SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTER ENDED September 30, 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 X
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Outstanding at
Class September 30, 1997
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Common Stock, $2.50 par value 226,755,739 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
Accounting Policies 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Third 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 19
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Exhibit 27 24
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
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Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
In millions, except for share amounts 1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Net Sales $4,857 $4,992 $15,215 $15,150
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Operating Costs and Expenses
Cost of sales 3,530 3,552 10,981 10,475
Insurance and finance company
operations, pretax income (35) (14) (71) (50)
Research and development expenses 197 182 583 567
Promotion and advertising expenses 101 94 283 281
Selling and administrative expenses 377 418 1,151 1,331
Amortization of intangibles 17 14 41 36
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Total operating costs and expenses 4,187 4,246 12,968 12,640
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Operating Income 670 746 2,247 2,510
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Other Income (Expense)
Equity in earnings of nonconsolidated
companies (18) 25 21 65
Interest expense and amortization of
debt discount (113) (112) (359) (354)
Interest income and foreign exchange-net 23 72 167 222
Sundry income - net (Note B) 98 56 378 166
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Total other income (expense) (10) 41 207 99
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Income before Provision for Taxes on Income
and Minority Interests 660 787 2,454 2,609
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Provision for Taxes on Income 236 283 895 953
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Minority Interests' Share in Income - 33 109 160
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Preferred Stock Dividends 2 2 5 5
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Net Income Available for Common Stockholders 422 469 1,445 1,491
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Average Common Shares Outstanding 227.9 244.4 231.9 247.7
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Earnings per Common Share $1.85 $1.92 $6.23 $6.02
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Common Stock Dividends Declared per Share $0.87 $0.75 $2.49 $2.25
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Depreciation $287 $332 $890 $948
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Capital Expenditures $310 $311 $802 $916
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</TABLE>
Notes to Financial Statements
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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.
Note D: In September 1997, the Company finalized the purchase of 80 percent
of the shares in BSL Olefinverbund GmbH (BSL) from the German
Government in a privatization agreement, for an amount of $206
million. BSL will be recorded as a nonconsolidated company until the
end of the restructuring period in the year 2000.
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<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
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Sept. 30, Dec. 31,
In millions (Unaudited) 1997 1996
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Assets
- ------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 277 $ 1,903
Marketable securities and interest-bearing deposits 194 399
Accounts and notes receivable:
Trade (less allowance for doubtful receivables-
1997, $70; 1996, $60) 2,887 2,985
Other 1,722 1,411
Inventories:
Finished and work in process 2,158 2,267
Materials and supplies 527 548
Deferred income tax assets-current 184 317
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Total current assets 7,949 9,830
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Investments
Capital stock at cost plus equity in accumulated
earnings of nonconsolidated companies 1,222 1,387
Other investments 2,625 2,060
Noncurrent receivables 364 437
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Total investments 4,211 3,884
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Property
Property 22,960 23,737
Less accumulated depreciation 15,243 15,253
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Net property 7,717 8,484
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Other Assets
Goodwill (net of accumulated amortization-
1997, $191; 1996, $167) 1,507 899
Deferred income tax assets-noncurrent 498 669
Deferred charges and other assets 863 907
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Total other assets 2,868 2,475
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Total Assets $22,745 $24,673
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See Notes to Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
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Sept. 30, Dec. 31,
In millions (Unaudited) 1997 1996
- ------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
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<S>
Current Liabilities <C> <C>
Notes payable $ 880 $ 665
Long-term debt due within one year 47 607
Accounts payable:
Trade 1,344 1,596
Other 971 724
Income taxes payable 502 567
Deferred income tax liabilities-current 88 64
Dividends payable 204 184
Accrued and other current liabilities 1,668 1,597
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Total current liabilities 5,704 6,004
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Long-Term Debt 4,318 4,196
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Other Noncurrent Liabilities
Deferred income tax liabilities-noncurrent 785 1,005
Pension and other postretirement benefits-noncurrent 1,847 1,896
Other noncurrent obligations 1,701 1,493
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Total other liabilities 4,333 4,394
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Minority Interest in Subsidiary Companies 645 2,091
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Temporary Equity
Temporary equity-other 0
Preferred stock at redemption value 125 128
Guaranteed ESOP obligation (94) (94)
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Total temporary equity 49 34
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Stockholders' Equity
Common stock 818 818
Additional paid-in capital 483 307
Retained earnings 12,197 11,323
Unrealized gains on investments 355 192
Cumulative translation adjustments (396) (363)
Minimum pension liability (22) (22)
Treasury stock, at cost (5,739) (4,301)
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Net stockholders' equity 7,696 7,954
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Total Liabilities and Stockholders' Equity $22,745 $24,673
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See Notes to Financial Statements.
