SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTER ENDED MARCH 31, 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. EmployerIdentification No.)
incorporation or organization)
2030 DOW CENTER, MIDLAND, MICHIGAN 48674
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 517-636-1000
Not applicable
(Former name, former address and former fiscal year if
changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Outstanding at
Class March 31, 1996
Common Stock, $2.50 par value 250,016,182 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
First Quarter Earnings Announcement 9
Acquisitions and Divestitures 11
Changes in Financial Condition 12
Results of Operations
First Quarter 1996 versus First Quarter 1995 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
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
(Unaudited)
- ---------------------------------------------------------------------
In millions, except for Three Months Ended
per share amounts Mar.31, 1996 Mar.31, 1995
- ---------------------------------------------------------------------
Net Sales $4,982 $5,205
- ------------------------------------------------------------------
Operating Costs and Expenses
Cost of sales 3,384 3,326
Insurance and finance company
operations, pretax income (22) (13)
Research and development expenses 191 213
Promotion and advertising expenses 85 117
Selling and administrative expense 467 476
Amortization of intangibles 9 11
-------------------------------------------------------------
Total operating costs and expenses 4,114 4,130
- ------------------------------------------------------------------
Operating Income 868 1,075
- ------------------------------------------------------------------
Other Income (Expense)
Equity in earnings of 20%-50%
owned companies 16 25
Interest expense and amortization
of debt discount (124) (101)
Interest income and foreign
exchange-net 75 38
Sundry income -net 48 11
-------------------------------------------------------------
Total other income (expense) 15 (27)
- ------------------------------------------------------------------
Income before Provision for Taxes
on Income and Minority Interests 883 1,048
- ------------------------------------------------------------------
Provision for Taxes on Income 326 414
- ------------------------------------------------------------------
Minority Interests' Share in Income 79 68
- ------------------------------------------------------------------
Preferred Stock Dividends 2 2
- ------------------------------------------------------------------
Income from Continuing Operations 476 564
- ------------------------------------------------------------------
Discontinued Operations
Income from pharmaceutical busines
net of taxes on income - 18
- ------------------------------------------------------------------
Net Income Available for
Common Stockholders $476 $582
- ------------------------------------------------------------------
Average Common Shares Outstanding 251.0 276.9
Earnings per Common Share from
Continuing Operations $1.90 $2.03
Earnings per Common Share $1.90 $2.10
Common Stock Dividends
Declared per Share $0.75 $0.65
Depreciation $308 $334
Capital Expenditure $264 $203
- ------------------------------------------------------------------
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.
3
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
- ------------------------------------------------------------------
Mar.31, Dec. 31,
In millions 1996 1995
- ------------------------------------------------------------------
Assets
- ------------------------------------------------------------------
Current Assets
Cash and cash equivalents $3,529 $2,839
Marketable securities and interest-bearing 576 611
Accounts and notes receivable:
Trade (less allowance for doubtful
receivables- 1996, $52; 1995, $53) 3,052 2,729
Other 1,433 1,380
Inventories:
Finished and work in process 2,091 2,197
Materials and supplies 518 551
Deferred income tax assets-current 191 247
-------------------------------------------------------------
Total current assets 11,390 10,554
- ------------------------------------------------------------------
Investments
Capital stock at cost plus equity in accumulated
earnings of 20%-50% owned companies 1,261 848
Other investments 1,546 1,558
Noncurrent receivables 478 314
-------------------------------------------------------------
Total investments 3,285 2,720
- ------------------------------------------------------------------
Plant Properties
Plant properties 23,330 23,218
Less accumulated depreciation 15,262 15,105
-------------------------------------------------------------
Net plant properties 8,068 8,113
- ------------------------------------------------------------------
Other Assets
Goodwill (net of accumulated amortization-
1996, $160; 1995, $177) 723 658
Deferred income tax assets-noncurrent 757 779
Deferred charges and other assets 840 758
-------------------------------------------------------------
Total other assets 2,320 2,195
- ------------------------------------------------------------------
Total Assets $25,063 $23,582
- ------------------------------------------------------------------
See Notes to Financial Statements.
