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 JUNE 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
Outstanding at
Class June 30, 1996
Common Stock, $2.50 par value 245,298,221 shares
THE DOW CHEMICAL COMPANY
Table of Contents
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Commitments and Contingent Liabilities 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Second 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 19
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
Exhibit 27 25
PART 1. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
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Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
In millions, except for share amounts 1996 1995 1996 1995
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Net Sales $5,176 $5,517 $10,158 $10,722
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Operating Costs and Expenses
Cost of sales 3,539 3,571 6,923 6,897
Insurance and finance company
operations, pretax income (14) (9) (36) (22)
Research and development expenses 194 193 385 406
Promotion and advertising expenses 102 109 187 226
Selling and administrative expenses 446 437 913 913
Amortization of intangibles 13 9 22 20
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Total operating costs and expenses 4,280 4,310 8,394 8,440
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Operating Income 896 1,207 1,764 2,282
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Other Income (Expense)
Equity in earnings of 20%-50%
owned companies 24 15 40 40
Interest expense and amortization of debt (118) (98) (242) (199)
Interest income and foreign exchange-net 75 35 150 73
Net loss on investment (Note B) 0 (330) 0 (330)
Sundry income - net 62 3 110 14
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Total other income (expense) 43 (375) 58 (402)
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Income before Provision for Taxes on Income 939 832 1,822 1,880
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Provision for Taxes on Income 344 420 670 834
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Minority Interests' Share in Income 48 77 127 145
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Preferred Stock Dividends 1 1 3 3
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Income from Continuing Operations $546 $334 $1,022 $898
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Discontinued Operations
Income from pharmaceutical business, net
of taxes on income 0 0 0 18
Gain on sale of pharmaceutical business,
net of taxes on income (Note C) 0 169 0 169
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Net Income Available for Common Stockholders $546 $503 $1,022 $1,085
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Average Common Shares Outstanding 247.7 273.5 249.3 275.2
Earnings per Common Share from
Continuing Operations $2.20 $1.22 $4.10 $3.25
Earnings per Common Share $2.20 $1.84 $4.10 $3.94
Common Stock Dividends Declared per Share $0.75 $0.75 $1.50 $1.40
Depreciation $308 $309 $616 $668
Capital Expenditures $341 $575 $605 $778
Notes to the 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
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.
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheet
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June 30, Dec. 31,
In millions (Unaudited) 1996 1995
- -------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $2,573 $2,839
Marketable securities and interest-bearing deposits 550 611
Accounts and notes receivable:
Trade (less allowance for doubtful receivables-
1996, $63; 1995, $53) 3,095 2,729
Other 1,363 1,380
Inventories:
Finished and work in process 2,069 2,197
Materials and supplies 610 551
Deferred income tax assets-current 235 247
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Total current assets 10,495 10,554
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Investments
Capital stock at cost plus equity in accumulated
earnings of 20%-50% owned companies 1,425 848
Other investments 1,675 1,558
Noncurrent receivables 320 314
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Total investments 3,420 2,720
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Plant Properties
Plant properties 23,273 23,218
Less accumulated depreciation 15,002 15,105
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Net plant properties 8,271 8,113
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Other Assets
Goodwill (net of accumulated amortization-
1996, $159; 1995, $177) 681 658
Deferred income tax assets-noncurrent 736 779
Deferred charges and other assets 831 758
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Total other assets 2,248 2,195
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Total Assets $24,434 $23,582
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See Notes to Financial Statements.
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
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June 30, Dec. 31,
In millions (Unaudited) 1996 1995
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable $1,711 $323
Long-term debt due within one year 401 375
Accounts payable:
Trade 1,435 1,529
Other 608 717
Income taxes payable 875 791
Deferred income tax liabilities-current 40 55
Dividends payable 186 192
Accrued and other current liabilities 1,535 1,619
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Total current liabilities 6,791 5,601
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Long-Term Debt 4,100 4,705
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Other Noncurrent Liabilities
Deferred income tax liabilities-noncurrent 632 659
Pension and other postretirement benefits-noncurrent 1,909 1,880
Other noncurrent obligations 1,302 1,260
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Total other liabilities 3,843 3,799
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Minority Interest in Subsidiary Companies 2,006 1,775
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Temporary Equity
Temporary equity-other 0 313
Preferred stock at redemption value 129 131
Guaranteed ESOP obligation (103) (103)
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Total temporary equity 26 341
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Stockholders' Equity
Common stock 818 818
Additional paid-in capital 226 315
Retained earnings 10,786 10,159
Unrealized gains (losses) on investments 103 62
Cumulative translation adjustments (348) (349)
Treasury stock, at cost (3,917) (3,644)
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Net stockholders' equity 7,668 7,361
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Total Liabilities and Stockholders' Equity $24,434 $23,582
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See Notes to Financial Statements.