</TABLE>
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<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
- ---------------------------------------------------------------------
Nine Months Ended
Sept. 30 Sept. 30
In millions (Unaudited) 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net Income Available for Common Stockholders $ 1,445 $ 1,491
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 948 984
Provision for deferred income tax 130 161
Undistributed earnings of
nonconsolidated companies 4 (34)
Minority interests' share in income 109 160
Net gain on sales of consolidated companies (186) -
Net gain on sales of property (33) -
Other-net (39) (16)
Changes in assets and liabilities that
provided (used) cash:
Accounts receivable (213) (180)
Inventories 111 55
Accounts payable (88) (253)
Other assets and liabilities 598 223
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Cash provided by operating activities 2,786 2,591
- ---------------------------------------------------------------------
Investing Activities
Purchases of property (802) (916)
Proceeds from sales of property 51 90
Purchases of consolidated companies (1,270) (224)
Proceeds from sale of consolidated companies 907 -
Purchases from outside investors in limited par (909) -
Investments in unconsolidated affiliates (201) (824)
Proceeds from sale of unconsolidated affiliates - 151
Purchases of investments (1,977) (1,571)
Proceeds from sales of investments 1,805 1,563
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Cash used by investing activities (2,396) (1,731)
- ---------------------------------------------------------------------
Financing Activities
Changes in short-term notes payable 283 893
Payments on long-term debt (621) (681)
Proceeds from issuance of long-term debt 244 281
Purchases of treasury stock (1,444) (1,061)
Proceeds from sales of common stock 146 221
Distributions to minority interests (64) (71)
Dividends paid to stockholders (553) (564)
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Cash used in financing activities (2,009) (982)
- ---------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (7) (5)
- ---------------------------------------------------------------------
Summary
Decrease in cash and cash equivalents (1,626) (127)
Cash and cash equivalents at beginning of year 1,903 2,839
-------------------------------------------------------------------
Cash and cash equivalents at end of period $ 277 $ 2,712
- ---------------------------------------------------------------------
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 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 is not
recognizing its 50 percent share of 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.
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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.
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 $289 million at September 30, 1997 for environmental
matters, including $12 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 20 years. In general, such
commitments were at prices not in excess of current market
prices. The table below shows the fixed and determinable
portion of the take-or-pay and throughput obligations:
Fixed and Determinable Portion of Obligations (in millions)
- -----------------------------------------------------
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 18 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.
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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 in the Company's
Form 10-K for the year ended December 31, 1996, 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 of 1997.
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 gains or losses are 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.
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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.
THIRD QUARTER EARNINGS ANNOUNCEMENT (OCTOBER 23, 1997)
DOW REPORTS THIRD QUARTER EARNINGS OF $1.85
- ---------------------------------------------------------------------------
Third Quarter of 1997 Highlights
- --------------------------------
Earnings per share were $1.85, continuing Dow's high
level of earnings performance for the third consecutive
year.
Dow's improved product mix and strategic focus on
performance businesses contributed to strong volume
gains and helped offset currency impacts, yielding
operating income of $670 million.
Third quarter sales were $4.9 billion compared to $5
billion a year ago.
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(In millions, except for per share amounts)
3 Months Ended 9 Months Ended
September 30 September 30
1997 1996 1997 1996
---- ---- ---- ----
Net Sales $4,857 $4,992 $15,215 $15,150
Operating Income $ 670 $ 746 $ 2,247 $ 2,510
Net Income Available for Common $ 422 $ 469 $ 1,445 $ 1,491
Stockholders
Average Common Shares Outstanding 227.9 244.4 231.9 247.7
Earnings Per Common Share $ 1.85 $ 1.92 $ 6.23 $ 6.02
- ---------------------------------------------------------------------------
Review of Quarterly Results
The Dow Chemical Company today announced sales of $4.9
billion, operating income of $670 million, and earnings per
share of $1.85 for the third quarter of 1997.
