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 SEPTEMBER 30, 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 September 30, 1995
Common Stock, $2.50 par value 261,784,373 shares
THE DOW CHEMICAL COMPANY
Table of Contents
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Commitments and Contingent Liabilities
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Third Quarter Earnings Announcement
Acquisitions and Divestitures
Changes in Financial Condition
Results of Operations
Third Quarter 1995 vs Third Quarter 1994
First Nine Months 1995 vs First Nine Months 1994
Part II - Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signature
Exhibit 27
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
In millions, except for share amounts (Unaudited) 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C>
Net Sales $4,884 $4,216 $15,606 $12,130
Operating Costs and ExpenseCost of sales 3,213 3,057 10,110 8,770
Insurance and finance company
operations, pretax income (13) (5) (35) (46)
Research and development expenses 203 202 609 588
Promotion and advertising expenses 87 102 313 310
Selling and administrative expenses 439 417 1,352 1,176
Amortization of intangibles 9 10 29 30
Total operating costs and expenses 3,938 3,783 12,378 10,828
Operating Income 946 433 3,228 1,302
Other Income (Expense) Equity in earnings of 20%-50%
owned companies (Note B) 14 25 54 83
Interest expense (127) (73) (326) (281)
Interest income and foreign exchange 120 29 193 69
Net loss on investments (Note B) 0 0 (330) 0
Sundry 2 40 16 73
Total other income (expense) 9 21 (393) (56)
Income before Provision for Taxes on Income and Minority Interests 955 454 2,835 1,246
Provision for Taxes on Income 358 183 1192 489
Minority Interests' Share in Income 24 32 169 168
Preferred Stock Dividends 2 2 5 5
Income from Continuing Operations $571 $237 $1,469 $584
Discontinued Operations Income from pharmaceutical business, net
(Note C): of taxes on income 0 51 18 125
Gain on sale of pharmaceutical business,
net of taxes on income 0 0 169 0
Net Income Available for Common Stockholders $571 $288 $1,656 $709
Average Common Shares Outstanding 265.8 276.4 272.1 275.7
Earnings per Common Share from Continuing Operations $2.15 $0.86 $5.41 $2.12
Earnings per Common Share $2.15 $1.04 $6.09 $2.57
Common Stock Dividends Declared per Share $0.75 $0.65 $2.15 $1.95
Depreciation $335 $329 $1,003 $943
Capital Expenditures (Note D) $299 $285 $1,077 $808
Note A: The unaudited interim 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 periods 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.
Note B: On May 15, 1995, Dow Corning Corporation announced that it
had filed for protection under Chapter 11 of the United States
Bankruptcy Code with the United States Bankruptcy Court in
Bay City, Michigan. The Company is a 50 percent shareholder
in Dow Corning Corporation. The Company's investment in Dow
Corning was $374 million at March 31, 1995.
Dow Corning reported an after tax net loss of $167 million for
the second quarter of 1995, of which the Company's share amounted
to $83 million. Dow Corning's second quarter loss was a result
of a $221 million after tax charge taken to reflect a change in
accounting method for its contribution to a breast implant global
settlement. The change in the method of accounting from a present
value or discounted basis, to an undiscounted basis, resulted from
uncertainties arising from Dow Corning's filing for protection under
Chapter 11.
As a result of Dow Corning's Chapter 11 filing and its 1995 second
quarter loss, the Company has recognized a pretax charge against
income of $330 million, has fully reserved its net investment in Dow
Corning and will not recognize its 50 percent share of future equity
earnings while Dow Corning remains in Chapter 11. The charge impacted
the Company's second quarter of 1995 earnings by $1.24 per share.
Note C: On June 28, 1995, the Company completed the sale of its
approximately 197 million shares of Marion Merrell Dow to Hoechst
for about $5.1 billion or $25.75 per share. In addition, subsidiaries
of the Company have completed the sale of the Company's Latin American
pharmaceutical business based in Argentina, Brazil and Mexico to
Roussel Uclaf S.A. for about $133 million. These two transactions,
net of taxes on income of $382 million, increased the Company's
second quarter of 1995 earnings by approximately $169 million or
62 cents per share.
The Company's consolidated statements of income and cash flows
have been restated to reflect the pharmaceutical business as a
discontinued operation. Net sales attributable to the pharmaceutical
business for the three months ended March 31, 1994, June 30, 1994,
September 30, 1994 and March 31, 1995, were $753, $808, $830 and
$757 million, respectively. Taxes on income from the pharmaceutical
business for the three months ended March 31, 1994, June 30, 1994,
September 30, 1994 and March 31, 1995, were $25, $33, $30 and $36
million, respectively.
Note D: Capital expenditures for 1995 have increased $269 million compared
to 1994 as a result of the Company investing $318 million, in the
second quarter, for assets formerly leased.
</TABLE>
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
Sept. 30, Dec. 31,
In millions (Unaudited) 1995 1994
<S> <C> <C> <C>
Assets
Current Assets Cash and cash equivalents $4,105 $569
Marketable securities and interest-bearing deposits 533 565
Accounts and notes receivable:
Trade (less allowance for doubtful receivables-
1995, $51; 1994, $104) 2,937 3,359
Other 1,439 1,099
Inventories:
Finished and work in process 2,068 2,079
Materials and supplies 606 633
Deferred income taxes receivable-current 461 389
Total current assets 12,149 8,693
Investments Capital stock at cost plus equity in accumulated
earnings of 20%-50% owned companies 597 931
Other investments 1,488 1,529
Noncurrent receivables 244 330
Total investments 2,329 2,790
Plant Properties Plant properties 23,118 23,210
Less accumulated depreciation 14,907 14,484
Net plant properties 8,211 8,726
Other Assets Goodwill (net of accumulated amortization-
1995, $170; 1994, $676) 653 4,365
Deferred income taxes receivable-noncurrent 787 1,132
Deferred charges and other assets 811 839
Total other assets 2,251 6,336
Total Assets $24,940 $26,545
See Notes to Financial Statements.
