UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
FOR THE QUARTER ENDED June 30, 1999
Commission file number 1-3433
THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 38-1285128
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
2030 DOW CENTER, MIDLAND, MICHIGAN 48674
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 517-636-1000
Not applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ].
Outstanding at
Class June 30, 1999
----- --------------
Common Stock, $2.50 par value 220,076,722 shares
<PAGE> --- Page 1 ---
THE DOW CHEMICAL COMPANY
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Consolidated Statements of Comprehensive Income 6
Operating Segments and Geographic Areas 7
Commitments and Contingent Liabilities 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Disclosure Regarding Forward-Looking Information 10
Second Quarter Earnings Announcement 10
Acquisitions and Divestitures 11
Changes in Financial Condition 12
Results of Operations 13
Subsequent Events 18
Accounting Policies 18
Year 2000 Readiness Disclosure 18
Euro Conversion 20
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security 24
Holders
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURE 26
Exhibit 27 27
<PAGE> --- Page 2 ---
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Note A)
<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------------------------------------
Consolidated Statements of Income Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
In millions, except for share amounts (Unaudited) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $4,619 $4,857 $9,036 $9,686
- -------------------------------------------------------------------------------------------------------------
Cost of Sales 3,395 3,502 6,671 7,193
Research and development expenses 223 190 415 382
Selling, general and administrative expenses 374 440 764 843
Amortization of intangibles 27 20 54 39
Purchased in-process research and development charges (Note B) - 12 - 350
Special charges (Note C) - - - 330
Insurance and finance company operations, pretax income 31 26 61 58
Equity in earnings of nonconsolidated affiliates 22 27 47 50
Sundry income - net (Note D) 89 14 157 854
- -------------------------------------------------------------------------------------------------------------
Earnings before Interest, Income Taxes and Minority Interest 742 760 1,397 1,511
- -------------------------------------------------------------------------------------------------------------
Interest income 27 31 52 66
Interest expense and amortization of debt discount 121 129 241 249
- -------------------------------------------------------------------------------------------------------------
Income before Income Taxes and Minority Interests 648 662 1,208 1,328
- -------------------------------------------------------------------------------------------------------------
Provision for taxes on income 228 232 431 474
Minority interests' share in income 8 3 35 5
Preferred stock dividends 2 2 3 3
- -------------------------------------------------------------------------------------------------------------
Net Income Available for Common Stockholders $410 $425 $739 $846
- -------------------------------------------------------------------------------------------------------------
Share Data
Earnings per common share - basic $1.86 $1.89 $3.35 $3.76
Earnings per common share - diluted $1.83 $1.86 $3.30 $3.70
Common stock dividends declared per share $0.87 $0.87 $1.74 $1.74
Weighted-average common shares outstanding - basic 220.6 224.8 220.4 225.1
Weighted-average common shares outstanding - diluted 225.1 228.7 224.4 229.6
- -------------------------------------------------------------------------------------------------------------
Depreciation $281 $272 $557 $542
- -------------------------------------------------------------------------------------------------------------
Capital Expenditures $347 $328 $597 $629
- -------------------------------------------------------------------------------------------------------------
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, 1998. (Except as otherwise indicated by the context, the terms
"Company" or "Dow" as used herein mean The Dow Chemical Company and its consolidated subsidiaries.)
Note B: During the first half of 1998, pretax charges totaling $350 million were recorded for purchased in-process research
and development (IPR&D) costs associated with the acquisitions of Dow AgroSciences, Mycogen and Sentrachem Limited.
This amount was reduced in the fourth quarter of 1998 by $55 million, in accordance with the SEC's clarified guidance
on IPR&D.
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 a pretax gain of $816 million.
</TABLE>
<PAGE> --- Page 3 ---
<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
June 30, Dec. 31,
In millions (Unaudited) 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
- -------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $218 $123
Marketable securities and interest-bearing deposits 296 267
Accounts and notes receivable:
Trade (less allowance for doubtful receivables - 1999, $120; 1998, $93) 2,260 2,787
Other 1,805 1,750
Inventories:
Finished and work in process 2,086 2,245
Material and supplies 507 565
Deferred income tax assets - current 278 303
-----------------------------------------------------------------------------------------------------------
Total current assets 7,450 8,040
- -------------------------------------------------------------------------------------------------------------
Investments
Investment in nonconsolidated affiliates 1,379 1,311
Other investments 2,310 2,191
Noncurrent receivables 410 424
-----------------------------------------------------------------------------------------------------------
Total investments 4,099 3,926
- -------------------------------------------------------------------------------------------------------------
Property
Property 23,721 24,435
Less accumulated depreciation 15,495 15,988
-----------------------------------------------------------------------------------------------------------
Net property 8,226 8,447
- -------------------------------------------------------------------------------------------------------------
Other Assets
Goodwill (net of accumulated amortization - 1999, $274; 1998, $246) 1,660 1,641
Deferred income tax assets - noncurrent 624 684
Deferred charges and other assets 1,046 1,092
-----------------------------------------------------------------------------------------------------------
Total other assets 3,330 3,417
- -------------------------------------------------------------------------------------------------------------
Total Assets $23,105 $23,830
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> --- Page 4 ---
<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
June 30, Dec. 31,
In millions (Unaudited) 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------------------------------------
Current Liabilities
Notes payable $918 $1,526
Long-term debt due within one year 368 300
Accounts payable:
Trade 1,534 1,682
Other 860 981
Income taxes payable 210 290
Deferred income tax liabilities - current 44 71
Dividends payable 197 192
Accrued and other current liabilities 1,862 1,800
-----------------------------------------------------------------------------------------------------------
Total current liabilities 5,993 6,842
- -------------------------------------------------------------------------------------------------------------