"We're pleased to see that our strategic initiatives
supported by continuing economic growth have sustained a
high level of earnings for a third consecutive year," said
J. Pedro Reinhard, executive vice president and chief
financial officer. "Dow performed very well in the third
quarter in the face of a stronger U.S. dollar, particularly
affecting Europe, and currency volatility in Southeast Asia.
Our strong performance was due to robust volume growth and
our focused efforts to manage Dow's business portfolio for
more consistent earnings growth going forward."
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Third Quarter Earnings Announcement (October 23, 1997)
(Continued)
Sales for the quarter were $4.9 billion, down just slightly
from the same period a year ago. Third quarter volume gains
of 3 percent partially offset a 6 percent decline in overall
pricing, substantially due to the impact of a stronger
dollar on overseas sales. Dow posted significant year-over-
year volume gains in its high-value areas of emphasis,
including a 13 percent gain in Performance Chemicals and 9
percent gains in both Performance Plastics and Plastics.
These gains were partially offset by volume declines in
Chemicals & Metals, mainly due to plant outages, and in
Hydrocarbons & Energy due to the sale of Destec in the
second quarter.
In addition to strong volume growth, Dow reduced operating
expenses by 3 percent in the third quarter and continued to
see the positive effects of recent portfolio restructuring
efforts. As a result, despite a negative impact of about
$155 million due to unfavorable currency and declining
prices, operating income was down only $76 million to $670
million from $746 million in the third quarter of 1996.
Dow's combined Performance segments recorded sales of $2.3
billion, 2 percent higher than the third quarter of 1996,
and operating income of $333 million. Sales in Europe
contributed significantly to these results, with volume
growth of greater than 10 percent in each Performance
segment. On a global basis, the Specialty Chemicals
business was particularly strong, posting a 13 percent
volume gain which, coupled with productivity improvements,
outweighed price declines. Operating expenses associated
with our biotechnology investment in Agricultural Products
resulted in lower year-over-year operating income for the
Performance Chemicals segment.
Plastics recorded sales of $1 billion, up 4 percent versus a
year ago. Polyethylene sales increased 3 percent compared
to the third quarter of 1996, reflecting a 5 percent volume
gain and modest local price improvements that were partially
offset by unfavorable currency effects. Demand continued to
be strong in Europe, where Dowlex* polyethylene resins
posted record sales in September.
Sales for Chemicals & Metals were down 8 percent from a year
ago due to volume and price declines. The lower volume was
due to plant outages at Fort Saskatchewan and the sale of
the North American and European coolants businesses in the
second quarter. Caustic prices were down versus a year ago
but are improving from second quarter levels.
Dow continued its share repurchase program, buying back over
2 million shares in the third quarter, reducing its overall
outstanding shares by 7 percent versus a year ago.
"Demand looks favorable for the fourth quarter, and the
fundamentals indicate a solid finish to the year for Dow,"
Reinhard said.
* Trademark of The Dow Chemical Company
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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.
In September 1997, the Company acquired 80 percent
ownership in BSL for an investment of $172 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 will include the
financial results of BSL as a nonconsolidated company until
the end of the restructuring period.
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. This
company provides environmental, information technology and
strategic chemical management services to industries and
governments worldwide. The book value of the net assets
transferred by the Company was $33 million. In September
1997, HSB notified the Company that it intends to exercise
its right to sell its interest in Radian International LLC
to the Company in January 1998 for approximately $140
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. This 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. This 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.
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. The Company
awaits regulatory approval from the United States Federal
Trade Commission.
In October 1997, the Company announced the sale of the
DowBrands business to S.C. Johnson & Son, Inc. for an amount
in excess of $1 billion, subject to customary government
approvals. This transaction is expected to result in a gain
in the fourth quarter of 1997.
<PAGE>
--- Page 12 ---
CHANGES IN FINANCIAL CONDITION
The following tables represent total debt and working
capital at September 30, 1997 versus December 31, 1996.
Sept. 30, Dec. 31, Increase
In millions 1997 1996 (Decrease)
- ---------------------------------------------------------------------------
Notes payable $ 880 $ 665 $ 215
Long-term debt due within one year 47 607 (560)
Long-term debt 4,318 4,196 122
- ---------------------------------------------------------------------------
Total debt $5,245 $5,468 $(223)
- ---------------------------------------------------------------------------
At September 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.