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
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Six Months Ended
June 30, June 30,
In millions (Unaudited) 1996 1995
- -------------------------------------------------------------------------------
Operating Activities
Income from Continuing Operations $1,022 $898
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 655 679
Provision for deferred income tax 14 60
Undistributed earnings of 20%-50%
owned companies (21) (14)
Minority interests' share in income 127 145
Net loss on investment 0 330
Net gain other (6) (43)
Changes in assets and liabilities that
provided (used) cash:
Accounts receivable (254) (765)
Inventories 156 (225)
Accounts payable (263) (20)
Other assets and liabilities 61 227
Operating activities related to discontinued operation 0 84
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Cash provided by operating activities 1,491 1,356
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Investing Activities
Purchases of plant properties (605) (770)
Proceeds from sales of plant properties 71 20
Purchases of consolidated companies (223) 0
Investments in unconsolidated affiliates (618) (5)
Proceeds from sale of pharmaceutical businesses
(net of cash divested) 0 5,060
Purchases of investments (1,042) (1,644)
Proceeds from sales of investments 1,140 1,285
Investing activities related to discontinued operation 0 (28)
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Cash provided (used) by investing activities (1,277) 3,918
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Financing Activities
Changes in short-term notes payable 1,244 88
Payments on long-term debt (672) (262)
Proceeds from issuance of long-term debt 39 100
Purchases of treasury stock (866) (693)
Proceeds from sales of common stock 210 72
Distributions to minority interests (49) (51)
Dividends paid to stockholders (381) (363)
Financing activities related to discontinued operation 0 17
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Cash used in financing activities (475) (1,092)
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Effect of Exchange Rate Changes on Cash (5) 0
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Summary
Increase (decrease) in cash and cash equivalents (266) 4,182
Cash and cash equivalents at beginning of year 2,839 569
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Cash and cash equivalents at end of period $2,573 $4,751
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See Notes to Financial Statements.
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 9,
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.
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 $242 million at June 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 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.
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.
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.
SECOND QUARTER EARNINGS ANNOUNCEMENT (July 25, 1996)
Dow Announces Quarterly Earnings of $2.20 per share
Second Quarter of 1996 Highlights
Earnings per share reached a seven year high.
The strong quarter was due to volume growth, productivity
improvements, and strong results in Performance Chemicals and
Performance Plastics.
Sales for the second quarter of 1996 were $5.2 billion
compared to $5.5 billion for the same period last year.
_________________________________________________________________________
3 Months Ended 6 Months Ended
June 30 June 30
(In millions, except for
per share amounts) 1996 1995 1996 1995
- -------------------------------------------------------------------------
Net Sales $5,176 $5,517 $10,158 $10,722
Operating Income 896 1,207 1,764 2,282
Income from Continuing Operations 546 334 1,022 898
Earnings per Common Share
from Continuing Operations 2.20 1.22 4.10 3.25
Earnings Per Common Share 2.20 1.84 4.10 3.94
_________________________________________________________________________
Note: Results for 1995 have been restated to show Dow's
pharmaceutical businesses as discontinued operations after
their sale in second quarter of 1995.
Review of Quarterly Results
The Dow Chemical Company today announced sales of $5.2
billion and operating income of $896 million for the second
quarter of 1996. Total earnings were $2.20 per share, the
highest since 1989.
"This was a strong quarter and we are on track for another
good year," said J. Pedro Reinhard, financial vice president
and chief financial officer. "Volume was up and we
benefited from our continued productivity improvements. We
are particularly pleased with the continued growth in our
Performance Chemicals and Performance Plastics segments,
which now account for over half of the company's operating
income."
Sales for the quarter of $5.2 billion were off 6 percent
from $5.5 billion during the same period a year ago.
Operating income was $896 million compared to $1.2 billion
in the second quarter of 1995. Despite a 10 percent
decrease from very high pricing levels a year ago, operating
income as a percent of sales declined by only 4.6 percentage
points reflecting the impact of volume gains, growth in the
Performance Chemicals and Performance Plastics segments, and
continued productivity improvements.
Total earnings were $2.20 per share compared to $1.84 per
share for the same period last year. In the second quarter
of 1995, Dow's earnings were impacted by a gain on the sale
of Dow's pharmaceutical businesses of 62 cents per share and
a charge of $1.24 per share related to Dow Corning's filing
for protection under Chapter 11 of the United States
Bankruptcy Code. Excluding these items, Dow's earnings per
share in the second quarter of 1995 were $2.46.
Second Quarter Earnings Announcement (July 25, 1996)
(Continued)
Chemicals and Metals posted sales of $790 million and
operating income of $205 million, compared to sales of $899
million and operating income of $313 million in the second
quarter of 1995. Lower prices were the primary reason for
the sales and earnings declines in this segment.