</TABLE>
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
Sept. 30, Dec. 31,
In millions (Unaudited) 1995 1994
<S> <C> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities Notes payable $393 $741
Long-term debt due within one year 544 534
Accounts payable:
Trade 1,360 1,928
Other 760 634
Income taxes payable 982 664
Deferred income taxes payable-current 59 56
Dividends payable 201 202
Accrued and other current liabilities 1,779 1,859
Total current liabilities 6,078 6,618
Long-Term Debt 5,026 5,303
Deferred Taxes and Deferred income taxes payable-noncurrent 698 644
Other Liabilities Pension and other postretirement benefits-noncurrent 1,931 1,987
Other noncurrent obligations 1,146 1,253
Total deferred taxes and other liabilities 3,775 3,884
Minority Interest in Subsidiary Companies 1,852 2,506
Temporary Equity Temporary equity-other 444 0
ESOP held preferred stock at redemption value 131 133
Guaranteed ESOP obligation (111) (111)
Total temporary equity 464 22
Stockholders' Equity Common stock 818 818
Additional paid-in capital 288 326
Retained earnings 9,934 8,857
Unrealized gains (losses) on investments 58 (21)
Cumulative translation adjustments (353) (330)
Treasury stock, at cost (3,000) (1,438)
Net stockholders' equity 7,745 8,212
Total liabilities and stockholders' equity $24,940 $26,545
See Notes to Financial Statements.
</TABLE>
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Nine Months Ended
In millions (Unaudited) Sept. 30, 1995 Sept. 30,
<S> <C> <C> <C>
Operating Activities Income from continuing operations $1,469 $584
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,033 949
Provision (credit) for deferred income tax 137 24
Undistributed earnings of 20%-50%
owned companies (23) (78)
Minority interests' share in income 169 168
Net loss on investments 330 0
Net gain on sales of sundry investments (62) 0
Net gain on sales of plant properties (24) (36)
Other 8 (8)
Changes in assets and liabilities that
provided (used) cash:
Accounts receivable (555) (212)
Inventories (294) (98)
Accounts payable (203) 33
Other assets and liabilities 308 221
Operating activities related to discontinued
operations 84 442
Cash provided by operating activities 2,377 1,989
Investing Activities Purchases of plant properties (1,068) (752)
Proceeds from sales of plant properties 57 48
Investments in unconsolidated affiliates (39) (55)
Proceeds from sale of pharmaceutical business
(net of cash divested) 5,060 0
Purchases of investments (2,126) (1,172)
Proceeds from sales of investments 1,731 1,118
Investing activities related to discontinued
operations (28) (324)
Cash used in investing activities 3,587 (1,137)
Financing Activities Changes in short-term notes payable (328) 117
Payments on long-term debt (399) (217)
Proceeds from issuance of long-term debt 98 78
Purchases of treasury stock (1,294) (4)
Proceeds from sales of common stock 121 83
Distributions to minority interests (79) (75)
Dividends paid to stockholders (564) (539)
Financing activities related to discontinued
operations 17 (19)
Cash used by financing activities (2,428) (576)
Effect of Exchange Rate Changes on Cash 0 0
Summary Increase in cash and cash equivalents 3,536 276
Cash and cash equivalents at beginning of year 569 407
Cash and cash equivalents at end of period $4,105 $683
See Notes to Financial Statements.
</TABLE>
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 a
global Breast Implant Litigation Settlement Agreement (the
Settlement Agreement); 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.
Dow Corning reported an after tax net loss of $167 million for
the second quarter of 1995, of which the Company's share amounted
to $83 million. Dow Corning's second quarter loss was a result
of a $221 million after tax charge taken to reflect a change in
accounting method from the present value basis noted above to an
undiscounted basis
resulting from the uncertainties associated with its voluntary
filing for protection under Chapter 11 of the United States
Bankruptcy Code on May 15, 1995. As a result of Dow Corning's
1995 second quarter loss and Chapter 11 filing, the Company has
recognized a pretax charge against income of $330 million for the
second quarter of 1995, fully reserved its investment in Dow
Corning and will not recognize its 50 percent share of future
equity earnings while Dow Corning remains in Chapter 11.
On September 1, 1994, Judge Sam C. Pointer, Jr. of the United
States District Court for the Northern District of Alabama
approved the Settlement Agreement pursuant to which plaintiffs
choosing to participate in the Settlement Agreement released the
Company from liability. The Company was not a participant in the
Settlement Agreement nor was it required to contribute to the
settlement. On October 7, 1995, Judge Pointer issued an order
which concluded that the Settlement Agreement was not workable in
its present form because the funds committed to it by industry
participants were inadequate. The order provided that plaintiffs
who had previously agreed to participate in the Settlement
Agreement may opt-out after November 30, 1995.
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 noted
above, is 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 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.
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.
COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
The Company has accrued $213 million at September 30, 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 possible 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 a portion of 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 $143 million at September 30, 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 $178 million with project completion scheduled for
fourth 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. 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.
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.
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
$62 million at September 30, 1995.
COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
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 contracts, 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER EARNINGS ANNOUNCEMENT (October 26, 1995)
Dow's Third Quarter Earnings From Continuing Operations More Than
Doubled
Third Quarter of 1995 Highlights
- Sales increased 16 percent to $4.9 billion.
- Quarterly operating income approached $1 billion.
- Earnings from continuing operations were $2.15 per share, 250
percent of the third quarter of 1994.
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
(In millions, except for share amounts) 1995 1994 1995 1994
Net Sales $4,884 $4,216 $15,606 $12,130
Operating Income 946 433 3,228 1,302
Income from Continuing Operations 571 237 1,469 584
Earnings per Common Share from
Continuing Operations 2.15 0.86 5.41 2.12
Earnings Per Common Share 2.15 1.04 6.09 2.57
Note: Results for 1994 and the first quarter of 1995
have been restated to present Dow's pharmaceutical
businesses as discontinued operations after their sale
in the second quarter of 1995.
Review of Quarterly Results
The Dow Chemical Company today announced substantially higher
sales and earnings in the third quarter of 1995 compared to the
same period a year ago. Sales in the quarter were up 16 percent
to $4.9 billion compared to $4.2 billion in the third quarter of
1994, restated due to the sale of Dow's pharmaceutical
businesses. The sales increase resulted from a 15 percent
improvement in prices and a 1 percent gain in volume.
Operating income was $946 million, 218 percent of $433 million in
the third quarter a year ago. Earnings from continuing
operations in the third quarter of 1995 were $2.15 per share, 250
percent of restated earnings of 86 cents per share in 1994.