Sept. 30, Dec. 31, Increase
In millions 1997 1996 (Decrease)
- ---------------------------------------------------------------------------
Cash and cash equivalents $ 277 $ 1,903 $(1,626)
Marketable securities and
interest-bearing deposits 194 399 (205)
Accounts and notes receivable - net 4,609 4,396 213
Inventories:
Finished and work in process 2,158 2,267 (109)
Materials and supplies 527 548 (21)
Deferred income tax assets-current 184 317 (133)
- ---------------------------------------------------------------------------
Total current assets 7,949 9,830 (1,881)
- ---------------------------------------------------------------------------
Total current liabilities 5,704 6,004 (300)
- ---------------------------------------------------------------------------
Working capital $2,245 $ 3,826 $(1,581)
- ---------------------------------------------------------------------------
Operating activities provided cash of $2.8 billion for the
nine months ended September 1997, and the sale of Destec
provided a further $974 million. Cash was used to purchase
the outstanding 40 percent of DowElanco for $1.2 billion, to
repurchase Dow stock for $1.4 billion, to purchase the
limited partners' capital accounts (minority interest) in
DowBrands L.P of $909 million, to reduce total debt by $223
million, and for other normal activities. This resulted in a
decrease in cash and cash equivalents and marketable
securities and interest-bearing deposits of $1.6 billion.
(See the Consolidated Statements of Cash Flows and the
Acquisitions and Divestitures section for more detail).
Sept. 30, Dec. 31,
Balance Sheet Ratios 1997 1996
- -----------------------------------------------------------------
Current assets over current liabilities 1.4:1 1.6:1
Days-sales-outstanding-in-receivables 45 45
Days-sales-in-inventory 82 87
Debt as a percentage of total capitalization 38.5 35.2
The Company purchased 2.1 million shares of common stock
during the third quarter of 1997 and 17.4 million shares for
the nine months ended September 30, 1997 as part of its
overall stock repurchase program. The Company's average
shares outstanding for the nine months of 1997 was 232
million, a decrease of 6 percent from the average shares
outstanding for the nine months of 1996. Since the beginning
of 1995, the Company has purchased approximately 61 million
shares or about 22 percent of its outstanding shares.
In September 1997, the Board of Directors announced a
quarterly dividend of 87 cents per share, which was paid on
October 30, 1997 to shareholders of record on September 30,
1997. The announced dividend reflects an increase of 16
percent, or 12 cents per share, versus the same quarter last
year. This was the 343rd 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 Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
In millons 1997 1996 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Industry segment sales
Performance Plastics $1,345 $1,337 $3,950 $4,055
Performance Chemicals 986 942 3,514 3,290
Plastics 1,040 999 3,106 2,893
Chemicals and Metals 706 771 2,201 2,271
Hydrocarbons and Energy 503 646 1,696 1,794
Diversified Businesses
and Unallocated 277 297 748 847
- ------------------------------------------------------------------------------
Total $4,580 $4,695 $14,467 $14,303
- ------------------------------------------------------------------------------
Industry segment operating
income (loss)
Performance Plastics 241 275 709 918
Performance Chemicals 92 100 537 584
Plastics 217 253 660 647
Chemicals and Metals 141 203 509 597
Hydrocarbons and Energy (3) (18) (9) (47)
Diversified Businesses
and Unallocated (18) (67) (159) (189)
- ------------------------------------------------------------------------------
Total $670 $746 $2,247 $2,510
- ------------------------------------------------------------------------------
Geographic sales
United States $2,094 $2,205 $6,718 $6,667
Europe 1,466 1,545 4,682 4,879
Rest of World 1,297 1,242 3,815 3,604
- ------------------------------------------------------------------------------
Total $4,857 $4,992 $15,215 $15,150
- ------------------------------------------------------------------------------
Geographic operating income
United States $235 $287 $871 $979
Europe 250 179 706 717
Rest of World 185 280 670 814
-----------------------------------------------------------------------------
Total $670 $746 $2,247 $2,510
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Industry and Geographic Segment Sales Volume and Price
-----------------------------------------------------------------------------
Three Months Ended Nine Months Ended
Percentage change from Sept. 30, 1997 Sept. 30, 1997
prior year Volume Price Total Volume Price Total
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Industry segment
Performance Plastics 9% (8)% 1% 6% (9)% (3)%
Performance Chemicals 13% (8)% 5% 14% (7)% 7%
Plastics 9% (5)% 4% 7% 0% 7%
Chemicals and Metals (4)% (4)% (8)% 0% (3)% (3)%
Hydrocarbons and Energy (20)% (2)% (22)% (9)% 4% (5)%
Diversified Businesses
and Unallocated (7)% 1% (7)% (12)% 0% (12)%
- ------------------------------------------------------------------------------
Total 3% (5)% (2)% 4% (3)% 1%
- ------------------------------------------------------------------------------
Geographic segment
United States (2)% (3)% (5)% 1% 0% 1%
Europe 5% (10)% (5)% 4% (8)% (4)%
Rest of World 9% (5)% 4% 10% (4)% 6%
- ------------------------------------------------------------------------------
Total 3% (6)% (3)% 4% (4)% 0%
- ------------------------------------------------------------------------------
</TABLE>
<PAGE>
--- Page 14 ---
Results of Operations (Continued)
The following are selected data for the three months and nine
months ended September 30, 1997 and 1996.
