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, 1998
Commission file number 1-3433
THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 38-1285128
(State or other jurisdiction of (I.R.S. EmployerIdentification No.)
incorporation or organization)
2030 DOW CENTER, MIDLAND, MICHIGAN 48674
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 517-636-1000
Not applicable
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
the past 90 days. Yes [X] No [ ].
-------- --------
Outstanding at
Class March 31, 1998
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Common Stock, $2.50 par value 225,123,489 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 5
Consolidated Statements of Comprehensive Income 5
Accounting Policies 6
Commitments and Contingent Liabilities 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
First Quarter Earnings Announcement 8
Acquisitions and Divestitures 10
Changes in Financial Condition 11
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
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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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Note A)
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
<CAPTION>
Three Months Ended
Mar. 31, Mar. 31,
In millions, except for share amounts (Unaudited) 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Sales $4,829 $4,992
- ----------------------------------------------------------------------------------------------------
Operating Costs and Expenses
Cost of sales 3,691 3,615
Insurance and finance company operations,
pretax income (32) (28)
Research and development expenses 192 187
Selling, general and administrative expenses 403 440
Amortization of intangibles 19 13
Purchased in-process research and development (Note B) 338 -
Special charge (Note C) 330 -
-----------------------------------------------------------------------------------------------
Total operating costs and expenses 4,941 4,227
- ----------------------------------------------------------------------------------------------------
Operating Income (Loss) (112) 765
- ----------------------------------------------------------------------------------------------------
Other Income (Expense)
Equity in earnings of nonconsolidated affiliates 23 14
Interest expense and amortization of debt discount (120) (122)
Interest income and foreign exchange - net 33 84
Sundry income - net (Note D) 842 63
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Total other income (expense) 778 39
- ----------------------------------------------------------------------------------------------------
Income before Provision for Taxes on Income and Minority Interests 666 804
- ----------------------------------------------------------------------------------------------------
Provision for Taxes on Income 242 289
- ----------------------------------------------------------------------------------------------------
Minority Interests' Share in Income 2 61
- ----------------------------------------------------------------------------------------------------
Preferred Stock Dividends 1 2
- ----------------------------------------------------------------------------------------------------
Net Income Available for Common Stockholders $421 $452
- ----------------------------------------------------------------------------------------------------
Weighted-average Common Shares Outstanding 225.5 237.8
- ----------------------------------------------------------------------------------------------------
Per Share Data
Earnings per common share $1.87 $1.90
Earnings per common share - assuming dilution $1.84 $1.88
Common stock dividends declared per share $0.87 $0.75
- ----------------------------------------------------------------------------------------------------
Depreciation $270 $294
- ----------------------------------------------------------------------------------------------------
Capital Expenditures $301 $245
- ----------------------------------------------------------------------------------------------------
Notes to Financial Statements
Note A: The unaudited interim financial statements reflect all adjustments (consisting of normal
recurring accruals) which, in the opinion of management, are considered necessary for a fair
presentation of the results for the periods covered. Certain reclassifications of prior year
amounts have been made to conform to current year presentation. These statements should be
read in conjunction with the financial statements and notes thereto included in the Company's
Form 10-K for the year ended December 31, 1997.
Note B: During the first quarter of 1998, a pretax charge of $338 million was recorded for purchased
in-process research and development costs associated with the recent acquisitions of Dow
AgroSciences, Mycogen and Sentrachem Limited.
Note C: During the first quarter of 1998, a pretax special charge of $330 million was recorded,
principally for severance costs and asset write-downs.
Note D: In January 1998, the Company completed the sale of the DowBrands business to S.C. Johnson &
Son, Inc. The sale resulted in profit before tax of $816 million.
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</TABLE>
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
Mar. 31, Dec. 31,
In millions (Unaudited) 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
- ----------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $371 $235
Marketable securities and interest-bearing deposits 327 302
Accounts and notes receivable:
Trade (less allowance for doubtful receivables -
1998, $73; 1997, $73) 3,323 3,257
Other 1,464 1,701
Inventories 2,762 2,921
Deferred income tax assets - current 438 224
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Total current assets 8,685 8,640
- ----------------------------------------------------------------------------------------------------
Investments
Investment in nonconsolidated affiliates 1,213 1,206
Other investments 2,514 2,529
Noncurrent receivables 394 400
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Total investments 4,121 4,135
- ----------------------------------------------------------------------------------------------------
Property
Property 22,990 23,345
Less accumulated depreciation 15,130 15,293
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Net property 7,860 8,052
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Other Assets
Goodwill (net of accumulated amortization - 1998, $208; 1997, $211) 1,412 1,762
Deferred income tax assets - noncurrent 492 452
Deferred charges and other assets 954 999
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Total other assets 2,858 3,213
- ----------------------------------------------------------------------------------------------------
Total Assets $23,524 $24,040
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- ----------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ----------------------------------------------------------------------------------------------------
Current Liabilities
Notes payable $1,247 $1,656
Long-term debt due within one year 293 406
Accounts payable: Trade 1,525 1,731
Other 922 960
Income taxes payable 659 521
Deferred income tax liabilities - current 48 100
Dividends payable 199 200
Accrued and other current liabilities 1,719 1,766
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Total current liabilities 6,612 7,340
- ----------------------------------------------------------------------------------------------------
Long-Term Debt 4,081 4,196
- ----------------------------------------------------------------------------------------------------
Other Noncurrent Liabilities
Deferred income tax liabilities - noncurrent 942 649
Pension and other postretirement benefits - noncurrent 1,844 1,840
Other noncurrent obligations 1,788 1,664
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Total other noncurrent liabilities 4,574 4,153
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Minority Interest in Subsidiary Companies 415 676