Performance Chemicals sales were $1.2 billion, flat with a
year ago. Operating income was $237 million compared to
$259 million in the second quarter of 1995. Both the
Specialty Chemicals and Emulsion Polymers businesses had
strong quarters posting higher earnings compared to the same
period last year. This is the tenth consecutive quarter
that Specialty Chemicals has posted a sales increase versus
the previous year. Unfavorable climatic conditions,
primarily in North America, negatively impacted sales and
earnings for Agricultural Chemicals.
Plastics sales were $966 million down 12 percent from $1.1
billion in the second quarter of 1995. Operating income was
$223 million, down from $467 million for the same period
last year. The strong volume growth experienced in this
segment was not enough to offset the substantial price
declines versus a year ago. Polyethylene prices globally
have been trending upward since the beginning of the year
and polystyrene prices have risen in Europe, reversing the
general pricing decline for Plastics.
Performance Plastics posted sales of $1.4 billion, down
slightly from the same period a year ago, reflecting the
transfer of Dow's elastomers business to DuPont Dow
Elastomers L.L.C.. However, operating income was up 25
percent to $325 million from $261 million in the second
quarter of 1995. Polyurethanes, Epoxies, Engineering
Plastics, Fabricated Products and the Adhesives, Sealants
and Coatings businesses all reported higher earnings than a
year ago. These results demonstrate the value of the
company's continued focus on these businesses.
Hydrocarbons and Energy sales were $595 million, down 15
percent from $697 million in the second quarter of 1995.
The segment experienced an operating loss of $20 million,
about flat with a year ago.
The Diversified Businesses and Unallocated segment posted
sales of $276 million, up 10 percent from $252 million a
year ago. The segment recorded a loss of $74 million, about
equal to the second quarter of 1995. DowBrands experienced
its fourth consecutive profitable quarter reflecting
successful restructuring efforts.
In the second quarter of 1996, Dow repurchased 6 million
shares, bringing the year-to-date total to 10 million
shares. This completed the repurchase program of 25
million shares initiated in July 1995. In July 1996, the
company authorized an additional program to repurchase a
further 20 million shares. Since the beginning of 1995, Dow
has bought back 39 million shares, or about 15 percent of
its outstanding shares.
"The overall global economic scenario is improving. Growth
in North America is stable, economic activity is increasing
in Japan, and we have seen the first indicators of an upward
move in Europe," said Reinhard. "The inventory correction
is over and the pricing environment for many of our key
products has improved. These factors, combined with our on-
going productivity initiatives and business portfolio
restructuring, should result in another good year for Dow."
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 by the
end of 1996. 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 $200 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 $170 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 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 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 value of the net assets
transferred by the Company will be approximately $32
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 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.
CHANGES IN FINANCIAL CONDITION
The following tables represent total debt and working capital
at June 30, 1996 versus December 31, 1995.
June 30, Dec. 31, Increase
In millions 1996 1995 (Decrease)
- --------------------------------------------------------------------------
Notes payable $1,711 $ 323 $1,388
Long-term debt due within one year 401 375 26
Long-term debt 4,100 4,705 (605)
- -------------------------------------------------------------------------
Total debt $6,212 $5,403 $809
- -------------------------------------------------------------------------
The notes payable increase of $1.4 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.
June 30, Dec. 31, Increase
In millions 1996 1995 (Decrease)
- --------------------------------------------------------------------------
Cash and cash equivalents $ 2,573 $ 2,839 $ (266)
Marketable securities and
interesting-bearing deposits 550 611 (61)
Accounts and notes receivable - net 4,458 4,109 349
Inventories:
Finished and work in process 2,069 2,197 (128)
Materials and supplies 610 551 59
Deferred income tax assets-current 235 247 (12)
- --------------------------------------------------------------------------
Total current assets 10,495 10,554 (59)
- --------------------------------------------------------------------------
Total current liabilities 6,791 5,601 1,190
- --------------------------------------------------------------------------
Working capital $ 3,704 $ 4,953 $(1,249)
- --------------------------------------------------------------------------
Working capital was reduced by $1.2 billion. These
resources were used in the repayment of long-term debt and
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. In addition, the
Company purchased 10 million shares of common stock during
the first half of 1996 as part of its overall stock
repurchase program. The Company's average shares outstanding
for the half year was 249 million, a decrease of 9 percent
from the first half of 1995. Since the beginning of 1995,
Dow has repurchased 39 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 June 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.
June 30, Dec. 31,
Balance Sheet Ratios 1996 1995
- ----------------------------------------------------------------
Current assets over current liabilities 1.5:1 1.9:1
Days-sales-outstanding-in-receivables 45 47
Days-sales-in-inventory 81 90
Debt as a percentage of total capitalization 39.0 36.3
The increase of 2.7 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.