Three Months Ended Nine Months Ended
Dollars in millions, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
except for share amounts 1997 1996 1997 1996
- ------------------------ ---- ---- ---- ----
Cost of sales $3,530 $3,552 $10,981 $10,475
% of sales 73% 71% 72% 69%
Research and development,
promotion and advertising,
selling and administrative
expenses 675 694 2,017 2,179
Operating income 670 746 2,247 2,510
% of sales 14% 15% 15% 17%
Equity in earnings of
nonconsolidated companies (18) 25 21 65
Minority Interests' Share in Income - 33 109 160
Effective tax rate 35.8% 36.0% 36.5% 36.5%
Net income available
for common stockholders 422 469 1,445 1,491
Earnings per common share $1.85 $1.92 $6.23 $6.02
Operating rate percentage 92% 91% 92% 89%
Net sales for the third quarter of 1997 were $4.9 billion, a
decrease of 3 percent from $5.0 billion in the same period last
year. The decrease was primarily due to a price decrease of 6
percent, which was partially offset by a volume increase of 3
percent. Volume was particularly strong in Performance Chemicals,
up 13 percent, and in Performance Plastics and Plastics, both up
9 percent. The 20 percent volume decline in Hydrocarbons and
Energy was due to the sale of Destec in the second quarter of
1997. Volume was up in Europe and the Rest of World, but down
slightly in the United States entirely due to the absence of
Destec. Of the 6 percent price decline in the quarter compared to
the same quarter last year, unfavorable currency impact accounted
for 4 percent and local prices declined by 2 percent. Sales for
the nine months of 1997 were $15.2 billion, about flat with the
same period last year. Volume was up 4 percent while prices
declined 4 percent for this period versus the same period last
year.
The decline in equity in earnings of nonconsolidated
subsidiary companies in the third quarter of 1997 was primarily
the result of unfavorable currency impacts on joint ventures in
Thailand and Indonesia. In addition, the absence of the Destec
ventures in this quarter that were positive in the third quarter
of 1996 added to the decline.
Minority interests' share in income decreased by $33 million
for the three months ended September 1997 versus the same period
last year. Minority interest reduced substantially 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 the DowBrands L.P.
minority interest was repurchased in July 1997.
Net income for the third quarter of 1997 was $422 million or
$1.85 per share versus $469 million or $1.92 per share for the
third quarter of 1996. Earnings only declined $0.07 per share
despite a 6 percent price decline. This price decline was
mitigated by increased volume, particularly in the Performance
and Plastic segments which strengthened the product mix, lower
hydrocarbon and energy costs, and continued productivity
improvements. Another factor that supported the earnings per
share was the reduced share count due to the share repurchase
program. For the nine months ended September 1997, the net income
was $1,445 million or $6.23 per share compared to $1,491 million
or $6.02 per share for the same period of 1996.
<PAGE>
---Page 15 ---
Results of Operations (Continued)
PERFORMANCE PLASTICS
Performance Plastics sales of $1,345 million were up 1 percent
from $1,337 million in the third quarter of 1996 due to an 9
percent increase in volume largely offset by a price decrease of
8 percent. Operating income for this segment decreased 12 percent
to $241 million, from $275 million in the third quarter of 1996.
Polyurethanes sales increased versus the third quarter of 1996
on solid volume growth. Prices, though still lower than last
year's elevated levels, have stabilized and are showing some
strength going forward, particularly in Europe. Operating income
was down from a year ago due mainly to the lower selling prices.