Long-Term Debt 4,063 4,051
- -------------------------------------------------------------------------------------------------------------
Other Noncurrent Liabilities
Deferred income tax liabilities - noncurrent 785 747
Pension and other postretirement benefits - noncurrent 1,870 1,903
Other noncurrent obligations 2,241 2,283
-----------------------------------------------------------------------------------------------------------
Total other noncurrent liabilities 4,896 4,933
- -------------------------------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies 406 532
- -------------------------------------------------------------------------------------------------------------
Temporary Equity
Temporary equity - other 12 -
Preferred stock at redemption value 115 117
Guaranteed ESOP obligation (74) (74)
-----------------------------------------------------------------------------------------------------------
Total temporary equity 53 43
- -------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock 818 818
Additional paid-in capital 891 718
Retained earnings 13,242 12,887
Accumulated other comprehensive income (300) (347)
Treasury stock, at cost (6,957) (6,647)
-----------------------------------------------------------------------------------------------------------
Net stockholders' equity 7,694 7,429
- -------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $23,105 $23,830
- -------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
<PAGE> --- Page 5 ---
<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
- --------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows Six Months Ended
June 30, June 30,
In millions (Unaudited) 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income available for common stockholders $739 $846
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 626 583
Purchased in-process research & development - 350
Special charge - 330
Provision for deferred income tax 68 68
Undistributed earnings of nonconsolidated affiliates (36) (38)
Minority interests' share in income 35 5
Net gain on sale of consolidated companies - (816)
Net gain on sales of property (50) (5)
Other net (gain) loss (76) 5
Changes in assets and liabilities that provided (used) cash:
Accounts receivable 436 291
Inventories 218 225
Accounts payable (226) (317)
Other assets and liabilities 159 293
---------------------------------------------------------------------------------------------
Cash provided by operating activities 1,893 1,820
- --------------------------------------------------------------------------------------------------
Investing Activities
Capital expenditures (597) (629)
Proceeds from sales of property 95 27
Purchases of consolidated companies (99) (355)
Proceeds from sale of consolidated companies - 1,183
Purchases from outside investors in limited partnership - (210)
Proceeds from outside investors in limited partnership - 200
Investments in nonconsolidated affiliates (79) (39)
Purchases of investments (1,458) (1,759)
Proceeds from sales of investments 1,471 1,343
---------------------------------------------------------------------------------------------
Cash used in investing activities (667) (239)
---------------------------------------------------------------------------------------------
Financing Activities
Changes in short-term notes payable (547) (592)
Payments on long-term debt (150) (420)
Proceeds from issuance of long-term debt 257 222
Purchases of treasury stock (319) (341)
Proceeds from sales of common stock 144 105
Purchase of subsidiary preferred stock (102) -
Distributions to minority interests (24) (11)
Dividends paid to stockholders (386) (395)
---------------------------------------------------------------------------------------------
Cash used in financing activities (1,127) (1,432)
- --------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (4) (10)
- --------------------------------------------------------------------------------------------------
Summary
Increase in cash and cash equivalents 95 139
Cash and cash equivalents at beginning of year 123 235
---------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $218 $374
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
In millions (Unaudited) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income Available for Common Stockholders $410 $425 $739 $846
- ---------------------------------------------------------------------------------------------------
Other Comprehensive Income, Net of Tax
Unrealized gains (losses) on investments 19 (56) 100 (59)
Income, Net of Tax Cumulative translation adjustment (25) 3 (5) (5)
Minimum pension liability - - - -
---------------------------------------------------------------------------------------------
Total other comprehensive income (6) (53) 47 (64)
- ---------------------------------------------------------------------------------------------------
Comprehensive Income $404 $372 $786 $782
- ---------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
<PAGE> --- Page 6 ---
<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
- ------------------------------------------------------------------------------------------------------------
Operating Segments and Geographic Areas Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
In millons (Unaudited) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating segment sales
Performance Plastics $1,297 $1,293 $2,560 $2,546
Performance Chemicals 656 662 1,297 1,302
Agricultural Products 664 729 1,333 1,407
Plastics 1,022 996 1,940 1,990
Chemicals 541 612 1,053 1,262
Hydrocarbons and Energy 363 363 672 786
Unallocated and Other 76 202 181 393
- ------------------------------------------------------------------------------------------------------------
Total $4,619 $4,857 $9,036 $9,686
- ------------------------------------------------------------------------------------------------------------
Operating segment EBIT
Performance Plastics $294 $283 $567 $541
Performance Chemicals 149 112 273 198
Agricultural Products 159 123 240 (138)
Plastics 89 201 230 417
Chemicals 89 63 189 146
Hydrocarbons and Energy 23 (48) 10 (32)
Unallocated and Other (61) 26 (112) 379
- ------------------------------------------------------------------------------------------------------------
Total $742 $760 $1,397 $1,511
- ------------------------------------------------------------------------------------------------------------
Operating segment intersegment revenues
Performance Plastics $2 $4 $6 $8
Performance Chemicals 4 3 7 5
Plastics - 1 2 2
Chemicals 7 11 14 23
Unallocated and Other (13) (19) (29) (38)
- ------------------------------------------------------------------------------------------------------------
Total - - - -
- ------------------------------------------------------------------------------------------------------------
Geographic area sales
United States $1,922 $2,013 $3,756 $3,967
Europe 1,517 1,681 3,091 3,403
Rest of World 1,180 1,163 2,189 2,316
- ------------------------------------------------------------------------------------------------------------
Total $4,619 $4,857 $9,036 $9,686
- ------------------------------------------------------------------------------------------------------------
The reconciliation between "Earnings before Interest, Income Taxes and Minority Interests (EBIT)"
and "Income before Income Taxes and Minority Interests" consists of "Interest income" and "Interest
expense and amortization of debt discount," and can be found in the Consolidated Statements of
Income on page 3.