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Temporary Equity
Temporary equity - other - 9
Preferred stock at redemption value 120 124
Guaranteed ESOP obligation (84) (84)
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Total temporary equity 36 49
- ----------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock 818 818
Additional paid-in capital 570 532
Retained earnings 12,582 12,357
Accumulated other comprehensive income (157) (146)
Treasury stock, at cost (6,007) (5,935)
-----------------------------------------------------------------------------------------------
Net stockholders' equity 7,806 7,626
- ----------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $23,524 $24,040
- ----------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
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</TABLE>
<TABLE>
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Three Months Ended
Mar. 31, Mar. 31,
In millions (Unaudited) 1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------
Operating Activities
Net income available for common stockholders $421 $452
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 287 320
Provision (credit) for deferred income tax (60) 26
Undistributed earnings of nonconsolidated affiliates (19) (12)
Minority interests' share in income 2 61
Net gain on sale of consolidated companies (816) -
Other net gain 3 16
Purchased in-process research & development 338 -
Special charge 330 -
Changes in assets and liabilities that provided (used) cash:
Accounts receivable 17 (317)
Inventories 94 42
Accounts payable (243) (155)
Other assets and liabilities 423 272
----------------------------------------------------------------------------------
Cash provided by operating activities 777 705
- ---------------------------------------------------------------------------------------
Investing Activities
Purchases of property (301) (245)
Proceeds from sales of property - 5
Purchases of consolidated companies (314) -
Proceeds from sale of consolidated companies 1,183 -
Purchases from outside investors in limited partnership (201) -
Investments in nonconsolidated affiliates (18) 2
Purchases of investments (854) (537)
Proceeds from sales of investments 855 583
----------------------------------------------------------------------------------
Cash provided by (used in) investing activities 350 (192)
- ---------------------------------------------------------------------------------------
Financing Activities
Changes in short-term notes payable (506) 376
Proceeds from issuance of long-term debt - 7
Payments on long-term debt (227) (46)
Purchases of treasury stock (82) (712)
Proceeds from sales of common stock 29 51
Distributions to minority interests (7) (25)
Dividends paid to stockholders (196) (182)
----------------------------------------------------------------------------------
Cash used in financing activities (989) (531)
- ---------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (2) (4)
- ---------------------------------------------------------------------------------------
Summary
Increase (decrease) in cash and cash equivalents 136 (22)
Cash and cash equivalents at beginning of year 235 1,903
----------------------------------------------------------------------------------
Cash and cash equivalents at end of period $371 $1,881
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
- ---------------------------------------------------------------------------------------
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income
<CAPTION>
Three Months Ended
Mar. 31, Mar. 31,
In millions (Unaudited) 1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------
Net Income Available for Common Stockholders $421 $452
- ---------------------------------------------------------------------------------------
Other Comprehensive Income, Net of Tax
Unrealized gains on investments (3) (24)
Cumulative translation adjustments (8) (12)
Minimum Pension Liability - -
----------------------------------------------------------------------------------
Total other comprehensive income (11) (36)
- ---------------------------------------------------------------------------------------
Comprehensive Income $410 $416
- ---------------------------------------------------------------------------------------
See Notes to Financial Statements.
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</TABLE>
ACCOUNTING POLICIES
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130 (Reporting Comprehensive Income), which was effective
January 1, 1998. Consolidated Statements of Comprehensive Income
for the first quarter of 1998 have been included in Part I -
Financial Information, under Item 1. Financial Statements.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131 (Disclosures about Segments of an Enterprise and
Related Information), which was effective January 1, 1998. SFAS No.
131 redefines how operating segments are determined and requires
disclosure of certain financial and descriptive information about a
company's operating segments. The Company has not yet determined
what changes, if any, will be made to its segment structure as a
result of this standard. This standard is not expected to be
adopted for interim financial reporting in 1998.
COMMITMENTS AND CONTINGENT LIABILITIES
In January 1994, Dow Corning Corporation (Dow Corning), in which
the Company 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, 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 net income was a charge of $192 million for 1993
and $70 million for 1994.
Dow Corning reported an after tax net loss of $167 million for
the second quarter of 1995 as 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 U.S. Bankruptcy Code on May 15,
1995. As a result of such 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 U.S.
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 more than
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 was 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 earlier 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
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Commitments and Contingent Liabilities (Continued)
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.
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 had accrued $396 million at
March 31, 1998, for environmental matters, including $11 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 ultimate 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 $199 million,
$221 million and $204 million in 1997, 1996 and 1995, respectively.
At December 31, 1997, 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.
Fixed and Determinable Portion of Take or Pay and
Throughput Obligations at December 31, 1997 (in millions)
- --------------------------------------------
1998 $ 215
1999 179
2000 168
2001 157
2002 148
- --------------------------------------------
2003 through expiration of contracts 1,270
- --------------------------------------------
Total $2,137
- --------------------------------------------
In addition to the take or pay obligations at December 31, 1997,
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 $178 million. In general, such commitments were at
prices not in excess of current market prices. The Company also had
outstanding direct and indirect commitments for construction
performance and lease payment guarantees and other obligations of
$226 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.
FIRST QUARTER EARNINGS ANNOUNCEMENT (APRIL 23, 1998)
DOW REPORTS FIRST QUARTER EARNINGS
- -------------------------------------------------------------------
First Quarter of 1998 Highlights
- --------------------------------
Basic earnings per share were $1.87 versus $1.90 for the same
period last year. Excluding unusual items, earnings per share for
the first quarter of 1998 were $1.80.
Dow's first quarter results reflected the impact of unusual
items, including a gain on the sale of the DowBrands business
that was largely offset by charges for purchased technology,
restructuring and environmental remediation.