Sales of epoxies and intermediates increased about 6 percent
versus third quarter of 1996. Volume was particularly strong
which offset lower prices. Prices, however, showed signs of
improvement from last quarter. Demand remained strong and
operating rates remained at capacity. Operating income for this
business was up, as volume growth outweighed the price declines.
Engineering plastics sales for the quarter declined versus the
third quarter of 1996. Volume grew 9 percent against a 14 percent
price decline. Operating income improved versus the third quarter
of 1996 as productivity improvements outweighed the price
declines.
Adhesives, sealants and coatings sales increased in the third
quarter of 1997 versus the same period last year due to volume
growth. Operating income for this quarter decreased compared to
the third quarter of 1996, due mainly to lower prices.
Fabricated products sales for the third quarter of 1997
declined primarily due to price decline versus the third quarter
of 1996. Styrofoam volume in Europe achieved a new record in
shipments. Carbon dioxide blown foam set a new record in sales
for this product due to significant sales growth in Eastern
Europe, France, Spain and Portugal. Demand was down in North
America where new home construction continued at a slow pace.
Operating income decreased in the third quarter of 1997, compared
to the same period last year, due to the decline in price and
currency, the conversion of two plants to carbon dioxide blowing
agents, and the move of the research and development group from
Granville, Ohio, to Midland, Michigan.
For the nine months of 1997, sales in Performance Plastics
were $3,950 million, down 3 percent against $4,055 million in the
nine months of 1996. Operating income was $709 million for the
nine months of 1997, down from $918 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 third quarter were $986
million, an increase of 5 percent from $942 million in the same
quarter last year. Volume was up 13 percent with a portion of
this due to the Mycogen sales that were not in the 1996
comparative numbers. Sales prices were down 8 percent. Operating
income for the segment decreased 8 percent to $92 million for the
third quarter of 1997 from $100 million a year ago.
Specialty chemicals continued to show good sales results with
substantial volume growth. The oxygenated solvents, polyglycols
and alkanolamines product groups all grew in volume by about 18
percent. Europe and Asia Pacific demand was particularly brisk,
with Europe's volume up 23 percent with increases across the
board. Operating income improved 22 percent on the increased
volume and productivity improvements, outweighing price declines.
Emulsion polymers sales decreased 3 percent for the quarter
compared to the same quarter last year as volume increased by 10
percent and prices decreased by 13 percent. Operating income
improved significantly with strong volume demand for latex in the
European paper industry and improved demand in the North American
carpet industry.
Agricultural products sales for the third quarter of 1997
increased 7 percent versus the same period last year, mostly due
to the inclusion of Mycogen sales. In June 1997, the Company
purchased the outstanding shares of DowElanco from Eli Lilly and
Company, bringing its ownership to 100 percent. The allocation of
the purchase price to the assets acquired and liabilities assumed
has not yet been completed. Final determination of the fair
values to be assigned may result in adjustments to the
preliminary values assigned at the date of acquisition. Operating
income was down from the same quarter last year due to
unfavorable currency impact on sales to Europe supplied from
plants in the United States, and the inclusion of costs incurred
in Mycogen.
Sales for the nine months of 1997 for Performance Chemicals
were $3,514 million, up 7 percent from $3,290 million for the
same period last year. Volume grew 14 percent and prices declined
7 percent. Mycogen sales in the first nine months of 1997 was the
major contributor to volume growth. Operating income for the
period was $537 million, a decline from $584 million for the same
period last year.
<PAGE>
--- Page 16 ---
Results of Operations (Continued)
PLASTICS
Plastics sales in the third quarter of 1997 were $1,040 million,
up 4 percent from $999 million a year ago, due to volume growth
of 9 percent and a 5 percent price decrease. Virtually all of the
price decrease was due to the unfavorable currency effect of the
stronger dollar. Plastics operating income for the quarter was
$217 million, down from $253 million for the third quarter last
year.
Polyethylene sales improved 3 percent in the third quarter
versus the same period last year. Europe performed strongly with
good demand and rising local currency prices. Demand also picked
up in North America. Operating income for polyethylene decreased
over the third quarter of 1996 due to currency effects, higher
ethylene costs, and production problems in Latin America that
were partially offset by improved volume.
