 percent to $6.0 billion.
- Sales in the quarter were the highest in Dow's history.
- Operating income improved 119 percent to $1.2 billion.
- Earnings were up 239 percent to $2.10 per share.
Quarter Ended March 31
(In millions, except for share amounts) 1995 1994
- -------------------------------------------------------------------
Net Sales $5,962 $4,541
Operating Income 1,154 527
Net Income* 582 171
Earnings Per Common Share 2.10 0.62
- ------------------------------------------------------------------
* Available For Common Stockholders
Review of Quarterly Results
The Dow Chemical Company today announced record sales for the
second consecutive quarter, surpassing the previous quarterly
record by almost $500 million. The company also more than
tripled its earnings in the first quarter of 1995 compared to the
same period a year ago.
Sales in the first quarter were up 31 percent to $6.0 billion due
to improvements in prices and volume of 17 percent and 12 percent,
respectively. Operating income improved to $1.2 billion in the first
quarter of 1995 compared to $527 million a year ago. Earnings for
the quarter were $2.10 per share versus 62 cents per share in 1994.
First quarter earnings in 1995 reflected the impact of a $49
million or 13 cents per share Marion Merrell Dow charge related
to its acquisition of Selectide Corporation. Earnings in the
first quarter of 1994 included a charge of 3 cents per share due
to a Marion Merrell Dow short-term investment portfolio decline.
Excluding these charges, earnings were $2.23 per share in the
first quarter of 1995 compared to 65 cents per share in the same
period the prior year.
"Improving global economic conditions, advances in margin
restoration and the benefits of reengineering the company are
producing strong results," said Frank Popoff, Dow chairman and
chief executive officer. "We are also pleased to see Dow's
European operations resuming their traditional contribution to
our earnings growth."
Chemicals and Performance Products had first quarter sales of
$1.5 billion, up 45 percent versus a year ago. Operating income
was $400 million, an increase of 267 percent. The stronger
results were primarily attributed to improved prices for
chlor-alkali products.
Plastics had sales of $2.3 billion in the first quarter of 1995,
a gain of 43 percent from the same period in 1994. Operating
income increased by 289 percent to $626 million. Most of the
improvement in sales and operating income came from
Thermoplastics, which had a 62 percent sales increase and
significantly higher operating income. Thermosets and Fabricated
Products had sales increases of 26 percent and 15 percent,
respectively, with improved profitability.
10
FIRST QUARTER EARNINGS ANNOUNCEMENT (April 27, 1995) (Continued)
Hydrocarbons and Energy experienced a 41 percent sales increase
to $588 million with an operating loss of $12 million compared to
a loss of $1 million in the same period a year ago.
Consumer Specialties had sales of $1.6 billion in first quarter
of 1995, up 9 percent versus the same period in 1994.
Agricultural Products provided most of the gain as sales improved
22 percent to a record $635 million with a significant increase
in profitability. Sales were up slightly for Pharmaceuticals and
flat for Consumer Products. Consumer Specialties generated $222
million in operating income, a 10 percent decline from the first
quarter a year ago. The decline was due to Marion Merrell Dow's
charge related to the acquisition of Selectide and continued
competitive pressures on Consumer Products.
"We are optimistic that the earnings recovery we are experiencing
will continue," Popoff said. "The current state of the global
economy and strong industry fundamentals will benefit us well
into the future."
11
ACQUISITIONS AND DIVESTITURES
In January 1995, Marion Merrell Dow Inc. (MMDI) acquired
Selectide Corporation (Selectide) for $58 million as part of
MMDI's strategy to accelerate research and development.
Selectide is a leader in the fields of combinatorial chemistry
and rapid screening technologies for pharmaceutical research.
MMDI recorded a one-time charge of $49 million in the first
quarter of 1995 for the cost of acquired research. This charge
reflects the amount of the acquisition price in excess of the net
identifiable assets of Selectide.
On May 3, 1995, the Company, Hoechst and Marion Merrell Dow Inc.
(MMDI) signed the agreements under which Hoechst will acquire all
of MMDI for $25.75 per share or about $7.1 billion. As part of
the agreements, Hoechst will acquire approximately 197 million
MMDI shares owned by the Company for about $5.1 billion. Subject
to government regulatory approvals, the closing is expected to
take place within 90 days of the signing.
In early May 1995, various Company affiliates signed an agreement
with Roussel Uclaf to sell the pharmaceutical activities in Latin
America based in three countries: Brazil, Mexico and Argentina.
The purchase price will be $140 million, subject to an adjustment
based on the book value of net assets at closing. Unlike what
the parties initially contemplated, the transaction will exclude
real estate properties which will remain with the local Company
affiliates. The closing is expected to take place within 90 days
of the signing.
If the sales of these two pharmaceutical businesses are completed
as planned, they are estimated to result in a gain for the
Company in the range of 50 to 70 cents per share.
On April 6, 1995, the Company announced that it signed an
agreement with Bundesanstalt fuer vereinigungsbedingte
Sonderaufgaben (BvS) for the privatization of three state-owned
chemical companies in eastern Germany. The agreement completes
negotiations between the two parties for the privatization of
Buna GmbH in Schkopau. Buna GmbH operates electrochemical units
and derivative operations and wholly owns Saechsische Olefinwerke
GmbH, which operates a steam cracker in Boehlen, and
LEUNA-Polyolefine GmbH, which has polyolefin operations in Leuna.
The agreement is subject to approval of the German Finance
Ministry and the European Commission. Economic transfer of
business operations to the Company will be June 1, 1995, with
legal closing anticipated by December 31, 1995.