4
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
- ------------------------------------------------------------------
Mar.31, Dec. 31,
In millions, except for share amounts 1996 1995
- ------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------
Current Liabilities
Notes payable $1,853 $323
Long-term debt due within one year 388 375
Accounts payable:
Trade 1,457 1,529
Other 662 717
Income taxes payable 758 791
Deferred income tax liabilities-current 41 55
Dividends payable 196 192
Accrued and other current liabilities 1,436 1,619
-------------------------------------------------------------
Total current liabilities 6,791 5,601
- ------------------------------------------------------------------
Long-Term Debt 4,492 4,705
- ------------------------------------------------------------------
Other Noncurrent Liabilities
Deferred income tax liabilities-noncurrent 722 659
Pension and other postretirement benefits-n 1,934 1,880
Other noncurrent obligations 1,480 1,260
-------------------------------------------------------------
Total other liabilities 4,136 3,799
- ------------------------------------------------------------------
Minority Interest in Subsidiary Companies 1,915 1,775
- ------------------------------------------------------------------
Temporary Equity
Temporary equity-other 207 313
Preferred stock at redemption value 130 131
Guaranteed ESOP obligation (103) (103)
-------------------------------------------------------------
Total temporary equity 234 341
- ------------------------------------------------------------------
Stockholders' Equity
Common stock 818 818
Additional paid-in capital 171 315
Retained earnings 10,410 10,159
Unrealized gains (losses) on investments 51 62
Cumulative translation adjustments (345) (349)
Treasury stock, at cost (3,610) (3,644)
-------------------------------------------------------------
Net stockholders' equity 7,495 7,361
- ------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $25,063 $23,582
- ------------------------------------------------------------------
See Notes to Financial Statements.
5
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
- ---------------------------------------------------------------------
Three Months Ended
In millions Mar.31 Mar.31
1996 1995
- ---------------------------------------------------------------------
Operating Activities
Income from Continuing Operations $476 $564
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 326 355
Provision for deferred income tax 328 49
Undistributed (earnings) losses of 20%-50%
owned companies (14) (12)
Minority interests' share in income 79 68
Net (gain) or loss other (15) 8
Changes in assets and liabilities that
provided (used) cash:
Accounts receivable (291) (621)
Inventories 173 (158)
Accounts payable (125) 40
Other assets and liabilities (295) 132
Operating activities related to
discontinued operations 0 84
------------------------------------------------------------------
Cash provided by operating activities 642 509
- ---------------------------------------------------------------------
Investing Activities
Purchases of plant properties (264) (194)
Investments in unconsolidated affiliates (323) (4)
Purchases of consolidated companies
(net of cash acquired) (160) 0
Proceeds from sales of plant properties 12 1
Purchases of investments (535) (394)
Proceeds from sales of investments 534 439
Investing activities related to
discontinued operations 0 (28)
------------------------------------------------------------------
Cash used in investing activities (736) (180)
- ---------------------------------------------------------------------
Financing Activities
Changes in short-term notes payable 1,401 31
Proceeds from issuance of long-term debt 0 93
Payments on long-term debt (229) (74)
Purchases of treasury stock (342) (149)
Proceeds from sales of common stock 166 23
Distributions to minority interests (21) (27)
Dividends paid to stockholders (188) (180)
Financing activities related to
discontinued operations 0 17
------------------------------------------------------------------
Cash provided by (used in) financing activities 787 (266)
- ---------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (3) 0
- ---------------------------------------------------------------------
Summary
Increase in cash and cash equivalents 690 63
Cash and cash equivalents at beginning of year 2,839 569
------------------------------------------------------------------
Cash and cash equivalents at end of period $3,529 $632
- ---------------------------------------------------------------------
See Notes to Financial Statements.
6
COMMITMENTS AND CONTINGENT LIABILITIES
In January 1994, Dow Corning Corporation (Dow Corning), in
which Dow is a 50 percent shareholder, announced a pretax
charge of $640 million ($415 million after tax) for the
fourth quarter of 1993. In January 1995, Dow Corning
announced a pretax charge of $241 million ($152 million after
tax) for the fourth quarter of 1994. These charges included
Dow Corning's best estimate of its potential liability for
breast implant litigation based on 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 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
12,549 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, would have a material adverse impact on the
Company's financial position or cash flows. Nevertheless, in
light of Judge Pointer's April 25 ruling, it is possible that
a resolution of plaintiffs' direct participation claims,
including the vigorous defense against those claims, could
have a material adverse impact on the Company's net income
for a particular period, although it is impossible at this
time to estimate the range or amount of any such impact.