Polystyrene sales increased in the third quarter of 1997
versus the same period last year with good volume growth mostly
offset by price declines. Volume was up primarily due to demand
in Europe and Asia Pacific, and 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 compared to the third
quarter of 1996 due to price declines.
Sales for the nine months of 1997 for Plastics were $3,106
million, up 7 percent from $2,893 million for the same period
last year. Volume grew 7 percent and prices were flat. Operating
income for the period was $660 million, an improvement from $647
million for the same period last year.
CHEMICALS AND METALS
Chemical and Metals sales in the third quarter of 1997 were $706
million, a decrease of 8 percent from $771 million in the third
quarter of 1996. Volume for the segment was down 4 percent, while
prices declined 4 percent. Ethylene dichloride (EDC) and vinyl
chloride monomer (VCM) extended plant outages in North America,
and the sale of the North American and European coolant
businesses were the primary reasons for the volume decline.
Caustic prices were well below third quarter 1996 levels, but
strong demand and announced price increases should improve
caustic results. Operating income for this segment of $141
million in the third quarter of 1997 dropped 30 percent from
$203 million in the third quarter of 1996, due to lower sales and
higher costs as a result of the extended EDC and VCM plant
outages.
Sales for the nine months of 1997 for Chemical and Metals were
$2,201 million, down from $2,271 million for the same period last
year. Volume was flat and prices decreased 3 percent. Operating
income for the period was $509 million, a decrease from $597
million for the same period last year.
HYDROCARBONS AND ENERGY
Sales for Hydrocarbons and Energy in the third quarter of 1997
were $503 million, a decrease of 22 percent from $646 million a
year ago. Prices declined by 2 percent and volume declined by 20
percent. The volume decline was due to the absence of Destec
which was sold in the second quarter of 1997. Operating income
improved from a loss of $18 million in the third quarter of 1996
to a loss of $3 million in the third quarter of 1997.
Sales for the nine months of 1997 were $1,696 million, a
decrease from $1,794 million for the nine months of last year.
The decrease was due to a volume decline of 9 percent partially
offset by a price increase of 4 percent. Operating income
improved from a loss of $47 million for the nine months ended
September 1996 to a loss of $9 million for the same period this
year.
DIVERSIFIED BUSINESSES AND UNALLOCATED
Diversified Businesses sales for the third quarter of 1997 were
$277 million, down 7 percent from $297 million in the third
quarter of 1996. Operating income for this segment improved from
a loss of $67 million in the third quarter of 1996 to an
operating loss of $18 million for the same period this year. The
major factors contributing to the improved operating income were
stronger DowBrands and insurance companies results.
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. Consumers products
posted a record operating income in the third quarter of this
year, an increase of over 70 percent compared to third quarter of
1996.
New Businesses sales were flat with the third quarter of 1996
while the operating loss improved substantially over the same
period.
Sales for the nine months of 1997 were $748 million, a
decrease from $847 million for the nine months of last year. The
decrease was mainly due 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 improved from a loss
of $189 million for the nine months ended September 1996 to a
loss of $159 million for the same period this year.
<PAGE>
--- Page 17 ---
Results of Operations (Continued)
COMPANY SUMMARY
Manufacturing Costs
Dow's global plant operating rate for its chemicals and plastics
businesses was 92 percent, up from 91 percent in the third
quarter of 1996. Unit manufacturing costs for these businesses,
adjusted for volume but not mix, were down over 5 percent
compared to the third quarter of 1996, primarily due to the
absence of Destec in the Hydrocarbons and Energy segment, and
positive mix change and cost control in the two Performance
segments.
Other Income (Expense)
Equity in earnings of nonconsolidated companies decreased from
$25 million in the third quarter of 1996 to a loss of $18 million
in the third quarter of 1997. The main reason for this decline in
earnings was the currency impact on our joint ventures in
Thailand and Indonesia. In addition, the absence of the Destec
joint ventures that contributed positively in the third quarter
of 1996 added to this decline.
Net financial expenses, which are the total of interest
expense, interest income and foreign exchange, increased to $90
million this quarter, compared to $40 million in the third
quarter of 1996. The increased financial expense was attributable
primarily to the decrease in interest income for the quarter.
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 September 1997, sundry income was $98 million versus
$56 million for the same period last year, primarily due to sales
of securities and land, and higher royalty income.
Provision for Taxes on Income
The effective tax rate for the second quarter was 36 percent,
essentially flat with the third quarter of 1996.