"We are pleased that the company's financial performance in 1995
continues to far exceed last year's," said J. Pedro Reinhard, Dow
chief financial officer. "On the strength of margin restoration
and ongoing cost reductions, we had one of our best third
quarters."
Chemicals and Performance Products had third quarter sales of
$1.4 billion, up 21 percent versus a year ago. Operating income
was $422 million, 232 percent of the third quarter of 1994.
Higher prices for large volume products, including caustic soda
and latex, resulted in improved sales and operating income.
THIRD QUARTER EARNINGS ANNOUNCEMENT (October 26, 1995)
(Continued)
Sales for Plastics were $2.3 billion in the third quarter of
1995, a gain of 19 percent compared to the same period in 1994.
Operating income was $671 million, 220 percent of a year ago.
All of the major businesses within this segment outperformed the
same period in 1994 and Thermosets achieved record sales and
profits.
Hydrocarbons and Energy had sales of $527 million, up 1 percent
compared to the third quarter of 1994, and an operating loss of
$26 million versus operating income of $23 million a year ago.
Consumer Specialties had $574 million in sales, up 6 percent
versus the same period a year ago. Operating income was higher,
improving to $18 million compared to a break-even third quarter
of 1994. Significant cost reductions by DowBrands contributed to
the operating income growth.
"While prices for certain basic chemicals and plastics have
softened since midyear, we still expect overall prices to be
higher in the fourth quarter versus a year ago," Reinhard said.
"Our continuing productivity improvements and the balance of our
geographic and product mix are also contributing to an excellent
year for Dow."
ACQUISITIONS AND DIVESTITURES
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 completed
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.
Economic transfer of business operations to the Company occurred
June 1, 1995, with legal closing anticipated during the first
half of 1996.
Saechsische Olefinwerke GmbH and LEUNA-Polyolefine GmbH have been
merged into Buna GmbH which was 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 the reconstruction
program.
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 $2.9 billion.
On June 28, 1995, the Company completed the sale of its
approximately 197 million shares of Marion Merrell Dow to Hoechst
for about $5.1 billion or $25.75 per share. In addition,
subsidiaries of the Company completed the sale of the Company's
Latin American pharmaceutical business based in Argentina, Brazil
and Mexico to Roussel Uclaf S.A. for about $133 million. These
two transactions, net of taxes on income of $382 million,
increased the Company's second quarter of 1995 earnings by
approximately $169 million or 62 cents per share.
CHANGES IN FINANCIAL CONDITION
The following table represents current assets, current
liabilities and debt at September 30, 1995 versus
December 31, 1994. The Company's pharmaceutical business was
sold on June 28, 1995. The Company's consolidated balance sheet
at December 31, 1994 has not been restated for the disposal of
this business.
Sept. 30, Dec. 31, Increase
In millions 1995 1994 (Decrease)
Cash and cash equivalents $4,105 $569 $3,536
Marketable securities and
interest-bearing deposits 533 565 (32)
Accounts and notes receivable - net 4,376 4,458 (82)
Inventories:
Finished and work in process 2,068 2,079 (11)
Materials and supplies 606 633 (27)
Deferred income taxes 461 389 72
Total current assets 12,149 8,693 3,456
Total current liabilities 6,078 6,618 (540)
Working capital 6,071 2,075 3,996
Notes payable 393 741 (348)
Long-term debt due within one year 544 534 10
Long-term debt 5,026 5,303 (277)
Total debt $5,963 $6,578 $(615)
During the first nine months of 1995, cash and cash equivalents
increased by $3.5 billion, primarily as a result of the proceeds
received from the sale of the Company's pharmaceutical business
on June 28. Total debt of $6.0 billion decreased 9 percent
compared to December 31, 1994, while net debt, which equals total
debt less cash, cash equivalents, marketable securities and
interest-bearing deposits, decreased from $5.4 billion to $1.3
billion at
September 30, 1995. Long-term debt decreased by $277 million to
$5.0 billion.
The Consolidated Statements of Cash Flows have been restated to
reflect the pharmaceutical business as a discontinued operation.
Operating activities provided $2.4 billion in cash during the
first nine months of 1995, up $388 million from the corresponding
period a year ago. Increased income from continuing operations,
particularly when excluding a Dow Corning related noncash pretax
charge of $330 million, was largely offset by additional working
capital requirements. Accounts receivable increased primarily
due to the Company's increased sales versus a year ago. As a
result of the net cash proceeds from the sale of the
pharmaceutical business, cash provided by investing activities
was $3.6 billion this year versus cash used in investing
activities of $1,1 billion in the first nine months of 1994.
Purchases of plant properties of $1,068 million increased $316
million from the corresponding 1994 period, as a result of the
Company investing $318 million in acquiring assets formerly
leased. Cash used in financing activities was $2.4 billion
versus $576 million in the first nine months of 1994. This
increase in the use of cash was largely due to increased
purchases of treasury stock and reduction of short-term notes
payable.
The Company is contemplating several alternatives for the cash
proceeds realized from the sale of the pharmaceutical business
including stock repurchase and debt reduction. On July 13, 1995,
the Company announced that it will purchase 25 million shares of
its own stock, which would be bought over a period of time on the
open market or in private transactions. The Company purchased
17.8 million shares during the first nine months of 1995 under a
previously authorized program. At September 30, 1995, the
Company had 262 million shares outstanding. The Company is also
utilizing options as part of its overall stock repurchase
program. The Company's potential repurchase obligation related
to these options has been reclassified from stockholders' equity
to temporary equity and amounted to $444 million at September 30,
1995.
In May, the Board of Directors announced a quarterly dividend
increase from 65 cents to 75 cents per share. This increased
dividend was paid for the second and third quarter dividends.
At September 30, 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.
Sept. 30, Dec. 31,
Balance Sheet Ratios 1995 1994
Current assets over current liabilities 2:1 1.3:1
Days-sales-outstanding-in-receivables 57 54
Days-sales-in-inventory 91 80
Debt as a percentage of total capitalization 38.3 38.0
RESULTS OF OPERATIONS
As a result of the sale of the Company's pharmaceutical business,
the amounts reported for prior periods have been restated to
reflect the pharmaceutical business as discontinued operations.
Third Quarter 1995 vs Third Quarter 1994
The following table represents geographic sales and operating
income for the three months ended September 30, 1995 and 1994.