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Sales Volume and Price by Operating Segment and Geographic Area Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
Percentage change from prior year Volume Price Total Volume Price Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating segments
Performance Plastics 5% (5)% 0% 5% (4)% 1%
Performance Chemicals 2% (3)% (1)% 2% (2)% 0%
Agricultural Products (8)% (1)% (9)% (3)% (2)% (5)%
Plastics 13% (10)% 3% 13% (16)% (3)%
Chemicals (2)% (10)% (12)% (1)% (16)% (17)%
Hydrocarbons and Energy 4% (4)% 0% (2)% (13)% (15)%
- --------------------------------------------------------------------------------------------------------------
Total 1% (6)% (5)% 1% (8)% (7)%
- --------------------------------------------------------------------------------------------------------------
Geographic areas
United States (2)% (3)% (5)% 0% (5)% (5)%
Europe (1)% (9)% (10)% 1% (10)% (9)%
Rest of World 7% (6)% 1% 4% (9)% (5)%
- --------------------------------------------------------------------------------------------------------------
Total 1% (6)% (5)% 1% (8)% (7)%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> --- Page 7 ---
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
14,000 breast implant product liability cases, of which
approximately 4,000 state cases are the subject of summary
judgments in favor of the Company. 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 development of
those products, and the Company intends to contest those claims
vigorously. Management believes that the possibility is remote
that a resolution of plaintiffs' direct participation claims,
including the vigorous defense against those claims, would have a
material adverse impact on the Company's financial position or
cash flows. Nevertheless, in light of Judge Pointer's April 25,
1995, ruling, it is possible that a resolution of plaintiffs'
direct participation claims, including the vigorous defense
against those claims, could have a material adverse impact on the
Company's net income for a particular period, although it is
impossible at this time to estimate the range or amount of any
such impact.
<PAGE> --- Page 8 ---
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 had accrued $338 million at
June 30, 1999, for environmental matters, including $6 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 entered into two 20-year agreements, one
which expired in 1998 and one which expires in 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, $199 million and $221 million
in 1998, 1997 and 1996, respectively.
At December 31, 1998, the Company had various outstanding
commitments for take or pay and throughput agreements, including
the Canadian subsidiary's ethylene contract, 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, 1998 (in millions)
- ---------------------------------------------------------
1999 $ 272
2000 253
2001 255
2002 248
2003 240
2004 through expiration of contracts 1,669
- ---------------------------------------------------------
Total $2,937
- ---------------------------------------------------------
In addition to the take or pay obligations at December 31,
1998, 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 $106 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 $307 million.
<PAGE> --- Page 9 ---
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements made by or on behalf
of the Company. This section covers the current performance and
outlook of the Company and each of its operating segments. The
forward-looking statements contained in this section and in other
parts of this document involve risks and uncertainties that may
affect the Company's operations, markets, products, services,
prices and other factors as more fully discussed elsewhere and in
filings with the U.S. Securities and Exchange Commission. These
risks and uncertainties include, but are not limited to,
economic, competitive, legal, governmental, and technological
factors, as well as issues related to Year 2000 and the Euro
conversion. Accordingly, there is no assurance that the Company's
expectations will be realized.
SECOND QUARTER EARNINGS ANNOUNCEMENT (JULY 22, 1999)
DOW REPORTS SECOND QUARTER EARNINGS OF $1.83 PER SHARE
- ----------------------------------------------------------------------------
Second Quarter of 1999 Highlights
- - Second quarter earnings per share of $1.83 decreased only 3
cents per share from a year ago and were above expectations.
- - EBIT of $742 million resulted from an improved business mix
and continued productivity gains, which largely offset a price
decline of approximately $275 million.
- - Performance businesses achieved a 14 percent improvement in
EBIT compared with second quarter 1998.
- ----------------------------------------------------------------------------
(In millions, except for per share amounts)
3 Months Ended 6 Months Ended
June 30 June 30
- ----------------------------------------------------------------------------
1999 1998 1999 1998
---------------------------------
Net Sales $4,619 $4,857 $9,036 $9,686
Earnings Before Interest and Taxes (EBIT) 742 760 1,397 1,511
Earnings Per Common Share $ 1.83 $ 1.86 $ 3.30 $ 3.70
- ----------------------------------------------------------------------------
Review of Second Quarter Results
The Dow Chemical Company today announced second quarter earnings
per share of $1.83, only 3 cents per share less than a year ago
and above expectations. Dow reported sales of $4.6 billion,
earnings before interest, income taxes and minority interests
(EBIT) of $742 million and net income of $410 million.