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 $260 million at March 31, 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
FIRST QUARTER EARNINGS ANNOUNCEMENT (April 25, 1996)
Dow Announces Quarterly Earnings of $1.90 per share
First Quarter of 1996 Highlights
Sales for the first quarter of 1996 were $5.0 billion.
Earnings from continuing operations were $1.90 per
share, down 6 percent from $2.03 for the same period last year.
A balanced product portfolio and continued productivity
improvements contributed to a strong first quarter.
- -----------------------------------------------------------------
3 Months Ended
Mar. 31
(In millions, except for share amounts) 1996 1995
- -----------------------------------------------------------------
Net Sales $4,982 $5,205
Operating Income 868 1,075
Income from Continuing Operations 476 564
Earnings per Common Share
from Continuing Operations 1.90 2.03
Earnings Per Common Share 1.90 2.10
- -----------------------------------------------------------------
Note: Results for the first quarter of 1995 have been
restated to present Dow's pharmaceutical businesses as
discontinued operations after their sale in the second
quarter of 1995.
Review of Quarterly Results
The Dow Chemical Company today announced sales of $5.0
billion for the first quarter of 1996. Net income from
continuing operations was $476 million, and earnings from
continuing operations were $1.90 per share, down 6 percent
from $2.03 a year ago. Sales were off 4 percent from $5.2
billion for the same period a year ago. A 7 percent decline
in prices was partially offset by a 3 percent increase in
volume. Operating income was $868 million, down 19 percent
from $1.1 billion a year ago. Total earnings, which include
the results from discontinued pharmaceutical operations, were
$1.90 per share versus $2.10 for the first quarter of 1995.
"We are very pleased with our first quarter results, " said
J. Pedro Reinhard, Dow's financial vice-president and chief
financial officer. "Our balanced product portfolio and the
realization of our on-going productivity improvements
buffered the decline in commodity prices which occurred over
the last six months."
Chemicals and Metals recorded sales of $752 million, off 13
percent from $861 million a year ago. Operating income was
$190 million compared to $304 million in the first quarter of
1995. Lower prices for vinyl chloride monomer (VCM), coupled
with a slowdown in the pulp and paper industry, impacted this
segment's results.
Performance Chemicals sales declined 6 percent to $1.1
billion, while operating income at $247 million was basically
flat compared to a year ago. The Specialty Chemicals
business remained strong, posting higher sales and earnings
compared to the first quarter of 1995. This offset lower
results for Agricultural Chemicals which were impacted by a
delayed planting season in North America caused by the
extremely cold weather. It is expected that the second
quarter will benefit from these delayed sales.
Plastics sales were down 15 percent to $928 million.
Operating income was $170 million compared to $451 million in
the first quarter of 1995. Prices were down 27 percent,
compared to the same period last year. However, by quarter's
end, prices began trending upward due to increased demand in
all geographic markets.
Performance Plastics experienced a strong quarter with sales
of $1.3 billion, up 6 percent from the same period a year
ago. Operating income increased 72 percent to $317 million
compared to $184 million during the first quarter of 1995.
All businesses in this segment posted very strong gains.
FIRST QUARTER EARNINGS ANNOUNCEMENT (April 25, 1996)
(Continued)
Hydrocarbons and Energy sales were $553 million, down 6
percent from $588 million in the first quarter of 1995. The
segment posted an operating loss of $9 million versus an
operating loss of $12 million a year ago.
The Diversified Businesses and Unallocated segment achieved
sales of $273 million, up 33 percent versus $205 million a
year ago. Sales from Radian International LLC, Dow's
environmental management subsidiary, contributed to the
revenue increase. This segment posted an operating loss of
$47 million, a $58 million improvement compared to an
operating loss of $105 million in the first quarter of 1995.
Substantially better performance at DowBrands contributed to
the stronger results.
"Our long-term strategy for success is beginning to create
results. Our value-growth initiatives are positively
contributing to our earnings and we continue to make
productivity gains. Indeed, we are on-target to meet our
cost reduction goals for 1996. Our efforts, along with the
current favorable supply and demand balances, should result
in another good year," said Reinhard.
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 in mid-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 all
environmental cleanup obligations for operations through the
legal closing date.
