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, 1996
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
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Outstanding at
Class September 30, 1996
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Common Stock, $2.50 par value 242,992,633 shares
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THE DOW CHEMICAL COMPANY
Table of Contents
Page
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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 9
Third Quarter Earnings Announcement 9
Acquisitions and Divestitures 11
Changes in Financial Condition 12
Results of Operations 13
Part II - Other Information
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
Exhibit 27 23
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<TABLE>
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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
- ---------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
(Unaudited) Sept.30, Sept.30, Sept.30, Sept.30,
In millions, except for share amounts 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $4,992 $4,884 $15,150 $15,606
- ---------------------------------------------------------------------------------------------------
Operating Costs and Expenses
Cost of sales 3,552 3,213 10,475 10,110
Insurance and finance company
operations, pretax income (14) (13) (50) (35)
Research and development expenses 182 203 567 609
Promotion and advertising expenses 94 87 281 313
Selling and administrative expenses 418 439 1,331 1,352
Amortization of intangibles 14 9 36 29
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Total operating costs and expenses 4,246 3,938 12,640 12,378
- ---------------------------------------------------------------------------------------------------
Operating Income 746 946 2,510 3,228
- ---------------------------------------------------------------------------------------------------
Other Income (Expense)
Equity in earnings of 20%-50% owned companies 25 14 65 54
Interest expense and amortization of debt discount (112) (127) (354) (326)
Interest income and foreign exchange-net 72 120 222 193
Net loss on investment (Note B) 0 0 0 (330)
Sundry income - net 56 2 166 16
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Total other income (expense) 41 9 99 (393)
- ---------------------------------------------------------------------------------------------------
Income before Provision for Taxes on Income 787 955 2,609 2,835
and Minority Interests
- ---------------------------------------------------------------------------------------------------
Provision for Taxes on Income 283 358 953 1,192
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Minority Interests' Share in Income 33 24 160 169
- ---------------------------------------------------------------------------------------------------
Preferred Stock Dividends 2 2 5 5
- ---------------------------------------------------------------------------------------------------
Income from Continuing Operations $469 $571 $1,491 $1,469
- ---------------------------------------------------------------------------------------------------
Discontinued Operations
Income from pharmaceutical businesses,
net of taxes on income 0 0 0 18
Gain on sale of pharmaceutical businesses,
net of taxes on income (Note C) 0 0 0 169
- ---------------------------------------------------------------------------------------------------
Net Income Available for Common Stockholders $469 $571 $1,491 $1,656
- ---------------------------------------------------------------------------------------------------
Average Common Shares Outstanding 244.4 265.8 247.7 272.1
- ---------------------------------------------------------------------------------------------------
Earnings per Common Share from Continuing Operations $1.92 $2.15 $6.02 $5.40
Earnings per Common Share $1.92 $2.15 $6.02 $6.09
- ---------------------------------------------------------------------------------------------------
Common Stock Dividends Declared per Share $0.75 $0.75 $2.25 $2.15
- ---------------------------------------------------------------------------------------------------
Depreciation $332 $335 $948 $1,003
Capital Expenditures $311 $299 $916 $1,077
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</TABLE>
Notes to Financial Statements
- -----------------------------
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, 1995.
Note B: In May 1995, Dow Corning Corporation filed for protection under
Chapter 11 of the United States Bankruptcy Code. The Company is a
50 percent shareholder in Dow Corning Corporation. As a result of
Dow Corning's Chapter 11 filing and its 1995 second quarter loss,
the Company recognized a pretax charge against income of
$330 million, 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: In June 1995, the Company sold its 197 million shares of Marion
Merrell Dow to Hoechst for $5.1 billion or $25.75 per share. In
addition, subsidiaries of the Company sold the Company's Latin
American pharmaceutical business based in Argentina, Brazil and
Mexico to Roussel Uclaf S.A. for $133 million. These two transactions,
net of taxes on income of $382 million, increased the Company's second
quarter of 1995 earnings by $169 million or 62 cents per share.
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<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
- ---------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31,
In millions (Unaudited) 1996 1995
- ---------------------------------------------------------------------------------------------------
Assets
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $2,712 $2,839
Marketable securities and interest-bearing deposits 496 611
Accounts and notes receivable:
Trade (less allowance for doubtful receivables-1996, $60; 1995, $53) 2,989 2,729
Other 1,416 1,380
Inventories:
Finished and work in process 2,190 2,197
Materials and supplies 591 551
Deferred income tax assets-current 308 247
-------------------------------------------------------------------------------------------------
Total current assets 10,702 10,554
- ---------------------------------------------------------------------------------------------------
Investments
Capital stock at cost plus equity in accumulated
earnings of 20%-50% owned companies 1,593 848
Other investments 1,770 1,558
Noncurrent receivables 376 314
-------------------------------------------------------------------------------------------------
Total investments 3,739 2,720
- ---------------------------------------------------------------------------------------------------
Plant Properties
Plant properties 23,323 23,218
Less accumulated depreciation 15,073 15,105
-------------------------------------------------------------------------------------------------
Net plant properties 8,250 8,113
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Other Assets
Goodwill (net of accumulated amortization-1996, $167; 1995, $177) 763 658
Deferred income tax assets-noncurrent 733 779
Deferred charges and other assets 797 758
-------------------------------------------------------------------------------------------------
Total other assets 2,293 2,195
- ---------------------------------------------------------------------------------------------------
Total Assets $24,984 $23,582
- ---------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
- ---------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31,
In millions (Unaudited) 1996 1995
- ---------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Notes payable $1,339 $323
Long-term debt due within one year 566 375
Accounts payable:
Trade 1,423 1,529
Other 687 717
Income taxes payable 821 791
Deferred income tax liabilities-current 40 55
Dividends payable 187 192
Accrued and other current liabilities 1,610 1,619
-------------------------------------------------------------------------------------------------
Total current liabilities 6,673 5,601
- ---------------------------------------------------------------------------------------------------
Long-Term Debt 4,180 4,705
- ---------------------------------------------------------------------------------------------------
Other Noncurrent Liabilities
Deferred income tax liabilities-noncurrent 850 659
Pension and other postretirement benefits-noncurrent 1,909 1,880
Other noncurrent obligations 1,412 1,260