Improved business mix and continued productivity gains largely
offset a price decline of approximately $275 million or the
equivalent of 79 cents per share.
Sales for the quarter decreased 5 percent versus the same
period a year ago, due to a 6 percent decline in price, including
currency, that was only partially offset by a 1 percent increase
in volume. Excluding acquisitions and divestitures, volume rose 3
percent.
"The fact that our earnings remain solid is a direct
reflection of the significant strides we have made in forging a
stronger portfolio and continuing to reduce our structural
costs," said William S. Stavropoulos, president and chief
executive officer. "Many of our businesses are enduring prices
that are lower than in the last chemical cycle trough, yet
performing vastly better in terms of profitability. These results
offer the strongest evidence yet that we will meet Dow's
financial objective of achieving positive economic profit at the
bottom of the cycle. We are well positioned for substantial
future growth centered on performance businesses."
In the Performance Plastics segment, EBIT rose 4 percent due
to productivity improvements as well as volume growth, which was
spurred by increased demand in the construction and automotive
industries. Both the Engineering Plastics and the Adhesives,
Sealants and Coatings businesses recorded greater than 15 percent
volume growth.
<PAGE> --- Page 10 ---
Second Quarter Earnings Announcement (July 22, 1999) (Continued)
The Performance Chemicals segment delivered a 33 percent gain
in EBIT, aided by reductions in operating costs and expenses as
well as volume increases in several key specialty products.
In the Agricultural Products segment, EBIT was $159 million,
up 18 percent from second quarter 1998 excluding unusual items,
despite particularly adverse conditions in the worldwide
agricultural industry. Sales of higher-margin new products,
combined with stringent cost controls, more than offset an 8
percent decline in volume.
The Chemicals segment posted EBIT of $89 million, up 41
percent from second quarter 1998, due to a marked improvement in
productivity, more efficient plant operations and portfolio
changes.
Though the Plastics segment turned in lower earnings, due
largely to price declines, it recorded double-digit volume growth
with the highest increases in polyethylene.
"The performance of our businesses year to date as well as the
improving prospects for economic growth around the world are
encouraging," said Stavropoulos. "We look for potentially
favorable second-half earnings in comparison with 1998. Combined
with our strong financial position, this will give us added
momentum for achieving our strategy for growth."
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 (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 $132 million 1. 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 January 1998, the Company completed the sale of the
DowBrands consumer products business to S.C. Johnson & Son, Inc.
for $1.2 billion. This transaction resulted in a pretax gain of
$816 million.
In February 1998, the Company entered into an agreement with
Pronor Petroquimica S.A. (Pronor) to purchase a portion of its
business. The new company, named Isopol, was acquired for the
production and commercialization of toluene diisocyanate (TDI),
used to manufacture durable goods such as cushioned furniture and
mattresses, and will primarily supply the markets of the Mercosur
countries of Latin America. The Company's total investment was
$137 million.
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 named DowElanco) invested an additional
$121 million in Mycogen, increasing its ownership to 69 percent.
In November 1998, following the expiration of a tender offer, the
Company completed the acquisition of all remaining shares for
$418 million. Mycogen is a diversified agribusiness and
biotechnology company that develops and markets seeds and value-
added traits for genetically enhanced crops and provides crop
protection products and services.
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 (Radian) to provide
environmental services. In January 1998, HSB exercised a put
option requiring the Company to purchase HSB's interest for $136
million. In July 1998, as part of the Company's ongoing efforts
to restructure its business portfolio, Radian was sold to Dames &
Moore Group for $117 million.
In December 1998, the Company and United Technologies
Corporation sold the business and certain assets of their 50:50
joint venture, Dow-United Technologies Composite Products, Inc.,
to GKN Westland Aerospace, Inc., a unit of GKN plc, of the United
Kingdom. The Company expects to dissolve the joint venture in
1999, with no material effect on its consolidated financial
statements.
See the sections entitled "Purchased In-process Research and
Development" and "Special Charge" on page 16 regarding certain
charges recorded during 1998 related to acquisitions and
divestitures.
<PAGE> --- Page 11 ---
CHANGES IN FINANCIAL CONDITION
The following tables represent total debt, working capital and
certain balance sheet ratios at June 30, 1999 versus December 31,
1998.
June 30, Dec. 31, Increase
In millions 1999 1998 (Decrease)
- ---------------------------------------------------------------------
Notes payable $ 918 $1,526 $ (608)
Long-term debt due within one year 368 300 68
Long-term debt 4,063 4,051 12
- ---------------------------------------------------------------------
Total debt $5,349 $5,877 $ (528)
- ---------------------------------------------------------------------
At June 30, 1999, the Company had unused and available credit
facilities with various U.S. and foreign banks totaling $2.6
billion in support of its working capital requirements and
commercial paper borrowings. Additional unused credit facilities
totaling $1.5 billion are available for use by foreign
subsidiaries.