RESULTS OF OPERATIONS
- ----------------------
The Dow Chemical Company and Subsidiaries
GEOGRAPHIC AND INDUSTRY SEGMENTS
- -------------------------------------------------------------------------------
In millons (Unaudited)
- -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
In millions 1996 1995 1996 1995
- -------------------------------------------------------------------------------
Geographic sales
United States $2,287 $2,443 $4,462 $4,802
Europe 1,655 1,814 3,334 3,487
Rest of World 1,234 1,260 2,362 2,433
Total $5,176 $5,517 $10,158 $10,722
Geographic operating income
United States $346 $475 $692 $876
Europe 275 365 538 705
Rest of World 275 367 534 701
Total $896 $1,207 $1,764 $2,282
- -------------------------------------------------------------------------------
Industry segment sales
Chemicals & Metals $790 $899 $1,542 $1,760
Performance Chemicals 1,176 1,178 2,307 2,375
Plastics 966 1,092 1,894 2,183
Performance Plastics 1,373 1,399 2,718 2,662
Hydrocarbons and Energy 595 697 1,148 1,285
Diversified Businesses and Unallocated 276 252 549 457
Total $5,176 $5,517 $10,158 $10,722
Industry segment operating income
Chemicals & Metals $205 $313 $394 $618
Performance Chemicals 237 259 485 512
Plastics 223 467 394 918
Performance Plastics 325 261 642 445
Hydrocarbons and Energy (20) (21) (29) (33)
Diversified Businesses and Unallocated (74) (72) (122) (178)
Total $896 $1,207 $1,764 $2,282
- --------------------------------------------------------------------------------
Industry segment sales volume and price Three Months Ended June 30, 1996
Percentage change from prior year Volume Price Total
- --------------------------------------------------------------------------------
Chemicals & Metals -1% -11% -12%
Performance Chemicals 5% -5% -0%
Plastics 15% -27% -12%
Performance Plastics 2% -4% -2%
Hydrocarbons and Energy -5% -10% -15%
Diversified Businesses and Unallocated nm nm nm
Total 4% -10% -6%
- --------------------------------------------------------------------------------
Industry segment sales volume and price Six Months Ended June 30, 1996
Percentage change from prior year Volume Price Total
- --------------------------------------------------------------------------------
Chemicals & Metals -2% -10% -12%
Performance Chemicals 0% -3% -3%
Plastics 14% -27% -13%
Performance Plastics 2% 0% 2%
Hydrocarbons and Energy 0% -11% -11%
Diversified Businesses and Unallocated nm nm nm
Total 4% -9% -5%
- --------------------------------------------------------------------------------
nm=Not Meaningful
Results of Operations (Continued)
The following are selected data for the three months and six months
ended June 30, 1996 and 1995.
Three Months Ended Six Months Ended
Dollars in millions, June 30, June 30, June 30, June 30,
except for share amounts 1996 1995 1996 1995
Cost of sales $3,539 $3,571 $6,923 $6,897
% of sales 68% 65% 68% 64%
Research and development,
promotion and advertising,
selling and administrative
expenses 742 739 1,485 1,545
Operating income 896 1,207 1,764 2,282
% of sales 17% 22% 17% 21%
Equity in earnings of
20%-50% owned companies 24 15 40 40
Effective tax rate
from continuing operations 36.6% 50.5% 36.8% 44.4%
Income from continuing operations 546 334 1,022 898
Net income available
for common stockholders 546 503 1,022 1,085
Earnings per common share
from continuing operations $2.20 $1.22 $4.10 $3.25
Earnings per common share $2.20 $1.84 $4.10 $3.94
Operating rate percentage 89% 93% 88% 94%
Net sales for the second quarter of 1996 were $5.2 billion, a
decline of 6 percent from $5.5 billion in the same period last year.
The decrease was primarily due to a price decrease of 10 percent,
which was partially offset by a volume increase of 4 percent. The
Plastics business had the largest sales price decline of 27 percent,
against the very high price level in the second quarter of 1995.
Volume was mixed in the industry segments with the Plastics
business showing a 15 percent improvement in the quarter. Sales in
the United States accounted for 44 percent of the total sales, both
in this quarter and in the same quarter last year.
Operating income of $896 million was 26 percent lower for this
quarter versus $1,207 million in the second quarter of 1995. As a
percent of sales, operating income was 17 percent versus 22 percent
in the same quarter last year. This 5 percentage point decline was a
result of a 10 percent price decline from a strong pricing level of
a year ago, which was partly offset by volume gains, growth in the
Performance Plastics segment and continued productivity
improvements. The impact of the stronger dollar, most notably
against the North European and Pacific currencies, versus the second
quarter last year was not significant to the Company's
profitability.