-------------------------------------------------------------------------------------------------
Total other liabilities 4,171 3,799
- ---------------------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies 2,064 1,775
- ---------------------------------------------------------------------------------------------------
Temporary Equity
Temporary equity-other 110 313
Preferred stock at redemption value 128 131
Guaranteed ESOP obligation (103) (103)
-------------------------------------------------------------------------------------------------
Total temporary equity 135 341
- ---------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock 818 818
Additional paid-in capital 260 315
Retained earnings 11,072 10,159
Unrealized gains (losses) on investments 184 62
Cumulative translation adjustments (352) (349)
Treasury stock, at cost (4,221) (3,644)
-------------------------------------------------------------------------------------------------
Net stockholders' equity 7,761 7,361
- ---------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $24,984 $23,582
- ---------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
- ---------------------------------------------------------------------------------------------------
Nine Months Ended
Sept.30, Sept.30,
In millions (Unaudited) 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Income from Continuing Operations $1,491 $1,469
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 984 1,033
Provision for deferred income tax 161 137
Undistributed earnings of 20%-50% owned companies (34) (23)
Minority interests' share in income 160 169
Net loss on investment 0 330
Net gain other (16) (78)
Changes in assets and liabilities that provided (used) cash:
Accounts receivable (180) (555)
Inventories 55 (294)
Accounts payable (253) (203)
Other assets and liabilities 223 308
Operating activities related to discontinued operations 0 84
-------------------------------------------------------------------------------------------------
Cash provided by operating activities 2,591 2,377
- ---------------------------------------------------------------------------------------------------
Investing Activities
Purchases of plant properties (916) (1,068)
Proceeds from sales of plant properties 90 57
Purchases of consolidated companies (224) 0
Investments in unconsolidated affiliates (824) (39)
Proceeds from sale of unconsolidated affiliates 151 0
Proceeds from sale of pharmaceutical businesses 0 5,060
(net of cash divested)
Purchases of investments (1,571) (2,126)
Proceeds from sales of investments 1,563 1,731
Investing activities related to discontinued operations 0 (28)
-------------------------------------------------------------------------------------------------
Cash provided (used) by investing activities (1,731) 3,587
- ---------------------------------------------------------------------------------------------------
Financing Activities
Changes in short-term notes payable 893 (328)
Payments on long-term debt (681) (399)
Proceeds from issuance of long-term debt 281 98
Purchases of treasury stock (1,061) (1,294)
Proceeds from sales of common stock 221 121
Distributions to minority interests (71) (79)
Dividends paid to stockholders (564) (564)
Financing activities related to discontinued operations 0 17
-------------------------------------------------------------------------------------------------
Cash used in financing activities (982) (2,428)
- ---------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (5) 0
- ---------------------------------------------------------------------------------------------------
Summary
Increase (decrease) in cash and cash equivalents (127) 3,536
Cash and cash equivalents at beginning of year 2,839 569
-------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $2,712 $4,105
- ---------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
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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 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 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 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 then-current
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 could 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 1995 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 over
13,000 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, concert of action 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.
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, will
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.
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Commitments and Contingent Liabilities (Continued)
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 $229 million at September 30,
1996, for probable environmental remediation and restoration
liabilities, including $17 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 liability, 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.
Dow has an active risk management program consisting of
numerous insurance policies secured from many carriers at
various times. These policies provide coverage which will be
utilized to minimize the impact, if any, of the
contingencies described above.
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.
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, which expire in 1998 and 2004, to purchase
ethylene. The purchase price 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
manufacturing plants with a specified return on capital.
Total purchases under the agreements were $204 million, $252
million and $237 million in 1995, 1994 and 1993,
respectively.
At December 31, 1995, the Company had various outstanding
commitments for take or pay and throughput agreements,
including the Canadian subsidiary's 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)
- ----------------------------------------------------
1996 $248
1997 204
1998 185
1999 102
2000 73
2001 through expiration of contracts 174
- ----------------------------------------------------
Total $986
- ----------------------------------------------------
In addition to the take or pay obligations at December 31,1995,
the Company had outstanding purchase commitments which
range from one to eighteen years for steam, electrical
power, materials, property, and other items used in the
normal course of business of approximately $588 million. In
general, such commitments were at prices not in excess of
current market prices. In addition, the Company had other
outstanding direct and indirect commitments for construction
performance and lease payment guarantees and other
obligations of approximately $423 million.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussions in this quarterly report contains both
historical information and forward-looking statements. The
forward-looking statements involve risks and uncertainties
that affect the Company's operations, markets, products,
services, prices and factors as discussed in the Company's
filings with the Securities and Exchange Commission. These
risks and uncertainties include, but are not limited to,
economic, competitive, governmental and technological
factors. Accordingly, there is no assurance that the
Company's expectations will be realized.
THIRD QUARTER EARNINGS ANNOUNCEMENT (October 24, 1996)
Dow Chemical reports third quarter earnings of $1.92 per
share
Third Quarter of 1996 Highlights
Sales of $5.0 billion set a third quarter record for
continuing operations.
Earnings per share were $1.92, down 11 percent from $2.15 a
year ago.
Continued productivity improvements, including a 5 percent
drop in expenses, and volume growth of 11 percent versus a year
ago, contributed to a strong quarter.
- -----------------------------------------------------------------------
3 Months Ended 9 Months Ended
Sept. 30 Sept. 30
(In millions, except for
per share amounts) 1996 1995 1996 1995
---- ---- ---- ----
Net Sales $4,992 $4,884 $15,150 $15,606
Operating Income 746 946 2,510 3,228
Income from Continuing Operations 469 571 1,491 1,469
Earnings Per Common Share
from Continuing Operations 1.92 2.15 6.02 5.40
Earnings Per Common Share 1.92 2.15 6.02 6.09
- ------------------------------------------------------------------------
Note: Results for 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 sales of $5
billion, operating income of $746 million and earnings per
share of $1.92 for the third quarter of 1996.