Expectations for the Remainder of 1997
The global economic expansion continues to demonstrate
exceptional endurance. The United States has led the expansion
among mature economies with an adjusted 1997 GDP growth of
between 3 and 4 percent. The United States economy could simmer
down in 1998 versus a very robust 1997, but still grow at a
healthy rate. European growth rates are improving, moving toward
1998. Economic prospects in Asia Pacific have been adversely
affected by devaluation in several Southeast Asia countries, but
growth is still expected to be above mature economy growth rates,
perhaps in the 4 to 5 percent range.
In the chemicals and plastics industries, the global economic
expansion is driving strong demand growth, which improves
supply/demand balances in the short to medium-term. It would
appear that demand growth will fuel rising caustic prices over
the near-term, while mitigating price declines in ethylene and
polyethylene. Caustic supply/demand balances are quite tight now,
in both the United States and Europe, and this should continue
well into 1998. The expected industry ethylene plant start-ups in
the United States in the fourth quarter could eventually
alleviate currently low ethylene inventory balances and have a
negative affect on prices, but strong European demand should keep
ethylene pricing more stable in that region. Polystyrene prices,
on the other hand, will continue to experience competitive
pressure in most regions, in a long supply environment.
Volume growth in Dow's performance segments should continue to
be strong, not just from global economic growth, but also from
aggressive initiatives by Dow businesses designed to capture
value-based growth. This growth in higher margin products should
improve the overall mix of Dow's product offering, and improve
operating income. Pricing in Dow's performance segments has
stabilized with a general outlook for slightly rising prices,
particularly in the polyurethanes, epoxy products and engineering
plastics products. It is expected that prices in the specialty
chemicals business will be mostly stable going forward.
Dow continues its cost containment and expense reduction
efforts. Initiatives in Europe on administrative costs and in the
global EH&S function were announced in the third quarter of 1997,
with action steps to be taken over the coming quarters. The
favorable effect of a Texas manufacturing restructuring will also
be felt in upcoming quarters. The recent rise in United States
oil and natural gas prices will affect the fourth quarter
feedstock and energy costs, but are expected to fall back to
more normalized price levels during the fourth quarter.
<PAGE>
--- Page 18 ---
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, the Company and/or Corning 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
is not recognizing its 50 percent share of 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 19 ---
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 has been
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. 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.
On August 18, 1997, at the conclusion of the first of four phases
of this case, the jury found in part that the Company had been
negligent in the testing and/or research of silicone, had
misrepresented and concealed unspecified hazards associated with
using silicone in the human body and had conspired with Dow
Corning to misrepresent or conceal such hazards. The second phase,
which will decide causation and damages with respect to eight
named class representatives, is scheduled to begin on January 7,
1998. 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 which are then transferred to the United States District
Court, Eastern District of Michigan. It is impossible to predict
the outcome or to estimate the cost to the Company of resolving
any of the product liability cases described above.
The Company was 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. That judgment is now final.
<PAGE>
--- Page 20 ---
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 cross-claims and/or
third party 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.
In addition to the jury findings in the first phase of the
Louisiana state case noted above, 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 or any other adverse decision related to Dow
Corning's products.
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 had not been
entered, whether pending in state or federal courts, be
transferred to the United States District Court, Eastern District
of Michigan pursuant to a decision issued by the United States
Court of Appeals for the Sixth Circuit on May 8, 1997. 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. On November 10,
1997, the Supreme Court denied the Tort Committee's petition.
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.
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.
Environmental Matters
On September 17, 1997, the United States Environmental Protection
Agency filed a complaint against the Company alleging violations
of various sections of the Clean Air Act, the Clean Water Act,
the Emergency Planning and Community Right-to-Know Act and the
Resource Conservation and Recovery Act. Proposed fines total
$288,100.
<PAGE>
--- Page 21 ---
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
There were no Current Reports on Form 8-K filed by the Company
during the third quarter of 1997.
The following trademarks of The Dow Chemical Company
appear in this report: Dowlex, Styrofoam
<PAGE>
--- Page 22 ---
SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
THE DOW CHEMICAL COMPANY
------------------------
Registrant
Date: November 11, 1997
- --------------------------
G. Michael Lynch
---------------------------
G. Michael Lynch
Vice President & Controller
(Chief Accounting Officer)
<PAGE>
--- 23 ---
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