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, 1997
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, 1997
--------------
Common Stock, $2.50 par value 227,973,479 shares
----------------------------- ------------------
<PAGE>
--- Page 1 ---
THE DOW CHEMICAL COMPANY
Table of Contents
Page
----
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Commitments and Contingent Liabilities 7
Accounting Policies 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Second Quarter Earnings Announcement 10
Acquisitions and Divestitures 12
Changes in Financial Condition 13
Results of Operations 14
Part II - Other Information
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
Signature 25
Exhibit 27 26
<PAGE>
--- Page 2 ---
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
- ------------------------------
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
- -------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
(Unaudited) June 30, June 30, June 30, June 30,
In millions, except for share amounts 1997 1996 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $5,366 $5,176 $10,358 $10,158
- -------------------------------------------------------------------------------------
Operating Costs and Expenses
Cost of sales 3,836 3,539 7,451 6,923
Insurance and finance company
operations, pretax income (8) (14) (36) (36)
Research and development expenses 199 194 386 385
Promotion and advertising expenses 111 102 182 187
Selling and administrative expenses 405 446 774 913
Amortization of intangibles 11 13 24 22
-----------------------------------------------------------------------------------
Total operating costs and expenses 4,554 4,280 8,781 8,394
- -------------------------------------------------------------------------------------
Operating Income 812 896 1,577 1,764
- -------------------------------------------------------------------------------------
Other Income (Expense)
Equity in earnings of 20%-50% owned companies 25 24 39 40
Interest expense and amortization of debt (124) (118) (246) (242)
Interest income and foreign exchange-net 60 75 144 150
Sundry income - net (Note B) 217 62 280 110
-----------------------------------------------------------------------------------
Total other income (expense) 178 43 217 58
- -------------------------------------------------------------------------------------
Income before Provision for Taxes on Income
and Minority Interests 990 939 1,794 1,822
- -------------------------------------------------------------------------------------
Provision for Taxes on Income 370 344 659 670
- -------------------------------------------------------------------------------------
Minority Interests' Share in Income 48 48 109 127
- -------------------------------------------------------------------------------------
Preferred Stock Dividends 1 1 3 3
- -------------------------------------------------------------------------------------
Net Income Available for Common Stockholders 571 546 1,023 1,022
- -------------------------------------------------------------------------------------
Average Common Shares Outstanding 229.9 247.7 233.8 249.3
- -------------------------------------------------------------------------------------
Earnings per Common Share $2.48 $2.20 $4.38 $4.10
- -------------------------------------------------------------------------------------
Common Stock Dividends Declared per Share $0.87 $0.75 $1.62 $1.50
- -------------------------------------------------------------------------------------
Depreciation $309 $308 $603 $616
- -------------------------------------------------------------------------------------
Capital Expenditures $247 $341 $492 $605
- -------------------------------------------------------------------------------------
</TABLE>
Notes to Financial Statements
- -----------------------------
Note A: The unaudited interim financial statements reflect
all adjustments (consisting of normal recurring accruals) which,
in the opinion of management, are considered necessary for
a fair presentation of the results for the periods covered. Certain
reclassifications of prior year amounts have been made to conform
to current year presentation. These statements should be read
in conjunction with the financial statements and notes thereto
included in the Company's Form 10-K for the year ended
December 31, 1996.
Note B: In June 1997, the Company completed the sale of 45 million
shares of Destec Energy, Inc. to NGC Acquisition Corporation for
$21.65 per share.This transaction resulted in a profit
before tax of approximately $186 million reflected in
Other Income - Sundry on the Consolidated Statement of Income.
The impact on the Company's after tax earnings was $0.43 per share.
Note C: In June 1997, the Company purchased the outstanding
40 percent share in DowElanco from Eli Lilly and Company for an
amount of $900 million plus Lilly's share of undistributed earnings.
This transaction resulted in the Company owning 100 percent
of DowElanco.
<PAGE>
--- Page 3 ---
<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------
June 30, Dec. 31,
In millions (Unaudited) 1997 1996
- --------------------------------------------------------------------------
Assets
- --------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $1,186 $1,903
Marketable securities and interest-bearing deposits 194 399
Accounts and notes receivable:
Trade (less allowance for doubtful receivables-
1997, $70; 1996, $63) 3,125 2,985
Other 1,435 1,411
Inventories:
Finished and work in process 2,117 2,267
Materials and supplies 532 548
Deferred income tax assets-current 296 317
------------------------------------------------------------------------
Total current assets 8,885 9,830
- --------------------------------------------------------------------------
Investments
Capital stock at cost plus equity in accumulated
earnings of 20%-50% owned companies 1,062 1,387
Other investments 2,277 2,060
Noncurrent receivables 344 437
------------------------------------------------------------------------
Total investments 3,683 3,884
- --------------------------------------------------------------------------
Property
Property 22,954 23,737
Less accumulated depreciation 15,196 15,253
------------------------------------------------------------------------
Net property 7,758 8,484
- --------------------------------------------------------------------------
Other Assets
Goodwill (net of accumulated amortization-
1997, $172; 1996, $159) 1,499 899
Deferred income tax assets-noncurrent 673 669
Deferred charges and other assets 823 907
------------------------------------------------------------------------
Total other assets 2,995 2,475
- --------------------------------------------------------------------------
Total Assets $23,321 $24,673
- --------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
<PAGE>
--- Page 4 ---
<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------
June 30, Dec. 31,
In millions (Unaudited) 1997 1996
- --------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------
<S>
Current Liabilities <C> <C>
Notes payable $ 658 $ 665
Long-term debt due within one year 242 607
Accounts payable:
Trade 1,345 1,596
Other 790 724
Income taxes payable 928 567
Deferred income tax liabilities-current 78 64
Dividends payable 203 184
Accrued and other current liabilities 1,504 1,597
------------------------------------------------------------------------
Total current liabilities 5,748 6,004
- --------------------------------------------------------------------------
Long-Term Debt 4,141 4,196
- --------------------------------------------------------------------------
Other Noncurrent Liabilities
Deferred income tax liabilities-noncurrent 832 1,005
Pension and other postretirement benefits-noncurren 1,868 1,896
Other noncurrent obligations 1,611 1,493
------------------------------------------------------------------------
Total other liabilities 4,311 4,394
- --------------------------------------------------------------------------
Minority Interest in Subsidiary Companies 1,568 2,091
- --------------------------------------------------------------------------
Temporary Equity
Temporary equity-other 17 0
Preferred stock at redemption value 126 128
Guaranteed ESOP obligation (94) (94)
------------------------------------------------------------------------
Total temporary equity 49 34
- --------------------------------------------------------------------------
Stockholders' Equity
Common stock 818 818
Additional paid-in capital 431 307
Retained earnings 11,973 11,323
Unrealized gains on investments 264 192