"This was another good quarter for Dow," said J. Pedro
Reinhard, financial vice president and chief financial
officer. "Our strategy of continuously improving
productivity while focusing on value growth enabled us to
turn in a strong performance despite year-over-year price
declines and feedstock cost increases. Solid results from
Performance Chemicals and Performance Plastics helped to
buffer declines in other segments."
Sales for the quarter of $5 billion were up 2 percent from
the same period a year ago, reflecting a 9 percent decline
in prices and an 11 percent increase in volume. Despite
the $433 million erosion in prices and a $100 million
increase in feedstock and energy costs, operating income was
down only $200 million to $746 million from $946 million in
the third quarter of 1995. The lower prices and higher costs
were offset by volume gains and improved productivity.
Earnings for the quarter were $1.92 per share versus $2.15
per share for the same period last year.
"We are particularly pleased with this quarter's reduction
in expenses that occurred even while we were absorbing our
value-growth acquisitions in Argentina, Europe and the
U.S.," said Reinhard. "We are well positioned to not only
meet but exceed our expense reduction target for the year."
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Third Quarter Earnings Announcement (October 24, 1996)
(Continued)
Chemicals and Metals reported sales of $794 million and
operating income of $203 million compared to sales of $816
million and operating income of $324 million for the third
quarter of 1995. Higher energy costs and lower prices for
caustic soda and vinyl chloride monomer (VCM) versus a year
ago contributed to this segment's declines in revenue and
earnings. Prices for VCM, however, have trended upward from
the second quarter of this year.
Performance Chemicals posted sales of $919 million up
slightly from $902 million a year ago. Operating income was
$100 million, up 11 percent from $90 million in the third
quarter of 1995. Specialty Chemicals posted another good
quarter and recorded higher year-over-year profits for the
eleventh consecutive quarter demonstrating volume growth and
the value of the strategic portfolio restructuring
undertaken by that business. Lower prices for Emulsion
Polymers, especially in Europe, were partially offset by
higher volume. Agricultural Chemicals faced its typical
seasonal slowdown.
Plastics sales were $999 million up 5 percent from $952
million in the third quarter of 1995. Operating income was
$253 million down from $361 million a year ago mainly as the
result of overall price declines from last year's very high
levels, especially for polystyrene. During the quarter, the
Polystyrene business experienced solid volume growth.
Prices for polyethylene terephthalate (PET) continued to
soften. Polyethylene posted higher sales than a year ago as
strong volume offset lower prices. Prices for polyethylene
continued the upward trend that began earlier in the year
and high demand has resulted in our product being sold out
worldwide.
Performance Plastics posted sales of $1.3 billion and
operating income of $275 million compared to sales of $1.4
billion and operating income of $320 million for the same
period a year ago. Strong performance in North America for
polyurethanes was partially offset by lower prices and
volume in Europe and the impact of a significant plant
turnaround. The Epoxy Products business posted lower sales
than a year ago as a result of price declines primarily in
Intermediates and weaker computer industry fundamentals.
Fabricated Products posted higher earnings than a year ago,
due to a global increase in construction and lower
manufacturing costs.
Hydrocarbons and Energy recorded sales of $646 million up 23
percent from $527 million a year ago. The segment posted an
operating loss of $18 million, a $7 million improvement from
the third quarter of 1995, primarily due to improved
profitability at Destec.
The Diversified Businesses and Unallocated segment posted
sales of $297 million up slightly from $291 million for the
same period last year. The segment experienced a loss of
$67 million, $57 million better than the third quarter of
1995. DowBrands continues to contribute to the improvement
in this segment's results.
"The global economic outlook remains positive," said
Reinhard. "Our September sales were particularly strong,
creating good momentum for the fourth quarter. While higher
feedstock costs in the U.S. will continue to dampen results
somewhat, we expect to see higher comparisons for the
fourth quarter versus last year. Our strategy is on track
and 1996 should be another good year for Dow."
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ACQUISITIONS AND DIVESTITURES
In April 1995, the Company signed an agreement with
Bundesanstalt fuer vereinigungsbedingte Sonderaufgaben (BvS)
for the privatization of three state-owned chemical
companies in eastern Germany (referred to herein as BSL).
Economic transfer of business operations to the Company,
through management consulting and service agreements,
occurred in June 1995 with legal closing anticipated during
the first half of 1997. The Company will include the
financial results of BSL effective with the legal closing
date.
On closing, the Company will acquire 80 percent ownership
in BSL for an investment of approximately $195 million. BvS
will maintain a 20 percent ownership until the end of the
restructuring period of five years. After the restructuring
period, the Company will have a call option and BvS a put
option for the remaining 20 percent of BSL for an additional
investment of approximately $165 million. BvS is providing
certain incentives during the restructuring period to cover
portions of the reconstruction program and has retained
environmental cleanup obligations for existing facilities.
The Company intends to build several new facilities at
the BSL sites including a Dowlex linear low density
polyethylene plant and polypropylene, aniline and acrylic
acid plants, and to upgrade the chlorine plant and steam
cracker. A multi-feedstock liquid pipeline will be
constructed from the port of Rostock to the Boehlen site, as
well as harbor facilities, terminals and pump stations. As
part of the restructuring of the acquired sites, several
facilities will be closed and demolished.
In December 1995, a Company-controlled consortium
acquired the shares of Petroquimica Bahia Blanca (PBB) and
Indupa owned by the Argentine government for $358 million.
The consortium subsequently agreed, in 1996, to sell Indupa
and purchase Polisur S.A. This series of transactions will
result in the consortium owning, in Argentina, PBB (a
leading ethylene producer) and Polisur (a polyethylene
manufacturer). The net investment by the Company is expected
to be $376 million.