Price and volume changes are presented for sales.
Three Months Ended Percentage
Sept. 30, Sept. 30, 1995 vs 1994 Change* due to
In millions 1995 1994 Dollars % Price Volume
Geographic sales
United States $2,140 $2,024 $116 6% 11% (5)%
Europe 1,549 1,185 364 31% 24% 6%
Rest of world 1,195 1,007 188 19% 15% 7%
Total $4,884 $4,216 $668 16% 15% 1%
Geographic operating income
United States $390 $253 $137 54%
Europe 261 29 232 800%
Rest of world 295 151 144 95%
Total $946 $433 $513 118%
The following table represents industry segment sales and
operating income for the three months ended
September 30, 1995 and 1994. Price and volume changes are
presented for sales.
Three Months Ended Percentage
Sept. 30, Sept. 30, 1995 vs 1994 Change* due to
In millions 1995 1994 Dollars % Price Volume
Industry segment sales
Chemicals &
Performance Products $1,434 $1,187 $247 21% 18% 3%
Plastic Products 2,313 1,948 365 19% 19% (1)%
Hydrocarbons & Energy 527 520 7 1% 7% (5)%
Consumer Specialties 574 542 32 6% 4% 2%
Unallocated 36 19 17 89% nm nm
Total $4,884 $4,216 $668 16% 15% 1%
Industry segment operating income
Chemicals &
Performance Products $422 $182 $240 132%
Plastic Products 671 305 366 120%
Hydrocarbons & Energy (26) 23 (49) (213)%
Consumer Specialties 18 0 18 nm
Unallocated (139) (77) (62) (80)%
Total $946 $433 $513 118 %
* not intended to add
nm - not meaningful
Third Quarter 1995 vs Third Quarter 1994 (Continued)
The following are selected data for the three months ended
September 30, 1995 and 1994.
Three Months Ended
Dollars in millions, Sept. 30, Sept. 30, 1995 vs 1994
except for share amounts 1995 1994 Dollars %
Cost of sales $3,213 $3,057 $156 5%
% of sales 66% 73% (7) points
Research and development,
promotion and advertising, selling
and administrative expenses 729 721 8 1%
Operating income 946 433 513 118%
% of sales 19% 10% 9 points
Equity in earnings of
20%-50% owned companies 14 25 (11) (44)%
Effective tax rate
from continuing operations 37.5% 40.3% 2.8 points
Income from continuing operations 571 237 334 141%
Net income available
for common stockholders 571 288 283 98%
Earnings per common share
from continuing operations $2.15 $0.86 $1.29 150%
Earnings per common share $2.15 $1.04 $1.11 107%
Operating Rate Percentage 92% 94% (2) points
Company Summary
Sales for the third quarter of 1995 were $4.9 billion, up 16
percent from $4.2 billion in the same period last year. The
result was due to increases of 15 percent in selling prices and 1
percent in volume. Generally, the U.S. dollar weakened versus
foreign currencies compared to the third quarter of 1994. This
resulted in a favorable impact on sales of approximately 1.9
percentage points of the increase in selling price. Sales in the
United States of $2.1 billion were higher by $116 million or 6
percent when compared to the same period a year ago resulting
primarily from a 11 percent increase in selling prices. Sales in
Europe of $1.5 billion increased 31 percent versus the third
quarter of 1994 as selling prices increased 24 percent and volume
increased 6 percent. Sales in the rest of the world were up 19
percent to $1.2 billion as selling prices increased 15 percent
and volume increased 7 percent.
Operating income of $946 million was up 118 percent for the
quarter versus $433 million in the third quarter of 1994.
Operating income in the United States increased 54 percent to
$390 million. Non-U.S. operating income showed dramatic
improvement. In Europe, operating income increased to $261
million from $29 million in the third quarter last year, up 800
percent. Operating income in the rest of the world was up 95
percent to $295 million from $151 million in the same period a
year ago. These results reflected the impact of higher selling
prices in all geographic areas and stronger volume in Europe and
the Rest of the World. The impact of the weaker dollar on
operating income versus the third quarter of 1994 was not
significant.
Chemicals and Performance Products
Sales of Chemicals and Performance Products were $1.4 billion, an
increase of 21 percent compared to the corresponding period a
year ago, as selling prices were up 18 percent and volume
increased 3 percent. Operating income of $422 million increased
132 percent versus $182 million in the third quarter of 1994.
Chemicals and Metals sales of $895 million were up 21 percent
versus the same period a year ago. Selling prices increased 23
Third Quarter 1995 vs Third Quarter 1994 (Continued)
percent with increases strong across all geographic areas.
Selling prices for ethylene glycol, caustic soda and vinyl
chloride monomer maintained their good performance. Volume was
down 2 percent due mainly to North America. Volume was up in
Europe and the Pacific area. Price increases more than doubled
the operating income for Chemicals and Metals. Sales of
Performance Products were up 21 percent versus the third quarter
of 1994. Volume increased 11 percent and selling prices 9
percent compared to the corresponding period a year ago. Volume
increased in all geographic areas with Pacific and Europe
achieving the largest gains. Operating income increased 29
percent as a result of strong contributions from numerous
businesses in Performance Products. Start-up of a new plant in
Indonesia and a joint venture plant in Saudi Arabia added needed
latex capacity.
Plastic Products
Sales of Plastic Products were $2.3 billion, an increase of 19
percent compared to the third quarter of 1994. Selling prices
were up 19 percent and volume decreased 1 percent versus the
corresponding period a year ago. Operating income for this
segment improved 120 percent to $671 million from $305 million in
the third quarter of 1994, primarily as the result of price
increases. Thermoplastics sales were $1.2 billion, up 18 percent
from a year ago. Selling prices were up 27 percent with all
geographic areas contributing to the increase. Price increases
were the largest in Europe and Latin America versus last year's
difficult pricing environment. Volume was down 7 percent with
the Pacific area impacted most by China's withdrawl from the
polystyrene market and an exceptionally strong volume in the
third quarter 1994. Operating income for Thermoplastics nearly
tripled versus the third quarter 1994. Sales of Thermosets were
$836 million, up 25 percent from the corresponding 1994 period as
volume increased 10 percent and prices increased 14 percent. The
isocyanates and urethanes businesses were particularly good
performers. The industry balances for propylene oxide,
isocyanates, urethanes and epoxy intermediates remain tight and
pricing continues to be positive. Sales of Fabricated Products
were $261 million, an increase of 5 percent compared to the $248
million recorded in the third quarter of 1994. Higher selling
prices accounted for an 8 percent increase and volume was down 2
percent. The anticipated slowdown in North American residential
construction was mitigated by strong performance in the
commercial sector. Operating income for Fabricated Products
increased 16 percent versus the third quarter of 1994.