June 30, Dec. 31, Increase
In millions 1999 1998 (Decrease)
- ---------------------------------------------------------------------
Cash and cash equivalents $ 218 $ 123 $ 95
Marketable securities and
interest-bearing deposits 296 267 29
Accounts and notes receivable - net 4,065 4,537 (472)
Inventories:
Finished and work in process 2,086 2,245 (159)
Materials and supplies 507 565 (58)
Deferred income tax assets - current 278 303 (25)
- ---------------------------------------------------------------------
Total current assets 7,450 8,040 (590)
- ---------------------------------------------------------------------
Total current liabilities 5,993 6,842 (849)
- ---------------------------------------------------------------------
Working capital $1,457 $1,198 $ 259
- ---------------------------------------------------------------------
Operating activities provided cash of $1.9 billion for the six
months ended June 30, 1999. Included in this amount was the sale
of U.S. trade receivables totaling $450 million late in the
second quarter. Cash was used to reduce total debt $528 million,
to purchase Hoechst South Africa's shares in the Safripol and
Plastomark polyolefins joint venture with Sentrachem for $47
million, to repurchase shares of the Company's common stock for
$319 million, and for capital expenditures and other normal
activities. (See the Consolidated Statements of Cash Flows for
more detail.)
June 30, Dec. 31,
Balance Sheet Ratios 1999 1998
- ---------------------------------------------------------------------
Current assets over current liabilities 1.2:1 1.2:1
Days-sales-outstanding-in receivables 50 49
Days-sales-in-inventory 69 72
Debt as a percentage of total capitalization 39.6% 42.3%
- ---------------------------------------------------------------------
The Company purchased 1.6 million shares of common stock
during the second quarter of 1999 as part of its overall stock
repurchase program, bringing the year to date total to 2.9
million shares. The Company's average shares outstanding for the
first six months of 1999 were 220 million, a decrease of 2
percent from the average shares outstanding for the first six
months of 1998.
On July 30, 1999, the Company paid a quarterly dividend of 87
cents per share to shareholders of record on June 30, 1999. This
was the 350th consecutive quarterly dividend since 1912 and in
each instance Dow has maintained or increased the dividend.
<PAGE> --- Page 12 ---
RESULTS OF OPERATIONS
Following are selected data for the three months ended June 30,
1999 and 1998:
Three Months Ended Six Months Ended
------------------ ------------------
Dollars in millions, June 30, June 30, June 30, June 30,
except for share amounts 1999 1998 1999 1998
- -------------------------------------------------------------------------------
Sales $4,619 $4,857 $9,036 $9,686
Cost of sales 3,395 3,502 6,671 7,193
% of sales 74% 72% 74% 74%
Research and development, selling
general and administrative expenses 597 630 1,179 1,225
Earnings before interest, income taxes,
and minority interests (EBIT) 742 760 1,397 1,511
% of sales 16% 16% 15% 16%
Earnings before interest, income taxes,
and minority interests excluding
unusual items 742 760 1,397 1,483
% of sales 16% 16% 15% 15%
Effective tax rate 35.2% 35.0% 35.7% 35.7%
Net income available for common $410 $425 $739 $846
stockholders
Earnings per common share - basic $1.86 $1.89 $3.35 $3.76
Earnings per common share - diluted $1.83 $1.86 $3.30 $3.70
Operating rate percentage 86% 86% 86% 87%
Net sales for the second quarter of 1999 were $4.6 billion, down
5 percent from $4.9 billion in the second quarter of last year.
Sales were up 1 percent versus the same quarter last year due to
increased volume, and down 6 percent, approximately $275 million,
due to declining prices. Considering the effect of acquisitions
and divestitures, volume for the second quarter improved 3
percent from the same period last year. Volume was particularly
strong in Plastics, up 13 percent due primarily to double-digit
growth in polyethylene, but down 8 percent in Agricultural
Products due to industry conditions. Volume was down slightly in
the United States and Europe, but up 7 percent in Rest of World
driven primarily by a 26 percent volume increase in Asia Pacific
over last year's depressed levels. Prices were down in all
segments, most notably in our basic segments, and in all
geographic areas. Net sales of $9.0 billion for the first half of
1999 were down 7 percent from $9.7 billion for the same period
last year due to an 8 percent decline in prices.
Expenses, which include research and development (R&D),
selling, general and administrative expenses, were $597 million,
down $33 million from the second quarter of 1998. R&D was up 17
percent versus last year, supporting our growth initiatives in
biotechnology. Selling, general and administrative were down 15
percent, due to the Company's on-going efforts to reduce
structural costs, more than offsetting the increase in R&D.
Net income for the second quarter was $410 million or $1.83
per share (diluted), down slightly from last year's net income of
$425 million or $1.86 per share (diluted). Net income was
negatively impacted by lower selling prices and, unlike recent
quarters, was not helped by lower hydrocarbon and energy costs,
which were flat with last year. Results were helped by improved
product mix, cost reductions, continued productivity gains, and
gains on the sales of several small assets. Year to date, net
income was $739 million compared with $846 million last year. Net
income last year included the gain on the sale of the DowBrands
business, offset by several unusual charges, recorded in the
first quarter. The unusual charges included charges for purchased
in-process research and development, severance costs, asset write-
downs and environmental remediation costs.
<PAGE> --- Page 13 ---
Results of Operations (Continued)
PERFORMANCE PLASTICS
Performance Plastics sales of $1,297 million were flat with sales
for the second quarter of 1998. While volume improved 5 percent,
prices declined 5 percent. Second quarter EBIT for the segment
increased 4 percent to $294 million from $283 million a year ago,
as increased volume and productivity improvements more than
offset the decline in prices.
Polyurethanes sales for the second quarter were down 9 percent
versus the same period last year, due to a 6 percent decrease in
volume and a 3 percent decline in prices. Weak polyol sales in
Latin America and a shortage of toluene diisocyanate (TDI)
(resulting from plant start-up problems that led to a declaration
of force majeure late in the first quarter) were the major
contributors to the loss in volume. Prices were down in all
geographic areas and across most products. Although sales were
down, EBIT improved versus the second quarter of last year due to
the business' cost reduction efforts.