In January 1996, the Company and The Hartford Steam
Boiler Inspection and Insurance Company formed, through the
transfer of net assets and existing businesses, a 60:40
joint venture named Radian International LLC. The new
company provides environmental, information technology and
strategic chemical management services to industries and
governments worldwide. The book value of the net assets
transferred by the Company was $33 million.
In January 1996, the Company acquired an 80 percent share
in EniChem's INCA International SpA subsidiary, a producer
of polyethylene terephthalate (PET) resin and its major
precursor, purified terephthalic acid (PTA). The investment
by the Company was $155 million.
In January 1996, DowElanco, a 60 percent joint venture,
entered into agreements with Mycogen Corporation and the
Lubrizol Corporation for transactions through which
DowElanco, for a cash investment of $158 million, acquired
approximately a 47 percent equity stake in Mycogen and
Mycogen acquired DowElanco's United Agriseeds subsidiary.
In April 1996, the Company and E.I. duPont de Nemours and
Company formed, through the transfer of net assets and
existing businesses, a 50:50 joint venture named DuPont Dow
Elastomers L.L.C. The new company focuses on the discovery,
development, production and sale of thermoset and
thermoplastic elastomer products. The book value of the net
assets transferred by the Company was $529 million.
In September 1996, a consortium which includes a
subsidiary of Destec Energy, Inc. (Destec) completed the
acquisition of the Hazelwood Power Station, a large coal-
fired power generation facility, and the adjacent Hazelwood
Mine from the State of Victoria, Australia. The Destec
subsidiary holds a 20 percent interest in the consortium.
The investment by Destec was $164 million. Dow's ownership
of Destec exceeds 80 percent.
In June 1995, the Company completed the sale of its 197
million shares of Marion Merrell Dow to Hoechst A.G. for
$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 $133 million. These two
transactions, net of taxes on income of $382 million,
increased the Company's second quarter of 1995 earnings by
$169 million or 62 cents per share.
<PAGE>
---- Page 11----
CHANGES IN FINANCIAL CONDITION
The following tables represent total debt and working
capital at September 30, 1996 versus
December 31, 1995.
Sept 30, Dec. 31, Increase
In millions 1996 1995 (Decrease)
- -----------------------------------------------------------------------
Notes payable $1,339 $ 323 $1,016
Long-term debt
within one year 566 375 191
Long-term debt 4,180 4,705 (525)
- -----------------------------------------------------------------------
Total debt $6,085 $5,403 $ 682
- -----------------------------------------------------------------------
The notes payable increase of $1 billion was due mainly
to excess BSL funds being managed by the Company. The funds
are advance receipts of reconstruction funding from BvS, as
discussed in the Acquisitions and Divestitures section of
this report. These funds are recorded as both current assets
and current liabilities by the Company.
Sept 30, Dec. 31, Increase
In millions 1996 1995 (Decrease)
- -----------------------------------------------------------------------
Cash and cash equivalents $2,712 $ 2,839 $(127)
Marketable securities and
interest-bearing deposits 496 611 (115)
Accounts and notes receivable-net 4,405 4,109 296
Inventories:
Finished and work in process 2,190 2,197 (7)
Materials and supplies 591 551 40
Deferred income tax assets-current 308 247 61
- ----------------------------------------------------------------------
Total current assets 10,702 10,554 148
- ----------------------------------------------------------------------
Total current liabilities 6,673 5,601 1,072
- ----------------------------------------------------------------------
Working capital $4,029 $ 4,953 $(924)
- ----------------------------------------------------------------------
Working capital this year has been reduced by $924
million. The reduction in working capital together with the
very positive cash flow from continuing operations was used
in the investments in Mycogen, INCA, PBB/Polisur and DuPont
Dow Elastomers L.L.C. as discussed in the Acquisitions and
Divestitures section of this report and the repayment of
long-term debt. In addition, the Company purchased 12.5
million shares of common stock during the nine months of
1996 as part of its overall stock repurchase program. The
Company's average shares outstanding for the nine months was
248 million, a decrease of 9 percent from the average shares
outstanding for the nine months of 1995. Since the beginning
of 1995, Dow has repurchased 41.7 million shares. By June
30, 1996, Dow completed the repurchase of 25 million shares
under a buy-back program authorized in July 1995. On July
11, 1996, the Company authorized a stock repurchase program
to buy back a further 20 million shares.
At September 30, 1996, the Company had unused and
available credit facilities with various United States and
foreign banks totaling $1.9 billion in support of commercial
paper borrowings and working capital requirements.
Additional unused credit facilities totaling $1.1 billion
are available for use by foreign subsidiaries.
Sept. 30, Dec. 31,
Balance Sheet Ratios 1996 1995
- ----------------------------------------------------------------------
Current assets over current liabilities 1.6:1 1.9:1
Days-sales-outstanding-in-receivables 46 47
Days-sales-in-inventory 84 90
Debt as a percentage of total capitalization 37.9 36.3
The increase of 1.6 percentage points in the debt as a
percentage of total capitalization was primarily
attributable to the funds received from BSL (as discussed
above) which increased the total debt.
