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, 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
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Outstanding at
Class March 31, 1997
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Common Stock, $2.50 par value 233,302,881 shares
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THE DOW CHEMICAL COMPANY
Table of Contents
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Commitments and Contingent Liabilities 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
First Quarter Earnings Announcement 9
Acquisitions and Divestitures 11
Changes in Financial Condition 12
Results of Operations 13
Part II - Other Information
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
Exhibit 27 23
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FINANCIAL STATEMENTS
====================
The Dow Chemical Company and Subsidiaries
- -----------------------------------------
Consolidated Statements of Income
- ----------------------------------
- ---------------------------------------------------------------
In millions, except for Three Months Ended
per share amount Mar. 31 Mar. 31
(Unaudited) 1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
Net Sales $4,992 $4,982
- ---------------------------------------------------------------
Operating Costs and Expenses
Cost of sales 3,615 3,384
Insurance and finance company
operations, pretax income (28) (22)
Research and development expenses 187 191
Promotion and advertising expenses 71 85
Selling and administrative expenses 369 467
Amortization of intangibles 13 9
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Total operating costs and expenses 4,227 4,114
- --------------------------------------------------------------
Operating Income 765 868
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Other Income (Expense)
Equity in earnings of 20%-50% owned
companies 14 16
Interest expense and amortization
of debt discount (122) (124)
Interest income and foreign exchange-net 84 75
Sundry income -net 63 48
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Total other income (expense) 39 15
- ---------------------------------------------------------------
Income before Provision for Taxes
on Income and Minority Interests 804 883
- ---------------------------------------------------------------
Provision for Taxes on Income 289 326
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Minority Interests' Share in Income 61 79
- ---------------------------------------------------------------
Preferred Stock Dividends 2 2
- ---------------------------------------------------------------
Net Income Available for Common 452 476
Stockholders
- ---------------------------------------------------------------
Average Common Shares Outstanding 237.8 251.0
- ---------------------------------------------------------------
Earnings per Common Share $1.90 $1.90
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Common Stock Dividends Declared per Share $0.75 $0.75
- ---------------------------------------------------------------
Depreciation $294 $308
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Capital Expenditures $245 $264
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</TABLE>
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.
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The Dow Chemical Company and Subsidiaries
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Consolidated Balance Sheets
===========================
Mar. 31 Dec. 31
In millions (Unaudited) 1997 1996
- -------------------------------------------------------------------------
Assets
- -------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $1,881 $1,903
Marketable securities and interest-bearing deposits 357 399
Accounts and notes receivable:
Trade (less allowance for doubtful receivables-
1997, $71; 1996, $71) 3,112 2,985
Other 1,581 1,411
Inventories:
Finished and work in process 2,262 2,267
Materials and supplies 515 548
Deferred income tax assets-current 232 317
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Total current assets 9,940 9,830
- -------------------------------------------------------------------------
Investments
Capital stock at cost plus equity in accumulated
earnings of 20%-50% owned companies 1,375 1,387
Other investments 2,063 2,060
Noncurrent receivables 437 437
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Total investments 3,875 3,884
- -------------------------------------------------------------------------
Property
Property 23,356 23,737
Less accumulated depreciation 15,157 15,253
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Net property 8,199 8,484
- -------------------------------------------------------------------------
Other Assets
Goodwill (net of accumulated amortization-
1997, $184; 1996, $177) 905 899
Deferred income tax assets-noncurrent 516 669
Deferred charges and other assets 951 907
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Total other assets 2,372 2,475
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Total Assets $24,386 $24,673
- -------------------------------------------------------------------------
See Notes to Financial Statements.
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<CAPTION>
The Dow Chemical Company and Subsidiaries
- -----------------------------------------
Consolidated Balance Sheets
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Mar. 31 Dec. 31
In millions (Unaudited) 1997 1996
- -------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Notes payable $1,012 $665
Long-term debt due within one year 616 607
Accounts payable:
Trade 1,350 1,596
Other 915 724
Income taxes payable 633 567
Deferred income tax liabilities-current 48 64
Dividends payable 180 184
Accrued and other current liabilities 1,442 1,597
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Total current liabilities 6,196 6,004
- -------------------------------------------------------------------------
Long-Term Debt 4,156 4,196
- -------------------------------------------------------------------------
Other Noncurrent Liabilities
Deferred income tax liabilities-noncurrent 796 1,005
Pension and other postretirement benefits-noncurrent 1,874 1,896
Other noncurrent obligations 1,560 1,493
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Total other liabilities 4,230 4,394
- -------------------------------------------------------------------------
Minority Interest in Subsidiary Companies 2,231 2,091
- -------------------------------------------------------------------------
Temporary Equity
Temporary equity-other 61 0
Preferred stock at redemption value 127 128
Guaranteed ESOP obligation (94) (94)
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Total temporary equity 94 34
- -------------------------------------------------------------------------
Stockholders' Equity
Common stock 818 818
Additional paid-in capital 362 307
Retained earnings 11,600 11,323
Unrealized gains on investments 168 192
Cumulative translation adjustments (375) (363)
Minimum pension liability (22) (22)
Treasury stock, at cost (5,072) (4,301)
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Net stockholders' equity 7,479 7,954
- -------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $24,386 $24,673
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See Notes to Financial Statements.