Sales of Epoxies and Intermediates were down 2 percent from a
year ago, with price declines of 6 percent partially offset by a
4 percent gain in volume. Significant volume growth in Asia
Pacific, along with modest volume growth in Europe, more than
offset volume declines in the other geographic areas. Pricing
pressure continued with prices down across all product lines and
in all geographic areas. EBIT for the business was down compared
with last year due to price declines and shutdown costs
associated with both planned and unplanned plant outages in the
second quarter.
Engineering Plastics sales for the quarter were up 20 percent
from the same quarter last year, with volume up 30 percent and
prices down 10 percent. Volume, up significantly in all
geographic areas, was boosted by new sales of nylon from a
marketing agreement with Solutia. Demand was also very strong for
polycarbonate. Price pressure continued in all geographic areas,
except Latin America, especially for polycarbonate. EBIT for the
quarter was down versus the second quarter of 1998 due to price
declines.
Fabricated Products sales for the second quarter of 1999 were
down 2 percent versus a year ago, due to a 4 percent decline in
prices, only partially offset by an increase in volume. Sales
were reduced by price declines in all geographic areas. Volume,
up 2 percent, increased in all geographic areas except Latin
America. Volume for Styrofoam brand insulation was up
significantly due to the strength of the construction industry.
EBIT for the quarter was flat with last year.
Adhesives, Sealants and Coatings sales for the second quarter
were up 14 percent versus the second quarter of 1998, due to a 19
percent increase in sales volume partially offset by a 5 percent
decline in prices. Volume in the business' Systems Houses was up
significantly with strong growth in Europe and new sales in China
and Brazil. Second quarter EBIT for this business was up
significantly when compared with last year, due to volume growth
and continued cost control.
For the first six months of the year, Performance Plastics
sales were $2,560 million, up slightly from $2,546 million last
year. Volume growth of 5 percent during this period was partially
offset by a 4 percent decline in prices. Year to date, EBIT of
$567 million improved 4 percent from $547 million last year,
excluding unusual charges of $6 million recorded in the first
quarter of 1998.
PERFORMANCE CHEMICALS
Second quarter sales for Performance Chemicals were $656 million,
down slightly from $662 for the same quarter last year, as a 3
percent decline in prices more than offset a 2 percent increase
in volume. EBIT for the segment was $149 million, up 33 percent
from $112 million last year, due to reductions in operating costs
and expenses and volume increases in several key specialty
products.
Specialty Chemicals sales for the quarter were up, with a 2
percent increase in volume more than offsetting a slight decline
in prices versus the same quarter last year. Volume was
particularly strong in Asia Pacific, up over 30 percent. In
Europe and North America, construction and pharmaceutical demand
for Methocel continued to be strong. Sales for the Company's
Contract Manufacturing operations were also up. Despite the
relatively flat sales, EBIT for the second quarter improved
versus last year due to lower raw material costs and continued
cost control.
Emulsion Polymers sales were down versus the second quarter of
1998 as prices declined 6 percent on relatively flat volume.
Price declines were most notable in Europe for paper latex, down
due to incremental capacity additions. Volume continued to be
strong in the United States and Asia Pacific. Driven by lower
sales, EBIT for the quarter was down versus last year.
Sales for the first half of 1998 for this segment were $1,297
million, flat with last year as a 2 percent increase in volume
was offset by a 2 percent decline in prices. Year to date, EBIT
for this segment was $273 million, up 30 percent versus $210
million last year, excluding unusual charges of $12 million
recorded in the first quarter of 1998.
<PAGE> --- Page 14 ---
Results of Operations (Continued)
AGRICULTURAL PRODUCTS
Sales of Agricultural Products for second quarter 1999 were $664
million, down 9 percent compared with $729 million for the same
quarter of 1998. Volume declined 8 percent due to adverse
worldwide industry conditions; the negative effect of currency
reduced sales by an additional 1 percent. Volume was down in all
geographic areas except Latin America, which was up 12 percent.
Volume declines were most notable for seeds in North America and
weed control products, such as Lontrel and Gallant, in Europe and
Asia Pacific. Volume improvements were reported for Spinosad
insect control products, Sentricon, and glyphosate. Despite lower
sales and increased biotechnology-related R&D expenses, EBIT of
$159 million for the quarter was up 18 percent compared with $135
million for the second quarter of 1998 excluding purchased in-
process research and development of $12 million recorded last
year. EBIT improved as sales of higher-margin new products offset
declines in older, lower-margin products, and cost reduction
efforts continued.
Sales for the segment were $1,333 million for the first six
months of this year, down 5 percent from $1,407 million in 1998,
due to a volume decline of 3 percent and price declines of 2
percent. EBIT of $240 million for the same period was up 6
percent from $226 million last year excluding unusual items
recorded in the first half of 1998. Unusual items totaling $364
million, recorded in the first half of 1998, included charges for
purchased in-process research and development related to the
additional investments in Dow AgroSciences and Mycogen, severance
costs, and environmental remediation costs. (See sections
entitled "Purchased In-process Research and Development" and
"Special Charge" in Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
PLASTICS
Plastics sales for the second quarter of 1999 were $1,022
million, up 3 percent from $996 million a year ago. While volume
increased 13 percent, prices fell 10 percent. EBIT of $89 million
for the quarter was down from $201 million in second quarter
1998, due to the significant decline in prices.