<PAGE>
---- Page 12 ----
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
- ---------------------
The Dow Chemical Company and Subsidiaries
Geographic and Industry Segments
- -------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
In millons (Unautited) 1996 1995 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Geographic sales
United States $2,205 $2,140 $6,667 $6,942
Europe 1,545 1,549 4,879 5,036
Rest of World 1,242 1,195 3,604 3,628
------ ------ ------- -------
Total $4,992 $4,884 $15,150 $15,606
Geographic operating income
United States $287 $390 $979 $1,266
Europe 179 261 717 966
Rest of World 280 295 814 996
---- ---- ------ ------
Total $746 $946 $2,510 $3,228
Industry segment sales
Chemicals and Metals $794 $816 $2,335 $2,576
Performance Chemicals 919 902 3,226 3,277
Plastics 999 952 2,893 3,135
Performance Plastics 1,337 1,396 4,055 4,058
Hydrocarbons and Energy 646 527 1,794 1,812
Diversified Businesses and Unallocated 297 291 847 748
------ ------ ------- -------
Total $4,992 $4,884 $15,150 $15,606
Industry segment operating income
Chemicals and Metals $203 $324 $597 $942
Performance Chemicals 100 90 584 602
Plastics 253 361 647 1,280
Performance Plastics 275 320 918 766
Hydrocarbons and Energy (18) (25) (47) (59)
Diversified Businesses and Unallocated (67) (124) (189) (303)
---- ----- ------- -------
Total $746 $946 $2,510 $3,228
</TABLE>
<TABLE>
<CAPTION>
Industry Segment Sales Volume and Price
- --------------------------------------------------------------------------------------
Three Months Ended Sept. 30, 1996
Percentage change from prior year Volume Price Total
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Chemicals and Metals 10% (13)% (3)%
Performance Chemicals 9% (7)% 2%
Plastics 22% (17)% 5%
Performance Plastics 2% (6)% (4)%
Hydrocarbons and Energy 26% (3)% 23%
Diversified Businesses and Unallocated nm nm nm
----- ----- -----
Total 11% (9)% 2%
- --------------------------------------------------------------------------------------
Nine Months Ended Sept. 30, 1996
Percentage change from prior year Volume Price Total
- --------------------------------------------------------------------------------------
Chemicals and Metals 2% (11)% (9)%
Performance Chemicals 2% (4)% (2)%
Plastics 17% (25)% (8)%
Performance Plastics 2% (2)% (0)%
Hydrocarbons and Energy 8% (9)% (1)%
Diversified Businesses and Unallocated nm nm nm
----- ----- -----
Total 6% (9)% (3)%
nm=not meaningful
</TABLE>
<PAGE>
---- Page 13 ----
Results of Operations (Continued)
The following are selected data for the three months and nine
months ended September 30, 1996 and 1995.
Three Months Ended Nine Months Ended
Dollars in millions, Sept. 30, Sept. 30, Sept. 30, Sept 30,
except for share amounts 1996 1995 1996 1995
- ------------------------ ---- ---- ---- ----
Cost of sales $3,552 $3,213 $10,475 $10,110
% of sales 71% 66% 69% 65%
Research and development,
promotion and advertising,
selling and administrative
expenses 694 729 2,179 2,274
Operating income 746 946 2,510 3,228
% of sales 15% 19% 17% 21%
Equity in earnings of
20%-50% owned companies 25 14 65 54
Effective tax rate
from continuing operations 36.0% 37.5% 36.5% 42.0%
Income from continuing
operations 469 571 1,491 1,469
Net income available
for common stockholders 469 571 1,491 1,656
Earnings per common share
from continuing operations $1.92 $2.15 $6.02 $5.40
Earnings per common share $1.92 $2.15 $6.02 $6.09
Operating rate percentage 91% 92% 89% 93%
Net sales for the third quarter of 1996 were $5.0 billion, an
increase of 2 percent from $4.9 billion in the same period last
year. The increase was primarily due to a volume increase of 11
percent, which was partially offset by a price decrease of 9
percent. Prices were down in all industry and geographic
segments, with major declines in polystyrene across the globe and
polyethylene in Europe.
Volume, in contrast to price, was up in all industry and
geographic segments for the quarter compared to the same quarter
last year. Volume was particularly strong in polyethylene,
polystyrene and hydrocarbons.
Operating income of $746 million was 21 percent lower for this
quarter versus $946 million in the third quarter of 1995. As a
percent of sales, operating income was 15 percent versus 19
percent in the same quarter last year, a decline of only 4
percentage points despite a 9 percent sales price decline from a
strong pricing level of a year ago coupled with a substantial
increase in hydrocarbons purchase cost. These elements were
partly offset by volume gains and continued productivity
improvements. The impact of the stronger dollar, most notably
against the North European and Pacific currencies, versus the
third quarter of last year was not significant to the Company's
profitability.
Sales for the nine months of 1996 were $15.2 billion, down 3
percent from $15.6 billion in the same period last year. The
decrease was due to a 9 percent price decline and a 6 percent
volume growth. Operating costs and expenses were up only 2
percent versus the nine months of last year despite the 6 percent
volume growth. This demonstrates the Company's continuing
attention to expense control. Included in the nine months of this
year's costs were wage increases and the addition of new
businesses such as PBB/Polisur, INCA and Radian International
LLC. The Operating Income for the nine months of this year was
$2.5 billion, down 22 percent versus $3.2 billion for the nine
months of last year. Most of this decline was attributable to the
9 percent sales price decline and increased hydrocarbons purchase
cost as discussed above.
<PAGE>
---- Page 14 ----
Results of Operations (Continued)
CHEMICALS AND METALS
Chemicals and Metals sales for the third quarter of 1996 were
$794 million, a 3 percent decline from $816 million in the third
quarter of 1995. Sales prices declined 13 percent and volume
increased 10 percent. Operating income for the segment fell 37
percent from $324 million in the third quarter of 1995 to $203
million for the same period this year.
Substantial drops in the prices of ethylene glycol (EG), vinyl
chloride monomer (VCM) and caustic, compared to a year ago, were
the major reasons for the lower sales and operating income for
this business. Prices for EG began to show improvement late in
the quarter due to an increase in demand for antifreeze and
fibers. Although VCM prices were well below those of a year ago,
they were up versus the second quarter of 1996. Expenses were
about 10 percent below last year due to continued efforts on cost
reduction, and manufacturing costs were up 10 percent due
primarily to higher energy costs. Businesses in this segment, such
as chlor-alkali, are particularly sensitive to power costs.
Sales for the nine months of 1996 were $2,335 million, a 9
percent decline from $2,576 million for the nine months of 1995.
Sales prices declined 11 percent and volume increased 2 percent.
Operating income for the segment fell 37 percent, to $597 million
from $942 million for the same period last year.