Saechsische Olefinwerke GmbH and LEUNA-Polyolefine GmbH will be
merged into Buna GmbH which will be renamed BSL Olefinwerke GmbH
(BSL). On closing, the Company will take an 80 percent stake in
BSL for a cost of approximately $200 million. BvS will maintain
a 20 percent stake in the operations during a Restructuring
Period of five years. After the Restructuring Period, the
Company will have a call option and the BvS a put option for the
remaining 20 percent of BSL for a cost of approximately $167
million. BvS will provide certain incentives to BSL during the
Restructuring Period to cover portions of reconstruction capital,
cash flow shortfalls and certain long-term structural
disadvantages.
The Company intends to build several new facilities at these
sites including a Dowlex linear low density polyethylene plant
and polypropylene, aniline and acrylic acid plants, and to upgrade
the chlorine plant at Schkopau and the steam cracker at Boehlen.
A 16-inch multi-feedstock liquid pipeline will be constructed from
the port of Rostock to the Boehlen site, as will harbor facilities,
terminals and pump stations. As part of the restructuring of the
three sites, several facilities will be closed and demolished.
The investment plan for the sites is approximately $2.7 billion.
12
CHANGES IN FINANCIAL CONDITION
The following table represents current assets, current
liabilities and debt at March 31, 1995 versus December 31, 1994.
Mar. 31, Dec. 31, Increase
In millions 1995 1994 (Decrease)
- -------------------------------------------------------------------------------
Cash and cash equivalents $632 $569 $63
Marketable securities and interest-bearing deposits 549 565 (16)
Accounts and notes receivable - net 5,203 4,458 745
Inventories:
Finished and work in process 2,257 2,079 178
Materials and supplies 620 633 (13)
Deferred income taxes 482 389 93
- -----------------------------------------------------------------------------
Total current assets 9,743 8,693 1,050
- -----------------------------------------------------------------------------
Total current liabilities 7,352 6,618 734
- -----------------------------------------------------------------------------
Working capital 2,391 2,075 316
- -----------------------------------------------------------------------------
Notes payable 845 741 104
Long-term debt due within one year 665 534 131
Long-term debt 5,429 5,303 126
- -----------------------------------------------------------------------------
Total debt $6,939 $6,578 361
- -----------------------------------------------------------------------------
During the first three months of 1995, cash and cash equivalents
increased by $63 million. Accounts and notes receivable
increased by $745 million to $5.2 billion at March 31, 1995, as a
result of increased sales during the first quarter. Total debt
increased by $361 million, or 5.5 percent, while net debt, which
equals total debt less cash, cash equivalents, marketable
securities and interest-bearing deposits, increased by $314
million, or 5.8 percent. Long-term debt increased by $126
million to $5.4 billion.
Operating activities provided $533 million in cash during the
first three months of 1995, up $92 million from the corresponding
period a year ago. Increases in net income and depreciation and
amortization expense were largely offset by additional working
capital requirements. Cash used in investing activities was $204
million versus $259 million in the first three months of 1994.
Cash used in financing activities was $266 million versus $116
million provided by financing activities in the first quarter of
1994. This $382 million increase in the use of cash was largely
due to a reduction in cash received from short-term notes payable
as well as increased purchases of treasury stock.
As discussed in the Acquisitions and Divestitures section on page 12,
the Company is planning to sell its ownership interest in
Marion Merrell Dow Inc. to Hoechst and its pharmaceutical
activities in Latin America to Roussel Uclaf. Cash proceeds that
would be realized by the Company from these two transactions
would be about $5.2 billion less applicable taxes. The Company
is contemplating several alternatives for these cash proceeds
including stock repurchase and debt reduction.
At March 31, 1995 the Company had unused and available credit
facilities with various United States and foreign banks totaling
$2.0 billion in support of commercial paper borrowings and
working capital requirements. These arrangements are
supplemented by a variety of other credit facilities available
for use by foreign subsidiaries.
Mar. 31, Dec. 31,
Balance Sheet Ratios 1995 1994
- ------------------------------------------------------------------------
Current assets over current liabilities 1.3:1 1.3:1
Days-sales-outstanding-in-receivables 55 54
Days-sales-in-inventory 84 80
Debt as a percentage of total capitalization 38.4 38.0
13
RESULTS OF OPERATIONS
First Quarter 1995 vs First Quarter 1994
The following table represents geographic sales and operating
income for the three months ended March 31, 1995 and 1994.
Price and volume changes are presented for sales.
Three Months Ended Percentage
Mar. 31, Mar. 31, 1995 vs 1994 Change* due to
In millions 1995 1994 Dollars % Price Volume
- ----------- ------------------ ------------ --------------
Geographic sales
United States $2,777 $2,343 $434 19% 13% 5%
Europe 1,801 1,182 619 52% 23% 24%
Rest of world 1,384 1,016 368 36% 18% 15%
Total $5,962 $4,541 $1,421 31% 17% 12%
Geographic operating income
United States $395 $339 $56 17%
Europe 366 94 272 289%
Rest of world 393 94 299 318%
Total $1,154 $527 $627 119%
The following table represents industry segment sales and
operating income for the three months ended March 31, 1995 and
1994. Price and volume changes are presented for sales.
Three Months Ended Percentage
Mar. 31, Mar. 31, 1995 vs 1994 Change* due to
In millions 1995 1994 Dollars % Price Volume
- ----------- ------------------ ------------ --------------
Industry segment sales
Chemicals & Performance
Products $1,462 $1,008 $454 45 % 25% 16%
Plastic Products 2,315 1,616 699 43 % 26% 13%
Hydrocarbons &
Energy 588 418 170 41 % 10% 28%
Consumer Specialties 1,588 1,463 125 9 % 3% 6%
Unallocated 9 36 (27) (75)% nm nm
Total $5,962 $4,541 $1,421 31 % 17% 12%
Industry segment operating income
Chemicals & Performance
Products $400 $109 $291 267 %
Plastic Products 626 161 465 289 %
Hydrocarbons & Energy (12) (1) (11) nm
Consumer Specialties 222 246 (24) (10)%
Unallocated (82) 12 (94) nm
Total $1,154 $527 $627 119 %
* not intended to add
nm - not meaningful
14
First Quarter 1995 vs First Quarter 1994 (Continued)
The following are selected data for the three months ended March 31,
1995 and 1994.