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 16-inch
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 PBB, a leading ethylene producer,
and Polisur, a polyethylene manufacturer, in Argentina. 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 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 joint venture has been
formed by both parents transferring assets and existing
businesses. The estimated book value of the net assets
transferred by the Company will be approximately $500
million. The combined annual sales of the existing businesses
exceed $1 billion.
In January 1996, the Company and The Hartford Steam Boiler
Inspection and Insurance Company formed 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 joint venture was formed by both parents transferring net
assets. The value of the net assets transferred by the
Company will be approximately $32 million. Radian
International LLC is expected to have annual revenues of
nearly $400 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 $160 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 $156 million, acquired
approximately a 46 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 businesses 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, current assets and
current liabilities at March 31, 1996 versus
December 31, 1995.
Mar. 31, Dec. 31, Increase
In millions 1996 1995 (Decrease)
- ----------------------------------------------------------------------
Notes payable $1,853 $ 323 $1,530
Long-term debt due within one year 388 375 13
Long-term debt 4,492 4,705 (213)
- ----------------------------------------------------------------------
Total debt $6,733 $5,403 $1,330
- ----------------------------------------------------------------------
The notes payable increase of $1.5 billion was due mainly
to excess BSL funds being managed by the Company. These
excess funds are advance receipts of reconstruction funding
from BvS. These funds are recorded both as current assets and
current liabilities by the Company.
Mar. 31, Dec. 31, Increase
In millions 1996 1995 (Decrease)
- ---------------------------------------------------------------------
Cash and cash equivalents $ 3,529 $ 2,839 $ 690
Marketable securities and
interest-bearing deposits 576 611 (35)
Accounts and notes receivable - net 4,485 4,109 376
Inventories:
Finished and work in process 2,091 2,197 (106)
Materials and supplies 518 551 (33)
Deferred income taxes 191 247 (56)
- ---------------------------------------------------------------------
Total current assets 11,390 10,554 836
- ---------------------------------------------------------------------
Total current liabilities 6,791 5,601 1,190
- ---------------------------------------------------------------------
Working capital $ 4,599 $ 4,953 $ (354)
- ---------------------------------------------------------------------
Excluding the funds managed for BSL as mentioned above,
cash and cash equivalents were reduced by $580 million. These
cash resources were used in the repayment of long-term debt
and the investments in Mycogen, INCA and PBB/Polisur as
discussed in the Acquisitions and Divestitures section of
this report. In addition, the Company purchased 4.1 million
shares of common stock during the first quarter of 1996 as
part of its overall stock repurchase program. The Company's
average shares outstanding for the quarter were 251 million,
a decrease of 10 percent from the first quarter of 1995.
There were 6 million shares left to repurchase at the end of
the first quarter 1996 within the current authorization,
which is expected to be completed by the end of the second
quarter.
At March 31, 1996, the Company had unused and available
credit facilities with various United States and foreign
banks totaling $2.0 billion in support of commercial paper
borrowings and working capital requirements. Additional
unused credit facilities totaling $1.2 billion are available
for use by foreign subsidiaries.
Mar. 31, Dec. 31,
Balance Sheet Ratios 1996 1995
- ---------------------------------------------------------------
Current assets over current liabilities 1.7:1 1.9:1
Days-sales-outstanding-in-receivables 52 56
Days-sales-in-inventory 85 90
Debt as a percentage of total capitalization 41.7 36.3
The increase of 5.4 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
As a result of the sale of the Company's pharmaceutical
businesses, the amounts reported for prior periods have been
restated to reflect the pharmaceutical businesses as
discontinued operations.
First Quarter 1996 versus First Quarter 1995
The following table represents geographic segment sales and
operating income for the three months ended
March 31, 1996 and 1995. Price and volume changes are
presented for sales.
Three Months Ended Percentage
Mar. 31, Mar. 31, 1996 vs 1995 Change* due to
In millions 1996 1995 Dollars % Price Volume
---- ---- ------- - ----- ------
Geographic sales
United States $2,175 $2,359 $(184) (8)% (7)% (1)%
Europe 1,679 1,673 6 0 % (7)% 7 %
Rest of world 1,128 1,173 (45) (4)% (8)% 4 %
------ ------ ------
Total $4,982 $5,205 $(223) (4)% (7)% 3 %
Geographic operating income
United States $346 $ 401 $ (55) (14)%
Europe 263 340 (77) (23)%
Rest of world 259 334 (75) (22)%
---- ---- -----
Total $868 $1,075 $(207) (19)%
The following table represents industry segment sales and
operating income for the three months ended March 31, 1996 and 1995.