PERFORMANCE CHEMICALS
Sales for Performance Chemicals in the third quarter were $919
million, an increase of 2 percent from $902 million in the same
quarter last year. Sales prices were down 7 percent and volume
was up 9 percent. Due to the continued strong performance in
specialty chemicals, the operating income for the segment
increased 11 percent to $100 million for the third quarter of
1996 from $90 million a year ago.
Specialty chemicals continued to show good results. While
sales were flat with last year, operating income benefited from
volume growth, reduction of costs, the addition of a new Contract
Manufacturing business and the rationalization of some businesses
which were not adding value. The rationalization included the
disposals of aspirin, Cynara and Generon gas separation, and the
write down of the membranes operations in Denmark.
Emulsion polymers sales were about flat with last year as
volume increased by 12 percent and prices decreased by about the
same amount. The largest price decrease was in Europe. Unit
conversion cost reductions have helped offset some of the price
decline. The reduction in styrene monomer pricing is keeping
pressure on latex prices, especially in the carpet market.
Operating income for the business was about a third below last
year's record level.
Agricultural products sales for the third quarter increased 6
percent versus the same period last year. Manufacturing costs
were higher than a year ago due to pre-startup expenses of the
Harbor Beach facility. Operating income was flat from the same
quarter last year.
Sales for the nine months of 1996 for Performance Chemicals
were $3,226 million, down 2 percent from $3,277 million for the
same period last year. Higher sales in specialty chemicals were
partially offset by lower sales in emulsion polymers and
agricultural products. Sales prices declined 4 percent and volume
increased 2 percent. Operating income for the nine months of 1996
was $584 million, down 3 percent from $602 million a year ago.
PLASTICS
Plastics sales for the second quarter of 1996 were $999 million,
a 5 percent increase from $952 million in the third quarter of
1995. Sales prices declined 17 percent and volume increased 22
percent. Prices for polyethylene and polystyrene were sharply
lower from last year's very strong levels. Volume increased
across all businesses and was further enhanced by the addition of
polyethylene terephthalate (PET). Operating income for the
segment fell 30 percent from $361 million in the third quarter of
1995 to $253 million for the same period this year.
Polystyrene sales volume improved substantially versus last
year when China was absent from the market and there were
inventory corrections in other regions. Prices for polystyrene
showed a modest improvement in the U.S. versus the second quarter
of 1996 but continued to decline in other areas.
Polyethylene had an excellent third quarter as most of Dow's
products continued to be sold out worldwide. Volume was up
substantially in all geographic areas and prices were up year-
over-year in North America. Price levels in Europe are still
substantially below last year but showed signs of improvement at
the end of the quarter. PET prices fell sharply during the
quarter, but the impact on the overall results in Plastics was
small.
Plastics sales for the nine months of 1996 were $2,893
million, down 8 percent from $3,135 million a year ago. Prices
were lower by 25 percent and volume increased by 17 percent.
Operating income for the nine months was $647 million, down 49
percent from $1,280 million for the same period last year. Again,
price was the predominant reason for the large reduction in
operating income.
<PAGE>
---- Page 15 ----
Results of Operations (Continued)
PERFORMANCE PLASTICS
Performance Plastics sales of $1,337 million were down 4 percent
from $1,396 million in the third quarter of 1995 due to a 6
percent decrease in price. Volume was up 2 percent despite the
transfer of the Company's elastomer products to DuPont Dow
Elastomers L.L.C., which is reported as a 20%-50% owned company.
Operating income for this segment decreased 14 percent to $275
million, from $320 million in the third quarter of 1995.
Polyurethanes sales were down versus the third quarter of 1995
on lower prices and volume. Prices and volume were up in North
America and Latin America, but down in Europe and the Pacific.
Polyurethanes results were also impacted by an extended
turnaround of the methylene diphenyl diisocyanate (MDI) plant in
Germany, for maintenance and incremental expansion, and an
unplanned outage in the U.S.
Sales of epoxies and intermediates were down about 5 percent
versus third quarter of 1995. Prices were down almost 10 percent
as a slowdown in the electronics industry affected the demand for
epoxy resin and the greater availability of intermediates
products has loosened last year's very tight supply and demand
balance.
Engineering plastics third quarter of 1996 results were about
even with third quarter of 1995. Volume improved in North America
and Latin America, but was down in Europe where slower economies
have also had a negative impact on price.
Adhesives, sealants and coatings experienced another excellent
quarter with a sales increase of over 10 percent in the third
quarter of 1996 versus the same period last year. Operating
income for this quarter was double the third quarter of 1995.
Fabricated products sales for the third quarter of 1996 were
up about 2 percent from the same period last year in what is
typically its seasonally strongest quarter. Volume gains in all
areas offset a modest price decline. Operating income for this
business increased over 10 percent this quarter versus the third
quarter of 1995.
For the nine months of 1996, sales in Performance Plastics
were $4,055 million, flat with $4,058 million in the nine months
of 1995. Operating income was $918 million for the nine months of
1996, up 20 percent from $766 million for the same period last
year. Volume increases, lower raw material costs and cost control
efforts combined to increase the operating income for this
segment.
HYDROCARBONS AND ENERGY
Hydrocarbons and Energy sales of $646 million in the third
quarter of 1996 were up 23 percent from $527 million in the same
quarter of 1995. Feedstock costs were significantly higher this
quarter. These cost increases were buffered by managing the
Company's hydrocarbons exposure through increased cracker margins
due to monomer price improvements (ethylene, propylene),
improvement in refinery margins in Europe, the Company's
purchasing and trading activities and optimizing based on Dow's
cracker feedstock flexibility.
Destec's third quarter revenue increased 48 percent versus the
third quarter of 1995, and was flat for the nine months ended
September 30, 1996, compared to the nine months of 1995. This
resulted in an operating profit in 1996, compared to an operating
loss in 1995, both for the quarter and the nine months. Since
June 1996, as a result of Destec's stock repurchase programs,
Dow's ownership of Destec exceeds 80 percent. In October 1996,
Destec's Board of Directors announced that it would retain the
investment banking firm of Morgan Stanley & Co. Incorporated to
assist Destec in exploring strategic alternatives to maximize
shareholder value, including a possible sale of Destec. However,
no decision has been made at this time to pursue any particular
course of action.