Hydrocarbons and Energy
Sales in the Hydrocarbons and Energy segment were $527 million,
an increase of 1 percent compared to the third quarter of 1994.
Volume was down 5 percent and selling prices increased 7 percent
versus the same period a year ago. An operating loss of $26
million was reported for this segment in the third quarter of
1995 compared to operating income of $23 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 about 3 percent
higher than a year ago, with increases in purchased hydrocarbons
offsetting decline in energy costs in North America.
Destec Energy Inc. reported lower third quarter sales and
substantially lower net income compared to the third quarter of
1994. This was mainly attributable to the expiration of their
long term Texas power sales agreements. Destec is attempting to
negotiate new contracts to sell the available capacity from the
CoGen Lyondell facility and from Dow's Freeport facility to
industrials, utilities, municipalities and cooperatives. Two
long-term power sales agreements were signed with the Lower
Colorado River Authority, a large Texas power system, and the
Oakland, California Airport. However, no assurances can be made
that other new contracts can be obtained or that the revenues
generated from any new contracts will replace all of the revenue
and gross margin generated by the recently expired contracts.
Manufacturing Costs
Dow's global plant operating rate for its Chemicals and Plastics
businesses was 92 percent, down from 94 percent in the third
quarter of 1994. Manufacturing costs for these businesses,
adjusted for volume, were up 6 percent compared to the same
period a year ago, primarily due to higher purchased costs for
Hydrocarbons and Energy, higher fixed costs due to new plants and
a weaker U.S. dollar which increased costs outside the United
States.
Third Quarter 1995 vs Third Quarter 1994 (Continued)
Consumer Specialties
Sales for Consumer Specialties were $574 million, up 6 percent
versus the same period last year. Selling prices increased 4
percent while volume was up 2 percent. Operating income was $18
million, an increase of over the break-even in the third quarter
of 1994 with both Agricultural Products and Consumer Products
contributing to the improvement.
Agricultural Products sales of $320 million were up 5 percent
from the third quarter of 1994. Selling prices increased 4
percent and volume was up 1 percent for the quarter. Volume
growth was strongest in Europe which was up nearly 16 percent.
Volume increased across a broad spectrum of product lines, from
newer products such as Broadstrike and Sentricon, to core
products like Dursban and Lorsban. Operating income for the
third quarter of 1995 improved modestly compared to the third
quarter of 1994.
Consumer Products sales were $254 million, up 7 percent from the
third quarter of 1994. Selling prices increased about 4 percent
compared to a year earlier and volume grew 3 percent. The North
American Home Food Management group led by Ziploc storage bags
remains the strongest business for Consumer Products. During the
past twelve months, DowBrands has improved its leading position
in this market despite the introduction of competitive products.
Consumer Products' operating income improved in the third quarter
of 1995 compared to the same quarter last year by more than 200
percent.
Unallocated
In the third quarter of 1995, a loss of $139 million was reported
for this segment compared to a loss of $77 million in the third
quarter of 1994. The increase was mainly due to severance costs
and a higher level of resources assigned to new businesses in the
Ventures group.
Other Income (Expense)
Equity in earnings of 20%-50% owned companies decreased $11
million compared to the corresponding period a year ago,
primarily due to no longer recognising equity earnings of Dow
Corning. On May 15, 1995, Dow Corning Corporation announced that
it had filed for protection under Chapter 11 of the United States
Bankruptcy Code with the United States Bankruptcy Court in Bay
City, Michigan.
Net financial expenses, which are the total of interest expense,
interest income and foreign exchange, amounted to $7 million this
quarter, significantly below the $44 million in the third quarter
of 1994. This was primarily due to the large cash position
created by the sale of the Company's pharmaceutical business in
the second quarter of 1995.
Provision for Taxes on Income
The effective tax rate from continuing operations for the third
quarter was 37.5 percent compared to a restated 40.3 percent in
the third quarter of 1994.
Income from Continuing Operations
The third quarter's income from continuing operations was $571
million or $2.15 per share. In the third quarter of 1994 income
from continuing operations was $237 million or 86 cents per
share. This increase reflected improved operating results,
primarily in the Company's chemicals and plastics businesses.
Discontinued Operations
Income from the pharmaceutical business in the third quarter of
1994 was $51 million. Net sales attributed to the pharmaceutical
business for the three months ended March 31, 1994, June 30,
1994, September 30, 1994, and March 31, 1995, were $753, $808,
$830 and $757 million, respectively. Taxes on income from the
pharmaceutical business for the three months ended March 31,
1994, June 30, 1994, September 30, 1994 and March 31, 1995 were
$25, $33, $30 and $36 million, respectively.
Net Income Available for Common Stockholders
The third quarter's net income available for common stockholders
was $571 million or $2.15 per share. This compared with net
income for the corresponding period last year of $288 million or
$1.04 per share.
First Nine Months 1995 vs First Nine Months 1994
The following table represents geographic sales and operating
income for the nine months ended September 30, 1995 and 1994.
Price and volume changes are presented for sales.
Nine Months Ended Percentage
Sept. 30, Sept 30, 1995 vs 1994 Change* due to
In millions 1995 1994 Dollars % Price Volume
Geographic sales
United States $6,942 $5,948 $994 17% 15% 1%
Europe 5,036 3,436 1,600 47% 29% 14%
Rest of world 3,628 2,746 882 32% 22% 12%
Total $15,606 $12,130 $3,476 29% 20% 7%
Geographic operating income
United States $1,266 $802 $464 58%
Europe 966 169 797 472%
Rest of world 996 331 665 201%
Total $3,228 $1,302 $1,926 148%
The following table represents industry segment sales and
operating income for the nine months ended
September, 30, 1995 and 1994. Price and volume changes are
presented for sales.