Cumulative translation adjustments (406) (363)
Minimum pension liability (22) (22)
Treasury stock, at cost (5,554) (4,301)
------------------------------------------------------------------------
Net stockholders' equity 7,504 7,954
- --------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $23,321 $24,673
- --------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
<PAGE>
--- Page 5 ---
<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------
Six Months Ended
June 30, June 30,
In millions (Unaudited) 1996 1996
- -------------------------------------------------------------------------
<S>
Operating Activities <C> <C>
Income from Continuing Operations $1,023 $1,022
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 644 655
Provision for deferred income tax (48) 14
Undistributed earnings of 20%-50%
owned companies (24) (21)
Minority interests' share in income 109 127
Net gain on sales of consolidated companies (186) -
Net gain on sales of property (15) -
Other-net 16 (6)
Changes in assets and liabilities that
provided (used) cash:
Accounts receivable (217) (254)
Inventories 149 156
Accounts payable (206) (263)
Other assets and liabilities 718 61
-----------------------------------------------------------------------
Cash provided by operating activities 1,963 1,491
- -------------------------------------------------------------------------
Investing Activities
Purchases of property (492) (605)
Proceeds from sales of property 31 71
Purchases of consolidated companies (1,257) (223)
Proceeds from sale of consolidated companies 907 -
Investments in unconsolidated affiliates (12) (618)
Purchases of investments (1,251) (1,042)
Proceeds from sales of investments 1,302 1,140
-----------------------------------------------------------------------
Cash used by investing activities (772) (1,277)
- -------------------------------------------------------------------------
Financing Activities
Changes in short-term notes payable 13 1,244
Payments on long-term debt (388) (672)
Proceeds from issuance of long-term debt 29 39
Purchases of treasury stock (1,253) (866)
Proceeds from sales of common stock 111 210
Distributions to minority interests (55) (49)
Dividends paid to stockholders (359) (381)
- -------------------------------------------------------------------------
Cash used in financing activities (1,902) (475)
- -------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (6) (5)
- -------------------------------------------------------------------------
Summary
Decrease in cash and cash equivalents (717) (266)
Cash and cash equivalents at beginning of year 1,903 2,839
- -------------------------------------------------------------------------
Cash and cash equivalents at end of period $1,186 $2,573
- -------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
<PAGE>
--- Page 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 noted above for 1993 was $2,300 million
less expected insurance recoveries of $1,200 million.
As a result of the Dow Corning actions, the Company recorded
its 50 percent share of the charges, net of tax benefits
available to Dow. The impact on the Company's net income was a
charge of $192 million for 1993 and a charge of $70 million for
1994.
Dow Corning reported an after tax net loss of $167 million
for the second quarter of 1995, of which the Company's share
amounted to $83 million. Dow Corning's second quarter loss was
a result of a $221 million after tax charge taken to reflect a
change in accounting method from the present value basis noted
above to an undiscounted basis resulting from the uncertainties
associated with its voluntary filing for protection under
Chapter 11 of the United States Bankruptcy Code on May 15,
1995. As a result of Dow Corning's 1995 second quarter loss and
Chapter 11 filing, the Company recognized a pretax charge
against income of $330 million for the second quarter of 1995,
fully reserved its investment in Dow Corning and will not
recognize its 50 percent share of future equity earnings while
Dow Corning remains in Chapter 11.
On September 1, 1994, Judge Sam C. Pointer, Jr. of the
United States District Court for the Northern District of
Alabama approved the Settlement Agreement, pursuant to which
plaintiffs choosing to participate in the Settlement Agreement
released the Company from liability. The Company was not a
participant in the Settlement Agreement nor was it required to
contribute to the settlement. On October 7, 1995, Judge Pointer
issued an order which concluded that the Settlement Agreement
was not workable in its then-current form because the funds
committed to it by industry participants were inadequate. The
order provided that plaintiffs who had previously agreed to
participate in the Settlement Agreement could opt out after
November 30, 1995.
The Company's maximum exposure for breast implant product
liability claims against Dow Corning is limited to its
investment in Dow Corning which, after the second quarter of
1995 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, 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, 1995 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.
<PAGE>
--- Page 7 ---
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.
Accruals for environmental matters are recorded when it is
probable that a liability has been incurred and the amount of
the liability can be reasonably estimated, based on current law
and existing technologies. The Company has accrued $310 million
at June 30, 1997, for environmental matters including $13
million for the remediation of Superfund sites. This is
management's best estimate of the costs for remediation and
restoration with respect to environmental matters for which the
Company has accrued liabilities, although the cost with respect
to these particular matters could range up to twice that
amount. Inherent uncertainties exist in these estimates
primarily due to unknown conditions, changing governmental
regulations and legal standards regarding liability, and
evolving technologies for handling site remediation and
restoration. 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 is party to a number of other
claims and lawsuits arising out of the normal course of
business with respect to commercial matters, including product
liability, governmental regulation and other actions. Certain
of these actions purport to be class actions and seek damages
in very large amounts. All such claims are being contested.
Dow has an active risk management program consisting of
numerous insurance policies secured from many carriers at
various times. These policies provide coverage which will be
utilized to minimize the impact, if any, of the contingencies
described above.
Except for the possible effect on the Company's net income
for breast implant litigation described above, it is the
opinion of the Company's management that the possibility is
remote that the aggregate of all claims and lawsuits will have
a material adverse impact on the Company's consolidated
financial statements.
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 $221 million, $204 million and $252
million in 1996, 1995 and 1994, respectively.
At December 31, 1996, 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 twenty 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)
- -----------------------------------------------
1997 $ 223
1998 191
1999 121
2000 95
2001 69
2002 through expiration of contracts 726
- -----------------------------------------------
Total $1,425
- -----------------------------------------------
In addition to the take or pay obligations at December 31,
1996, 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 $200 million. In general, such
commitments were at prices not in excess of current market
prices. Prior to the sale of Destec the Company also had
commitments as of December 31, 1996 for loan guarantees,
related to Destec, of $1,282 million and outstanding direct and
indirect commitments for construction performance and lease
payment guarantees and other obligations of $310 million.
<PAGE>
--- Page 8 ---
ACCOUNTING POLICIES
For new property released to operations after December 31, 1996,
the Company has changed from an accelerated method to the
straight line method of depreciation. The change reflects
improvements in the Company's engineering and maintenance
practices which result in property not being subject to high
maintenance costs or substantially reduced productivity in the
later years of its useful life. In addition, the change to the
straight-line method conforms to predominant industry practice.