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<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
- ---------------------------------------------------------------------
Three Months Ended
Mar 31 Mar 31
In millions (Unaudited) 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Income from Continuing Operations $452 $476
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 320 326
Provision for deferred income taxes 26 328
Undistributed earnings of 20%-50%
owned companies (12) (14)
Minority interests' share in income 61 79
Other - net 16 (15)
Changes in assets and liabilities that
provided (used) cash:
Accounts receivable (317) (291)
Inventories 42 173
Accounts payable (155) (125)
Other assets and liabilities 272 (295)
--------------------------------------------------------------------
Cash provided by operating activities 705 642
- ---------------------------------------------------------------------
Investing Activities
Purchases of property (245) (264)
Proceeds from sales of property 5 12
Purchases of consolidated companies 0 (160)
Investments in unconsolidated affiliates 2 (323)
Purchases of investments (537) (535)
Proceeds from sales of investments 583 534
--------------------------------------------------------------------
Cash used in investing activities (192) (736)
- ---------------------------------------------------------------------
Financing Activities
Changes in short-term notes payable 376 1,401
Proceeds from issuance of long-term debt 7 -
Payments on long-term debt (46) (229)
Purchases of treasury stock (712) (342)
Proceeds from sales of common stock 51 166
Distributions to minority interests (25) (21)
Dividends paid to stockholders (182) (188)
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Cash provided by (used in) financing activies (531) 787
- ---------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (4) (3)
- ---------------------------------------------------------------------
Summary
Increase in cash and cash equivalents (22) 690
Cash and cash equivalents at beginning of year 1,903 2,839
- ---------------------------------------------------------------------
Cash and cash equivalents at end of period $1,881 $3,529
- ---------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
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COMMITMENTS AND CONTINGENT LIABILITIES
In January 1994, Dow Corning Corporation (Dow Corning), in
which Dow is a 50 percent shareholder, announced a pretax
charge of $640 million ($415 million after tax) for the fourth
quarter of 1993. In January 1995, Dow Corning announced a
pretax charge of $241 million ($152 million after tax) for the
fourth quarter of 1994. These charges included Dow Corning's
best estimate of its potential liability for breast implant
litigation based on a global Breast Implant Litigation
Settlement Agreement (the Settlement Agreement); litigation and
claims outside of the Settlement Agreement; and provisions for
legal, administrative and research costs related to breast
implants. The charges for 1993 and 1994 included pretax amounts
of $1,240 million and $441 million, respectively, less expected
insurance recoveries of $600 million and $200 million,
respectively. The 1993 amounts reported by Dow Corning were
determined on a present value basis. On an undiscounted basis,
the estimated liability above for 1993 was $2,300 million less
expected insurance recoveries of $1,200 million.
As a result of the Dow Corning actions, the Company recorded
its 50 percent share of the charges, net of tax benefits
available to Dow. The impact on the Company's net income was a
charge of $192 million for 1993 and a charge of $70 million for
1994.
Dow Corning reported an after tax net loss of $167 million
for the second quarter of 1995, of which the Company's share
amounted to $83 million. Dow Corning's second quarter loss was
a result of a $221 million after tax charge taken to reflect a
change in accounting method from the present value basis noted
above to an undiscounted basis resulting from the uncertainties
associated with its voluntary filing for protection under
Chapter 11 of the United States Bankruptcy Code on May 15,
1995. As a result of Dow Corning's 1995 second quarter loss and
Chapter 11 filing, the Company recognized a pretax charge
against income of $330 million for the second quarter of 1995,
fully reversed 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 ruling, it is possible that a resolution of
plaintiffs' direct participation claims, including the vigorous
defense against those claims, could have a material adverse
impact on the Company's net income for a particular period,
although it is impossible at this time to estimate the range or
amount of any such impact.
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Commitments and Contingent Liabilities (Continued)
Numerous lawsuits have been brought against the Company and
other chemical companies alleging that the manufacture,
distribution or use of pesticides containing
dibromochloropropane (DBCP) has caused, among other things,
property damage, including contamination of groundwater. To
date, there have been no verdicts or judgments against the
Company in connection with these allegations. It is the opinion
of the Company's management that the possibility is remote that
the resolution of such lawsuits will have a material adverse
impact on the Company's consolidated financial statements.
The Company has accrued $293 million at March 31, 1997, for
probable environmental remediation and restoration liabilities,
including $13 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 twice that amount. 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. 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. The Company also had commitments 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.
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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.
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 had minimal effect on the Company's first quarter
1997 results and is not expected to have a material impact on
full year 1997 results.
FIRST QUARTER EARNINGS ANNOUNCEMENT (April 24, 1997)
DOW CHEMICAL ANNOUNCES EARNINGS OF $1.90 PER SHARE
__________________________________________________________________
First Quarter of 1997 Highlights
--------------------------------
First quarter sales of $5.0 billion represent the second
highest first quarter sales ever posted, despite a negative
currency impact of about $100 million.
Earnings were $1.90 per share, equal to the first quarter of
1996.
On-going productivity improvements and a globally balanced
product portfolio recovered over two-thirds of the impact of
higher feedstock costs and the unfavorable impact of currency on
sales.