Nine Months Ended Percentage
Sept. 30, Sept. 30, 1995 vs 1994 Change* due to
In millions 1995 1994 Dollars % Price Volume
Industry segment sales
Chemicals &
Performance Products $4,432 $3,243 $1,189 37% 25% 10%
Plastic Products 7,068 5,351 1,717 32% 26% 5%
Hydrocarbons & Energy 1,812 1,445 367 25% 13% 11%
Consumer Specialties 2,221 2,006 215 11% 4% 7%
Unallocated 73 85 (12) (14)% nm nm
Total $15,606 $12,130 $3,476 29% 20% 7%
Industry segment operating income
Chemicals &
Performance Products $1,247 $388 $859 221%
Plastic Products 2,009 713 1,296 182%
Hydrocarbons & Energy (59) 49 (108) (220)%
Consumer Specialties 313 274 39 14%
Unallocated (282) (122) (160) nm
Total $3,228 $1,302 $1,926 148%
* not intended to add
nm - not meaningful
First Nine Months 1995 vs First Nine Months 1994 (Continued)
The following are selected data for the nine months ended
September 30, 1995 and 1994.
Nine Months Ended
Dollars in millions, Sept. 30, Sept. 30, 1995 vs 1994
except for share amounts 1995 1994 Dollars %
Cost of sales $10,110 $8,770 $1,340 15%
% of sales 65% 72% (7) points
Research and development,
promotion and advertising, selling
and administrative expenses 2,274 2,074 200 10%
Operating income 3,228 1,302 1,926 148%
% of sales 21% 11% 10 points
Equity in earnings of
20%-50% owned companies 54 83 (29) (35)%
Effective tax rate
from continuing operations 42.0% 39.2% 2.8 points
Income from continuing operations 1,469 584 885 152%
Net income available
for common stockholders 1,656 709 947 134%
Earnings per common share
from continuing operations $5.41 $2.12 $3.29 155%
Earnings per common share $6.09 $2.57 $3.52 137%
Operating Rate Percentage 94% 91% 3 points
Company Summary
Sales for the first nine months of 1995 were $15.6 billion, up 29
percent from $12.1 billion in the same period last year. The
result was due to increases of 20 percent in selling prices and 7
percent in volume. Generally, the U.S. dollar weakened versus
foreign currencies compared to the first nine months of 1994.
This resulted in a favorable impact on sales of approximately 2.6
percentage points of the increase in selling prices. Sales in
the United States of $6.9 billion were higher by $994 million or
17 percent when compared to the same period a year ago as selling
prices increased 15 percent and volume was up 1 percent. Sales
in Europe of $5.0 billion increased 47 percent versus the third
quarter of 1994 as volume increased 14 percent and selling prices
increased 29 percent. Sales in the rest of the world were up 32
percent to $3.6 billion as selling prices increased 22 percent
and volume increased 12 percent.
Operating income of $3.2 billion was up 148 percent for the first
nine months of 1995 versus $1.3 billion in the first nine months
of 1994. Operating income in the United States increased 58
percent to $1.3 billion. In Europe, operating income increased
to $966 million from $169 million in the third quarter last year,
up 472 percent. Operating income in the rest of the world was up
201 percent to $996 million from $331 million in the same period
a year ago. These results reflected 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 nine
months of 1994 was not significant.
Chemicals and Performance Products
Sales of Chemicals and Performance Products were $4.4 billion, an
increase of 37 percent compared to the corresponding period a
year ago, as selling prices were up 25 percent and volume
increased 10 percent. Operating income of $1.2 billion increased
221 percent versus $388 million in the first nine months of 1994.
Chemicals and
First Nine Months 1995 vs First Nine Months 1994 (Continued)
Metals sales of $2.8 billion were up 46 percent versus the same
period a year ago. Selling prices increased 36 percent with
increases strong across all geographic areas. The improvement
in selling prices coupled with a 7 percent increase in volume
resulted in a 312 percent increase in operating income compared
to the first nine months of 1994. Selling prices for caustic
soda improved substantially versus last year. Sales of
Performance Products were up 23 percent versus the first nine
months of 1994. Volume increased 13 percent and selling prices
9 percent compared to the corresponding period a year ago. Volume
increased in all geographic areas with Latin America and Europe
achieving the largest gains. Operating income increased 41
percent as a result of strong contributions from various
businesses in Performance Products during the first nine months
of 1995. Latex was a strong contributor and was helped by the
start-up of a new plant in Indonesia and joint venture plant in
Saudi Arabia that added needed capacity.
Plastic Products
Sales of Plastic Products were $7.1 billion, an increase of 32
percent compared to the first nine months of 1994. Selling
prices were up 26 percent and volume increased 5 percent versus
the corresponding period a year ago. Operating income for this
segment improved 182 percent to $2.0 billion from $713 million in
the first nine months of 1994, as the result of both price and
volume increases. Thermoplastics sales were $3.9 billion, up 43
percent from a year ago. Selling prices were up 40 percent with
all geographic areas contributing to the increase. Price
increases were the largest in Latin America and Europe. Volume
was up 2 percent. Polyethylene, polystyrene and engineering
thermoplastics all showed substantial increases in profitability
resulting in a 410 percent increase in operating income for
Thermoplastics versus the first nine months of 1994. Sales of
Thermosets were $2.5 billion, up 25 percent from the
corresponding 1994 period as volume increased 10 percent and
selling prices were up 14 percent. Operating income for
Thermosets increased 51 percent over last year. Sales of
Fabricated Products were $745 million, an increase of 11 percent
compared to the $673 million recorded in the first nine months of
1994 as selling prices increased 9 percent and volume was up 2
percent. Operating income for Fabricated Products increased 27
percent over the first nine months of 1994.
Hydrocarbons and Energy
Sales in the Hydrocarbons and Energy segment were $1.8 billion,
an increase of 25 percent compared to the first nine months of
1994. Volume was up 11 percent and selling prices increased 13
percent versus the same period a year ago. An operating loss of
$59 million was reported for this segment in the first nine
months of 1995 compared to operating income of $49 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 versus the first nine months of 1994.
Destec Energy Inc. reported lower first nine months sales and
substantially lower net income compared to the first nine months
of 1994. Destec's first nine months 1995 results were impacted
by the expiration of two major Texas power purchase contracts
during 1994. Destec's remaining Texas power purchase contract
expired on April 30, 1995.