Three Months Ended
Mar. 31, Mar. 31, 1995 vs 1994
In millions 1995 1994 Dollars %
- ------------------------------------------------------------------------
Cost of Sales $3,574 $2,989 $585 20%
% of Sales 60% 66% (6) points
Research and development, promotion
and advertising, selling and
administrative expenses 1,155 1,011 144 14%
Operating Income 1,154 527 627 119%
% of Sales 19% 12% 7 points
Equity in earnings of 20%-50%
owned companies 30 34 (4) (12)%
Effective Tax Rate Percentage 40.0% 38.0% 2 points
Net Income available for
Common Stockholders 582 171 411 240%
Net earnings per common share $2.10 $0.62 $1.48 239%
Operating Rate Percentage 95% 87% 8 points
Company Summary
Total sales for the first quarter of 1995 were $6.0 billion, up
31 percent from $4.5 billion in the same period last year. The
result was due to increases of 17 percent in selling prices and
12 percent in volume. Generally, the U.S. dollar weakened versus
foreign currencies compared to the first quarter of 1994. This
resulted in a favorable impact on sales of approximately $90
million or 2 percentage points of the increase in selling prices.
Sales in the United States of $2.8 billion were higher by $434
million or 19 percent when compared to the same period a year ago
as selling prices increased 13 percent. Sales in Europe of $1.8
billion increased 52 percent versus the first quarter of 1994 as
volume increased 24 percent and selling prices increased 23
percent. Sales in the rest of the world were up 36 percent to
$1.4 billion as selling prices increased 18 percent and volume
increased 15 percent.
Operating income of $1.2 billion was up 119 percent for the
quarter versus $527 million in the first quarter of 1994.
Operating income in the United States increased 17 percent to
$395 million. Non-U.S. operating income showed dramatic
improvement. In Europe, operating income increased to $366
million versus $94 million in the first quarter last year, up 289
percent. Operating income in the rest of the world was up 318
percent to $393 million from $94 million in the same period a
year ago. These results reflect the impact of higher selling
prices and stronger volume in all geographic areas. The impact
of the weaker dollar on operating income versus the first quarter
of 1994 was not significant.
Chemicals and Performance Products
Sales of Chemicals and Performance Products were $1.5 billion, an
increase of 45 percent compared to the corresponding period a
year ago, as selling prices were up 25 percent and volume
increased 16 percent. Operating income of $400 million increased
267 percent versus $109 million in the first quarter of 1994.
Chemicals and Metals sales of $950 million were up 61 percent
versus the same period a year ago. Selling prices increased 39
percent with increases strong across all geographic areas.
Selling prices for caustic soda improved substantially versus
last year. Selling prices for ethylene glycol, phenol, acetone
and vinyl chloride monomer also showed significant improvement.
The largest volume gains were in ethylene dichloride and vinyl
chloride monomer due to the start-up of a new facility in Texas
in mid-1994. Sales increases and volume gains generated nearly a
six-fold increase in operating income for Chemicals and Metals.
Sales of Performance Products were up 23 percent versus
15
First Quarter 1995 vs First Quarter 1994 (Continued)
the first quarter of 1994. Volume increased 16 percent and
selling prices 7 percent compared to the corresponding period a
year ago. Volume increased in all geographic areas with Latin
America and Pacific achieving the largest gains. The selling
price increase of 13 percent in Europe was the largest among the
geographic areas. Operating income increased 40 percent as a
result of strong contributions from numerous businesses in
Performance Products.
Plastic Products
Sales of Plastic Products were $2.3 billion, an increase of 43
percent compared to the first quarter of 1994. Selling prices
were up 26 percent and volume increased 13 percent versus the
corresponding period a year ago. Operating income for this
segment improved 289 percent to $626 million from $161 million in
the first quarter of 1994, primarily as the result of price and
volume increases. Thermoplastics sales were $1.3 billion, up 62
percent from a year ago. Selling prices were up 46 percent with
all geographic areas contributing to the increase. Price
increases were the largest in Latin America, Canada and Europe.
Volume was up 11 percent with Latin America and Europe showing
the most strength. Polyethylene, polystyrene and engineering
thermoplastics all showed substantial increases in profitability
resulting in operating income for Thermoplastics being up over
850 percent versus the first quarter of 1994. Sales of
Thermosets were $762 million, up 26 percent from the
corresponding 1994 period as volume increased 15 percent. Strong
economies, particularly outside the United States, are driving
demand for both epoxies and polyurethanes. Sales of Fabricated
Products were $221 million, an increase of 15 percent compared to
the $192 million recorded in the first quarter of 1994 as volume
and selling prices were each up 7 percent. Styrofoam sales in
North America and Europe are significantly ahead of last year.
While a United States economic slowdown may dampen Styrofoam
sales later this year, the gains shown by many of the European
countries are expected to continue.
Hydrocarbons and Energy
Sales in the Hydrocarbons and Energy segment were $588 million,
an increase of 41 percent compared to the first quarter of 1994.