Price and volume changes are presented for sales.
Three Months Ended Percentage
Mar. 31, Mar. 31, 1996 vs 1995 Change* due to
In millions 1996 1995 Dollars % Price Volume
---- ---- ------- - ----- ------
Industry segment sales
Chemicals & Metals $ 752 $ 861 $(109) (13)% (10)% (3)%
Performance Chemicals 1,131 1,197 (66) (6)% (1)% (5)%
Plastics 928 1,091 (163) (15 % (27)% 12 %
Performance Plastics 1,345 1,263 82 6 % 5 % 1 %
Hydrocarbons & Energy 553 588 (35) (6)% (11)% 5 %
Diversified Businesses
& Unallocated 273 205 68 nm nm nm
------ ------ ------
Total $4,982 $5,205 $(223) (4)% (7)% 3 %
Industry segment operating income
Chemicals & Metals $190 $ 304 $(114) (38)%
Performance Chemicals 247 253 (6) (2)%
Plastics 170 451 (281) (62)%
Performance Plastics 317 184 133 72 %
Hydrocarbons & Energy (9) (12) 3 25 %
Diversified Businesses
& Unallocated (47) (105) 58 55 %
----- ------- ------
Total $868 $1,075 $(207) (19)%
( ) - unfavorable
* - not intended to add
nm - not meaningful
First Quarter 1996 vs First Quarter 1995 (Continued)
The following are selected data for the three months ended
March 31, 1996 and 1995.
Three Months Ended
Dollars in millions, Mar. 31, Mar. 31, 1996 vs1995
except for share amounts 1996 1995 Dollars %
---- ---- ------- -
Cost of sales $3,384 $3,326 $58 2 %
% of sales 68% 64% 4 points
Research and development,
promotion and advertising,
selling and administrative
expenses 743 806 (63) (8)%
Operating income 868 1,075 (207) (19)%
% of sales 17% 21% (4) points
Equity in earnings of
20%-50% owned companies 16 25 (9) (36)%
Effective tax rate
from continuing operations 37% 39% (2) points
Income from continuing operations 476 564 (88) (16)%
Net income available
for common stockholders 476 582 (106) (18)%
Earnings per common share
from continuing operations $1.90 $2.03 $(0.13) (6)%
Earnings per common share $1.90 $2.10 $(0.20) (9)%
Operating rate percentage 87% 95% (8) points
Results of Operations
Net sales for the first quarter of 1996 were $5 billion, a
decline of 4 percent from $5.2 billion in the same period
last year. The result was due to a price decrease of 7
percent and a volume increase of 3 percent. All geographic
and industry segments, with the exception of Performance
Plastics business, showed a price decline. The Plastics
business had the largest sales price decline of 27 percent,
against the first quarter 1995's strong level.
Volume was mixed in the industry segments with Plastics
business showing a 12 percent improvement. Sales in the
United States accounted for 44 percent of the total sales in
this quarter and 45 percent in the same period last year.
Operating income of $868 million was 19 percent lower for
this quarter versus $1,075 million in the first quarter of
1995. All geographic segments contributed to the decline
caused mainly by sales price erosion. The effect of cost
control which lowered expenses helped mitigate the impact of
lower sales prices. The impact of the dollar, weakening
against the European currencies and strengthening against the
Rest of World currencies, was not significant.
CHEMICALS AND METALS
Chemicals and Metals sales for the first quarter of 1996 were
$752 million, a 13 percent decline from $861 million in the
first quarter 1995. Sales prices and volume declined 10
percent and 3 percent respectively. Operating income for the
segment fell 38 percent from $304 million in this quarter
compared to the same period last year. A substantial drop in
the price of ethylene dichloride (EDC) and vinyl chloride
monomer (VCM) compared to a year ago, was the major reason
for the lower sales and operating income for this business.
Prices for EDC and VCM began to show improvement late in the
first quarter 1996. Sales and operating income of chlorinated
organics were lower than last year because of the phase-out
of 1,1,1-trichloroethane sales due to the Montreal Protocol.