Polyethylene sales were up 3 percent in the second quarter
versus the same quarter last year, as a 13 percent increase in
volume was partially offset by a 10 percent decline in prices.
Demand continued to be strong, with volume growth in all
geographic areas. Second quarter sales were also boosted by the
addition of sales from Safripol, following the purchase of
Hoechst South Africa's shares of the joint venture, bringing
Dow's ownership to 100 percent. Prior to this, results for
Safripol were reported in Unallocated and Other. Price declines,
like volume growth, were experienced around the globe. Comparing
second quarter with first quarter, however, prices were up.
Second quarter EBIT for polyethylene was down from the same
quarter of 1998 due to significant price declines and higher
ethylene costs.
Polystyrene sales decreased 10 percent in the second quarter
versus the same quarter of 1998. Prices declined 11 percent
compared with second quarter of last year; volume grew 1 percent.
While prices were lower in all regions of the globe, they were
down most significantly in Europe due to excess supply. Demand
was strong in Europe, despite the excess supply and the
competitive environment, but down in North America. Demand was
also strong in Asia Pacific and Latin America. EBIT for the
business was down compared with second quarter 1998, due to lower
selling prices and higher feedstock costs.
Polypropylene sales continued a strong growth trend, with
volume up significantly in the second quarter. In Europe and
Latin America, prices declined versus the same period last year.
EBIT for the quarter was relatively flat versus last year.
Insite EBIT for the second quarter improved compared with the
same period last year, primarily due to an improvement in equity
earnings from DuPont Dow Elastomers L.L.C. on higher sales and
lower structural costs.
Plastics sales for the first half of 1999 were $1,940 million,
compared with $1,990 for the same period last year. During the
first six months of the year volume grew 13 percent, but was more
than offset by a 16 percent decline in prices. EBIT for the
period was $230 million, down from $417 million for the first six
months of 1998.
CHEMICALS
Second quarter sales for the Chemicals segment were $541 million,
down from $612 million for the same quarter last year. Sales
continued to be negatively impacted by price declines (10
percent) globally. Volume, down 2 percent, was strong in Asia
Pacific and Latin America, but lower in North America (magnesium)
and Europe. Net of sales volume lost by exiting magnesium-related
businesses late last year, volume was up 6 percent. Vinyl
chloride monomer sales were up significantly with strong volume
and increased prices. Caustic volume was relatively flat compared
with last year, but prices were down over 30 percent. Ethylene
glycol volume was up significantly, about 40 percent on high
seasonal demand, with prices flat versus the same period last
year. Volume for propylene glycol and propylene oxide was about
flat with last year, but prices were down about 8 percent due to
new industry capacity in Europe. EBIT for the segment was $89
million for the quarter, up from $63 million for the same period
last year due to a marked improvement in productivity, more
efficient plant operations and portfolio changes.
<PAGE> --- Page 15 ---
Results of Operations (Continued)
For the first half of 1999, sales for the Chemicals segment
were $1,053 million, down from $1,262 million last year due
almost entirely to a 16 percent decline in prices. EBIT for the
period was $189 million compared with $201 for 1998, excluding
$55 million of unusual items (primarily environmental remediation
charges) recorded in the first quarter of 1998. (See section
entitled "Special Charge" in Management's Discussion and Analysis
of Financial Condition and Results of Operations.) Cost
reductions, better plant operations and changes in the segment's
portfolio helped offset declining prices and maintain EBIT.
HYDROCARBONS AND ENERGY
Sales for Hydrocarbons and Energy for the second quarter of 1999
were $363 million, flat with 1998. Sales volume, up 4 percent,
increased mainly due to spot sales in North America. Prices
declined 4 percent. EBIT for the quarter was $23 million, up from
a loss of $48 million last year, due to fewer scheduled and
unscheduled shutdowns this year.
Sales for the first half of 1999 were $672 million, down 15
percent versus sales of $786 million last year, due largely to a
13 percent decline in prices. Volume was down 2 percent. EBIT for
the first six months was $10 million, compared with a loss of $21
million last year, excluding $11 million of charges for unusual
items (environmental remediation costs) recorded in the first
quarter of 1998. (See section entitled "Special Charge" in
Management's Discussion and Analysis of Financial Condition and
Results of Operations.)
UNALLOCATED AND OTHER
EBIT for Unallocated and Other was a loss of $61 million for the
second quarter of 1999, compared with EBIT of $26 million last
year. Year to date, EBIT was a loss of $112 million compared with
a loss of $85 million, excluding an unusual gain of $464 million
recorded in the first quarter of 1998. Unusual items included: a
gain on the sale of the DowBrands business, partially offset by
purchased in-process research and development costs related to
the acquisition of Sentrachem; severance costs; asset write-
downs; and environmental remediation costs. (See sections
entitled "Purchased In-process Research and Development" and
"Special Charge" in Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
COMPANY SUMMARY
Operating Rate
- --------------
The Company's global plant operating rate for its chemicals and
plastics businesses was 86 percent for the second quarter of
1999, unchanged from the same period last year.