Sales for the first six months of 1996 were $10.2 billion, down 5
percent from $10.7 billion in the same period last year. The
decrease was due to a 9 percent price decline and a 4 percent volume
growth. Operating costs were flat and expenses were down 4 percent
versus the first half of last year despite the 4 percent volume
growth. This demonstrated the Company's continued attention to
expense control. Included in the first six 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 first six months of this year was $1.8 billion, down
23 percent versus $2.3 billion for the first six months of last
year. Most of this decline is attributable to the 9 percent sales
price decline as discussed above.
Results of Operations (Continued)
CHEMICALS AND METALS
Chemicals and Metals sales for the second quarter of 1996 were $790
million, a 12 percent decline from $899 million in the second
quarter of 1995. Sales prices and volume declined 11 percent and 1
percent respectively. Operating income for the segment fell 35
percent from $313 million in the second quarter of 1995 to $205
million for the same period this year.
Substantial drops in the prices of ethylene dichloride (EDC),
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 EDC and VCM began to show improvement late
in the first quarter and into the second quarter of 1996 but were
still well below the 1995 levels. Both of the key caustic markets of
pulp and paper and alumina were weaker than last year. Chlorinated
organics volume was up versus a year ago despite the discontinued
sales of 1,1,1-trichloroethane as a result of the Montreal
Protocol.
Sales for the first six months of 1996 were $1,542 million, a 12
percent decline from $1,760 million for the first six months of
1995. Sales prices and volume declined 10 percent and 2 percent
respectively. Operating income for the segment fell 36 percent to
$394 million in this half year compared to the same period last
year.
PERFORMANCE CHEMICALS
Sales for Performance Chemicals in the second quarter were $1,176
million, level with $1,178 million in the same quarter last year.
Sales prices were down 5 percent and volume was up 5 percent.
Despite continued strong performance in specialty chemicals and
emulsion polymers, the operating income for the segment declined
about 8 percent to $237 million for the second quarter of 1996 from
$259 million a year ago.
Specialty chemicals continued to show good results. Sales have
increased for ten consecutive quarters versus the prior year.
Compared to the second quarter of 1995, prices were down 5 percent
and volume was up 8 percent. Demand was strong for superabsorbents,
oxygenated solvents and polyglycols. Operating income benefited from
the disposal of some businesses which were not adding value. These
include aspirin, Cynara and Generon gas separation, and the
membranes operations in Denmark. Portfolio restructuring continued
with the completion of technology sale and manufacturing agreements
for the acrylamides business at the end of June. Overall operating
income for specialty chemicals improved more than 20 percent versus
the second quarter of 1995.
Emulsion polymers lower prices were partially offset by a 5
percent volume increase. Volume improved substantially in all
geographic areas with the exception of Europe where paper demand
remained sluggish. North America volume gains reflected improvements
in both coated paper and carpet markets, and prices in this
geography have stabilized. Lower costs and expenses combined with
higher volume produced a 10 percent gain in operating income in this
quarter versus the second quarter of 1995.
Agricultural products had a disappointing quarter as poor weather
continued to affect sales, primarily in North America. The wet, cold
spring weather slowed dinitroanaline sales, while the excessive
dryness in the Southwest U.S. impacted sales of phenoxy herbicides.
Sales in the second quarter were about flat with last year with
little change in either price or volume. Sales of new products
continued to meet expectations. Manufacturing costs were higher than
a year ago due to lower operating rates plus some pre-startup
expenses at the Harbor Beach facility. Operating income declined
about 20 percent from the same quarter last year.
Sales for the first six months of 1996 for Performance Chemicals
were $2,307 million, down 3 percent from $2,375 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 were down 3 percent and volume was
unchanged. Operating income for the first six months of 1996 was
$485 million, down 5 percent from $512 million a year ago.
PLASTICS
Plastics sales for the second quarter of 1996 were $966 million, a
12 percent decline from $1,092 million in the second quarter of
1995. Sales prices declined 27 percent and volume increased 15
percent. Prices for polyethylene and polystyrene were sharply lower
from last year's very strong levels. Volume rose due to increases in
polyethylene and the addition of polyethylene terephthalate (PET)
sales. Operating income for the segment fell 52 percent from $467
million in the second quarter of 1995 to $223 million for the same
period this year.
Polystyrene sales volume was strong in North America. Prices were
lower in all areas, particularly in the Pacific, with the largest
decrease in China. The prices in China appear to have bottomed out
and are starting to move up.
Polyethylene prices, while substantially below the second quarter
of 1995, strengthened in the second quarter versus the first
quarter of this year. Supply and demand balance was still tight with
industry operating rates in the 90 percent range, especially in
North America where the industry was still operating at a sold-out
rate. The Company had additional volume with the acquisition of
PBB/Polisur in Argentina.