Price and volume were slightly below last year for caustic
soda. Propylene glycol performance was better than last year
due to lower manufacturing costs and expenses, combined with
sales price and volume gains to unsaturated polyester resin
and personal care manufacturers.
PERFORMANCE CHEMICALS
Sales for Performance Chemicals were $1,131 million, down
about 6 percent from $1,197 million compared to the previous
year. Sales prices were down slightly and volume was down
about 5 percent. The volume in Europe, however, was stronger,
up about 4 percent. Operating income for the segment was $247
million, down 2 percent from $253 million a year ago.
Specialty chemicals posted a 2 percent increase in sales,
due to a volume increase of 4 percent and a 2 percent price
decline. Volume was particularly strong in the United States
with strong demand for superabsorbents, oxygenated solvents
and polyglycols. The construction industry's slow start due
to colder than normal weather conditions adversely affected
sales of Methocel. Lower manufacturing costs and expenses
combined with higher volume were instrumental in producing a
23 percent increase in operating income over the first
quarter last year.
Sales prices were up slightly in emulsion polymers, but
volume was down versus a year ago due to inventory reduction
in the coated paper industry. After a slow start in January
and February, demand improved in March, particularly in North
America, Europe and the Pacific. Lower manufacturing costs
helped mitigate the effect of reduced demand, resulting in
the operating income for these products being about flat with
last year.
Cold weather in North America and a late spring slowed
this quarter's agricultural products sales. Also, the delay
in the farm bill in the United States caused some herbicide
decisions to be postponed until crop selection was
determined. It is expected that the delayed sales will take
place in the second quarter. Agricultural sales in Europe for
this quarter were well ahead of the first quarter last year.
Sales of new products, Broadstrike and Sentricon, are on
track with expectations. Cost control efforts resulted in
lower expenses, which helped offset some of the reduction in
sales.
PLASTICS
Plastics reported sales of $928 million in the first quarter
of 1996, a decrease of 15 percent from $1,091 million in the
previous year's first quarter. Sales prices fell 27 percent
from last year's strong levels, but volume rose 12 percent
due to increased polyethylene demand. Operating income
declined 62 percent from $451 million to $170 million which
reflected the lower sales prices.
While sales prices fell sharply in polyethylene, volume
was up substantially versus the first quarter of 1995.
Polyethylene was sold out globally on all major products.
Exports to the Far East were strong as volume in the Pacific
doubled that of a year-ago. It is believed that some of the
volume increase was due to pre-price increase inventory
building. Sales price increases were implemented in Europe
during the quarter and in North America at the end of the
quarter.
Polyethylene terephthalate (PET) operations were
consolidated in the first quarter of 1996 with positive
contributions to sales and operating income.
Polystyrene sales were 26 percent below the first quarter
of 1995 on a price decline of 20 percent and a volume decline
of 6 percent. Prices are expected to turn around with price
increases in Europe in February and the implementation of
price increases in North America at the start of the second
quarter.
PERFORMANCE PLASTICS
Performance Plastics sales of $1,345 million were up 6
percent from $1,263 million in the first quarter of 1995.
Prices were up 5 percent and volume rose 1 percent, with
gains in almost all business areas. Lower expenses resulting
from cost control efforts, along with lower raw material
costs and higher prices, increased operating income for this
segment to $317 million, 72 percent above the first quarter
of 1995 of $184 million.
Polyurethanes sales were up 10 percent over the first
quarter of 1995 on higher prices, as volumes were about flat.
Reduced demand for durables, which accounts for a large
portion of the polyurethanes sales, dampened sales in the
quarter, but March sales showed improvement in North America.
Sales of epoxies and intermediates were up almost 5
percent over the first quarter of 1995 with gains in both
selling price and volume. Sales volume gains were strongest
in the intermediates. Resin sales volume was reduced somewhat
by a sluggish demand for personal computers. Operating income
was boosted 29 percent over the first quarter of 1995 by the
combination of higher sales volumes, increased selling prices
and lower expenses.
Higher sales prices and stable volumes for polycarbonates
improved engineering thermoplastic sales by 5 percent versus
the first quarter of 1995. Industry supply and demand balance
is good and the Company's polycarbonate plants are running at
capacity.