Manufacturing Costs
Dow's global plant operating rate for its Chemicals and Plastics
businesses was 94 percent, up from 91 percent in the first nine
months of 1994. Manufacturing costs for these businesses,
adjusted for volume, were up 6 percent compared to the same
period a year ago, primarily due to higher feedstock costs, new
capacity and the impact of a weaker U.S. dollar.
Consumer Specialties
Sales for Consumer Specialties were $2.2 billion, up 11 percent
versus the same period last year as restated. Volume increased 7
percent while selling prices were up 4 percent compared to the
first nine months of 1994. Operating income was $313 million, an
increase of 14 percent from $274 million in the first nine months
of 1994.
Agricultural Products sales of $1.5 billion were up 14 percent
from the first nine months of 1994. Volume increased 9 percent
and selling prices were up 4 percent for the for the first nine
months of 1995. Volume was up in all geographic areas with the
largest increase in Europe. Improved performance across many
product lines resulted in operating income increasing 15 percent
for Agricultural Products versus a year ago.
First Nine Months 1995 vs First Nine Months 1994 (Continued)
Consumer Products sales were $675 million, up 4 percent from the
first nine months of 1994. Volume increased 3 percent while
selling prices increased 1 percent compared to a year earlier.
Operating income for the first nine months of 1995 declined from
the same period 1994 due largely to increased employee severance
costs related to cost reduction efforts as well as transition
costs related to the new liquids filling plant in Ohio and the
shutdown of older facilities.
Unallocated
In the first nine months of 1995, a loss of $282 million was
reported for this segment compared to a loss of $122 million in
the same period a year ago. The larger loss in 1995, versus the
first nine months of 1994, is due primarily to the increased
employee severance costs, lower earnings from the consolidated
insurance and finance subsidiaries and a higher level of
resources assigned to new businesses in the Ventures group.
Other Income (Expense)
On May 15, 1995, Dow Corning Corporation announced that it had
filed for protection under Chapter 11 of the United States
Bankruptcy Code with the United States Bankruptcy Court in Bay
City, Michigan. The Company is a 50 percent shareholder in Dow
Corning Corporation. The Company's investment in Dow Corning was
$374 million at March 31, 1995.
Dow Corning reported an after tax net loss of $117 million for
the first half of 1995, including an after tax net loss of $167
million for the second quarter. Dow Corning's 1995 first half
results were impacted by a $221 million after tax charge taken to
reflect a change in accounting method for its contribution to a
breast implant global settlement. The change in the method of
accounting from a present value or discounted basis, to an
undiscounted basis, resulted from uncertainties arising from Dow
Corning's filing for protection under Chapter 11.
As a result of Dow Corning's Chapter 11 filing and its 1995
second quarter loss, the Company has recognized a pretax charge
against income of $330 million, has fully reserved its net
investment in Dow Corning and will not recognize its 50 percent
share of future equity earnings while Dow Corning remains in
Chapter 11. The charge impacted the Company's second quarter
1995 earnings by $1.24 per share.
Equity in earnings of 20%-50% owned companies decreased $29
million compared to the first nine months of 1994, primarily due
to reduced equity earnings from Dow Corning.
Net financial expenses, which are the total of interest expense,
interest income and foreign exchange, amounted to $133 million in
the first nine months of 1995 compared to $212 million a year
ago. Net financial expenses in the first nine months of 1995
were positively impacted primarily due to the large cash position
created by the Company's sale of the pharmaceutical business in
the second quarter of 1995.
Provision for Taxes on Income
The effective tax rate from continuing operations for the first
nine months of 1995 was 42.0 percent compared to 39.2 percent in
the first nine months of 1994. The increase this year was due
largely to the Company reserving the full amount of its
investment in Dow Corning Corporation with no related tax
benefit. Excluding the impact of the charge related to Dow
Corning, the tax rate would have been approximately 37 percent.
Income from Continuing Operations
Income from continuing operations for the first nine of 1995 of
$1,469 million or $5.41 per share, was reduced by $1.24 per share
as a result of the Company reserving the full amount of its net
investment in Dow Corning Corporation. Excluding this charge,
earnings per share from continuing operations was $6.65 per
share. In the first nine months of 1994 income from continuing
operations was $584 million or $2.12 cents per share. This
increase reflects improved operating results, primarily in the
Company's chemicals and plastics businesses.
First Nine Months 1995 vs First Nine Months 1994 (Continued)
Discontinued Operations
On June 28, 1995, the Company completed the sale of its
approximately 197 million shares of Marion Merrell Dow to Hoechst
for about $5.1 billion or $25.75 per share. In addition,
subsidiaries of the Company have completed the sale of the
Company's Latin American pharmaceutical business based in
Argentina, Brazil and Mexico to Roussel Uclaf S.A. for about $133
million. These two transactions, net of taxes on income of $382
million, increased the Company's first half of 1995 earnings by
approximately $169 million or 62 cents per share.
The sale of the pharmaceutical business is not expected to have a
material impact on the Company's future earnings and cash flow
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.
Net Income Available for Common Stockholders
Net income available for common stockholders for the first nine
months of 1995 was $1.7 billion or $6.09 per share. This
compares with net income for the corresponding period last year
of $709 million or $2.57 per share.
Expectations for the Remainder of 1995
As a result of the Company's geographic diversity (55 percent of
first half sales were outside the United States) and the strength
in the Company's major businesses, it is expected that the fourth
quarter of 1995 will improve compared to the fourth quarter of
1994. There has been some price softening in ethylene,
polyethylene and VCM going into the fourth quarter of 1995. It is
anticipated that the bulk of the inventory correction in basic
plastics is over and that the rate of price decline is slowing.
The third quarter of 1995 was better than expected and it is not
anticipated that that fouth quarter will reach this level. The
Company continues to emphasize cost reduction and expects the
fourth quarter of 1995 and beyond to benefit from the results of
this effort.
General
In early May 1995, the Board of Directors announced a quarterly
dividend of 75 cents per share, reflecting a quarterly increase
of 10 cents per share. This increased dividend was paid in the
second and third quarters of 1995. The third quarter dividend was
the 335th consecutive quarterly dividend since 1912. Dow has
maintained or increased the dividend throughout that time.
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.