__________________________________________________________________
(In millions, except for per share amounts)
3 Months Ended
Mar. 31
1997 1996
---- ----
Net Sales $4,992 $4,982
Operating Income 765 868
Net Income Available for Common Stockholders 452 476
Avg. Common Shares Outstanding 237.8 251.0
Earnings Per Common Share 1.90 1.90
___________________________________________________________________
Review of Quarterly Results
The Dow Chemical Company today announced sales of $5.0 billion,
operating income of $765 million, net income of $452 million and
earnings per share of $1.90 for the first quarter of 1997.
"Our first quarter results once again demonstrate the value of
our strategic initiatives," said William S. Stavropoulos, Dow's
president and CEO. "Strategic portfolio restructuring and
significant productivity improvements continue to buffer the
negative impact of unfavorable year-over-year feedstock cost
comparisons and unfavorable currency impact on sales."
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First Quarter Earnings Announcement (April 24, 1997) (Continued)
Dow's first quarter sales of $5.0 billion represent the second
highest first quarter sales ever posted by the Company and match
those for the same period last year. Sales volume grew 2 percent
while selling prices declined by 2 percent due to a negative
currency impact of approximately $100 million. Volume was up in
all of Dow's core businesses. During the quarter, the company
experienced a mixed pricing scenario. Prices in some key
products, notably polyethylene and vinyl chloride monomer, were
up substantially from a year ago. Other products, such as
caustic soda and polystyrene faced price declines.
"The strong U.S. dollar played a significant role in the price
decline we experienced in the first quarter," said Stavropoulos.
"However, when we adjust for this currency impact, we actually
see positive pricing trends in many of our key products from both
a year ago and the previous quarter."
Productivity, value growth initiatives, business portfolio
restructuring and lower costs combined to offset approximately
$200 million of the more than $300 million impact of higher
feedstock costs and the unfavorable currency impact on sales. As
a result, operating income for the quarter was down only $103
million to $765 million from $868 million a year ago.
Operating expenses for the quarter were down 16 percent to $627
million compared to $743 million for same period a year ago. The
reduction was achieved primarily through a combination of on-
going productivity gains, lower costs, and the overall impact of
currency on costs.
Earnings were $1.90 per share, equal to the first quarter of 1996
and up 12 percent from the previous quarter.
Dow's Performance segments contributed approximately half of
Dow's sales and operating income for the quarter. The
Performance Chemicals segment posted higher sales than a year
ago, with strong volume increases in each of its businesses, but
recorded lower operating income due primarily to a decline in
profitability of the Agricultural Chemicals business. The
decline in Agricultural Chemicals was due to the impact of
currency on sales prices along with increased costs associated
with strategic growth initiatives, including the launch of Tracer
insect control and the new manufacturing facility in Harbor
Beach, Michigan. This business posted a double-digit volume
increase with the acquisition of Mycogen. Specialty Chemicals
posted a strong quarter based on a combination of volume gains
and substantial productivity improvements. As a result, the
business recorded its sixth consecutive year-over-year increase
in operating income.
Performance Plastics posted lower sales and operating income in
the first quarter of 1997 versus a year ago. Volume growth was
strong for the majority of the businesses in the segment, led by
Engineering Plastics and Polyurethanes. The declines in year-
over-year results can be largely attributed to the following key
factors: the unfavorable impact of currency on selling prices; a
tough competitive environment particularly in Europe and Asia;
higher propylene costs which reduced the margin for the Epoxy
Resins and Polyurethanes businesses; and slowdowns in key market
segments, such as the automotive and housing industries.
Strong polyethylene prices led to higher sales and operating
income for the Plastics segment compared to a year ago. In the
Diversified Businesses and Unallocated segment, DowBrands posted
its seventh consecutive quarter of improved year-over-year
profits, continuing its productivity drive.
Dow continued its aggressive stock repurchase program in the
first quarter of 1997, buying back 8.8 million shares. Since
January 1995, Dow has repurchased 53 million shares.
"As we head into the second quarter, favorable global economic
conditions will support solid volume growth in our businesses.
Lower feedstock costs and price stability in some key products,
coupled with the on-going implementation of our productivity and
value-growth initiatives, should result in a strong quarter for
Dow," said Stavropoulos.
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ACQUISITIONS AND DIVESTITURES
In April 1995, the Company signed an agreement with Bundesanstalt
fuer vereinigungsbedingte Sonderaufgaben (BvS) for the
privatization of three state-owned chemical companies in eastern
Germany (referred to herein as BSL). Economic transfer of
business operations to the Company, through the privatization
agreement and various service agreements, occurred in June 1995
with legal closing anticipated during the summer of 1997. The
Company will include the financial results of BSL effective with
the legal closing date.
On closing, the Company will acquire 80 percent ownership in
BSL for an investment of approximately $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 intends to build several new facilities at the BSL
sites including Dowlex linear low density polyethylene,
polypropylene, aniline and acrylic acid plants, and to upgrade
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 January 1996, DowElanco, a 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 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.
In September 1996, a consortium which includes a subsidiary of
Destec Energy, Inc. (Destec) completed the acquisition of the
Hazelwood Power Station, a large coal-fired power generation
facility, and the adjacent Hazelwood Mine from the State of
Victoria, Australia. The Destec subsidiary holds a 20 percent
interest in the consortium. The investment by Destec was $164
million. Dow's ownership of Destec is approximately 80 percent.