Adhesives, sealants and coatings sales were up 22 percent
and operating income more than doubled the first quarter of
1995.
Fabricated products sales were down 3 percent from last
year as the cold weather in North America and Europe slowed
the sales of Styrofoam to the construction industry. Lower
expenses and good performance by the business resulted in an
overall increase in operating income of 15 percent.
HYDROCARBONS AND ENERGY
Hydrocarbons and Energy sales of $553 million in the first
quarter of 1996, down 6 percent from $588 million in the same
quarter of 1995, reflected significant declines in ethylene,
propylene and styrene prices. Operating loss for the quarter
was $9 million, versus a loss of $12 million in the first
quarter of 1995.
DIVERSIFIED BUSINESSES AND UNALLOCATED
Diversified Businesses and Unallocated sales were $273
million, an increase of 33 percent from $205 million in the
first quarter of 1995. The operating loss for this segment
was $47 million, an improvement from a loss of $105 million
for the same period last year.
DowBrands sales were flat with last year as price
improvements offset sales lost due to the divestiture of the
Personal Care business in the fourth quarter of 1995. Lower
manufacturing costs and significantly reduced promotion and
advertising expenses contributed to a modest profit for the
business this quarter, compared to a loss in the same quarter
a year-ago.
New Businesses sales rose sharply with the inclusion of
Radian International LLC, the Company's environmental
services joint venture with The Hartford Steam Boiler
Inspection and Insurance Company. Operating income for the
other new businesses was negative, reflecting the expenses
related to these developmental activities.
Miscellaneous costs which are not allocated to the other
business segments remained relatively flat versus the first
quarter 1995, with the exception of severance costs which
were reduced considerably.
Manufacturing Costs
Dow's global plant operating rate for its chemicals and
plastics businesses was 87 percent, down from 95 percent in
the first quarter of 1995. Manufacturing costs for these
businesses, adjusted for volume, were down 3 percent compared
to the same period a year ago.
Other Income (Expense)
Equity in earnings of 20%-50% owned companies decreased $9
million compared to the corresponding period a year ago,
primarily due to no longer recognizing equity earnings of Dow
Corning. On May 15, 1995, Dow Corning Corporation announced
that it had filed for protection under Chapter 11 of the
United States Bankruptcy Code with the United States
Bankruptcy Court in Bay City, Michigan.
Net financial expenses, which are the total of interest
expense, interest income and foreign exchange, amounted to
$49 million this quarter, below the $63 million in the first
quarter of 1995. This was due to the cash position created by
the sale of the Company's pharmaceutical business in the
second quarter of 1995 plus a positive operating cash flow.
Provision for Taxes on Income
The effective tax rate from continuing operations for the
first quarter was 37 percent compared to 39 percent in the
first quarter of 1995, after restatement for classification
of discontinued operations.
Income from Continuing Operations
The first quarter's income from continuing operations was
$476 million or $1.90 per share. In the first quarter of
1995, income from continuing operations was $564 million or
$2.03 cents per share. This decrease reflected a general
sales price decline across all industry segments with the
exception of the Performance Plastics business.
Discontinued Operations
Net sales attributed to the pharmaceutical business for the
three months ended March 31, 1995, was $757 million and
taxes on income from the pharmaceutical business for the
three months ended March 31, 1995 was $36 million.
Net Income Available for Common Stockholders
The first quarter's net income available for common
stockholders was $476 million or $1.90 per share. This
compared with net income for the corresponding period last
year of $582 million or $2.10 per share. The Company's
average shares outstanding for the quarter were 251 million,
a decrease of 10 percent from the first quarter of 1995.
Expectations for the Remainder of 1996
Economic conditions are improving, and there seems to be
demand growth. Currently there is a favorable supply/demand
scenario, the inventory correction cycle is generally
complete, and prices appear to have bottomed out and are
moving up for most products. The Company is monitoring the
overall economic situation around the globe, because demand
levels are dynamic and industry operating rates and available
capacity can change. Business conditions should remain
positive as long as the industry fundamentals stay as they
are now. It appears that earlier expectations for a stronger
economy in the second half of the year may be realized. With
the cost reduction plans and the benefits that are beginning
to show from the Company's value-growth initiatives, the
Company is well positioned for the remainder of the year.