This change is not expected to have a material impact on 1997
results.
The following accounting policy relating to commodity
derivative contracts supplements Note A to the Financial
Statements, and is provided in accordance with the provisions of
Rule 210.4-08(n) of Regulation S-X, which became effective in the
Company's second quarter:
The Company enters into various commodity contracts, including
futures, options and swap agreements to hedge its purchase of
commodity products used in the Company's business. These
contracts are predominantly settled in cash. For those contracts
which are designated as and effective as hedges, gains and losses
are accounted for as part of the basis of the related commodity
purchases. For contracts accounted for as hedges that are
terminated before their maturity date, the gain or loss is
deferred and included in the basis of the related commodity
purchases. Commodity contracts not accounted for as hedges are
marked-to-market at the end of each accounting period with the
related gains and losses recognized in income currently.
<PAGE>
--- Page 9 ---
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussions in this quarterly report contain 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 24, 1997)
DOW ANNOUNCES INCREASED SECOND QUARTER EARNINGS
_________________________________________________________________________
Second Quarter of 1997 Highlights
---------------------------------
Earnings per share were $2.48 versus $2.20 for the same
period last year. Excluding one-time events, earnings per share
for the quarter were $2.25.
Sales were $5.4 billion, up 4 percent from a year ago based
on strong volume growth.
Operating income, excluding one-time charges, was $900
million versus $896 million for the same period in 1996.
Including these charges, operating income was $812 million.
Net income rose 5 percent to $571 million from $546 million
a year ago.
- ---------------------------------------------------------------------------
(In millions, except for per share amounts)
3 Months Ended 6 Months Ended
June 30 June 30
1997 1996 1997 1996
---- ---- ---- ----
Net Sales $ 5,366 $ 5,176 $10,358 $10,158
Net Income Available for Common
Stockholders $ 571 $ 546 $ 1,023 $ 1,022
Average Common Shares Outstanding 229.9 247.7 233.8 249.3
Earnings Per Common Share $ 2.48 $ 2.20 $ 4.38 $ 4.10
- ---------------------------------------------------------------------------
Review of Quarterly Results
The Dow Chemical Company today announced sales of $5.4 billion,
net income of $571 million, and earnings of $2.48 per share for
the second quarter of 1997. Excluding one-time events, earnings
were $2.25 per share, an improvement over the same quarter in
1996.
"Dow's second quarter earnings improvement reflects the effect of
the company's strategically balanced product portfolio, the
impact of above average volume growth, and continued expense
control. The improvement was achieved despite unfavorable
currency effects and mixed prices," said J. Pedro Reinhard,
executive vice president and chief financial officer. "We are
extremely pleased with how our strategy has allowed us to sustain
this high-level earnings performance over two and a half years."
<PAGE>
--- Page 10 ---
Second Quarter Earnings Announcement (July 24, 1997) (Continued)
Sales for the quarter were $5.4 billion, up 4 percent from the
same period a year ago. Volume gains of 8 percent were partially
offset by a 4 percent decline in prices, mostly from currency.
Earnings per share for the quarter were up 13 percent from the
same period a year ago. Dow Chemical's second quarter earnings
were impacted by a number of one-time events that contributed a
net of 23 cents to the company's earnings per share of $2.48.
These events included a gain on the sale of Dow's majority stake
in Destec, Inc., and charges related to insurance restructuring,
the shutdown of an ethylene cracker in Texas, and charges
DowElanco made at the time of the purchase of Eli Lilly and Co.'s
40 percent stake in this joint venture. Excluding these one-
time events, Dow's second quarter earnings per share were $2.25.
Dow's operating income was $900 million, excluding one-time
charges, a slight improvement from last year's level. Including
the nonrecurring charges, operating income was $812 million.
Dow continued to experience strong worldwide volume growth, with
each of its core businesses recording gains. This growth,
combined with reduced operating expenses and the favorable impact
of currency on costs, offset a price decline of $200 million from
the second quarter of 1996. Prices were down in all geographies
and all core business segments versus a year ago with the
exception of Plastics. Since the first quarter of 1997, however,
price declines in most businesses have either slowed or
stabilized.
Dow's combined Performance segments posted sales of $2.7 billion,
3 percent higher than the second quarter of 1996. Performance
Chemicals posted a 10 percent increase in sales due to volume
growth in the Emulsion Polymers and Specialty Chemicals
businesses and DowElanco's acquisition of controlling interest in
Mycogen, a biotechnology company. Price declines from last
year's high levels, one-time events, and an unfavorable currency
impact on sales resulted in lower year-over-year operating income
for both the Performance segments. However, operating income for
these segments was higher than the first quarter of 1997 and they
contributed about 60 percent of Dow's total operating income.
Plastics recorded sales of $1.1 billion, up 9 percent from a year
ago. Operating income for the segment was equal to the second
quarter of 1996. Polystyrene prices were down significantly from
the same period a year ago, offsetting volume gains in the
emerging economies. The Polyethylene business is experiencing
continued strong volume and improved pricing in North America and
Europe.
Chemicals and Metals had higher sales due to strong volume gains
and equaled their earnings performance of a year ago. Prices for
ethylene glycol, ethylene dichloride and vinyl chloride monomer
were up versus the second quarter of 1996. Caustic prices, which
have declined steadily for the past five quarters, appear to have
stabilized since the first quarter of 1997.
Dow continued its share repurchase program, buying back over 6
million shares, reducing its overall outstanding shares by 7
percent versus a year ago.
<PAGE>
--- Page 11 ---
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 the privatization
agreement and various service agreements, occurred in June 1995
with legal closing anticipated during 1997. The Company will
include the financial results of BSL effective with the legal
closing date.
On closing, the Company will acquire 80 percent ownership in
BSL for an investment of approximately $180 million. BvS will
maintain a 20 percent ownership until the end of the
restructuring period, which is expected to be June 2000. 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 $150 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 is building several new facilities at the BSL
sites including Dowlex linear low density polyethylene,
polypropylene, aniline and acrylic acid plants, and is upgrading
the chlorine plant and steam cracker. A multi-feedstock liquid
pipeline is being constructed from the port of Rostock to the
Boehlen site, as well as harbor facilities, terminals and pump
stations. As part of the restructuring, several facilities at BSL
are being closed and demolished.
In January 1996, the Company and The Hartford Steam Boiler
Inspection and Insurance Company (HSB) formed, through the
transfer of net assets and existing businesses, a 60:40 joint
venture named Radian International LLC. The new company provides
environmental, information technology and strategic chemical
management services to industries and governments worldwide. The
book value of the net assets transferred by the Company was $33
million. HSB holds a put option requiring the Company to purchase
HSB's interest in Radian International LLC during 1998 for
approximately $150 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 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 $527 million.