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.
Dow announced on February 18, 1997 that it has agreed, subject
to regulatory approvals, to the merger of Destec Energy, Inc. and
NGC Corporation. More than 80 percent of Destec's shares (45
million) are currently held by Dow. Under the agreement, NGC will
acquire Destec for $21.65 in cash for each outstanding share of
Destec common stock. Following the merger, Destec will become a
wholly owned subsidiary of NGC. Regulatory approval is expected
to be completed in the summer of 1997.
On May 15, 1997, the Company and Eli Lilly jointly announced
that Dow will acquire Lilly's 40 percent interest in DowElanco,
as a result of Lilly's exercise of its option, for $900 million
plus approximately $300 million of undistributed earnings.
Dow currently owns 60 percent of DowElanco and will
become the sole owner.
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CHANGES IN FINANCIAL CONDITION
The following tables represent total debt and working capital at
March 31, 1997 versus December 31, 1996.
Mar. 31, Dec. 31, Increase
In millions 1997 1996 (Decrease)
- ---------------------------------------------------------------------
Notes payable $1,012 $ 665 $347
Long-term debt due within one year 616 607 9
Long-term debt 4,156 4,196 (40)
- ---------------------------------------------------------------------
Total debt $5,784 $5,468 $316
- ---------------------------------------------------------------------
The increase in total debt together with the very positive cash
flow from continuing operations was used by the Company to
purchase 8.8 million shares of common stock during the first
quarter of 1997 as part of its overall stock repurchase program.
The Company's average shares outstanding for the first three
months of 1997 was 238 million, a decrease of 5 percent from the
average shares outstanding for the first three months of 1996.
Since the beginning of 1995, Dow has repurchased 53 million
shares (approximately 19 percent). In July 1996, the Company
authorized a stock repurchase program to buy back 20 million
shares, of which about 14 million shares had been acquired by the
end of the first quarter.
Mar. 31, Dec. 31, Increase
In millions 1997 1996 (Decrease)
- ---------------------------------------------------------------------
Cash and cash equivalents $1,881 $ 1,903 $ (22)
Marketable securities and
interest-bearing deposits 357 399 (42)
Accounts and notes receivable-net 4,693 4,396 297
Inventories:
Finished and work in process 2,262 2,267 (5)
Materials and supplies 515 548 (33)
Deferred income tax assets-current 232 317 (85)
- ---------------------------------------------------------------------
Total current assets 9,940 9,830 110
- ---------------------------------------------------------------------
Total current liabilities 6,196 6,004 192
- ---------------------------------------------------------------------
Working capital $3,744 $ 3,826 $(82)
- ---------------------------------------------------------------------
Working capital this quarter was reduced by $82 million.
The company has a strong position of $2.2 billion in cash, cash
equivalents, marketable securities and interest-bearing deposits,
together with the positive cash flow from operations and the
pending sale of Destec. This will support the acquisition of Lilly's
40 percent interest in DowElanco as well as any cash that may be
required to redeem the partners' capital account in DowBrands L.P.
At March 31, 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 $1.4 billion are available for use by foreign
subsidiaries.
Mar. 31, Dec. 31,
Balance Sheet Ratios 1997 1996
- ---------------------------------------------------------
Current assets over current liabilities 1.6:1 1.6:1
Days-sales-outstanding-in-receivables 46 45
Days-sales-in-inventory 85 87
Debt as a percentage of total
capitalization 37.1 35.2
The increase of 1.9 percentage points in the debt as a percentage
of total capitalization was primarily attributable to the
increase in total debt used to purchase shares of common stock in
the Company during the first quarter of 1997.
<PAGE>
--- Page 12 ---
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
=====================
The Dow Chemical Company and Subsidiaries
- -------------------------------------------
Geographic and Industry Segments (Unaudited)
Three Months Ended
Mar. 31, Mar. 31,
In millons 1997 1996
<S> <C> <C>
Geographic sales
United States $2,208 $2,215
Europe 1,587 1,679
Rest of World 1,197 1,088
Total $4,992 $4,982
Geographic operating income
United States $331 $346
Europe 231 263
Rest of World 203 259
Total $765 $868
Industry segment sales
Performance Plastics $1,265 $1,345
Performance Chemicals 1,212 1,152
Plastics 1,010 928
Chemicals and Metals 707 731
Hydrocarbons and Energy 577 553
Diversified Businesses and Unallocated 221 273
Total $4,992 $4,982
Industry segment operating income
Performance Plastics $211 $317
Performance Chemicals 212 247
Plastics 221 170
Chemicals and Metals 161 190
Hydrocarbons and Energy (6) (9)
Diversified Businesses and Unallocated (34) (47)
Total $765 $868
</TABLE>
<TABLE>
<CAPTION>
Geographic and Industry Segment Sales Volume and Price
- -------------------------------------------------------
Three Months Ended
Mar. 31, 1997
Percentage change from prior year Volume Price Total
<S> <C> <C> <C>
Geographic segment
United States 0 % 0 % 0 %
Europe (1)% (4)% (5)%
Rest of World 10 % 0 % 10 %
Total 2 % (2)% 0 %
Industry segment
Performance Plastics 2 % (8)% (6)%
Performance Chemicals 11 % (6)% 5 %
Plastics 5 % 4 % 9 %
Chemicals and Metals (1)% (2)% (3)%
Hydrocarbons and Energy (8)% 12 % 4 %
Diversified Businesses and Unallocated (18)% (1)% (19)%
Total 2 % (2)% 0 %
</TABLE>
<PAGE>
--- Page 13 ---
Results of Operations (Continued)
The following are selected data for the three months ended March
31, 1997 and 1996.