Improved results from the combined Performance segments,
excluding unusual charges, and higher overall volume contributed
to a solid quarter.
__________________________________________________________________
(In millions, except for per share amounts)
3 Months Ended
March 31
1998 1997
---- ----
Net Sales $4,829 $4,992
Net Income Available for Common Stockholders 421 452
Earnings Per Common Share - Basic 1.87 1.90
Earnings Per Common Share - Diluted 1.84 1.88
Excluding Unusual Items:
Operating Income $ 676 $ 765
Earnings Per Common Share - Basic 1.80 1.90
Earnings Per Common Share - Diluted 1.77 1.88
___________________________________________________________________
NOTE: All earnings per share amounts in the following text are
basic (see Highlights and attached Financial Statements for
earnings per share assuming dilution).
Review of First Quarter Results
The Dow Chemical Company today reported first quarter sales of
$4.8 billion, net income of $421 million and earnings per share
of $1.87. Excluding unusual items, earnings per share were $1.80.
Dow's first quarter results were impacted by unusual items. A
pretax gain of $816 million on the sale of the DowBrands business
was largely offset by $788 million in charges for purchased in-
process research and development related to Dow's recent
acquisitions; restructuring, including asset write-downs; and
environmental remediation. These items contributed a net of 7
cents to earnings per share.
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First Quarter Earnings Announcement (April 23, 1998) (Continued)
Excluding the unusual items, operating income was $676 million, a
decline of $89 million versus a year ago despite nearly $400
million in unfavorable price and currency effects.
"We are pleased with Dow's continued solid performance in the
face of lower prices, a stronger dollar and weaker economic
conditions in Asia, offset by favorable feedstock costs and
strong volume," said J. Pedro Reinhard, executive vice president
and chief financial officer. "We are particularly encouraged by
the first quarter results of our combined Performance segments,
which posted higher volume and operating income, excluding
unusual charges."
Sales for the quarter were $4.8 billion, down 3 percent from the
same period a year ago. Volume grew 5 percent, offset by an 8
percent decline in prices partly due to the impact of a stronger
dollar on overseas sales. Excluding changes in sales volume from
recent acquisitions and divestitures, Dow's volume grew 6 percent
in the first quarter of 1998 compared with a year ago.
Dow's combined Performance segments recorded sales of $2.6
billion, up 4 percent versus a year ago. Excluding unusual
charges, operating income for the combined segments was up 8
percent from the first quarter of 1997.
In the Performance Plastics segment, Epoxy Products,
Polyurethanes and Engineering Plastics reported higher volumes
and strongly improved operating income. First quarter results
for Performance Chemicals were significantly affected by $364
million in unusual charges, primarily purchased technology
expenses related to recent acquisitions. Specialty Chemicals
sales increased 12 percent as a 15 percent increase in volume
more than offset a 3 percent price decline due to currency.
Sales for Dow AgroSciences were up 10 percent as 14 percent
volume growth offset a 4 percent price decline due to currency.
Plastics recorded sales of $981 million, down 3 percent from the
first quarter of 1997. Volume increased 7 percent, and prices
declined 10 percent as a result of lower local prices and
unfavorable currency effects. Polyethylene led the segment's
results with higher volume and favorable hydrocarbons and energy
costs.
Sales for Chemical & Metals were $650 million in the first
quarter, down 8 percent from a year ago. Operating income for
the segment declined substantially from the first quarter of
1997, mainly due to unusual charges and lower global pricing in
EDC/VCM influenced by economic conditions in Asia Pacific.
Caustic soda prices continued to strengthen, increasing about 20
percent compared with a year ago.
"Despite declining prices, we believe the overall economic
scenario and the strength of Dow's diverse product and geographic
portfolio will further sustain earnings in the second quarter,"
Reinhard said. "We will continue to be disciplined about
managing Dow's business mix, improving productivity and pursuing
value growth in order to achieve our financial objectives across
the cycle."
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ACQUISITIONS AND DIVESTITURES
In June 1997, the Company purchased the outstanding 40 percent
share in DowElanco, an agricultural chemicals joint venture, from
Eli Lilly and Company for $900 million plus Lilly's share of
undistributed earnings. This transaction resulted in the Company
owning 100 percent of DowElanco (since renamed Dow AgroSciences
LLC). During the first quarter of 1998, the Company recorded a
$220 million charge for purchased in-process research and
development as part of the final allocation of the purchase price
related to this acquisition.
In June 1997, the Company completed the sale of its 45 million
shares of Destec Energy, Inc. to NGC Acquisition Corporation for
$974 million or $21.65 per share. This transaction resulted in a
pretax gain of $189 million.
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 (Buna Sow Leuna Olefinverbund, 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 $174
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 $135 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.
Incentives relating to property construction reduce the basis of
such property. Incentives relating to expenses during the
reconstruction period are recognized as such expenses are
incurred. The Company expects to include the financial results of
BSL as a nonconsolidated affiliate until the end of the
restructuring period.
In December 1997, Dow acquired Sentrachem Limited, a global
chemical company based in South Africa, for $487 million.
Sentrachem's major businesses are specialty and agricultural
chemicals. During the first quarter of 1998, the Company recorded
a $50 million charge for purchased in-process research and
development as part of the allocation of the purchase price
related to this acquisition.
Allocation of the purchase price to the assets acquired and
liabilities assumed has not yet been completed for the Sentrachem
and BSL acquisitions. Final determination of the fair values to
be assigned may result in adjustments to the preliminary values
assigned at the dates of acquisition.
In January 1998, the Company completed the sale of the
DowBrands business to S.C. Johnson & Son, Inc. for approximately
$1.2 billion. This transaction resulted in a pretax gain of $816
million.