Volume was up 28 percent and selling prices increased 10 percent
versus the same period a year ago. An operating loss of $12
million was reported for this segment in the first quarter of
1995 compared to an operating loss of $1 million for the
corresponding period a year ago. The lower results are primarily
due to a decline in Destec's earnings as discussed below.
Purchased hydrocarbon and energy costs were up more than 9
percent, as increases in purchased ethylene and styrene far
outweighed declines in natural gas liquid feedstocks. The
ethylene market was moderately tight, with contract prices about
$.02 per pound higher than at year-end. Styrene was tight
globally with price increases posted each month during the first
quarter. The start-up of a new ethylene cracker in Freeport,
Texas was completed ahead of schedule and with very few problems.
Destec Energy Inc. reported lower first quarter sales and
substantially lower net income compared to the first quarter of
1994. Destec's first quarter 1995 results were impacted by the
expiration of major power sales agreements last year with two of
Texas' largest investor-owned utilities. Destec's remaining
Texas power purchase contract expired on April 30, 1995. Destec
is presently in various stages of discussion with several
parties, including municipal and cooperative utilities, to place
some 800 megawatts of available capacity. However, no assurances
can be made that new contracts can be obtained or that the
revenues generated from any new contracts will replace the
revenue and gross margin generated by the expired agreements.
Manufacturing Costs
Dow's global plant operating rate for its Chemicals and Plastics
businesses was 95 percent, up from 87 percent in the first
quarter of 1994. Manufacturing costs for these businesses,
adjusted for volume, were up 4 percent compared to the same
period a year ago, primarily due to higher feedstock costs and
new capacity having come on-line.
Consumer Specialties
Sales for Consumer Specialties were $1.6 billion, up 9 percent
versus the same period last year. Volume increased 6 percent
while selling prices were up 3 percent. Operating income was
$222 million, a decrease of 10 percent from $246 million in the
first quarter of 1994. Operating income this quarter was
adversely affected by a $49 million charge taken by Marion
Merrell Dow Inc. related to the acquisition of Selectide Corporation.
Agricultural Products sales of $635 million were up 22 percent
from the first quarter of 1994. Volume increased 16 percent and
selling prices were up 5 percent for the quarter. Volume was up
in all geographic areas but was especially strong in Canada,
Latin America and the Pacific. Volume gains were apparent across
almost all product lines resulting in an operating income
increase of 23 percent for Agricultural Products versus the first
quarter a year ago.
16
First Quarter 1995 vs First Quarter 1994 (Continued)
Pharmaceutical sales of $757 million were up 1 percent from the
corresponding period a year ago. Marion Merrell Dow Inc.
("MMDI") reported sales of $712 million for the first quarter of
1995, an increase of 1 percent from $708 million a year earlier.
MMDI's net income for the quarter was $75 million, down from
$86 million in the first quarter of 1994. MMDI's 1995 first quarter
results included the impact of a $49 million charge, representing the
cost of acquired research, related to the acquisition of Selectide
Corporation, a research technology company. Excluding this charge, first
quarter net income would have been $124 million, a 44 percent increase
from a year ago.
The Cardizem family of cardiovascular products recorded first
quarter 1995 sales of $242 million, 2 percent higher than a year
earlier. First quarter sales of once-a-day Cardizem CD were $200
million, up 10 percent. Sales of Cardizem tablets and Cardizem
SR continued to decline amid generic competition. Sales of the
Seldane (terfenadine) family of antiallergy products were $158
million for the first quarter of 1995, an increase of 8 percent
from a year earlier. While Seldane has not yet experienced
generic competition in the United States, MMDI cannot predict
when, or if, generic competition might begin. Sales of Carafate,
MMDI's antiulcer drug, were $32 million, 3 percent lower than the
first quarter of 1994 as a result of competitive pressure from
several newer products. Sales of Nicoderm, the leading
prescription smoking cessation aid in North America, were $23
million in the first quarter, 35 percent higher than a year ago.
MMDI recorded a special charge of $180 million in the second
quarter of 1993. At March 31, 1995 the special charge liability
was $44 million, which reflected the remaining obligations
related to MMDI's continuing plan to reduce costs and to position
itself for the future.
As discussed in the Acquisitions and Divestitures section on page 12,
the Company is planning to sell its ownership interest in
Marion Merrell Dow Inc. to Hoechst and its pharmaceutical
activities in Latin America to Roussel Uclaf. If the sales are
completed as planned, it is expected that the Company will no
longer include these pharmaceutical operations in its
consolidated financial statements from April 1, 1995. Although
the pharmaceutical businesses will no longer be consolidated, it
is expected that there will be no material impact on the
Company's future earnings and cash flows due to the alternatives
being contemplated for the net cash proceeds from the sale. In
1994, Pharmaceuticals accounted for $3.3 billion of the Company's
$20.0 billion sales total.
DowBrands sales were $196 million, the same as the first quarter
of 1994. Volume and selling prices were each flat compared to a
year earlier. Sales of Ziploc bags, especially the new snack
bags, were very strong in the quarter. Marketing support costs
in Home Food Management were up in the first quarter to
counteract new product introductions by competitors, resulting in
a decline in operating income. Progress continues on the new
liquid cleaners plant in Ohio. One of the older facilities has
been shut down, with the second facility scheduled for shutdown
in late 1995. Cost savings are expected to be realized in 1996
from the new Ohio plant. However, DowBrands continues to incur
additional costs during this transition period.
Unallocated
In the first quarter of 1995, an operating loss of $82 million
was reported for this segment compared to operating income of $12
million in the first quarter of 1994. Employee severance costs
and lower earnings from the consolidated insurance and finance
subsidiaries were the primary causes of the operating loss this
year.