Results of Operations (Continued)
PET operations in Italy were consolidated in the first quarter of
1996 with positive contributions to sales and operating income in
both first and second quarters.
Plastics sales for the six months of 1996 were $1,894 million,
down 13 percent from $2,183 million a year ago. Prices were lower by
27 percent and volume increased by 14 percent. Operating income for
the first half year was $394 million, down 57 percent from $918
million for the same period last year. Again, price was the
predominant reason for the large reduction in operating income.
PERFORMANCE PLASTICS
Performance Plastics sales of $1,373 million were down 2 percent
from $1,399 million in the second quarter of 1995 due mainly to the
transfer of the Company's elastomer products to DuPont Dow
Elastomers L.L.C. On a comparable basis Performance Plastics sales
were slightly ahead of the second quarter of 1995. Volume was up 2
percent, as all geographies outside of the Pacific showed gains, and
prices were down 4 percent. Operating income for this segment
increased 25 percent to $325 million, from $261 million in the
second quarter of 1995. Lower raw material costs and cost control
efforts combined to increase the operating income.
Polyurethanes sales were flat over the second quarter of 1995 on
slightly lower prices that were offset by higher volume. Volume was
down sharply in the Pacific because of lack of buying in China. This
was balanced with higher volume in all other geographies. Lower raw
material costs and cost control efforts combined to increase the
operating income by 40 percent compared to the second quarter of
1995.
Sales of epoxies and intermediates were flat over the second
quarter of 1995 with a 4 percent volume gain being offset by a
similar sales price decline. Results were particularly strong in
North America while Europe and the Pacific were adversely impacted
by a slower demand for personal computers. Operating income was
boosted 20 percent over the second quarter of 1995 by the
combination of lower unit costs and reduced expenses.
Engineering plastics sales were slightly ahead of last year's
level with volume up 5 percent and prices about 3 percent lower.
Improved manufacturing costs, primarily in polycarbonate,
contributed to a 30 percent gain in operating margin in the second
quarter of 1996 versus the second quarter of 1995.
Adhesives, sealants and coatings sales were up 20 percent and
operating income improved 40 percent in the second quarter of 1996
versus the second quarter of 1995. This is seasonally their
strongest quarter.
Fabricated products sales were down 5 percent from last year
despite modest volume gains in Europe and the Pacific, and stable
volumes in North America. The construction industry improved versus
last year, but competitive activity and weaker currencies adversely
affected pricing. Lower manufacturing costs and expenses resulted in
an overall increase in operating income of 10 percent versus the
second quarter of last year.
For the first six months of 1996, sales in Performance Plastics
were $2,718 million which was 2 percent higher than $2,662 million
in the first six months of 1995. This improvement was the result of
a 2 percent increase in volume. Operating income was $642 million,
up 44 percent from $445 million for the first half of 1995. 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 $595 million in the second quarter
of 1996 were down 15 percent from $697 million in the same quarter
of 1995, reflecting a selling price decrease of 10 percent, mainly
in ethylene, propylene and styrene prices. The demand for ethylene
strengthened in the quarter in North America and Europe with several
outages in Europe and inventories at low levels. Feedstock costs
continue to be at high levels, but there appears to be some
expansion in cracker margins due to monomer price improvements.
Destec's second quarter revenue decreased $76 million versus the
second quarter of 1995. This decrease resulted primarily from a
reduction in engineering revenue recognition on construction
projects. The related decrease in Destec's operating costs and
expenses more than compensated for the revenue reduction. This
resulted in an operating profit in 1996, compared to an operating
loss in 1995, for both the three and the six months periods. As of
June 1996, as a result of Destec's stock repurchase programs, Dow's
ownership of Destec exceeds 80 percent.
Operating loss for Hydrocarbons and Energy in the quarter was $20
million, versus a loss of $21 million in the second quarter of 1995.
The first six months of 1996 sales were $1,148 million, down 11
percent from $1,285 million for the same period last year. This
decline was due to price changes on a flat volume despite the
reduction in Destec revenue as discussed above. The first half year
of 1996 operating loss of $29 million was slightly improved over the
operating loss of $33 million for the first half year of 1995.
Results of Operations (Continued)
DIVERSIFIED BUSINESSES AND UNALLOCATED
Diversified Businesses and Unallocated sales were $276 million in
the second quarter of 1996, an increase of 10 percent from $252
million in the second quarter of 1995. The operating loss for this
segment was $74 million, flat from a loss of $72 million for the
same period last year.
DowBrands sales were down about 5 percent in the second quarter
of 1996 over the second quarter of 1995. The personal care business,
which accounted for about 10 percent of the second quarter of 1995
sales, was sold in the fourth quarter of 1995. Lower manufacturing
costs and expenses and a focus on key businesses contributed to
DowBrands achieving its fourth consecutive profitable quarter.