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 January 1998, HSB exercised a put option requiring
the Company to purchase HSB's interest for $136 million. As a
result of this transaction the Company now owns 100 percent of
Radian International LLC. Alternatives for this business are
being evaluated.
In January 1996, DowElanco entered into agreements with
Mycogen Corporation and the Lubrizol Corporation for transactions
through which DowElanco, for a cash investment of $158 million,
acquired 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 more
than 50 percent. During the first quarter of 1998, Dow
AgroSciences (formerly DowElanco) invested an additional $121
million in Mycogen, increasing its ownership to 69 percent, and
the Company recorded a $56 million charge for purchased in-
process research and development as part of the allocation of
this purchase price. In April 1998, the Company requested an
amendment to the 1996 agreement with Mycogen which states that
Dow AgroSciences cannot acquire the remaining shares of Mycogen
before February 1999. If the amendment is approved, Dow
AgroSciences is prepared to begin discussions immediately
regarding the purchase of Mycogen's minority shareholders'
interests. Mycogen is a world leader in agricultural
biotechnology.
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CHANGES IN FINANCIAL CONDITION
The following tables represent total debt and working capital at
March 31, 1998 versus December 31, 1997.
Mar. 31, Dec. 31, Increase
In millions 1998 1997 (Decrease)
- ------------------------------------------------------------------
Notes payable $1,247 $1,656 $(409)
Long-term debt due within one year 293 406 (113)
Long-term debt 4,081 4,196 (115)
- ------------------------------------------------------------------
Total debt $5,621 $6,258 $(637)
- ------------------------------------------------------------------
At March 31, 1998, the Company had unused and available credit
facilities with various U.S. and foreign banks totaling $1.8
billion in support of its working capital requirements and
commercial paper borrowings. Additional unused credit facilities
totaling $1.4 billion are available for use by foreign
subsidiaries.
Mar. 31, Dec. 31, Increase
In millions 1998 1997 (Decrease)
- ------------------------------------------------------------------
Cash and cash equivalents $ 371 $ 235 $ 136
Marketable securities and
interest-bearing deposits 327 302 25
Accounts and notes receivable - net 4,787 4,958 (171)
Inventories:
Finished and work in process 2,220 2,309 (89)
Materials and supplies 542 612 (70)
Deferred income tax assets - current 438 224 214
- ------------------------------------------------------------------
Total current assets 8,685 8,640 45
- ------------------------------------------------------------------
Total current liabilities 6,612 7,340 (728)
- ------------------------------------------------------------------
Working capital $2,073 $1,300 $ 773
- ------------------------------------------------------------------
Operating activities provided cash of $777 million for the
three months ended March 31, 1998. The sale of the DowBrands
business provided a further $1.2 billion. Cash was used to reduce
total debt by $637 million, to purchase the limited partner's
capital accounts (minority interest) in Chemtech Royalty
Associates, L.P (Chemtech) for $201 million, to pay Hartford
Steam Boiler Inspection and Insurance Company (HSB) $136 million
for the exercise of Radian put options, to purchase additional
ownership interest in Mycogen for $121 million, to repurchase
shares of the Company's common stock for $82 million, and for
other normal activities. This resulted in an increase in cash and
cash equivalents of $136 million. (See the Consolidated
Statements of Cash Flows and the Acquisitions and Divestitures
section for more detail).
Goodwill decreased $350 million to $1,412 million in the first
quarter of 1998, primarily the result of finalizing the
allocation of the purchase price associated with the acquisition
of Eli Lilly and Company's 40 percent ownership interest in
DowElanco.
Minority interest in subsidiary companies decreased $261
million to $415 million in the first quarter of 1998, primarily
due to the redemption of the outside partner's interest in
Chemtech and the acquisition of HSB's 40 percent share of Radian
International LLC.
Mar. 31, Dec. 31,
Balance Sheet Ratios 1998 1997
- ------------------------------------------------------------------
Current assets over current liabilities 1.3:1 1.2:1
Days-sales-outstanding-in-receivables 50 47
Days-sales-in-inventory 87 84
Debt as a percentage of total capitalization 40.5 42.8
- ------------------------------------------------------------------
The Company purchased 0.9 million shares of common stock during
the first quarter of 1998 as part of its overall stock repurchase
program. The Company's average shares outstanding for the first
three months of 1998 were 225.5 million, a decrease of 5 percent
from the average shares outstanding for the first three months of
1997. Since the beginning of 1995, the Company has purchased
approximately 65 million shares or about 23 percent of its
outstanding shares.
On April 30, 1998, the Company paid a quarterly dividend of 87
cents per share to shareholders of record on March 31, 1998. The
dividend reflects an increase of 16 percent, or 12 cents per
share, versus the same quarter last year. This was the 345th
consecutive quarterly dividend and in each instance Dow has
maintained or increased the dividend.