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.
Breast Implant Matters (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 a total
of 12,549 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 3,996 breast
implant cases pending in state courts in California, Indiana,
Michigan, New Jersey and New York, and 130 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. Plaintiffs have appealed
Judge Lobis' ruling. 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.
Breast Implant Matters (Continued)
On November 3, 1994, Judge Michael Schneider, presiding in
the consolidated breast implant cases in Harris County,
Texas, granted in part and denied in part the Company's
motion for summary judgment. Judge Schneider granted the
Company's motion as to (i) all claims based on the Company's
shareholder status in Dow Corning, (ii) the claim that the
Company was liable in negligence for failing to supervise Dow
Corning, and (iii) plaintiffs' licensor-licensee claim.
Judge Schneider denied the Company's motion with regard to
plaintiffs' claims sounding in fraud, aiding and abetting,
conspiracy, certain negligence claims and a claim brought
under the Texas Deceptive Trade Practices Act. As a result,
the Company remains a defendant as to such claims in 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. 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. Plaintiffs have asked
for reconsideration of the Sixth Circuit's ruling.
It is the opinion of the Company's management that the
possibility is remote that plaintiffs will prevail on the
theory that the Company should be liable in the breast
implant litigation because of its shareholder relationship
with Dow Corning. The Company's management believes that
there is no merit to plaintiffs' claims that the Company is
liable for alleged defects in Dow Corning's silicone products
because of the Company's alleged direct participation in the
development of those products, and the Company intends to
contest those claims vigorously. Management believes that
the possibility is remote that a resolution of plaintiffs'
direct participation claims, including the vigorous defense
against those claims, would have a material adverse impact on
the Company's financial position or cash flows.
Nevertheless, in light of Judge Pointer's April 25 ruling, it
is possible that a resolution of plaintiffs' direct
participation claims, including the vigorous defense against
those claims, could have a material adverse impact on the
Company's net income for a particular period, although it is
impossible at this time to estimate the range or amount of
any such impact.
Environmental Matters
On December 19, 1994, the Texas Natural Resource Conservation
Commission sent a proposed order to the Company seeking
administrative civil penalties of $519,350 for alleged
violations of the Texas Clean Air Act. That action was
settled on March 18, 1996 and the Company paid a civil
penalty of $96,125 and made a $100,000 contribution to the
Nature Conservancy of Texas.
In February 1996, the Michigan Department of Environmental
Quality demanded payment of $258,000 in civil penalties
associated with a notice of Violation and Proposed Consent
Order issued on November 16, 1995, for alleged violations of
hazardous waste regulations.
Dow Chemical Canada Inc., a wholly owned subsidiary of the
Company, has been investigated by Alberta Environment
Protection with respect to two violations of the Ozone-
Depleting Substances Regulation alleged to have occurred on
May 31, 1995, and March 26, 1996. The Crown is seeking a
civil penalty of $200,000 (Canadian) in respect of the May
31, 1995 incident.
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 first quarter 1996.
The following trademarks of DowElanco or its subsidiaries
appear in this report: Broadstrike and Sentricon.
The following trademarks of The Dow Chemical Company or its
subsidiaries appear in this report: Methocel and Styrofoam.
SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
THE DOW CHEMICAL COMPANY
------------------------
Registrant
Date: May 10, 1996
- ---------------------
Roger L. Kesseler
-----------------
Roger L. Kesseler
Vice President & Controller
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,529
<SECURITIES> 576
<RECEIVABLES> 3,104
<ALLOWANCES> 52
<INVENTORY> 2,609
<CURRENT-ASSETS> 11,390
<PP&E> 23,330
<DEPRECIATION> 15,262
<TOTAL-ASSETS> 25,063
<CURRENT-LIABILITIES> 6,791
<BONDS> 4,492
<COMMON> 818
130
0
<OTHER-SE> 6,677
<TOTAL-LIABILITY-AND-EQUITY> 25,063
<SALES> 4,982
<TOTAL-REVENUES> 4,982
<CGS> 3,384
<TOTAL-COSTS> 4,114
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> (124)
<INCOME-PRETAX> 883
<INCOME-TAX> 326
<INCOME-CONTINUING> 476
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 476
<EPS-PRIMARY> 1.90
<EPS-DILUTED> 1.90
</TABLE>