Other Income (Expense)
Equity in earnings of 20%-50% owned companies decreased $4
million compared to the corresponding period a year ago. The
decrease is primarily due to the Company having divested its
equity interest in Magma Power Company as a result of the merger
agreement between Magma and California Energy Company, Inc.
Net financial expenses, which are the total of interest expense,
interest income and foreign exchange, decreased to $95 million
this quarter from $146 million recorded in the first quarter of
1994. Net financial expenses in the first quarter of 1994 were
adversely impacted by losses incurred by trading and hedging
activities which did not anticipate the increase in long-term
European interest rates.
Provision for Taxes on Income
The effective tax rate for the first quarter was 40.0 percent as
compared to an effective tax rate of 38.0 percent in the first
quarter of 1994. The increase this quarter was due largely to
the charge taken by MMDI related to the acquisition of Selectide
Corporation.
17
First Quarter 1995 vs First Quarter 1994 (Continued)
Net Income Available for Common Stockholders
The first quarter's net income available for common stockholders
was $582 million or $2.10 per share. This compares with net
income for the corresponding period last year of $171 million or
$0.62 per share. This 240 percent increase reflects improved
operating results, primarily in the Company's chemicals and
plastics businesses.
Expectations for the Remainder of 1995
As was expected, Europe is in the midst of a strong recovery. In
the first quarter of 1995 volume was up 24 percent versus the
first quarter of 1994 and 11 percent versus the fourth quarter of
1994. Demand is strong in most countries, driven by export sales
and supported by growing local demand. These strong fundamentals
in Europe are expected to continue through 1995 and beyond. The
Pacific area is expected to remain strong for at least the
balance of 1995. Volume in the United States is expected to
continue at current levels for at least the balance of the first
half of 1995. While certain economic indicators point to the
start of a slowdown, the Company is currently showing little
evidence of it in its businesses.
Fundamentals in the chemicals and thermoplastics businesses are
strong, with many products in a balanced to tight position.
Ethylene is expected to remain relatively tight through mid-1995.
If demand in the United States slows later this year, some
softness in ethylene and its derivatives is expected in the
second half of 1995. However, because little new capacity is
scheduled for 1996, it is expected that average demand growth
will result in renewed tightness for the ethylene chain in the
second half of 1996.
Industrial Specialties is expected to continue to improve as
global economies provide opportunities for growth. Significantly
lower structural costs in latex and Thermosets will leverage the
price improvements provided by strong industry fundamentals.
Agricultural Products is expected to have another record year
with gains in all geographic areas and most product lines. As
discussed in the Acquisitions and Divestitures section on page 12,
the Company is planning to sell its ownership interest in
Marion Merrell Dow Inc. to Hoechst and its pharmaceutical
activities in Latin America to Roussel Uclaf. If the sales are
completed as planned, it is expected that the Company will no
longer include these pharmaceutical operations in its
consolidated financial statements from April 1, 1995. DowBrands
continues to face competitive challenges, but is expected to
maintain a leadership position in its key brands. Earnings
contributions from DowBrands are expected to improve as their
cost reduction initiatives are implemented.
General
In early May, the Board of Directors announced a quarterly
dividend of 75 cents per share, payable July 28, 1995, to
stockholders of record June 30, 1995. This dividend level
reflects a quarterly increase of 10 cents per share. This will
be the 334th consecutive quarterly dividend since 1912. Dow has
maintained or increased the dividend throughout that time.
Subsequent Event
On May 15, 1995, the Company made the following announcement
related to its investment in Dow Corning Corporation:
DOW CORNING ACTION TO RESULT IN CHARGE
AGAINST EARNINGS FOR DOW CHEMICAL
Dow Corning Corporation today announced that it has voluntarily
filed for protection under Chapter 11 of the United States
Bankruptcy Code with the United States Bankruptcy Court in Bay
City, Michigan.
As a result of this action, The Dow Chemical Company, a 50
percent shareholder in Dow Corning, has decided to establish a
reserve for the full amount of its investment of $374 million and
to discontinue recording any proportional share of future equity
earnings. The charge will impact Dow Chemical's second quarter
of 1995 earnings by approximately $1.25 per share.
"As one of two shareholders in Dow Corning, it is our
understanding that this was the only viable alternative under
today's existing tort system to resolve the thousands of breast
implant lawsuits pending against Dow Corning," said Enrique C.
Falla, Dow Chemical, executive vice president. "We are
disappointed that Dow Corning was required to take this action
despite substantial research that has not shown a link between
breast implants and the diseases alleged in lawsuits."
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Breast Implant Matters
The Company and Corning Incorporated ("Corning") are each 50
percent shareholders in Dow Corning Corporation ("Dow Corning").
Dow Corning, and in many cases the Company and Corning as well,
have been sued in a number of individual and class actions by
plaintiffs seeking damages, punitive damages and injunctive
relief in connection with injuries purportedly resulting from
alleged defects in silicone breast implants. In addition,
certain shareholders of the Company have filed separate
consolidated class action complaints alleging that the Company,
Dow Corning or some of their respective Directors violated duties
imposed by the federal securities laws regarding disclosure of
alleged defects in silicone breast implants. The Company and one
of its former officers have also been sued in two separate class
action complaints alleging that the defendants violated duties
imposed by the federal securities laws regarding disclosure of
information material to a reasonable investor's assessment of the
magnitude of the Company's exposure to direct liability in
silicone breast implant litigation. In a separate action, a
Corning shareholder has sued certain Dow Corning Directors
(including three current Company Directors and two former Company
Directors) alleging breaches of state law duties relating to the
manufacture and marketing of silicone breast implants and seeking
to recover unquantified money damages derivatively on Corning's
behalf.