<PAGE>
--- Page 11 ---
RESULTS OF OPERATIONS
(Unaudited) The Dow Chemical Company and Subsidiaries
- ------------------------------------------------------------------------------
Industry and Geographic Segments
- ------------------------------------------------------------------------------
Three Months Ended
Mar. 31, Mar. 31,
In millons 1998 1997
- ------------------------------------------------------------------------------
Industry segment sales
Performance Plastics $1,266 $1,265
Performance Chemicals 1,318 1,212
Plastics 981 1,010
Chemicals and Metals 650 707
Hydrocarbons and Energy 423 577
Diversified Businesses and Unallocated 191 221
- ------------------------------------------------------------------------------
Total $4,829 $4,992
- ------------------------------------------------------------------------------
Industry segment operating income (loss)
Performance Plastics 256 211
Performance Chemicals (171) 212
Plastics 208 221
Chemicals and Metals 53 161
Hydrocarbons and Energy 9 (6)
Diversified Businesses and Unallocated (467) (34)
- ------------------------------------------------------------------------------
Total ($112) $765
- ------------------------------------------------------------------------------
Geographic sales
United States $1,954 $2,208
Europe 1,722 1,587
Rest of World 1,153 1,197
- ------------------------------------------------------------------------------
Total $4,829 $4,992
- ------------------------------------------------------------------------------
Geographic operating income (loss)
United States ($453) $331
Europe 191 231
Rest of World 150 203
- ------------------------------------------------------------------------------
Total ($112) $765
- ------------------------------------------------------------------------------
Industry and Geographic Segment Sales Volume and Price
- ------------------------------------------------------------------------------
Three Months Ended
Mar. 31, 1998
Percentage change from prior year Volume Price Total
- ------------------------------------------------------------------------------
Industry segment
Performance Plastics 7% (7)% 0%
Performance Chemicals 14% (5)% 9%
Plastics 7% (10)% (3)%
Chemicals and Metals 0% (8)% (8)%
Hydrocarbons and Energy (12)% (15)% (27)%
Diversified Businesses and Unallocated (13)% (1)% (14)%
- ------------------------------------------------------------------------------
Total 5% (8)% (3)%
- ------------------------------------------------------------------------------
Geographic segment
United States (7)% (5)% (12)%
Europe 19% (10)% 9%
Rest of World 7% (11)% (4)%
- ------------------------------------------------------------------------------
Total 5% (8)% (3)%
- ------------------------------------------------------------------------------
<PAGE>
--- Page 12 ---
Results of Operations (Continued)
Following are selected data for the three months ended March 31,
1998 and 1997:
Three Months Ended
Mar.31, Mar. 31,
Dollars in millions, except for share amounts 1998 1997
Cost of sales $3,691 $3,615
% of sales 76% 72%
Research and development, selling,
general and administrative expenses 595 627
Operating income (112) 765
% of sales (2)% 15%
Operating income excluding unusual items 676 765
% of sales 14% 15%
Minority Interests' Share in Income 2 61
Effective tax rate 36.3% 35.9%
Net income available for common stockholders 421 452
Earnings per common share $1.87 $1.90
Earnings per common share - assuming dilution $1.84 $1.88
Operating rate percentage 88% 90%
Net sales for the first quarter of 1998 were $4.8 billion, down 3
percent from $5 billion in the first quarter of 1997. Sales
volume was up 5 percent, while prices were down almost 8 percent,
with about 3 percentage points of the price decline due to the
negative impact of currency. The acquisition of Sentrachem in
December 1997 generated new sales for first quarter 1998, while
the divestitures of DowBrands and Destec reduced sales versus a
year ago. Considering the effect of acquisitions and divestitures
on first quarter 1998 versus the previous year, volume improved 6
percent. Volume was particularly strong in Performance Chemicals,
up 14 percent, and in Plastics and Performance Plastics, each up
7 percent. The 12 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 due to the absence of DowBrands and
Destec. Prices were down in all segments and all geographic
regions.
Expenses, which include research and development, selling
(including promotion and advertising), general and administrative
expenses, were $595 million, down $32 million from the first
quarter of 1997. The reduction reflects the elimination of
expenses, most significantly promotion and advertising,
associated with the DowBrands business, partially offset by the
addition of Sentrachem's expenses.
Operating income for the first quarter of 1998 was a loss of
$112 million, down from income of $765 million for the first
quarter of 1997, as results were significantly impacted by
unusual items. The unusual items included: charges for purchased
in-process research and development related to recent
acquisitions, severance costs, asset write-downs and
environmental remediation costs. Excluding these items, operating
income was $676 million. First quarter 1998 results also included
approximately $400 million of unfavorable local price and
currency impact on sales, partially offset by $290 million in
favorable hydrocarbon and energy costs, and improved volume.
Minority interests' share in income of $2 million for the
first quarter of 1998 decreased significantly from $61 million a
year ago, and will continue to be lower in future quarters due to
the acquisition of Eli Lilly's 40 percent stake in DowElanco, the
divestiture of Destec and the redemption of partners' capital
accounts in DowBrands L.P.
Net income for the first quarter of 1998 was $421 million or
$1.87 per share versus $452 million or $1.90 per share for the
first quarter of 1997. Net income for the quarter included the
gain on the sale of the DowBrands business, offset by the unusual
charges previously discussed. The net positive impact of the
unusual items was $0.07 per share.
<PAGE>
--- Page 13 ---
Results of Operations (Continued)
PERFORMANCE PLASTICS
Performance Plastics sales of $1,266 million were flat versus
first quarter of 1997. Volume was up 7 percent, but was offset by
a 7 percent decline in prices. About half of the price decline
was due to the negative impact of currency. Operating income for
the segment increased 21 percent to $256 million, from $211
million a year ago.
Polyurethanes sales for first quarter were down 3 percent from
first quarter of 1997. Volume improved 2 percent, but was offset
by declining prices of 5 percent. Volume was relatively flat in
the United States and Europe, while Latin America and Canada
provided growth. First quarter volumes in Asia Pacific were down
3 percent versus first quarter 1997. Lower propylene market
prices, as reflected in lower propylene oxide costs to polyols,
more than offset the lower selling prices, thereby improving
gross margins. Operating income was up 24 percent from a year ago
due mainly to the lower propylene market prices.
Sales of epoxies and intermediates decreased 2 percent from a
year ago. A 1 percent increase in volume was more than offset by
a 3 percent decline in prices due to the impact of currency.
Volume was particularly strong in Europe. The Asian crisis
significantly impacted sales in the region causing volume to be
down 17 percent versus first quarter 1997. Operating income for
the business was up 14 percent versus last year, mainly due to
lower hydrocarbon costs.