Three Months Ended
Dollars in millions, Mar. 31, Mar. 31,
except for share amounts 1997 1996
- ------------------------ ---- ----
Cost of sales $3,615 $3,384
% of sales 72% 68%
Research and development,
promotion and advertising,
selling and administrative
expenses 627 743
Operating income 765 868
% of sales 15% 17%
Equity in earnings of
20%-50% owned companies 14 16
Effective tax rate 36% 37%
Net income available
for common stockholders 452 476
Earnings per common share $1.90 $1.90
Operating rate percentage 91% 87%
Net sales for the first quarter of 1997 were $5.0 billion, equal
to the same period last year. Volume increased 2 percent, which
was offset by a price decrease of 2 percent. Prices, particularly
in Europe, were negatively impacted by currency due to the
strengthening of the dollar. The approximately $100 million
currency decline on total sales was partially offset by local
currency price increases in North America, Latin America and
Europe. Pacific Area sales were negatively impacted by both
currency changes and local currency prices.
Volume remained strong in all industry and geographic segments
for the quarter compared to the same quarter last year. The
addition of the acquisitions in Latin America, higher
agricultural product sales in Latin America and good overall
growth in Asia Pacific led to a volume increase in the Rest of
World.
Expenses, which include research and development, promotion
and advertising, and selling and administrative expenses, were
$627 million down $116 million versus the first quarter of 1996.
The reduction was achieved by continued productivity gains,
favorable currency effect on expenses incurred outside of the
United States and lower costs generally.
Operating income of $765 million was 12 percent lower for this
quarter versus $868 million in the first quarter of 1996. As a
percent of sales, operating income was 15 percent versus 17
percent in the same quarter last year, a decline of only 2
percentage points. A substantial increase in hydrocarbons
purchase cost coupled with, a 2 percent sales price decline from
currency impact of a stronger dollar, were partly offset by
volume gains, continued productivity improvements, business
portfolio restructuring, and a decline in costs and expenses
incurred outside the United States because of the stronger
dollar.
<PAGE>
--- Page 14 ---
Results of Operations (Continued)
PERFORMANCE PLASTICS
Performance Plastics sales of $1,265 million were down 6 percent
from $1,345 million in the first quarter of 1996 due to a 8 percent
decrease in price including currency impact and a 2 percent increase
in volume. Volume growth would have been 4 percent when excluding the
transfer of the Company's elastomer products to DuPont Dow Elastomers
L.L.C., which is now reported as a 20%-50% owned company. The stronger
dollar accounted for 32 percent of the price decline. Operating income
for this segment decreased $106 million to $211 million, from $317
million in the first quarter of 1996. The reduction in operating
income in this segment was predominantly due to the price declines
and propylene cost increases.
Polyurethanes sales were down 2 percent versus the first
quarter of 1996 on lower prices but increased volume. Prices were
down in all geographies with the exception of the United States.
Volume was up in all geographies but down in the United States.
Volume growth in Europe and Asia Pacific was particularly strong,
coming back from a slow quarter in 1996. 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 4 percent
versus the first quarter of 1996. Prices were down almost 8
percent as most local currency price declines took place in the
second half of 1996 and stabilized in this quarter. Increased
volume partially offset the price decline with strong volume in
Europe as our strategic customers outperformed their industries.
Operating income was down from a year ago due mainly to lower
selling prices, as well as higher raw material costs.
Engineering plastics first quarter of 1997 sales were down 7
percent, with volume up 7 percent and price down 14 percent,
compared to the first quarter of 1996. Industry demand for
polycarbonate was up versus the first quarter of 1996, but there
is price pressure as the market anticipates new capacity in late
1997. ABS volume growth was due to the Company's strong
performance in the North American automotive and the European
distribution industries. Operating income was down from a year
ago due mainly to lower selling prices.
Adhesives, sealants and coatings experienced another good
quarter with a sales increase of 2 percent in the first quarter
of 1997 versus the same period last year. Operating income as a
percent of sales continued to be above the Company's average.
Fabricated products sales for the first quarter of 1997 were
down 7 percent from the same period last year. Volume and price
declined 2 and 5 percent, respectively. Operating income for this
business decreased this quarter versus the first quarter of 1996
due to both local selling price decreases and the impact of the
stronger dollar.
PERFORMANCE CHEMICALS
Sales for Performance Chemicals in the first quarter were $1,212
million, an increase of 5 percent from $1,152 million in the same
quarter last year. Sales prices were down 6 percent and volume
was up 11 percent. The volume increase included the consolidation
of Mycogen Corporation in the first quarter of 1997. Operating
income for this segment decreased $35 million to $212 million,
from $247 million in the first quarter of 1996. This reduction in
operating income was predominantly caused by price declines in
emulsion polymers and increased costs in agricultural products.