Through the sales of shares in Oasis Pipeline in June and
November 1996, the Company reduced its ownership from 70 percent
to 30 percent, recognizing pretax gains of $43 million and $77
million, respectively.
In October 1996, DowBrands Inc., a wholly owned subsidiary of
the Company, and Melitta Bentz KG formed, through the transfer of
net assets and existing businesses, a 35:65 joint venture named
Cofresco Frischhalteprodukte GmbH & Co. KG. The new company
focuses on the sale of food care products in Western Europe. The
book value of the net assets transferred by the Company was $29
million.
In January 1996, DowElanco, a then 60 percent owned 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 December 1996,
DowElanco increased its equity stake in Mycogen to over 50
percent.
In June 1997, the Company purchased the outstanding 40 percent
share in DowElanco, an agricultural chemicals joint venture, from
Eli Lilly and Company for an amount of $900 million plus Lilly's
share of undistributed earnings. This transaction resulted in the
Company owning 100 percent of DowElanco.
Dow announced in February 1997 that it had agreed, subject to
regulatory approvals, to the merger of Destec Energy, Inc. and
NGC Corporation. In June 1997, the Company completed the sale of
all of its 45 million shares of Destec Energy, Inc to NGC
Acquisition Corporation for $21.65 per share. This transaction
resulted in a pretax gain of $186 million for the Company, or
$0.43 per share on an after tax basis.
In August 1997, Dow made a public tender offer to acquire all
of the shares of Sentrachem Limited, a South African global
chemical company for approximately $425 million. Sentrachem has
annual sales of about 5 billion South African Rand (approximately
$1 billion). Its main businesses are specialty chemicals and
agricultural chemicals.
<PAGE>
--- Page 12 ---
CHANGES IN FINANCIAL CONDITION
The following tables represent total debt and working capital at
June 30, 1997 versus December 31, 1996.
June 30, Dec. 31, Increase
In millions 1997 1996 (Decrease)
- ---------------------------------------------------------------------------
Notes payable $ 658 $ 665 $ (7)
Long-term debt due within one year 242 607 (365)
Long-term debt 4,141 4,196 (55)
- ---------------------------------------------------------------------------
Total debt $ 5,041 $ 5,468 $ (427)
- ---------------------------------------------------------------------------
At June 30, 1997, 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 $1.3 billion are available for use by foreign
subsidiaries.
June 30, Dec. 31, Increase
In millions 1997 1996 (Decrease)
- ---------------------------------------------------------------------------
Cash and cash equivalents $1,186 $1,903 $(717)
Marketable securities and
interest-bearing deposits 194 399 (205)
Accounts and notes receivable - net 4,560 4,396 164
Inventories:
Finished and work in process 2,117 2,267 (150)
Materials and supplies 532 548 (16)
Deferred income tax assets-current 296 317 (21)
- ---------------------------------------------------------------------------
Total current assets 8,885 9,830 (945)
- ---------------------------------------------------------------------------
Total current liabilities 5,748 6,004 (256)
- ---------------------------------------------------------------------------
Working capital $3,137 $3,826 $(689)
- ---------------------------------------------------------------------------
This has been a very active second quarter and first half year
for Dow in terms of cash flow. Cash provided by operating
activities was in excess of $2 billion for the six months ended
June 1997 and the sale of Destec provided a further $974 million.
This cash was used to purchase the outstanding 40 percent of
DowElanco for $1.2 billion, to repurchase Dow stock for $1.3
billion, reduce net debt by $427 million and other normal
activities. This resulted in a decrease in cash and cash
equivalents and marketable securities and interest-bearing
deposits of $922 million. (See the Consolidated Statements of
Cash Flows and Acquisitions and Divestitures sections for more
detail).
The Company had a strong position at June 30, 1997 of $1.4
billion in cash, cash equivalents, marketable securities and
interest-bearing deposits and a sound positive cash flow from
operations. This position supported the redemption in July 1997
for approximately $900 million of the outstanding limited
partners' capital accounts (minority interest) in DowBrands L.P.
In addition to this financial restructuring, Goldman, Sachs & Co.
has been retained to explore strategic options with regard to
DowBrands.
June 30, Dec. 31,
Balance Sheet Ratios 1997 1996
- -----------------------------------------------------------------
Current assets over current liabilities 1.5:1 1.6:1
Days-sales-outstanding-in-receivables 45 45
Days-sales-in-inventory 79 87
Debt as a percentage of total capitalization 35.6 35.2
The Company purchased 6.4 million shares of common stock during
the second quarter of 1997 or 15.2 million shares for the six
months ended June 30, 1997 as part of its overall stock
repurchase program. The Company's average shares outstanding for
the first half of 1997 was 234 million, a decrease of 6 percent
from the average shares outstanding for the first half of 1996.
In May 1997, the Board of Directors announced a quarterly
dividend of 87 cents per share, which was paid on July 30, 1997
to shareholders of record on June 30, 1997. The announced
dividend reflects an increase of 16 percent, or 12 cents per
share. This was the 342nd consecutive quarterly dividend and in
each instance Dow has maintained or increased the dividend.