Engineering plastics sales for the quarter were up 5 percent
over the same quarter last year. Volume grew 12 percent against a
7 percent decline in prices. Sales volume was notably strong for
polycarbonate in all geographic areas, continuing a four quarter
trend. Operating income for the quarter more than doubled versus
the first quarter of 1997 due to higher sales and production
volumes, and lower costs.
Adhesives, sealants and coatings sales for first quarter were
up 13 percent versus the first quarter of 1997, with a 24 percent
increase in volume partially offset by a 11 percent price
decline. Volume increases were the result of plant/market
expansions in Europe and Latin America. First quarter operating
income for this growth business was up 18 percent over the same
quarter last year.
Fabricated products sales for the first quarter of 1998 were
down slightly versus a year ago. Volume was up 8 percent, but was
more than offset by a 5 percent decline in local prices and a 4
percent decline due to currency. Styrofoam volumes were strong in
Europe and North America, but declined in Asia Pacific due to the
general condition of the Japanese economy and, in particular, the
continuing decline in housing and constructions starts.
Polystyrene films showed strong sales volume in the window film
industry. Engineering laminates showed very strong sales growth
across all geographies. Operating income was down 26 percent
versus first quarter 1997 due to the negative price and currency
impacts.
PERFORMANCE CHEMICALS
First quarter sales for Performance Chemicals were $1,318
million, an increase of 9 percent from $1,212 million in the same
quarter last year. Volume increased 14 percent for the segment
while prices declined 5 percent, largely due to the negative
effect of currency. The operating loss of $171 million for the
quarter included the impact of several unusual items. Included in
these unusual items were charges for purchased in-process
research and development related to the recent additional
investments in Dow AgroSciences and Mycogen, severance costs and
environmental remediation costs. Excluding these unusual items,
operating income for the quarter was $193 million, down 9 percent
from $212 million in the first quarter of 1997.
Specialty chemicals sales for the quarter were up 12 percent,
with 15 percent volume growth and 3 percent price decline versus
the same quarter last year. The addition of Hampshire Chemical,
from the Sentrachem acquisition, accounted for a substantial
portion of the volume growth for the first quarter. The decline
in prices was almost entirely attributable to the impact of
currency, as local prices were virtually unchanged. Operating
income was down 11 percent, including unusual items. Excluding
these, operating income was down only 3 percent versus a year
ago, as the effects of currency and mix more than offset the
additional Hampshire volume.
Emulsion polymers sales decreased 2 percent for the quarter
compared to the first quarter of 1997 as volume growth of 12
percent was more than offset by an 8 percent decline in local
prices and a 6 percent unfavorable currency impact. Volume was
particularly strong in Europe and steady in North America. The
recent decline in hydrocarbon prices put downward pressure on
pricing. Operating income for the first quarter improved 20
percent versus a year ago, including unusual items. Excluding
these, operating income was up 47 percent due to strong volume
and lower hydrocarbon costs.
<PAGE>
--- Page 14 ---
Results of Operations (Continued)
Sales of agricultural products for first quarter 1998 were 10
percent above the same quarter last year, with volume up 14
percent, local prices flat, and currency unfavorable 4 percent.
First quarter included sales of Sentrachem, which were not in
first quarter 1997. Excluding these, sales volume was up 8
percent. North America provided strong results mainly due to
excellent market acceptance of two new products: Hornet Herbicide
and First Rate Herbicide. First quarter operating income was
significantly impacted by unusual items, primarily purchased in-
process research and development costs. Operating income
excluding these unusual items was down 21 percent from the same
quarter last year, primarily due to the unfavorable currency
impact on sales.
PLASTICS
Plastics sales in the first quarter of 1998 were $981 million,
down 3 percent from $1,010 million a year ago. Volume increased 7
percent while prices declined 10 percent. Plastics operating
income for the quarter was $208 million, down 6 percent from $221
million in first quarter 1997.
Polyethylene sales were down 5 percent in the first quarter
versus the same quarter last year, with a 6 percent increase in
volume more than offset by an 11 percent decline in price. North
America reported record volumes, but prices were under pressure
as Asian export markets weakened and plastics and feedstock
prices softened. European demand was strong, with local prices
stable to up slightly. The Company's new solution plant in BSL
successfully started operations in early April with a 210 MMT
capacity. First quarter operating income for polyethylene was
down 6 percent from the first quarter of 1997 as lower
hydrocarbon costs cushioned the effects of price and currency
declines.
Polystyrene sales decreased 4 percent in the first quarter of
1998 versus the same quarter last year with a 5 percent volume
gain offset by a 9 percent price decline. North America, Europe
and Latin America all showed strong volume growth, while Asia
Pacific volumes fell 15 percent. Operating income for the
business was more than double first quarter 1997 due to lower
global styrene costs and reduced structural costs.
Polypropylene sales continued their strong growth trend, with
volume up significantly over the startup levels of first quarter
1997. Market development and customer relationships have
progressed well in both North America and Europe, in anticipation
of the new BSL plant scheduled to startup in the second quarter.
CHEMICALS AND METALS
Chemical and Metals sales in the first quarter of 1998 were $650
million, down 8 percent from $707 million in the first quarter of
1997, entirely due to a decline in prices. The price of caustic
continued to strengthen and was significantly higher than a year
ago, but excess capacity in Asia Pacific and low pulp production
prevented further price increase in first quarter. Vinyl chloride
monomer (VCM) volumes were flat versus first quarter 1997 and
prices eroded primarily due to lower chlorine, ethylene and PVC
values. Propylene glycol volume and price decreased versus first
quarter 1997 due to weak demand in North America and Asia
Pacific. Operating income of $53 million in the first quarter of
1998 was significantly impacted by unusual items, most
significantly environmental remediation charges. Excluding the
unusual items, operating income was $108 million for the quarter,
down from $161 million a year ago, mainly due to overall lower
prices and higher costs associated with plant outages.