Two separate derivative actions have been brought in the federal
court, Southern District of New York, by Company shareholders
purportedly on the Company's behalf. In Kas, et al. v. Butler,
et al., two Company shareholders brought suit in 1992, naming as
defendants all persons who were serving the Company as Directors
on December 31, 1990, certain Dow Corning Directors, Dow Corning,
Corning and certain Dow Corning officers, seeking derivatively on
the Company's behalf unquantified money damages. In Rubinstein,
et al. v. Ludington, et al., four Company shareholders brought
suit in 1992, naming as defendants Dow Corning's Directors
(Messrs. Falla, Popoff and Stavropoulos) who were also Company
Directors and three former Company Directors, also seeking
derivatively on the Company's behalf unquantified money damages.
Plaintiffs in both cases subsequently made demands that the
Company's Board bring suit on behalf of the Company. After the
Board rejected those demands, the plaintiffs refiled their
complaints alleging that the demands were wrongfully rejected.
It is impossible to predict the outcome of each of the above
described legal actions. However, it is the opinion of the
Company's management that the possibility that these actions will
have a material adverse impact on the Company's consolidated
financial statements is remote, except as described below.
In September 1993, Dow Corning announced the possibility of a
global settlement concerning the silicone breast implant matter.
In January 1994, Dow Corning announced a pretax charge of $640
million ($415 million after tax) for the fourth quarter of 1993.
In January 1995, Dow Corning announced a pretax charge of $241
million ($152 million after tax) for the fourth quarter of 1994.
These charges included Dow Corning's best estimate of its
potential liability for breast implant litigation based on the
Settlement Agreement (defined below); litigation and claims
outside the Settlement Agreement; and provisions for legal,
administrative and research costs related to breast implants.
The charges for 1993 and 1994 included pretax amounts of $1,240
million and $441 million, respectively, less expected insurance
recoveries of $600 million and $200 million, respectively. The
1993 amounts reported by Dow Corning were determined on a present
value basis. On an undiscounted basis, the estimated liability
above for 1993 was $2,300 million less expected insurance
recoveries of $1,200 million. As a result of the Dow Corning
actions, the Company recorded its 50 percent share of the
charges, net of tax benefits available to the Company. The
impact on the Company's net income was a charge of $192 million
for 1993 and a charge of $70 million for 1994.
19
Breast Implant Matters (Continued)
On March 23, 1994, Dow Corning, along with other defendants and
representatives of breast implant litigation plaintiffs, signed a
Breast Implant Litigation Settlement Agreement (the "Settlement
Agreement"). The Settlement Agreement was approved by Dow
Corning's Board of Directors on March 28, 1994. Under the
Settlement Agreement, industry participants (the "Funding
Participants") would contribute up to approximately $4.2 billion
over a period of more than thirty years to establish several
special purpose funds. The Company is not a Funding Participant
and is not required to contribute to the settlement. The
Settlement Agreement, if implemented, provides for a claims-based
structured resolution of claims arising out of silicone breast
implants and defines periods during which breast implant
plaintiffs may "opt out" of the class subject to the settlement
by electing not to settle their claims by way of the Settlement
Agreement and instead continuing their individual breast implant
litigation against manufacturers and other defendants, including
the Company. In certain circumstances, if any defendant who is a
Funding Participant considers the number of plaintiffs who have
opted out and maintained lawsuits against such defendant to be
excessive, such defendant may withdraw from participation in the
Settlement Agreement. Pursuant to the Settlement Agreement, any
plaintiff who participates in the settlement releases the Company
from any breast implant related liability.
On April 1, 1994, the U.S. District Court for the Northern
District of Alabama (the "Court") preliminarily approved the
Settlement Agreement. A Court-supervised fairness review process
of the Settlement Agreement was completed on August 22, 1994.
The Settlement Agreement received final approval by the Court on
September 1, 1994. The Court's final approval of the Settlement
Agreement has been appealed to the U.S. Court of Appeals for the
Eleventh Circuit primarily by certain providers of health care
indemnity payments or services and by certain foreign claimants.
Various preliminary estimates of the aggregate number of
plaintiffs who have indicated an intent to opt out of the
settlement (the "Opt Out Plaintiffs") have been made public. Dow
Corning has reported that since July 1, 1994, many initial Opt
Out Plaintiffs with claims against Dow Corning have rejoined the
settlement. The Court is continuing to collect information
relating to the number of Opt Out Plaintiffs. Dow Corning will
continue to evaluate the nature and scope of the current or
potential future claims of these Opt Out Plaintiffs. Opt Out
Plaintiffs were able to rejoin the settlement until the March 1,
1995 date established by the Court. The Court has indicated that
Opt Out Plaintiffs may be allowed to rejoin the settlement even
after March 1, 1995, on a case-by-case basis.
The date by which Dow Corning was required to decide whether to
remain as a participant in or to exercise the first of its
options to withdraw from the Settlement Agreement was extended to
September 9, 1994. On September 8, 1994, Dow Corning's Board
of Directors approved Dow Corning's continued participation in
the Settlement Agreement. Initial claims were required to be
filed with the Court by September 16, 1994. After these claims
and the supporting medical records have been evaluated by the
Court for validity, eligibility, accuracy, and consistency, the
Court will determine whether contributions to the settlement are
sufficient to pay validated claims. On May 1, 1995, the Court
stated that its initial review of a sample of the claims
indicated that the total amount of current claims likely to be
approved for payment would substantially exceed the amount of
contributions committed to pay such claims. If contributions are
not sufficient, claimants with validated claims may become Opt
Out Plaintiffs during another specified period. In that event,
if any defendant who is a Funding Participant considers the
number of new Opt Out Plaintiffs to be excessive, such defendant
may decide to exercise a second option to withdraw from
participation in the Settlement Agreement. There can be no
assurance that Dow Corning will not withdraw from participation
in the Settlement Agreement.