<PAGE>
--- Page 13 ---
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
- ---------------------
(Unaudited)
The Dow Chemical Company and Subsidiaries
- -----------------------------------------
Industry and Geographic Segments
- -------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
In millons 1997 1996 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Industry segment sales
Performance Plastics $1,340 $1,373 $2,605 $2,718
Performance Chemicals 1,316 1,198 2,528 2,349
Plastics 1,056 966 2,066 1,894
Chemicals and Metals 788 768 1,495 1,500
Hydrocarbons and Energy 616 595 1,193 1,148
Diversified Businesses
and Unallocated 250 276 471 549
--------------------------------------------------------------------
Total $5,366 $5,176 $10,358 $10,158
- -------------------------------------------------------------------------
Industry segment operating income (loss)
Performance Plastics 257 325 468 642
Performance Chemicals 233 237 445 485
Plastics 222 223 443 394
Chemicals and Metals 207 205 368 394
Hydrocarbons and Energy 0 (20) (6) (29)
Diversified Businesses
and Unallocated (107) (74) (141) (122)
---------------------------------------------------------------------
Total $812 $896 $1,577 $1,764
- --------------------------------------------------------------------------
Geographic sales
United States $2,416 $2,287 $4,624 $4,462
Europe 1,629 1,655 3,216 3,334
Rest of World 1,321 1,234 2,518 2,362
---------------------------------------------------------------------
Total $5,366 $5,176 $10,358 $10,158
- --------------------------------------------------------------------------
Geographic operating income
United States $305 $346 $636 $692
Europe 225 275 456 538
Rest of World 282 275 485 534
---------------------------------------------------------------------
Total $812 $896 $1,577 $1,764
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Industry and Geographic Segment Sales Volume and Price
- ------------------------------------------------------------------
Three Months Ended
June 30, 1997
Percentage change from prior year Volume Price Total
- ------------------------------------------------------------------
<S> <C> <C> <C>
Industry segment
Performance Plastics 6% (8)% (2)%
Performance Chemicals 16% (6)% 10%
Plastics 8% 1% 9%
Chemicals and Metals 9% (6)% 3%
Hydrocarbons and Energy (1)% 5% 4%
Diversified Businesses
and Unallocated (9)% 0% (9)%
-------------------------------------------------------------
Total 8% (4)% 4%
- ------------------------------------------------------------------
Geographic segment
United States 6% 0% 6%
Europe 9% (11)% (2)%
Rest of World 8% (1)% 7%
-------------------------------------------------------------
Total 8% (4)% 4%
- ------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Six Months Ended
June 30, 1997
Percentage change from prior year Volume Price Total
- ------------------------------------------------------------------
<S> <C> <C> <C>
Industry segment
Performance Plastics 4% (8)% (4)%
Performance Chemicals 14% (6)% 8%
Plastics 7% 2% 9%
Chemicals and Metals 5% (5)% 0%
Hydrocarbons and Energy (4)% 8% 4%
Diversified Businesses
and Unallocated (15)% 1% (14)%
-------------------------------------------------------------
Total 5% (3)% 2%
- ------------------------------------------------------------------
Geographic segment
United States 3% 1% 4%
Europe 5% (9)% (4)%
Rest of World 11% (4)% 7%
-------------------------------------------------------------
Total 5% (3)% 2%
- ------------------------------------------------------------------
</TABLE>
<PAGE>
--- Page 14 ---
Results of Operations (Continued)
The following are selected data for the three months and six
months ended June 30, 1997 and 1996.
Three Months Ended Six Months Ended
Dollars in millions, June 30, June 30, June 30, June 30,
except for share amounts 1997 1996 1997 1996
- ------------------------ ---- ---- ---- ----
Cost of sales $3,836 $3,539 $7,451 $6,923
% of sales 71% 68% 72% 68%
Research and development,
promotion and advertising,
selling and administrative
expenses 715 742 1,342 1,485
Operating income 812 896 1,577 1,764
% of sales 15% 17% 15% 17%
Equity in earnings of
20%-50% owned companies 25 24 39 40
Effective tax rate 37.4% 36.6% 36.7% 36.8%
Net income available
for common stockholders 571 546 1,023 1,022
Earnings per common share $2.48 $2.20 $4.38 $4.10
Operating rate percentage 91% 89% 92% 88%
Net sales for the second quarter of 1997 were $5.4 billion, an
increase of 4 percent from $5.2 billion in the same period last
year. The increase was primarily due to a volume increase of 8
percent, which was partially offset by a price decrease of 4
percent. Of the 4 percent price decline in the quarter,
unfavorable currency impact accounted for 3 percent and local
prices declined by only 1 percent. Prices were up in Plastics
(polyethylene) and Hydrocarbons and Energy, but declined in all
other industry segments. Sales for the six months of 1997 were
$10.4 billion and $10.2 billion for the same period last year.
Price declined 3 percent for this period versus the same period
last year, with the strengthening dollar accounting for 2.5
percent.
Volume in the second quarter of 1997 was up 8 percent due to
good volume growth in all major industry and geographic segments
for the quarter compared to the same quarter last year. For the
six months ended June 1997 versus the six months ended June 1996
volume has increased 5 percent. The volume growth has been
maintained by higher capacity utilization of 92 percent versus 88
percent for the six months ending June 1997 and 1996,
respectively, as well as volume from acquisitions that were not
in the 1996 base.
Net income was $571 million or $2.48 a share for the three
months ended June 1997 versus $546 million or $2.20 a share
for the same period last year. This improvement in net income
included a positive impact of $0.23 per share from one time
events: the sale of Destec and charges for insurance
restructuring, DowElanco charges made at the time of the purchase
of Eli Lilly and Company's 40 percent ownership in this joint
venture, the Centennial deferred stock program and the shutdown
of an ethylene cracker in Texas. Of this, the Destec sale
contributed $0.43 a share. For the six months ended June 1997 the
net income was $1,023 million compared to $1,022 million for the
same period 1996. The impact of the stronger dollar, most notably
against the North European and Pacific currencies, on the three
and six months ended June 1997 compared to the same periods last
year, was not significant to the Company's profitability.
<PAGE>
--- Page 15 ---
Results of Operations (Continued)
PERFORMANCE PLASTICS
Performance Plastics sales of $1,340 million were down 2 percent
from $1,373 million in the second quarter of 1996 due to an 8
percent decrease in price. Volume was up 6 percent reflecting
solid growth in all businesses. Operating income for this segment
decreased 21 percent to $257 million, from $325 million in the
second quarter of 1996.
Polyurethanes sales were slightly down versus the second
quarter of 1996 on lower prices partly offset by higher volume.
Prices, though still lower than last year's elevated levels, have
stabilized and are showing some strength going forward. The
polyol and methylene diphenyl diisocyanate (MDI) supply situation
has tightened in Europe and in North America due to strong
demand. Operating income was down substantially from a year ago
due mainly to lower selling prices, as well as higher propylene
costs.
Sales of epoxies and intermediates were down about 1 percent
versus second quarter of 1996. Prices declined 7 percent but
price increases have been implemented in the United States,
Europe and Latin America reversing a 12 month downward trend.
Demand remains strong and it is expected that the operating rates
will remain at capacity for the foreseeable future. Operating
income for this business was down 25 percent largely due to price
and the cost of planned plant maintenance shutdowns.
Engineering plastics sales for the quarter declined 8 percent
versus the second quarter of 1996. Volume grew 7 percent against
a 15 percent price decline. Price was adversely affected by
excess industry capacity in both ABS and polycarbonate which
pushed prices lower. Operating income, however, improved versus
the second quarter of 1996 due to volume gains and improved
manufacturing costs.
Adhesives, sealants and coatings experienced another good
quarter with sales increasing in the second quarter of 1997
versus the same period last year due to volume growth. Operating
income for this quarter increased 7 percent compared to the
second quarter of 1996.
Fabricated products sales for the second quarter of 1997
declined 7 percent from the same period last year despite a 2
percent volume gain. This caused the operating income for this
business to decline 42 percent this quarter versus the second
quarter of 1996.