HYDROCARBONS AND ENERGY
Sales for Hydrocarbons and Energy in the first quarter of 1998
were $423 million, a decrease of 27 percent from $577 million a
year ago, largely due to the absence of Destec which was sold in
the second quarter of 1997. Operating income, including unusual
items (environmental remediation costs), was $9 million for the
quarter, up from a loss of $6 million in the first quarter of
1997. Excluding the unusual items, operating income was $20
million.
DIVERSIFIED BUSINESSES AND UNALLOCATED
Diversified Businesses sales for the first quarter of 1998 were
$191 million, down 14 percent from $221 million in the first
quarter of 1997. The addition of Sentrachem sales (those not
assigned to the other segments) largely offset the loss of
DowBrands sales due to the sale of the DowBrands business to S.C.
Johnson and Son, Inc. Operating results for this segment were a
loss of $467 million, including the following unusual items:
purchased in-process research and development costs related to
the acquisition of Sentrachem, severance costs, asset write-downs
and environmental remediation costs. Excluding these items,
operating income for the quarter was a loss of $115 million
versus a loss of $34 million in the first quarter of 1997.
<PAGE>
--- Page 15 ---
Results of Operations (Continued)
COMPANY SUMMARY
Manufacturing Costs
Dow's global plant operating rate for its chemicals and plastics
businesses was 88 percent, down slightly from 90 percent in the
first quarter of 1997. Unit manufacturing costs for these
businesses, adjusted for volume but not mix, improved 3 percent
when compared with the first quarter of 1997, primarily due to
lower hydrocarbon and energy costs and positive mix change and
cost control in the two Performance segments. Included in cost of
sales in the first quarter of 1998 was an unusual charge of $120
million relating to environmental remediation liabilities. The
Company's environmental remediation liabilities are adjusted
periodically as additional technical or legal information becomes
available. The first quarter charge was the result of an
evaluation of site-wide remediation management systems and a
determination of necessary remediation actions.
Purchased In-process Research and Development
Purchased in-process research and development represents the
value assigned in a purchase business combination to research and
development projects of the acquired business that had commenced
but had not yet been completed at the date of acquisition and
which have no alternative future use. In accordance with
Statement of Financial Accounting Standards No. 2, "Accounting
for Research and Development Costs," as interpreted by FASB
Interpretation No. 4, amounts assigned to purchased in-process
research and development meeting the above stated criteria must
be charged to expense as part of the allocation of the purchase
price of the business combination. Accordingly, a charge of $338
million was recorded during the first quarter of 1998 in the
allocation of the purchase prices related to the acquisitions of
Sentrachem, additional common stock of Mycogen, and the remaining
40 percent of DowElanco (since renamed Dow AgroSciences).
Special Charge
In the first quarter of 1998, a special charge of $330 million
was recorded, including $112 million for severance and $218
million for the write-down of several assets. In the first
quarter, the Company adopted employee severance plans for North
America, Europe and the Sentrachem acquisition, most of which
will be completed by the end of the year. The headcount reduction
related to these plans is expected to be about 1500 employees.
The asset write-downs recorded during the quarter included Radian
International LLC and Dow-United Technologies Composite Products,
Inc., as alternatives for these businesses are being evaluated,
and an agricultural plant in Brazil.
Other Income (Expense)
Equity in earnings of nonconsolidated affiliates increased from
$14 million in the first quarter of 1997 to $23 million in the
first quarter of 1998, primarily due to the inclusion of earnings
from BSL this quarter, following the acquisition of 80 percent of
BSL in September 1997. Accounting for BSL is discussed in
`Acquisitions and Divestitures' on page 10.
Net financial expense, which is the total of interest expense,
interest income and foreign exchange, increased to $87 million
this quarter, compared with $38 million in the first quarter of
1997. The increase in net financial expense was mainly
attributable to a decrease in interest income resulting primarily
from reduced cash and short-term investment balances.
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. Sundry income
for the first quarter of 1998 was up significantly versus a year
ago due to the gain on the sale of the DowBrands business of $816
million. Sundry income for the quarter was $842 million versus
$63 million for the same period last year.
Recap of Unusual Items
As discussed previously, several unusual items were recorded
during the first quarter of 1998. The following represents the
pretax effect of these unusual items (in millions):
Gain of the sale of the DowBrands business $816
Unusual charges:
Environmental remediation 120
Purchased in-process research and development 338
Special charge 330
----
Net positive impact on profit before taxes on income $ 28
<PAGE>
--- Page 16 ---
Results of Operations (Continued)
Provision for Taxes on Income
The effective tax rate for the first quarter was 36 percent,
essentially flat with the first quarter of 1997.
Expectations for the Remainder of 1998
In the chemicals and plastics industries, the financial situation
in Asia Pacific had a negative effect on global pricing. North
America PVC and therefore EDC/VCM were impacted by lower exports
to Asia Pacific, resulting in oversupply and reduced pricing.
Strong demand for caustic in North America and Europe, coupled
with expected lowering of chlor-alkali operating rates, provides
room for caustic price increases over the balance of the year.
Since rising caustic values are expected to largely offset the
declining chlorine and chlorine derivative values, the ECU
(electrochemical unit) should not decline as much as in past
cycles.
Ethylene chain prices are expected to continue some decline
through 1998. Polyethylene prices have not moved down as quickly,
because polyethylene industry capacity is fairly balanced with
demand; however, declining hydrocarbon and energy and ethylene
values could put pressure on polyethylene prices. Polystyrene
prices have shown signs of stabilizing, but at a low level.