Specialty chemicals volume increased 6 percent with good gains
in almost all businesses and in all geographies. Substantial
volume contributions came from the new contract manufacturing
operations, as well as polyglycols and Methocel. A difficult
competitive environment in superabsorbents, oxygenated solvents
and polyglycols reduced segment local currency prices by about 2
percent, while the stronger U.S. dollar reduced specialty
chemicals prices by a further 2 percent. Despite the price
declines, the combination of volume gains and substantial
productivity improvements resulted in the sixth consecutive
quarterly improvement in year-over-year operating income for
specialty chemicals.
Emulsion polymers volume increased nearly 20 percent in all
geographies versus first quarter of 1996 reflecting both improved
industry conditions and the success of Dow's strategy to capture
a majority of the polymer supply to the new coated paper
capacity. This volume increase helped offset about half of the
negative impact of lower prices. Prices declined throughout 1996
and into 1997 in line with styrene monomer prices.
Agricultural products sales increased 8 percent versus first
quarter of 1996, primarily because of the consolidation of
Mycogen in which DowElanco now holds a majority position.
Excluding the added Mycogen sales, agricultural products volume
was about flat while prices declined about 3 percent. Most of the
price change was due to currency. The negative currency impact
reduced operating income by close to 9 percent since most of
DowElanco's costs are in the United States. Business was strong
in Latin America with both price and volume up close to 8 percent
versus last year. Europe sales were down because of the reduction
in sales in Eastern Europe compared to the first quarter of 1996
and because of the unseasonably cold and dry European spring.
Tracer, a fermentation based insecticide, was approved by the
Environmental Protection Agency in first quarter of 1997, and
sales will begin in the second quarter. Pre-launch costs, the
inclusion of costs at the Tracer production facility, and the
negative currency effect, resulted in a 22 percent decline in
operating income.
<PAGE>
--- Page 15 ---
Results of Operations (Continued)
PLASTICS
Plastics sales in the first quarter of 1997 were $1,010 million,
up 9 percent from a year ago, with volume up 5 percent and prices
up 4 percent. The price gain was due almost entirely to the
improvement in polyethylene prices, while volume improved the
most in polystyrene versus a year ago. Plastics operating income
for first quarter of 1997 was $221 million, up 30 percent from
last year's $170 million.
Polyethylene operating income improved strongly in first
quarter of 1997 versus first quarter of 1996. Polyethylene prices
were up 14 percent versus first quarter of 1996, with increases
in all geographies even though there was a delay in price
implementation until March in North America. Polyethylene volume,
including acquisition, was up about 3 percent versus last year's
very strong quarter. Polyethylene remains in a sold-out mode.
Operating income for polyethylene increased over 60 percent
compared to the first quarter of 1996.
Polystyrene pricing continues to be under pressure, and prices
were down substantially versus a year ago. About one third of the
price decline in Europe was due to currency. Prices stabilized
from fourth quarter of 1996 to first quarter of 1997, but, due to
the styrene monomer capacity additions, near term price
improvement is not expected. Volume was up about 8 percent versus
first quarter of 1996, primarily due to renewed sales in China
and the addition of the acquisition of Estireno do Nordeste SA,
in Latin America.
PET prices were down substantially from first quarter of 1996,
but sharply improved from the low level of fourth quarter of
1996. These selling price decreases together with the increased
costs of raw materials, such as ethylene glycol and paraxylene,
have put operating margins under pressure. Volume was up versus a
year ago.
CHEMICALS AND METALS
Chemical and Metals sales in first quarter of 1997 were $707
million, down 3 percent from $731 million in the first quarter of
1996. Volume declined about 1 percent due in part to the impact
on chlorine derivatives caused by the Freeport plant's rectifier
outage. Propylene glycol volume was up substantially because of
the strong aircraft deicing season in North America and Europe
and increased sales to the unsaturated polyester resin industry
in Asia Pacific. Prices were reduced about 2 percent, split
evenly between currency impact and local currency price declines.
Caustic prices were substantially lower in first quarter of 1997
versus the first quarter of 1996. This decrease was offset by
higher prices for EDC and VCM. Modest price and volume declines
and significantly higher energy costs were partially offset by
productivity improvements. Operating income for this segment
declined from $190 million in first quarter of 1996 to $161
million in first quarter of 1997.
HYDROCARBONS AND ENERGY
Sales for Hydrocarbons and Energy in first quarter of 1997 were
$577 million, up 4 percent from $553 million a year ago. Prices
were up 12 percent, while volume was down 8 percent. Operating
loss for the quarter was $6 million, an improvement from an
operating loss of $9 million in first quarter of 1996. Demand was
strong, and Dow had record production volume in first quarter of
1997 in North America. In addition, ethylene remained in short
supply in Europe. Destec's first quarter of 1997 revenue was down
from a year ago due to reduced development and engineering
activities. Operating income for Destec was down from the first
quarter of 1996 due in part to nonrecurring expenses associated
with the pending merger with NGC Corporation.
DIVERSIFIED BUSINESSES AND UNALLOCATED
Diversified Businesses sales were $221 million, down 19 percent
from $273 million in first quarter of 1996. Operating income for
this segment improved from a loss of $47 million in the first
quarter of 1996 to an operating loss of $34 million in first
quarter of 1997.