For the six months of 1997, sales in Performance Plastics were
$2,605 million, down 4 percent against $2,718 million in the
first six months of 1996. Operating income was $468 million for
the first half of 1997, down from $642 million for the same
period last year. Price decline was the major factor contributing
to the reduced operating income for this segment.
PERFORMANCE CHEMICALS
Sales for Performance Chemicals in the second quarter were $1,316
million, an increase of 10 percent from $1,198 million in the
same quarter last year. Volume was up 16 percent with a portion
of this due to the Mycogen sales that were not in the 1996
comparative numbers. Sales prices were down 6 percent. Operating
income for the segment decreased 2 percent to $233 million for
the second quarter of 1997 from $237 million a year ago.
Specialty chemicals continued to show good sales results.
While sales were up versus last year, operating income declined,
primarily due to lower prices and currency effect. Most products
in this segment recovered volume in Europe from a slow 1996 and
sales continue to grow quite well in the Pacific.
Emulsion polymers sales were up 3 percent compared to last
year as volume increased by 16 percent and prices decreased by 13
percent. Volume growth was due to particular success in capturing
polymer sales to new coated paper facilities globally, while
maintaining share in existing applications. Competitors are
active outside of North America thereby creating price pressure.
Styrene selling prices remain low. Operating income for the
business was virtually flat with the second quarter of 1996.
Agricultural products sales for the second quarter of 1997
increased 18 percent versus the same period last year, with much
of that gain coming from the inclusion of Mycogen. Operating
income was flat from the same quarter last year due to one time
charges DowElanco made at the time of the purchase of Lilly's 40
percent share in DowElanco, costs related to the launch of
Tracer, and severance and litigation costs incurred in Mycogen.
Sales for the six months of 1997 for Performance Chemicals
were $2,528 million, up 8 percent from $2,349 million for the
same period last year. Volume grew 14 percent and prices declined
6 percent. Mycogen sales in the first six months of 1997 was the
major contributor in the volume growth. Operating income for the
period was $445 million, a decline from $485 million for the same
period last year.
<PAGE>
--- Page 16 ---
Results of Operations (Continued)
PLASTICS
Plastics sales in the second quarter of 1997 were $1,056 million,
up 9 percent from $966 million a year ago, with volume up 8
percent and prices up 1 percent. The price gain was due to the
improvement in polyethylene prices, while volume improved across
all businesses in this segment versus a year ago. Plastics
operating income for the first six months of 1997 was $222
million, flat with last year's $223 million.
Polyethylene sales improved 15 percent in the second quarter
versus the same period last year. This business benefited from
increased volume and improved prices when measured against the
same period last year, particularly in North America and Europe.
Polyethylene remains in a sold-out mode. Operating income for
polyethylene increased over the second quarter of 1996 due to
improved volume and price.
Polystyrene pricing continues to be under pressure. Prices
were down substantially versus a year ago, but this was offset by
good volume resulting in sales being flat. Volume was up
primarily due to demand in Eastern Europe, Asia Pacific and the
addition of the acquisition of Estireno do Nordeste SA in Latin
America. As a result of polystyrene industry capacity additions,
near term price improvement is not expected. Operating income was
significantly down over the second quarter of 1996 due to price
declines.
Sales for the six months of 1997 for Plastics were $2,066
million, up 9 percent from $1,894 million for the same period
last year. Volume grew 7 percent and prices increased 2 percent.
These improvements were both attributable to the improvement in
polyethylene. Operating income for the period was $443 million,
an improvement from $394 million for the same period last year.
CHEMICALS AND METALS
Chemical and Metals sales in the second quarter of 1997 were $788
million, up 3 percent from $768 million in the second quarter of
1996. Volume for the segment grew 9 percent, while prices
declined 6 percent. Ethylene dichloride (EDC), vinyl chloride
monomer (VCM) and ethylene glycol (EG) sales reflected strong
volume growth in this quarter versus the same quarter last year.
Volume was particularly strong in caustic sales, but prices
showed a major decline when compared to the same quarter last
year. Prices for caustic appear to have stabilized towards the
end of the quarter, with North America showing modest increases.
Operating income for this segment remained flat from $205 million
in the second quarter of 1996 to $207 million in the second
quarter of 1997. Higher volume and prices for EDC, VCM and EG
offset the lower caustic pricing.
Sales for the six months of 1997 for Chemical and Metals were
$1,495 million, down slightly from $1,500 million for the same
period last year. Volume grew 5 percent and prices decreased 5
percent. Operating income for the period was $368 million, a
decrease from $394 million for the same period last year.
HYDROCARBONS AND ENERGY
Sales for Hydrocarbons and Energy in the second quarter of 1997
were $616 million, up 4 percent from $595 million a year ago.
Prices were up 5 percent, while volume was down 1 percent.
Ethylene prices have stabilized at higher levels than last year.
Styrene prices remain depressed, particularly in Asia Pacific.
The Company shut down an ethylene cracker in Texas which created
a one time charge. Feedstock costs were about flat with the
second quarter of last year but substantially down from the first
quarter of this year. Operating income for the quarter was break-
even, an improvement from an operating loss of $20 million in the
second quarter of 1996.
Sales for the first half of 1997 were $1,193 million an
increase from $1,148 million for the first half of last year. The
increase was due to a price increase of 8 percent partially
offset by a volume decline of 4 percent. Operating income
improved from a loss of $29 million for the six months ended June
1996 to a loss of $6 million for the same period this year.
DIVERSIFIED BUSINESSES AND UNALLOCATED
Diversified Businesses sales were $250 million, down 9 percent
from $276 million in the second quarter of 1996. Operating income
for this segment declined from a loss of $74 million in the
second quarter of 1996 to an operating loss of $107 million in
the second quarter of 1997. The major factors contributing to the
increased loss were the charges relating to insurance
restructuring and the deferred stock award program offered to all
employees, as part of the Company's centennial celebration.
Consumers products sales were reduced due, in part, to the
fact that the DowBrands European sales are now part of the
Cofresco joint venture and are no longer consolidated. Operating
income increased in the second quarter 1997 compared to the same
period last year.
New Business sales were lower than the second quarter of 1996
while the operating loss improved over the same period.
<PAGE>
--- Page 17 ---
Results of Operations (Continued)
Sales for the first half of 1997 were $471 million, a decrease
from $549 million for the first half of last year. The decrease
was due, in the main, to the fact that the DowBrands European
sales are now part of the Cofresco joint venture with Melitta and
are no longer consolidated. Operating income declined from a loss
of $122 million for the six months ended June 1996 to a loss of
$141 million for the same period this year. The major factors
contributing to the increased loss were the charges relating to
insurance restructuring and the deferred stock awards related to
the Company's centennial celebration.