Dow's performance plastics and performance chemicals
businesses expect solid performance in 1998 on good demand growth
in a more stable pricing environment than experienced in 1997.
Hydrocarbon and energy prices are expected to remain below
average 1997 levels for the year. Liquid feedstock prices are
expected to remain at or below first quarter levels through
second quarter.
The Company's earnings per share results have proven
resilient, remaining near last year's level despite the situation
in Asia Pacific, cyclically declining prices and unfavorable
European currency impacts. This resilience is due to the impact
of portfolio restructuring, cost containment, volume growth and
the repurchase of shares. Despite declining prices, the overall
economic scenario and the strength of Dow's diverse product and
geographic portfolio are expected to further sustain earnings in
the second quarter.
Year 2000
Dow has established a plan to address what many call the Year
2000 challenge; specifically, the fact that many computing and
control systems will not accurately interpret dates after
December 31, 1999. Since early 1997, a Year 2000 project team has
been dedicated to making Dow's systems and businesses ready for
the next millennium. The project team's responsibilities include
assessing the potential impact of the Year 2000 issue on the
Company's systems and operations, developing action plans to
address the needs and issues identified, ascertaining the
resources required and establishing a time-phased work plan,
which will include systems tests to determine Year 2000
compliance. Year 2000 and the required system modifications are
not expected to materially affect the Company's business
operations or consolidated financial statements.
<PAGE>
--- Page 17 ---
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Dow's business operations give rise to market risk exposure due
to changes in foreign exchange rates, interest rates, commodity
prices and other market factors such as equity prices. To manage
such risks effectively, the Company enters into hedging
transactions, pursuant to established guidelines and policies,
that enable it to mitigate the adverse effects of financial
market risk. A secondary objective is to add value by creating
additional exposure within established limits and policies. The
potential impact of creating such additional exposures is not
material to the Company's results.
The global nature of Dow's business requires active
participation in the foreign exchange markets. As a result of
investments, production facilities and other operations on a
global scale, the Company has assets, liabilities and cash flows
in currencies other than the U.S. dollar. The primary objective
of the Company's foreign exchange risk management is to optimize
the U.S. dollar value of net assets and cash flows, keeping the
adverse impact of currency movements to a minimum. To achieve
this objective, the Company hedges on a net exposure basis using
foreign currency forward contracts and over-the-counter option
contracts. Main exposures are related to assets and liabilities
denominated in the currencies of Europe, Asia Pacific and Canada;
bonds denominated in foreign currencies - mainly the Deutsche
mark, Swiss franc and Japanese yen; and economic exposure derived
from the risk that currency fluctuations could affect the dollar
value of future cash flows. The majority of the foreign exchange
exposure is related to the Japanese yen, Deutsche mark, Dutch
guilder and other European currencies.
The main objective of interest rate risk management is to
reduce the total funding cost to the Company and to alter the
interest rate exposure to the desired risk profile. Dow uses
interest rate swaps, "swaptions" and exchange traded instruments
to accomplish this objective. The Company's primary exposure is
to the U.S. dollar yield curve.
Inherent in Dow's business is exposure to price changes for
several commodities. Some exposures can be hedged effectively
through liquid tradable financial instruments. Chemical
feedstocks and natural gas constitute the main commodity
exposures. Over-the-counter and exchange traded instruments are
used to hedge these risks when feasible. The risk of these
hedging instruments is not material.
As a result of acquisition and divestiture activity, the
Company has a portfolio of equity securities. The major part of
this exposure is related to restricted stock warrants. This
exposure is managed in a manner consistent with the Company's
market risk policies and procedures.
Dow uses value at risk (VAR) stress testing and scenario
analysis for risk measurement and control purposes. VAR estimates
the potential gain or loss in fair market values, given a certain
move in prices over a certain period of time, using specified
confidence levels. On an ongoing basis, the Company estimates the
maximum gain or loss that could arise in one day, given a two
standard deviation move in the respective price levels. These
amounts are relatively insignificant in comparison to the size of
the equity and earnings of the Company. The VAR methodology used
by Dow is based primarily on the variance/covariance statistical
model. As an example, the VAR for one day, using a 95 percent
confidence level at December 31, 1997, for foreign exchange,
interest rate and equity exposures, net of hedges was: foreign
exchange - $12 million; interest rate - $23 million; and equity -
$3 million. Management believes there have been no material
changes in market risk or in risk management policies subsequent
to December 31, 1997.
<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 Company has
appealed the jury's verdict. On December 1, 1997, the trial court
decertified the class. Further action in the Spitzfaden case
will commence, if at all, only after the resolution of pending
appeals. 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.
<PAGE>
--- Page 21 ---
Legal Proceedings (Continued)
Environmental Matters
On March 19, 1998, the United States Environmental Protection
Agency (the "EPA") filed a complaint against the Company alleging
violations of the Comprehensive Environmental Response,
Compensation and Liability Act and the Emergency Planning and
Commercial Right-to-Know Act. The complaint seeks civil fines
totaling $110,000.
On March 25, 1998, Dow AgroSciences LLC, a wholly owned
subsidiary of the Company, made a written inquiry to the EPA with
regard to alleged violations of the Federal Insecticide, Fungicide
and Rodenticide Act for which the EPA has verbally indicated that
it is seeking a civil penalty in the amount of $792,000.
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 1998.
The following trademark of The Dow Chemical Company appears in
this report: Styrofoam.
The following trademarks of Dow AgroSciences or its
affiliates appear in this report: Hornet and First Rate.
<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: May 15, 1998
G. Michael Lynch
----------------
G. Michael Lynch
Vice President & Controller
(Chief Accounting Officer)
<PAGE>
--- Page 23 ---
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