The operating loss for Hydrocarbons and Energy in the quarter
was $18 million, versus a loss of $25 million in the third
quarter of 1995.
The nine months of 1996 sales were $1,794 million, down 1
percent from $1,812 million for the same period last year. The
operating loss of $47 million for the nine months of 1996, was a
slight improvement over the operating loss of $59 million for the
nine months of 1995.
DIVERSIFIED BUSINESSES AND UNALLOCATED
Diversified Businesses and Unallocated sales were $297 million in
the third quarter of 1996, an increase of 2 percent from $291
million in the third quarter of 1995. The operating loss for this
segment was $67 million versus a loss of $124 million for the
same period last year.
DowBrands sales were down about 10 percent in the third
quarter of 1996 compared to the third quarter of 1995 due to the
sale of the personal care business in the fourth quarter of 1995.
Lower manufacturing costs and expenses and a focus on key
businesses contributed to DowBrands achieving a 20 percent
improvement in operating profit in the third quarter of 1996
versus the third quarter of 1995.
New businesses sales rose sharply with the inclusion of Radian
International LLC, the Company's environmental services joint
venture. Operating income for new businesses was negative,
reflecting the expenses related to developmental activities
across a range of new business opportunities.
<PAGE>
---- Page 16 ----
Results of Operations (Continued)
Unallocated costs which are not allocated to the other
business segments showed a $55 million improvement in the third
quarter of 1996 compared to the third quarter of 1995. The
improvement was due to lower severance expenses and lower net
variances.
Sales for the nine months of 1996 were $847 million, a 13
percent increase from $748 million for the nine months of 1995.
The sales increase was mainly due to the inclusion of Radian
International LLC. The operating loss for the segment improved
$114 million, to a loss of $189 million in the nine months of
1996, compared to a loss of $303 million for the same period last
year.
COMPANY SUMMARY
Manufacturing Costs
Dow's global plant operating rate for its chemicals and plastics
businesses was 91 percent, down from 92 percent in the third
quarter of 1995. For the nine months of 1996 the operating rate
was 89 percent versus last year's high rate of 93 percent for the
same period. Unit manufacturing costs for these businesses,
adjusted for volume but not mix, were up 1 percent compared to
the third quarter of 1995. This increase was primarily due to
feedstock and energy cost increases.
Other Income (Expense)
Equity in earnings of 20%-50% owned companies increased $11
million in the third quarter of 1996 compared to the
corresponding period a year ago. Earnings in this quarter were up
due mainly to the addition of DuPont Dow Elastomers L.L.C.,
continued strong performance from Gurit-Essex, and advantages
from the restructuring of Sumitomo Dow Ltd. Earnings for the nine
months of 1996 were $65 million, an increase of $11 million
versus the nine months of 1995. The Company is fully reserving
the equity earnings of Dow Corning Corporation after Dow Corning
filed for protection under Chapter 11 of the United States
Bankruptcy Code in May 1995.
Net financial expenses, which are the total of interest
expense, interest income and foreign exchange, increased to $40
million this quarter, compared to $7 million in the third quarter
of 1995. For the nine months of 1996, net financial expenses of
$132 million were flat compared to $133 million for the nine
months of 1995.
Sundry income includes a variety of both income and expense
items including royalty income, dividends from investments, and
gains or losses on sales of investments and assets. For the nine
months of 1996, sundry income benefited from the sale of part of
the Company's investment in Oasis Pipeline, the sale of a Ziploc
license in Japan, the disposition of the acrylamide monomer
product group, and the sale of a part of Promix systems and other
smaller product lines.
Provision for Taxes on Income
The effective tax rate from continuing operations for the third
quarter was 36.0 percent compared to 37.5 percent in the third
quarter of 1995.
The effective tax rate for the nine months of 1996 was 36.5
percent compared to an adjusted rate of 37.7 percent for the same
period last year. The adjustment was to the second quarter of
1995 to exclude the impact of the charge related to Dow Corning
in which the Company reserved the full amount of its net
investment with no related tax benefit. The unadjusted rate
equaled 42.0 percent.
Income from Continuing Operations
The third quarter 1996 income from continuing operations was $469
million or $1.92 per share. The third quarter of 1995 income from
continuing operations was $571 million or $2.15 per share. For
the nine months of 1996, the income from continuing operations
was $1,491 million or $6.02 per share compared to $1,469 million
or $5.40 per share for the same period of 1995. The nine months
of 1995 income from continuing operations included a $1.24 per
share charge for the write-down of Dow Corning. Comparable
earnings per share from continuing operations, excluding the Dow
Corning charge, was down 9 percent. This decrease reflected the
general sales price decline from the strong prices in the nine
months of 1995, which was partly offset by volume gains and
continued productivity improvements.
Discontinued Operations
In June 1995, the Company completed the sale of its 197 million
shares of Marion Merrell Dow to Hoechst A.G. for $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 $133 million. These two transactions, net of taxes on
income of $382 million, increased the Company's second quarter of
1995 earnings by $169 million or 62 cents per share.
<PAGE>
---- Page 17----
Results of Operations (Continued)
Net sales attributed to the pharmaceutical businesses for the
three months ended March 31, 1995, were $757 million and taxes on
income from the pharmaceutical businesses for the three months
ended March 31, 1995 were $36 million.
Minority Interest
Minority interest increased from $24 million in the third quarter
of 1995 to $33 million for the same period of 1996. The 5 percent
reduction in minority interest, from $169 million for the nine
months of 1995 to $160 million for the same period this year, was
primarily due to the earnings in DowElanco and its subsidiaries.