On May 15, 1995, Dow Corning announced that it had voluntarily
filed for protection under Chapter 11 of the United States
Bankruptcy Code (with the United States Bankruptcy Court in Bay
City, Michigan). As a result of this action, the Company has
decided to establish a reserve for the full amount of its
investment of $374 million in Dow Corning and to discontinue
recording any proportional share of future equity earnings. The
charge will impact the Company's second quarter of 1995 earnings
by approximately $1.25 per share.
20
Breast Implant Matters (Continued)
The Company's maximum exposure for breast implant product
liability claims against Dow Corning is limited to its investment
in Dow Corning which, after the second quarter charge above, will
be zero. As a result, any future charges by Dow Corning related
to such claims or as a result of the Chapter 11 proceeding would
not have an adverse impact on the Company's consolidated
financial statements.
The Company is separately named as a defendant in 12,774 breast
implant product liability cases. In these situations, plaintiffs
have alleged that the Company should be liable for Dow Corning's
alleged torts based on the Company's 50 percent stock ownership
in Dow Corning and that the Company should be liable by virtue of
alleged "direct participation" by the Company or its agents in
Dow Corning's breast implant business. These latter, direct
participation claims include counts sounding in strict liability,
fraud, aiding and abetting, conspiracy and negligence.
Federal District Court Judge Sam C. Pointer, Jr. has been
appointed by the Federal Judicial Panel on Multidistrict
Litigation to oversee all of the product liability cases
involving silicone breast implants filed in the U.S. federal
courts. As of April 27, 1995, the Company was a defendant in
4,897 of such cases. Initially, in a ruling issued on December 1,
1993, Judge Pointer granted the Company's motion for summary
judgment, finding that there was no basis on which a jury could
conclude that the Company was liable for any claimed defects in
the breast implants manufactured by Dow Corning. In an
interlocutory opinion issued on April 25, 1995, however, Judge
Pointer affirmed his December 1993 ruling as to plaintiffs'
corporate control claims but vacated that ruling as to
plaintiffs' direct participation claims.
In his opinion, Judge Pointer reaffirmed the view he had
expressed in his December 1993 ruling that the Company is a
separate, independent entity from Dow Corning and therefore has
no legal responsibility as a result of its ownership of Dow
Corning stock for Dow Corning's breast implant business.
However, Judge Pointer stated that under the law of at least some
states (although not necessarily all states), actions allegedly
taken by the Company independent of its role as a shareholder in
Dow Corning could give rise to liability under a negligence
theory. Judge Pointer declined to address plaintiffs' other
legal theories, including strict liability, corporate conspiracy,
concert of action, aiding and abetting, fraud and fraudulent
concealment. The Company intends to file a motion asking Judge
Pointer to reconsider his decision. It is impossible to predict
the outcome or to estimate the cost to the Company of resolving
any of the federal product liability cases. The Company has
filed claims with its insurance carriers to recover in the event
it is held liable in the federal (or any other) breast implant
litigation.
After Judge Pointer's initial ruling in December 1993, summary
judgment was granted to the Company in 3,934 breast implant cases
pending in state courts in California, Indiana, Michigan, New
Jersey and New York, and 116 actions in Pennsylvania were
dismissed. The California ruling has been appealed. The other
rulings are not final decisions and are subject to
reconsideration by the trial courts. The Company expects that
motions to reconsider will be filed in those states as a result
of Judge Pointer's April 25 decision. In addition, the Company
remains a defendant in 3,827 breast implant product liability
cases brought in state courts and continues to be named as a
defendant as cases are filed in various courts. It is impossible
to predict the outcome or to estimate the cost to the Company of
resolving any of the product liability cases pending in state
courts.
The Company is also a defendant in five federal silicone jaw
implant cases involving implants manufactured by Dow Corning.
Federal District Court Judge Paul A. Magnuson has been appointed
by the Federal Judicial Panel on Multidistrict Litigation to
oversee all of the product liability cases involving silicone jaw
implants filed in the U.S. federal courts. On March 31, 1995,
Judge Magnuson granted the Company's motion for summary judgment,
concluding, based on the same arguments that were presented to
Judge Pointer, that no reasonable jury could find in favor of
plaintiffs on any of their claims against the Company. The
Company has asked Judge Magnuson to enter a final judgment in its
favor based on his ruling. Plaintiffs are likely to ask Judge
Magnuson to reconsider his ruling in light of Judge Pointer's
ruling.
21
Breast Implant Matters (Continued)
On November 3, 1994, Judge Michael Schneider, presiding in the
consolidated breast implant cases in Harris County, Texas,
granted in part and denied in part the Company's motion for
summary judgment. Judge Schneider granted the Company's motion
as to (i) all claims based on the Company's shareholder status in
Dow Corning, (ii) the claim that the Company was liable in
negligence for failing to supervise Dow Corning, and (iii)
plaintiffs' licensor-licensee claim. Judge Schneider denied the
Company's motion with regard to plaintiffs' claims sounding in
fraud, aiding and abetting, conspiracy, certain negligence claims
and a claim brought under the Texas Deceptive Trade Practices
Act. As a result, the Company remains a defendant as to such
claims in 2,355 cases pending in Harris County litigation. In
those cases (and in cases pending in other jurisdictions
including those before Judge Pointer), the Company has filed
cross-claims against Dow Corning on the ground that if the
Company and Dow Corning are found jointly and severally liable,
Dow Corning should bear appropriate responsibility for the
injuries caused by its product. In certain other jurisdictions,
the Company has also filed similar cross-claims against Corning.