On May 15, 1995, Dow Corning announced that it had voluntarily
filed for protection under Chapter 11 of the United States
Bankruptcy Code. Under Chapter 11, all claims against Dow
Corning (although not against its co-defendants) are
automatically stayed.
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 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 a
global Breast Implant Litigation Settlement Agreement (the
"Settlement Agreement"); 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.
Breast Implant Matters (Continued)
Dow Corning reported an after tax net loss of $167 million for
the second quarter of 1995, of which the Company's share amounted
to $83 million. Dow Corning's second quarter loss was a result
of a $221 million after tax charge taken to reflect a change in
accounting method from the present value basis noted above to an
undiscounted basis
resulting from the uncertainties associated with its Chapter 11
filing. As a result of Dow Corning's 1995 second quarter loss
and Chapter 11 filing, the Company recognized a pretax charge
against income of $330 million for the second quarter of 1995,
fully reserved its investment in Dow Corning and will not
recognize its 50 percent share of future equity earnings while
Dow Corning remains in Chapter 11.
On September 1, 1994, Judge Sam C. Pointer, Jr. of the United
States District Court for the Northern District of Alabama
approved the Settlement Agreement pursuant to which plaintiffs
choosing to participate in the Settlement Agreement released the
Company from liability. The Company was not a participant in the
Settlement Agreement nor was it required to contribute to the
settlement. On October 7, 1995, Judge Pointer issued an order
which concluded that the Settlement Agreement was not workable in
its present form because the funds committed to it by industry
participants were inadequate. The order provided that plaintiffs
who had previously agreed to participate in the Settlement
Agreement may opt-out after November 30, 1995.
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 noted
above, is 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 a total of
13,132 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.
Judge Pointer 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. 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 has filed 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 4,110 breast implant cases
pending in state courts in California, Indiana, Michigan, New
Jersey and New York, and 114 actions in Pennsylvania were
dismissed. Of these rulings, the California ruling was final and
has been appealed. The New Jersey ruling has been reconsidered
and all claims were again dismissed, except for a single claim of
negligence. Plaintiffs in New York filed a motion to reconsider
based on Judge Pointers' April 25, 1995 ruling. On September 22,
1995, Judge Lobis, presiding over the consolidated New York
breast implant litigation,
Breast Implant Matters (Continued)
dismissed all counts of all cases filed against the Company in
New York on the ground that no reasonable jury could find against
the Company. Other rulings that are not final decisions are also
subject to reconsideration by the trial courts. The Company
expects that further motions to reconsider may be filed in those
states as a result of Judge Pointer's April 25 decision. The
Company remains a defendant in other breast implant product
liability cases originally 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 state product liability
cases.
The Company is also a defendant in ten 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 virtually 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.
On June 13, 1995, Judge Magnuson denied plaintiffs' motion to
reconsider his ruling based on Judge Pointer's April 25 decision,
and granted the Company's request to enter a final judgment in
its favor. Plaintiffs have appealed the final judgment to the
U.S. Court of Appeals for the Eighth Circuit.
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 the Harris County product liability cases. In those
cases (and in cases brought in certain 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 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 product
liability cases..
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 the Dallas County
product liability cases. It is impossible to predict the outcome
or to estimate the cost to the Company of resolving any of these
actions.
Three breast implant product liability cases brought against the
Company have now gone to trial. In February 1995, a Harris
County jury exonerated the Company in one case and found the
Company jointly and severally liable with Dow Corning for $5.23
million on a single count in a second case. After the verdict,
however, the Court overturned the jury's verdict and entered
judgment for the Company. On October 30, 1995 a state court jury
in Reno, Nevada found the Company liable for $3,953,654 in
compensatory damages and $10 million in punitive damages. The
Company will file a motion before the trial judge to set that
verdict aside and, if that motion is denied, will appeal the
verdict. The Company will also file a claim in Dow Corning's
bankruptcy proceedings to recover from Dow Corning its share of
any monies the Company might pay as a result of the Nevada
verdict.
With the principal exception of the cases filed in Michigan and
approximately 150 cases filed in Texas, Dow Corning or the
Company have removed virtually all cases originally filed in
state courts across the country to various federal courts. Those
cases have been, or are in the process of being, transferred to
Judge Pointer. Plaintiffs have asked Judge Pointer to remand
those cases back to their states of origin, and the Company has
opposed that motion.
Breast Implant Matters (Continued)
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.
Environmental Matters
On September 27, 1993, February 23, 1994, and October 31, 1994,
the U.S. Environmental Protection Agency filed actions against
the Company alleging violations of the boiler and industrial
furnace regulations. The Company agreed to pay a total of
$388,983 in settlement of $1,029,204 of proposed civil fines with
respect to four Company sites. Proposed civil fines for one
additional Company site total $576,790.
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. On August 17, 1995, a United
States Environmental Appeals Board approved a consent agreement
between DowElanco and the EPA under which DowElanco paid a civil
fine of $876,000 to resolve the matter.
On August 11, 1995, the U.S. Environmental Protection Agency
filed an administrative enforcement action against the Company in
connection with the Company's report of exceedences of its
monthly average limit for phosphorus discharge to the
Tittabawassee River for several months in 1994 and 1995. No
demand for monetary sanctions was made. Based on the same facts,
Michigan's Attorney General and the Michigan Department of
Natural Resources filed an action against the Company on August
18, 1995 in the Circuit Court for Ingham County, Michigan,
seeking "appropriate penalties" in excess of $50,000. A third
action, also based on the same facts, was filed on August 15,
1995 in the U.S. District Court for the Eastern District of
Michigan by PIRGIM Public Interest Lobby. That action seeks the
payment of unspecified amounts, costs and attorney fees.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
27 Financial Data Schedule
(b) Reports on Form 8-K.
A Current Report on Form 8-K dated June 28, 1995, was filed with
the Securities and Exchange Commission. Included within that
report were the Company's press release describing the sale of
its shares of Marion Merrell Dow to Hoechst and pro forma
financial information related to that transaction.
The following trademarks of DowElanco or its subsidiaries appear
in this report: Broadstrike, Dursban, Lorsban and Sentricon.
The following trademark of DowBrands or its subsidiaries appears
in this report: Ziploc.
SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of1934, 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: November 13, 1995
Roger L. Kesseler
Roger L. Kesseler
Vice President & Controller
(Chief Accounting Officer)
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