Expectations for the Remainder of 1996 and Outlook for 1997
Dow's September and early October sales were strong, which should
give some momentum for a good fourth quarter. The expectation is
for continued good volumes in North America and Latin America,
and perhaps some improvement in Europe and Pacific, but price
pressure is also expected to continue in caustic, polystyrene,
and some epoxy products. Polyethylene prices should be stable or
higher in Europe, but it is unlikely that there will be further
increases in North America this year. In many of Dow's
businesses, conversion cost and expense reductions will help
offset price declines, although the Company expects to feel more
of an impact from higher feedstock costs in the fourth quarter of
1996 if the current price levels are sustained. Management
projections indicate hydrocarbon costs could peak in the fourth
quarter and begin to come down as early as the first quarter of
1997.
Most of Dow's businesses expect 1997 to look a lot like 1996.
Supply/demand should continue relatively balanced, perhaps
through the first three quarters of the year, with continued
volume growth since the Company does not have a recession in its
forecast. In fact, Dow expects Europe, the Pacific and the
emerging markets to have higher growth than this year. Price is a
big question mark, especially for the commodity products. As new
capacity comes on towards the end of 1997, it will require
discipline on the part of the industry to avoid pressure on
price. That is why it is so critical that the Company maintains
its cost reduction emphasis and goals. On the plus side, Dow
expects some of the new businesses to begin contributing
positively to the bottom line in 1997.
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 (now consolidated) 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 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.
<PAGE>
---- Page 18 ----
Legal Proceedings (Continued)
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.
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 then-current 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 could 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 over 13,000
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, concert of
action 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, fraud, aiding and
abetting, conspiracy and concert of action. 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 insurance carriers to recover in
the event it is held liable in the federal (or any other) breast
implant litigation.
<PAGE>
---- Page 19 ----
Legal Proceedings (Continued)
After Judge Pointer's initial ruling in December 1993, summary
judgment was granted to the Company in approximately 4,000 breast
implant cases pending in state courts in California, Indiana,
Michigan, New Jersey and New York, and over 100 actions in
Pennsylvania were dismissed. Of these rulings, the California
ruling was final and was appealed. On September 25, 1996, the
California Court of Appeals for the 4th District affirmed the
trial court's order granting summary judgment to the Company. On
November 4, 1996, plaintiffs filed a petition for a hearing
before the California Supreme Court seeking review of that order.
The Company will oppose that petition. The New Jersey ruling has
been reconsidered and all claims were again dismissed, except the
negligence claim. Plaintiffs in New York filed a motion to
reconsider based on Judge Pointer's April 25, 1995 ruling. On
September 22, 1995, Judge Lobis, presiding over the consolidated
New York breast implant litigation, 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. On May 28, 1996,
the New York Supreme Court Appellate Division affirmed the lower
court's dismissal of all claims against the Company. After the
Appellate Division denied plaintiffs' motion to reconsider, the
plaintiffs sought leave to appeal to New York's highest court.
The Company has opposed that action. Other rulings that are not
final decisions are also subject to reconsideration by the trial
courts. The Company expects that plaintiffs will file motions to
reconsider in some 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. On October 20, 1996, in a Louisiana
state court breast implant case styled Spitzfaden v. Dow Corning,
et al., the court entered an order maintaining certification of a
class of Louisiana plaintiffs consisting of recipients of Dow
Corning breast implants who, as of January 15, 1997, (i) are
residents of Louisiana, (ii) are former residents of Louisiana
who are represented by Louisiana counsel, or (iii) received their
implants in Louisiana and are represented by Louisiana counsel,
together with the spouses and children of such plaintiffs, and
representatives of the estates of class members who are deceased.
The Company has appealed the order certifying the class. 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 judged to be 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 $4.15 million in
compensatory damages and $10 million in punitive damages. The
Company has appealed the verdict. The Company will also file a
claim in Dow Corning's
<PAGE>
---- Page 20 ----
Legal Proceedings (Continued)
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 500 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. The
removed cases have been, in most instances, transferred to Judge
Pointer for pre-trial proceedings. Plaintiffs have asked Judge
Pointer to remand those cases back to their states of origin, and
the Company has opposed that motion. On April 9, 1996, the United
States Court of Appeals for the Sixth Circuit ruled that because
silicone gel breast implant claims against the Company (and
certain other parties) were "related to" Dow Corning's
bankruptcy, the federal District Court for the Eastern District
of Michigan had the power to transfer such claims, including
claims currently pending before Judge Pointer, to itself and
ordered that Court to decide whether to make such a transfer. On
July 30, 1996, the District Court declined to order such a
transfer. The Company has appealed that decision.
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, will 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
The Company agreed to participate in the Toxic Substances Control
Act, Section 8(e) compliance audit program and paid a civil
penalty of $1 million on November 4, 1996.
On September 27, 1993, February 23, 1994, and October 31, 1994,
the U.S. Environmental Protection Agency (the "EPA") filed
actions against the Company alleging violations of the boiler and
industrial furnace regulations. The Company agreed to pay a
total of $538,622 in settlement of $1,605,994 of
proposed civil fines with respect to five Company sites. In
addition, with respect to one site, the Company has agreed to
complete a supplemental environmental project valued at $119,262.
This project was undertaken in connection with the settlement of
an enforcement action taken by the U.S. Environmental Protection
Agency alleging violations of the Resource Conservation and
Recovery Act, as amended.
On August 11, 1995, the EPA filed an administrative enforcement
action against the Company in connection with the Company's
report of exceedances of its limits for the discharge of
phosphorus and certain other chemicals 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 and on September 23, 1996, the
company paid a court ordered civil penalty of $100,000. 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 a $10,775,000 civil penalty plus 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.
There were no Current Reports on Form 8-K filed by the Company
during the third quarter of 1996.
<PAGE>
---- Page 21 ----
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: November 7, 1996
- -------------------------
Roger L. Kesseler
-----------------
Roger L. Kesseler
Vice President & Controller
(Chief Accounting Officer)
<PAGE>
---- Page 22 ----
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