It is impossible to predict the outcome or to estimate the cost
to the Company of resolving any of the Harris County actions.
The first of the Harris County cases went to trial in November
1994, and the jury returned a verdict on February 15, 1995.
At the conclusion of the evidence, plaintiffs voluntarily
withdrew their fraud and Deceptive Trade Practices Act claims
against the Company. The jury reached a verdict exonerating the
Company from all liability with respect to one plaintiff. As to
the second plaintiff, the jury found for the Company on
plaintiffs' conspiracy, concert of action and negligence counts.
The jury also found the Company jointly and severally liable with
Dow Corning in the amount of $5.23 million for having given Dow
Corning "substantial encouragement or assistance" in marketing
breast implants that had not been first adequately tested. The
jury allocated the Company's responsibility for plaintiffs'
damages at 20%. After the trial, Judge Schneider entered
judgment against Dow Corning on the jury's verdict, but granted
the Company's motion to disregard the one jury finding against
the Company and entered judgment in favor of the Company. Thus,
as it now stands, the Company has no responsibility for any
portion of the jury verdict in this case. Plaintiffs have asked
Judge Schneider to vacate the judgments and to order a new trial
in both cases. Plaintiffs have also asked that the Company be
severed from the cases to allow plaintiffs to pursue separate
trials against the Company and Dow Corning.
In an order dated December 1, 1994, Judge Frank Andrews,
presiding in the consolidated breast implant cases in Dallas
County, Texas, granted the Company's motion for summary judgment
"in all respects except as to theories of conspiracy and strict
liability as a component supplier." As a result, the Company
remains a defendant as to such claims in 119 cases pending in
Dallas County litigation. It is impossible to predict the
outcome or to estimate the cost to the Company of resolving these
actions.
It is the opinion of the Company's management that the
possibility is remote that plaintiffs will prevail on the theory
that the Company should be liable in the breast implant
litigation because of its shareholder relationship with Dow
Corning. The Company's management believes that there is no
merit to plaintiffs' claims that the Company is liable for
alleged defects in Dow Corning's silicone products because of the
Company's alleged direct participation in the development of
those products, and the Company intends to contest those claims
vigorously. Management believes that the possibility is remote
that a resolution of plaintiffs' direct participation claims,
including the vigorous defense against those claims, would have a
material adverse impact on the Company's financial position or
cash flows. Nevertheless, in light of Judge Pointer's April 25
ruling, it is possible that a resolution of plaintiffs' direct
participation claims, including the vigorous defense against
those claims, could have a material adverse impact on the
Company's net income for a particular period, although it is
impossible at this time to estimate the range or amount of any
such impact. Finally, it is impossible to predict the impact
of Dow Corning's Chapter 11 filing on the outcome of the
direct participation claims against the Company.
22
Transaction with Hoechst A.G.
Between February 28 and April 7, 1995, following an announcement
of discussions between the Company and Hoechst A.G. and its
affiliates ("Hoechst") regarding the possible acquisition by
Hoechst of Marion Merrell Dow Inc. ("MMD") for $25.75 per share
and of the Company's Latin American pharmaceuticals business for
$200 million, eleven class action complaints were filed in the
Delaware Chancery Court for New Castle County against MMD, its
directors (certain of whom are also the Company's directors) and
the Company. Hoechst is also a defendant in one of those
lawsuits. In general, the complaints allege that the Company
violated its fiduciary duties to MMD's shareholders by failing to
maximize the purchase price of MMD's shares in negotiating the
transactions. Plaintiffs seek class certification, injunctive
relief, compensation for an unspecified amount of losses and
damages, and, in some cases, to have the Company ordered to
evaluate alternatives, ensure no conflicts of interest, and
appoint an independent special committee or shareholder committee
to review all offers. It is impossible to predict the outcome or
to estimate the cost to the Company of resolving these legal
actions. However, it is the opinion of the Company's management
that the possibility that these actions will have a material
adverse impact on the Company's consolidated financial statements
is remote.
Environmental Matters
DowElanco, a general partnership 60% owned by the Company,
received a letter dated November 30, 1994 from the U.S.
Environmental Protection Agency (the "EPA") regarding incident
reporting under Section 6(a)(2) of the Federal Insecticide,
Fungicide and Rodenticide Act. In that regard, DowElanco entered
into a consent agreement with the EPA on May 1, 1995 and has
agreed to pay $732,000 in civil fines.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A Current Report on Form 8-K dated January 20, 1995 was filed
with the Securities and Exchange Commission. Attached to it was
the Company's press release describing the impact on the
Company's 1994 earnings resulting from a special charge taken by
Dow Corning Corporation for breast implant litigation and related
matters.
A Current Report on Form 8-K dated January 25, 1995 was filed
with the Securities and Exchange Commission. Attached to it were
two (2) press releases (i) describing the impact on the Company
of the pending sale of the Personal Care business of DowBrands;
and (ii) constituting the Company's earnings release for the
fourth quarter and full year of 1994.
The following trademarks of The Dow Chemical Company appear in
this report: Dowlex and Styrofoam.
The following trademarks of Marion Merrell Dow Inc. or its
subsidiaries appear in this report: Carafate, Cardizem, Cardizem
CD, Nicoderm, and Seldane.
The following trademark of DowBrands or its subsidiaries appears
in this report: Ziploc.
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
THE DOW CHEMICAL COMPANY
Registrant
Date: May 15, 1995
- ---------------------
Roger L. Kesseler
---------------------
Roger L. Kesseler
Vice President & Controller
(Chief Accounting Officer)
24
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