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 these developmental activities.
Miscellaneous costs which are not allocated to the other business
segments were about $40 million more negative in the second quarter
of 1996 than in the second quarter of 1995.
Sales for the first six months of 1996 were $549 million, a 20
percent increase from $457 million for the first six months of 1995.
The sales increase was mainly due to the inclusion of Radian
International LLC. Operating loss for the segment improved $56
million, to a loss of $122 million in the first half of 1996,
compared to a loss of $178 million for the same period last year.
This improvement was primarily due to DowBrands' positive
contribution.
COMPANY SUMMARY
Manufacturing Costs
Dow's global plant operating rate for its chemicals and plastics
businesses was 89 percent, down from 93 percent in the second
quarter of 1995. For the first six months of 1996 the operating
rate was 88 percent versus last year's high rate of 94 percent for
the same period.
Manufacturing costs for these businesses, adjusted for volume,
were down 3 percent compared to the second quarter of 1995. While
sales volume in this quarter increased by 4 percent, cost of sales
decreased by 1 percent over the second quarter last year. This good
performance is attributable to continued productivity improvements
and slightly reduced feedstock costs.
Other Income (Expense)
Equity in earnings of 20%-50% owned companies increased $9 million
in the second quarter of 1996 compared to the corresponding period a
year ago. Earnings in this quarter were up due to the addition of
Mycogen and DuPont Dow Elastomers L.L.C., continued strong
performance from Gurit-Essex, and advantages from the restructuring
of Sumitomo Dow Ltd. Earnings for the first half year of 1996 were
flat at $40 million versus the first half 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, were reduced to $43 million
this quarter, compared to $63 million in the second quarter of 1995.
For the first six months of 1996, net financial expenses have been
reduced by $34 million from $126 million in 1995 to $92 million in
1996. This reduction was due to the positive cash position created
by the sale of the Company's pharmaceutical businesses in the second
quarter of 1995 and continued positive cash provided by operating
activities.
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. The second quarter 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
and the disposition of the acrylamide monomer product group and
other smaller product lines.
Provision for Taxes on Income
The effective tax rate from continuing operations for the second
quarter was 37 percent compared to a 36 percent adjusted rate in the
second quarter of 1995. The adjustment to the second quarter of 1995
excludes 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. Without this adjustment the second quarter of
1995 effective tax rate from continuing operations was 51 percent.
The effective tax rate for the six months of 1996 was 37 percent
compared to an adjusted rate of 38 percent for the same period last
year. The unadjusted rate equaled 44 percent.
Results of Operations (Continued)
Income from Continuing Operations
The second quarter's income from continuing operations was $546
million or $2.20 per share. In the second quarter of 1995, income
from continuing operations was $334 million or $1.22 per share which
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, were down 10 percent. This decrease
reflected the general sales price decline from the strong prices in
the first half of 1995.
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.
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
The reduction of minority interest from $77 million in the second
quarter of 1995, to $48 million for the same period 1996, was
primarily due to the lower earnings in DowElanco and its
subsidiaries, as discussed under Performance Chemicals in this
section.
Expectations for the Remainder of 1996
Management is optimistic that the volume growth seen in most of the
Company's businesses in the first half of 1996 will continue. While
the Company expects that the third quarter will exhibit some typical
seasonal slowness, particularly in agricultural products, the
underlying economic factors are positive. Some key industries for
the Company's products - pulp for caustic, coated paper for latex -
are improving, growth in North America is expected to continue at or
near the current rate, economic activity is increasing in Japan, and
Dow has seen the first indicators of an upward move in Europe.
Prices for most products are expected to be stable, although there
are expectations of further improvements in polyethylene in the
third quarter. Industry fundamentals are sound for most of Dow's
businesses, with little new industry capacity being added in the
near term. The Company results will continue to show the impact of
it's on-going attention to productivity improvement and portfolio
restructuring, which will partially offset the effects of this
year's lower prices for some products. And, even with
seasonal slowdown of agricultural products in the second half of the
year, Performance Chemicals and Performance Plastics segments
are expected to be strong contributors to another good year for Dow.
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.
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.
Legal Proceedings (Continued)
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.
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 has been appealed. 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. Plaintiffs
have moved to reconsider the Appellate Division's affirmance. 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. 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.