COMPANY SUMMARY
Manufacturing Costs
Dow's global plant operating rate for its chemicals and plastics
businesses was 91 percent, up from 89 percent in the second
quarter of 1996. Unit manufacturing costs for these businesses,
adjusted for volume but not mix, were up 1 percent compared
to the second quarter of 1996.
Other Income (Expense)
Equity in earnings of 20%-50% owned companies increased $1
million in the second quarter of 1997 compared to the
corresponding period a year ago.
Net financial expenses, which are the total of interest
expense, interest income and foreign exchange, increased to $64
million this quarter, compared to $43 million in the second
quarter of 1996. The increased financial expense was attributable
to all the above mentioned categories with interest income
decrease being the largest contributor.
Sundry income includes a variety of both income and expense
items including royalty income, dividends from investments, and
gains or losses on sales of investments and assets. For the three
months ended June 1997, sundry income included a $186 million
favorable impact related to the sale of Destec.
Provision for Taxes on Income
The effective tax rate for the second quarter was 37.4 percent an
increase compared to 36.6 percent in the second quarter of 1996.
The increase was primarily due to the sale of Destec.
Net Income Available for Common Stockholders
The second quarter of 1997 net income was $571 million or $2.48
per share. The second quarter of 1996 net income was $546 million
or $2.20 per share. The improvement in net income included some
one time events with a net impact of $0.23 per share: the profit
on the sale of Destec, charges for insurance restructuring, the
DowElanco charges made at the time of the purchase of Eli Lilly
and Company's 40 percent ownership in this joint venture, the
Centennial deferred stock program and the shutdown of an ethylene
cracker in Texas. Excluding these one-time charges, the earnings
per share would have been $2.25 per share. For the six months
ended June 1997 the net income was $1,023 million compared to
$1,022 million for the same period 1996. The impact of the
stronger dollar, most notably against the North European and
Pacific currencies, on the three and six months ended June 1997
compared to the same periods last year, was not significant to
the Company's profitability.
Minority Interest
Minority interest of $48 million for the three months ended June
1997 was flat versus the same period last year. Minority interest
will reduce substantially after this quarter due to the fact that
DowElanco, Destec and DowBrands L.P. no longer impact this line
item. The DowElanco and Destec transactions were completed in
June 1997 and DowBrands L.P. minority interest was repurchased in
July 1997.
Expectations for the Remainder of 1997
Dow has completed two very successful quarters in 1997, during
which the Company has absorbed over $300 million in lower prices
and almost $250 million in higher hydrocarbon and energy costs
compared to the same period last year, but operating income
has dropped by only $187 million. The Company sustained the high
level of earnings longer than many predicted.
Dow is now benefiting from the volume and cost productivity
measures enacted over the past few years. The outlook for volume
growth in most businesses is optimistic, with much of this growth
supplied from incremental expansions with low capital
expenditures and minimal increase in fixed costs. Hydrocarbon
feedstock costs have come back down from elevated fourth quarter
of 1996 levels and have the potential to be slightly lower in the
third quarter of 1997. It is expected that hydrocarbon feedstock
costs for the year 1997 will be roughly equal to those of 1996.
<PAGE>
--- Page 18 ---
Results of Operations (Continued)
On a macro-economic basis, the global economy continues to
grow at a respectable rate. The United States has increased
growth projections and Europe's GDP is improving. There have been
changes in the robust rates in some parts of Asia Pacific, but
that is to be expected as these new economies work through their
national issues. Latin America and Asia Pacific overall still
provide good growth opportunities.
From an industry perspective, volume growth is strong.
Supply/demand issues will be key, and there has been some
extension of current ethylene prices due to industry outages, the
Company's shutdown of an ethylene cracker in Texas, and the
delay/cancellation of some other crackers. It is expected that
ethylene prices will be stable through the third quarter 1997,
but will be more uncertain in the fourth quarter of 1997 as the
industry awaits the eventual trade-off of effects from the timing
on industry outages and announced industry expansions.
More specifically for Dow, prices have stabilized in several
businesses including polyurethanes, epoxy and caustic, with some
potential for improvement in the third quarter of 1997. Overall,
demand is strong and the Company's plants are running at high
operating rates. Dow is continuing its emphasis on cost containment
and expense reduction. Based on these factors, 1997 is expected to be
another good year.
<PAGE>
--- Page 19 ---
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Breast Implant Matters
The Company and Corning Incorporated ("Corning") are each 50
percent stockholders 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 stockholders 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. All individual
defendants in this case have been dismissed without prejudice.
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.
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 noted above for 1993
was $2,300 million less expected insurance recoveries of $1,200
million. As a result of the Dow Corning actions, the Company
recorded its 50 percent share of the charges, net of tax benefits
available to the Company. The impact on the Company's net income
was a charge of $192 million for 1993 and a charge of $70 million
for 1994.
Dow Corning reported an after-tax net loss of $167 million for
the second quarter of 1995, of which the Company's share amounted
to $83 million. Dow Corning's second quarter loss was a result
of a $221 million after-tax charge taken to reflect a change in
accounting method from the present value basis noted above to an
undiscounted basis resulting from the uncertainties associated
with its Chapter 11 filing. As a result of Dow Corning's 1995
second quarter loss and Chapter 11 filing, the Company recognized
a pretax charge against income of $330 million for the second
quarter of 1995, fully reserved its investment in Dow Corning and
will not recognize its 50 percent share of future equity earnings
while Dow Corning remains in Chapter 11.
On September 1, 1994, Judge Sam C. Pointer, Jr. of the United
States District Court for the Northern District of Alabama
approved the Settlement Agreement pursuant to which plaintiffs
choosing to participate in the Settlement Agreement released the
Company from liability. The Company was not a participant in the
Settlement Agreement nor was it required to contribute to the
settlement. On October 7, 1995, Judge Pointer issued an order
which concluded that the Settlement Agreement was not workable in
its then-current form because the funds committed to it by
industry participants were inadequate. The order provided that
plaintiffs who had previously agreed to participate in the
Settlement Agreement could opt out after November 30, 1995.
The Company's maximum exposure for breast implant product
liability claims asserted 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.
<PAGE>
--- Page 20 ---
Legal Proceedings (Continued)
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, 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 stockholder 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 was appealed. On September 25, 1996, the
California Court of Appeals for the 4th District affirmed the
trial court's order granting summary judgment to the Company. On
January 15, 1997, the California Supreme Court granted
plaintiffs' petition for a review of that order. The Michigan
ruling was made final on March 20, 1997. This decision may be
appealed by plaintiffs. 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. New York's
highest court subsequently denied plaintiffs' petition for review,
and the order dismissing all claims against the Company is now final.