Consumers products sales were reduced due, in part, to the
fact that the DowBrands European sales are now part of a joint
venture with Melitta and are no longer consolidated, which
accounted for about half of the segment sales decline. Excluding
the European business, DowBrands sales were down about 13 percent
versus first quarter of 1996. Reduced promotion and advertising
expenses and improved manufacturing costs contributed to a
substantial improvement in the operating income, the seventh
consecutive quarter to show a year-over-year increase.
New Business sales were about flat with first quarter of 1996.
Operating loss improved over the first quarter of 1996.
The operating income of Unallocated was slightly more negative
than in first quarter of 1996, primarily because of increased
severance costs.
<PAGE>
--- Page 16 ---
Results of Operations (Continued)
COMPANY SUMMARY
Manufacturing Costs
Dow's global plant operating rate for its chemicals and plastics
businesses was 91 percent, up from 87 percent in the first
quarter of 1996. Unit manufacturing costs for these businesses,
adjusted for volume but not mix, was up 5 percent compared to the
first quarter of 1996. This increase was primarily due to
feedstock and energy cost increases.
Other Income (Expense)
Equity in earnings of 20%-50% owned companies decreased $2
million in the first 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, decreased to $38
million this quarter, compared to $49 million in the first
quarter of 1996. Interest expenses remained relatively flat this
quarter compared to the first quarter of 1996, but Dow's currency
risk management program resulted in foreign exchange gains. These
foreign exchange gains partially offset Dow's economic exposure
created by the strengthening of the dollar against the major
foreign currencies.
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 of 1997, sundry income benefited from the sale of part of
the Company's investment in Crestar Energy Inc.
Provision for Taxes on Income
The effective tax rate from continuing operations for the first
quarter was 35.9 percent compared to 36.9 percent in the first
quarter of 1996.
Net Income Available for Common Stockholders
The first quarter of 1997 net income was $452 million or $1.90
per share. The first quarter of 1996 net income was $476 million
or $1.90 per share. While these results appear similar, the first
three months of 1997 include a negative currency effect of more
than $100 million on sales and increased hydrocarbons costs of
more than $200 million, balanced by continued productivity
improvement, value growth initiatives, business portfolio
restructuring, a positive
currency effect on expenses in foreign currencies and the
repurchase of Dow stock.
Minority Interest
Minority interest decreased $18 million from $79 million in the
first quarter of 1996 to $61 million for the same period this
year, which was primarily due to lower earnings in DowElanco and
its subsidiaries.
Expectations for the Remainder of 1997
On a macro basis, management continues to expect stronger GDP
growth in 1997 than in 1996, particularly in the first half of
the year. North America and Western Europe are expected to grow
between two and a half and three percent, while Latin America,
Eastern Europe, and Asia Pacific will show faster economic
growth. Also, it appears that inflation will remain under
control. With favorable global economic conditions, indications
suggest that our businesses will experience solid volume growth.
Feedstock costs started to decline from very high levels
around the middle of the first quarter, and it is expected that
pressure from high feedstocks costs will continue to abate. For
the full year, these costs should average about the same level as
in 1996. Pricing in many of Dow's key products have stabilized in
the first quarter, and, while the pricing scenario is somewhat
mixed, some product prices will increase in the second quarter.
Pricing outlook for later in the year is more questionable
because of expected capacity increases in the industry.
The second quarter should bring expanding margins compared to
the first quarter of 1997 in some of our businesses with stable
pricing and declining feedstock costs, although hydrocarbons and
energy costs are expected to remain in line with a year-ago. It
is expected that volume will continue at a good level in the
Company's existing businesses, with added value growth from the
addition of polypropylene and Elite, Dow's new enhanced
polyethylene based on Insite. DowElanco expects second quarter
results to show significant improvement versus first quarter of
1997, primarily due to seasonality and growth in new products.
<PAGE>
--- Page 17 ---
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. 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 stockholder has sued certain Dow Corning
Directors (including certain former and current 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. On April 24, 1997, plaintiffs in this latter action
voluntarily dismissed all of their claims against all
defendants without prejudice.
Two separate derivative actions have been brought in the
federal court, Southern District of New York, by Company
stockholders purportedly on the Company's behalf. In Kas, et al.
v. Butler, et al., two Company stockholders 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
stockholders brought suit in 1992, naming as defendants Dow
Corning's Directors who were also Company Directors and certain
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 April 24 and April 30,
1997, plaintiffs in both cases voluntarily dismissed all of their
claims against all defendants without prejudice.
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 reversed its investment in Dow Corning and
will not recognize its 50 percent share of future equity earnings
while Dow Corning remains in Chapter 11.
<PAGE>
--- Page 18 ---
Legal Proceedings (Continued)
On September 1, 1994, Judge Sam C. Pointer, Jr. of the United
States District Court for the Northern District of Alabama
approved the Settlement Agreement pursuant to which plaintiffs
choosing to participate in the Settlement Agreement released the
Company from liability. The Company was not a participant in the
Settlement Agreement nor was it required to contribute to the
settlement. On October 7, 1995, Judge Pointer issued an order
which concluded that the Settlement Agreement was not workable in
its then-current form because the funds committed to it by
industry participants were inadequate. The order provided that
plaintiffs who had previously agreed to participate in the
Settlement Agreement could opt out after November 30, 1995.