Legal Proceedings (Continued)
On November 3, 1994, Judge Michael Schneider, presiding in the
consolidated breast implant cases in Harris County, Texas, granted
in part and denied in part the Company's motion for summary
judgment. Judge Schneider granted the Company's motion as to (i)
all claims based on the Company's shareholder status in Dow Corning,
(ii) the claim that the Company was liable in negligence for failing
to supervise Dow Corning, and (iii) plaintiffs' licensor-licensee
claim. Judge Schneider denied the Company's motion with regard to
plaintiffs' claims sounding in fraud, aiding and abetting,
conspiracy, certain negligence claims and a claim brought under the
Texas Deceptive Trade Practices Act. As a result, the Company
remains a defendant as to such claims in 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
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. 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.
Legal Proceedings (Continued)
Transaction with Hoechst A.G.
Between February 28 and April 7, 1995, following an announcement of
discussions between the Company and Hoechst A.G. and its affiliates
("Hoechst") regarding the possible acquisition by Hoechst of Marion
Merrell Dow Inc. ("MMD") for $25.75 per share and of the Company's
Latin American pharmaceuticals business for $200 million, eleven
class action complaints were filed in the Delaware Chancery Court
for New Castle County (the "Court") against MMD, its Directors
(certain of whom are also the Company's Directors) and the Company.
Hoechst is also a defendant in one of those lawsuits. In general,
the complaints allege that the Company violated its fiduciary duties
to MMD's shareholders by failing to maximize the purchase price of
MMD's shares in negotiating the transactions. Plaintiffs seek class
certification, injunctive relief, compensation for an unspecified
amount of losses and damages, and, in some cases, to have the
Company ordered to evaluate alternatives, ensure no conflicts of
interest, and appoint an independent special committee or shareholder
committee to review all offers. (See page 11 of this Quarterly Report
on Form 10-Q for a description of the transaction between the Company
and Hoechst as finally agreed and closed.)
In June of 1995, all eleven lawsuits were consolidated into a
single action and on June 3, 1996, the Court entered an order
dismissing without prejudice that action as against all defendants.
Although plaintiffs could refile their lawsuit, it is the opinion of
the Company's management that the possibility that such action will
have a material adverse impact on the Company's consolidated
financial statements is remote.
Environmental Matters
On July 1, 1994, the Louisiana Department of Environmental Quality
(the "DEQ") served a Penalty Notice on the Company alleging three
spills which violated the Louisiana Clean Water Act, seeking
proposed civil fines totaling $120,740, including administrative
expenses. In settlement of the proposed fines, the Company donated
two early warning devices to the DEQ having a total value of
approximately $77,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of The Dow Chemical Company was
held on May 9, 1996. At that meeting the following directors were
elected: Jacqueline K. Barton, David T. Buzzelli, Anthony J.
Carbone, John C. Danforth, Joseph L. Downey, Barbara Hackman
Franklin, Allan D. Gilmour, Michael D. Parker, J. Pedro Reinhard and
Harold T. Shapiro. In addition, the terms of the following
directors continued after that meeting: Fred P. Corson, Willie D.
Davis, Michael L. Dow, Enrique C. Falla, William J. Neely, Frank P.
Popoff, Paul G. Stern and William S. Stavropoulos.
Separately, William J. Neely resigned from the Board of Directors on
June 1, 1996. And on July 11, 1996, the Company elected Arnold A.
Allemang, Vice President and Director of Manufacturing and
Engineering, as a new director.
The following table gives a brief description of each matter voted
upon at the above referenced annual meeting and, as applicable, the
number of votes cast for, against or withheld, as well as the number
of abstentions and broker nonvotes.
Description of Matter
Broker
For Against Withheld Abstentions Nonvotes
- ---------------------------------------------------------------------------
1. Election of Directors:
Class 1
Jacqueline K.
Barton 209,845,189 n/a 5,716,756 n/a n/a
David T.
Buzzelli 208,644,855 n/a 6,917,090 n/a n/a
Anthony J.
Carbone 208,416,354 n/a 7,145,591 n/a n/a
Joseph L.
Downey 208,399,070 n/a 7,162,875 n/a n/a
Barbara Hackman
Franklin 209,642,465 n/a 5,919,480 n/a n/a
Harold T.
Shapiro 209,844,118 n/a 5,677,827 n/a n/a
Class II
Michael D.
Parker 208,562,202 n/a 6,999,743 n/a n/a
J. Pedro
Reinhard 208,609,475 n/a 6,952,470 n/a n/a
Class III
John C.
Danforth 208,561,372 n/a 7,000,573 n/a n/a
Allan D.
Gilmour 209,652,932 n/a 5,909,013 n/a n/a
2.
Ratification of
the Selection
of Deloitte &
Touch LLP as
the Company's
Independent
Auditors for
1996. 213,868,241 457,926 n/a 1,235,778 n/a
n/a - not applicable
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 second quarter 1996.
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: August 8, 1996
- -----------------------
Roger L. Kesseler
-----------------
Roger L. Kesseler
Vice President & Controller
(Chief Accounting Officer)
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