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, 1995 decision. The Company
remains a defendant in other breast implant product liability cases
originally brought in state courts and continues to be named as a
defendant as cases are filed in various courts. On October 20,
1996, in a Louisiana state court breast implant case styled
Spitzfaden v. Dow Corning, et al., the court entered an order
maintaining certification of a class of Louisiana plaintiffs
consisting of recipients of Dow Corning breast implants who, as
of January 15, 1997, (i) are residents of Louisiana, (ii) are
former residents of Louisiana who are represented by Louisiana
counsel, or (iii) received their implants in Louisiana and are
represented by Louisiana counsel, together with the spouses and
children of such plaintiffs, and representatives of the estates
of class members who are deceased. The trial of the first phase
of this case commenced on March 17, 1997. 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, 1995
decision, and granted the Company's request to enter a final
judgment in its favor. The United States Court of Appeals for
the Eighth Circuit affirmed the summary judgment in favor of the
Company on May 16, 1997.
<PAGE>
--- Page 21 ---
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 stockholder 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 been tried to judgment. 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 has
filed 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 500 cases filed in Texas, Dow Corning or the
Company have removed virtually all cases originally filed in
state courts across the country to various federal courts. The
removed cases have been, in most instances, transferred to Judge
Pointer for pre-trial proceedings. Plaintiffs have asked Judge
Pointer to remand those cases back to their states of origin, and
the Company has opposed that motion. On April 9, 1996, the United
States Court of Appeals for the Sixth Circuit ruled that because
silicone gel breast implant claims against the Company (and
certain other parties) were "related to" Dow Corning's
bankruptcy, the federal District Court for the Eastern District
of Michigan had the power to transfer such claims, including
claims currently pending before Judge Pointer, to itself and
ordered that Court to decide whether to make such a transfer. On
July 30, 1996, the District Court declined to order such a
transfer. The Company appealed that decision and on May 8, 1997,
the United States Court of Appeals for the Sixth Circuit ordered
the Federal District Court for the Eastern District of Michigan
to transfer the claims against the Company to the Eastern District
of Michigan. In its order, the Sixth Circuit went on to state that
once transfer had been accomplished, that the District Court should
index and cross reference the transferred claims so that "in any
proceeding in which a motion for abstention is filed, the District
Court may make the required abstention determinations and adequately
state its reasoning as to each such proceeding." On May 13, 1997,
United States District Court Judge Denise Page Hood ordered that all
breast implant claims currently pending against the Company as to
which judgment has not been entered, whether pending in state or
federal courts, are transferred to the United States District Court,
Eastern District of Michigan. On August 1, 1997, Judge Hood issued her
case management order with respect to the transferred claims, and
ordered that all implant claims later filed in federal or state
courts against the Company should likewise be transferred. On
August 5, 1997, the Tort Committee in Dow Corning's bankruptcy case
filed a petition for a writ of certiorari with the United States
Supreme Court seeking review of the May 8, 1997 decision of the
Sixth Circuit.
Judge Hood's May 13 order transferred the Louisiana state
court breast implant case, Spitzfaden v. Dow Corning, et al., to
the United States District Court, Eastern District of Michigan.
The plaintiffs in that case filed an emergency motion to
transfer, or abstain and remand, the case back to the Louisiana
state court. On May 21, 1997, Judge Hood "abstain(ed) from the
claims involved in Phases I and II" of that case resulting in its
return to the Louisiana state court and the resumption of the
trial. The Company has sought review of Judge Hood's May 21
decision by the United States Court of Appeals for the Sixth
Circuit.
<PAGE>
--- Page 22 ---
Legal Proceedings (Continued)
It is the opinion of the Company's management that the
possibility is remote that plaintiffs will prevail on the theory
that the Company should be liable in the breast implant
litigation because of its stockholder 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,
1995 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.
<PAGE>
--- Page 23 ---
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 15, 1997. At that meeting the following directors
were elected: Arnold A. Allemang, Fred P. Corson, Willie D.
Davis, Michael L. Dow, Michael D. Parker, J. Pedro Reinhard and
Paul G. Stern. In addition, the terms of the following directors
continued after that meeting: Jacqueline K. Barton, David T.
Buzzelli, Anthony J. Carbone, John C. Danforth, Joseph L. Downey,
Enrique C. Falla, Barbara Hackman Franklin, Allan D. Gilmour,
Frank P. Popoff, Harold T. Shapiro and William S. Stavropoulos.
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
- ---------------------
<TABLE>
<CAPTION> Broker
For Against Withheld Abstentions Nonvotes
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Election of Directors:
Class II
Fred P. Corson 193,591,833 n/a 4,915,121 n/a n/a
Willie D. Davis 193,950,769 n/a 4,556,185 n/a n/a
Michael L. Dow 194,197,988 n/a 4,308,965 n/a n/a
Michael D. Parker 193,564,785 n/a 4,942,169 n/a n/a
J. Pedro Reinhard 193,613,486 n/a 4,893,468 n/a n/a
Paul G. Stern 194,095,972 n/a 4,410,982 n/a n/a
Class III
Arnold A. Allemang 194,413,893 n/a 5,093,060 n/a n/a
2. Ratification of the
Selection of Deloitte &
Touche LLP as the
Company's Independent
Auditors for 1997 196,913,318 684,762 n/a 908,873 0
3. Authorization of the
Amendment of the 1988
Award and Option Plan 174,491,608 20,950,523 n/a 3,064,822 0
n/a - not applicable
</TABLE>
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 of 1997.
The following trademark of DowElanco or its affiliates
appears in this report: Tracer.
<PAGE>
--- Page 24 ---
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, 1997
- -----------------------
G. Michael Lynch
---------------------------
G. Michael Lynch
Vice President & Controller
(Chief Accounting Officer)
<PAGE>
--- Page 25 ---
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,186
<SECURITIES> 194
<RECEIVABLES> 3,195
<ALLOWANCES> 70
<INVENTORY> 2,649
<CURRENT-ASSETS> 8,885
<PP&E> 22,954
<DEPRECIATION> 15,196
<TOTAL-ASSETS> 23,321
<CURRENT-LIABILITIES> 5,748
<BONDS> 4,141
<COMMON> 818
126
0
<OTHER-SE> 6,686
<TOTAL-LIABILITY-AND-EQUITY> 23,321
<SALES> 10,358
<TOTAL-REVENUES> 10,358
<CGS> 7,451
<TOTAL-COSTS> 8,781
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5
<INTEREST-EXPENSE> (124)
<INCOME-PRETAX> 990
<INCOME-TAX> 370
<INCOME-CONTINUING> 571
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 571
<EPS-PRIMARY> 2.48
<EPS-DILUTED> 2.48
</TABLE>