The Company's maximum exposure for breast implant product
liability claims against Dow Corning is limited to its investment
in Dow Corning which, after the second quarter charge noted
above, is zero. As a result, any future charges by Dow Corning
related to such claims or as a result of the Chapter 11
proceeding would not have an adverse impact on the Company's
consolidated financial statements.
The Company is separately named as a defendant in over 13,000
breast implant product liability cases. In these situations,
plaintiffs have alleged that the Company should be liable for Dow
Corning's alleged torts based on the Company's 50 percent stock
ownership in Dow Corning and that the Company should be liable by
virtue of alleged "direct participation" by the Company or its
agents in Dow Corning's breast implant business. These latter,
direct participation claims include counts sounding in strict
liability, fraud, aiding and abetting, conspiracy, concert of
action and negligence.
Judge Pointer has been appointed by the Federal Judicial Panel
on Multidistrict Litigation to oversee all of the product
liability cases involving silicone breast implants filed in the
U.S. federal courts. Initially, in a ruling issued on December
1, 1993, Judge Pointer granted the Company's motion for summary
judgment, finding that there was no basis on which a jury could
conclude that the Company was liable for any claimed defects in
the breast implants manufactured by Dow Corning. In an
interlocutory opinion issued on April 25, 1995, 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 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.
<PAGE>
--- Page 19 ---
Legal Proceedings (Continued)
The Company is also a defendant in ten federal silicone jaw
implant cases involving implants manufactured by Dow Corning.
Federal District Court Judge Paul A. Magnuson has been appointed
by the Federal Judicial Panel on Multidistrict Litigation to
oversee all of the product liability cases involving silicone jaw
implants filed in the U.S. federal courts. On March 31, 1995,
Judge Magnuson granted the Company's motion for summary judgment,
concluding, based on virtually the same arguments that were
presented to Judge Pointer, that no reasonable jury could find in
favor of plaintiffs on any of their claims against the Company.
On June 13, 1995, Judge Magnuson denied plaintiffs' motion to
reconsider his ruling based on Judge Pointer's April 25 decision,
and granted the Company's request to enter a final judgment in
its favor. Plaintiffs have appealed the final judgment to the
U.S. Court of Appeals for the Eighth Circuit.
On November 3, 1994, Judge Michael Schneider, presiding in the
consolidated breast implant cases in Harris County, Texas,
granted in part and denied in part the Company's motion for
summary judgment. Judge Schneider granted the Company's motion
as to (i) all claims based on the Company's 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. Judge Hood set June 27, 1997 as the date
for a status conference to address the transfer order and any
motions for abstention.
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. Plaintiffs' motion will be heard by Judge Hood on
May 19, 1997.
<PAGE>
--- Page 20 ---
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
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.
Seldane
In July 1992, two class action lawsuits were filed in the United
States District Court for the Western District of Missouri
alleging that Marion Merrell Dow Inc. ("MMD"), then a subsidiary
of the Company, violated the federal securities laws as a result
of alleged false statements and omissions regarding the drug
Seldane. The suits, which were brought by purchasers of MMD stock
and sought unquantified damages, also named the Company as a
defendant, principally because of its status as an alleged
"controlling person" of MMD. In addition to seeking recovery
against MMD and the Company, the suits named as defendants a
variety of entities and individuals including certain Directors
of MMD (some of whom are also Directors of the Company) and
certain underwriters of a 1992 offering of MMD stock.
Subsequently, plaintiffs filed a consolidated amended class
action complaint in the same court consolidating the two
previously filed complaints and captioned In re Marion Merrell
Dow Securities Litigation (the "Seldane Securities Litigation").
The consolidated amended class action complaint does not name the
Company as a defendant but reserves the right to name the Company
in the future should discovery disclose a basis for doing so. In
December 1992, plaintiffs and the Company entered into an
agreement conditionally tolling the statute of limitations as to
any action against the Company.
On May 2, 1997, Judge Howard F. Sachs of the United States
District Court for the Western District of Missouri entered an
order approving a January 24, 1997 stipulation of settlement
entered into by the parties to the Seldane Securities Litigation.
The stipulation of settlement provides, among other things, that,
as of the effective date of the settlement, each of the
defendants, including certain Directors of the Company, and each
past or present controlling shareholder and affiliated entity of
MMD, which includes the Company, shall be released from any and
all claims that were, or might have been, asserted in or related
to the matters referred to in the Seldane Securities Litigation.
Environmental Matters
On May 31, 1994, the EPA filed an action against the Company
alleging violations of the Clean Water Act at the Company's
Ludington, Michigan site. Proposed civil fines totaled $125,000.
On March 19, 1997, the Company paid an $80,000 civil fine in this
matter pursuant to a Consent Agreement and Final Order.
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 of 1997.
The following trademarks of The Dow Chemical Company
appear in this report: Elite, Insite and Methocel.
The following trademark of DowElanco or its affiliates
appears in this report: Tracer.
<PAGE>
--- Page 21 ---
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
THE DOW CHEMICAL COMPANY
------------------------
Registrant
Date: May 15, 1997
- ---------------------
G. Michael Lynch
----------------
G. Michael Lynch
Vice President & Controller
(Chief Accounting Officer)
<PAGE>
--- Page 22 ---
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