Purchased In-process Research and Development
- ---------------------------------------------
Purchased in-process research and development (IPR&D) 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 SFAS No. 2, "Accounting for Research and
Development Costs," as clarified by FASB Interpretation No. 4,
amounts assigned to IPR&D 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 as part of the allocations 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). An additional $12
million was recorded during the second quarter of 1998 related to
Mycogen's acquisition of Dinamilho Carol Productos Agricolas, a
Brazilian seed company. During the third and fourth quarters of
1998, the U.S. Securities and Exchange Commission (SEC) issued
clarifying guidance on how these amounts should be determined. In
light of this clarification, the Company reviewed all IPR&D
charges, and in the fourth quarter recorded a $55 million
reduction of the IPR&D charges recorded in the first half of 1998
to comply with the SEC guidance.
Special Charge
- --------------
In the first quarter of 1998, a special charge of $330 million
was recorded, including $218 million for the write-down of
several assets and $112 million for severance. The asset write-
downs included Radian International LLC, Dow-United Technologies
Composite Products, Inc., both of which were subsequently sold
(see Acquisitions and Divestitures), and an agricultural plant in
Brazil. In the third quarter, based on changes in the estimated
fair values, a $24 million adjustment to the reduced values of
the assets to be disposed was recorded.
<PAGE> --- Page 16 ---
Results of Operations (Continued)
Severance plans were adopted by the Company in the first
quarter of 1998 for North America, Europe and Sentrachem,
resulting in the special charge of $112 million. The plans for
North America and Europe were complete at the end of 1998. The
plan for Sentrachem is expected to be completed during 1999.
During 1998, severance costs of $138 million were incurred
relative to these plans, exceeding the initial severance accrual
by $39 million. Total headcount reduction related to the
severance plans was 1,881 through December 31, 1998. At year-end,
the balance of the accrual for the Sentrachem plan was $13
million, representing an anticipated additional headcount
reduction of 180. During the first half of 1999, $8 million
related to the Sentrachem plan was paid to 111 individuals,
leaving an accrued balance of $5 million for an anticipated
additional headcount reduction of 95.
Equity in Earnings of Nonconsolidated Affiliates
- ------------------------------------------------
Equity in earnings of nonconsolidated affiliates was $22 million
in the second quarter of 1999, down slightly from $27 million in
the second quarter of last year.
Sundry Income - Net
- -------------------
Sundry income includes a variety of income and expense items
including royalty income, the gain or loss on foreign currency
exchange, dividends from investments, and gains and losses on
sales of investments and assets. Sundry income for the second
quarter was $89 million, up from $14 million last year. The
increase was due to gains totaling $50 million on the sales of
several assets, including a terminal in Europe and land in Japan,
and favorable economic exposure hedging. Year to date, sundry
income was $157 million compared with $854 million last year. The
first quarter of 1998 included a pretax gain of $816 million on
the sale of DowBrands.
Interest Income and Expense
- ---------------------------
Interest expense (net of capitalized interest) and interest
income totaled $94 million for the second quarter, down from $98
million last year.
Provision for Taxes on Income
- -----------------------------
The effective tax rate for the second quarter was 35.2 percent
versus 35.0 percent for the second quarter of 1998. Year to date,
the effective tax rate was 35.7 percent.
Outlook
- -------
We expect the U.S. economy to slow in the second half of the
year, though still show GDP growth of around 3 percent. European
economies are expected to improve in the second half, stimulated
by first-half interest rate declines and weaker exchange rates.
The economic situation in Asia Pacific continues to improve with
some recovery seen in Korea, Taiwan and Malaysia, continued
growth in China, and slight improvement in Japan. In Latin
America, Argentina has been down as the recession continues, but
Brazil should have growth returning by the end of the second
half.
Ethylene is expected to remain tight throughout the second
half of the year, due to strong derivative demand, slowing the
industry's recovery back to normal inventory levels. The strength
of the global construction and automotive industries should carry
over to the second half, benefiting several of Dow's businesses.
Rising oil and gas prices are expected to add to chemical
industry producer costs through the third quarter, increasing
Dow's costs, but providing a more favorable atmosphere for price
increases.
Agricultural Products will face continued industry challenges
due to recession conditions and credit issues in Latin America,
as that geographic area enters its primary growing season in the
third quarter. In the performance businesses, price pressures are
likely to continue for Epoxy Products and Engineering Plastics
due to excess industry supply from new capacity. Most other
performance businesses expect to see stable pricing with moderate
volume growth.
Polyethylene volume growth is expected to continue. Combined
with rising prices, this should bring an improvement in total
EBIT for that business sequentially. Polystyrene prices are
expected to remain at low levels, with some improvement in Asia
Pacific. VCM prices are likely to continue to rise on the
strength of PVC and ethylene pricing. This will help offset
declining caustic prices, down due to the lower second-half
alumina price settlement and general contract pricing that
bottomed in July.
Overall, we expect to achieve our goal of earning the cost of
capital at the trough of the chemical cycle, and look forward to
second-half earnings that are expected to be favorable in
comparison with 1998.
<PAGE> --- Page 17 ---
SUBSEQUENT EVENTS
On August 2, 1999, the Company announced it had reached an
agreement with TransCanada Pipelines Limited to acquire CanStates
Holdings, Inc., and its subsidiary, ANGUS Chemical Company. ANGUS
Chemical is a global leader in the manufacture and marketing of
unique specialty chemicals - nitroparaffins and their derivatives -
sold into over 40 industries. ANGUS Chemical reports annual sales
of more than $150 million.
On August 3, 1999, the Board of Directors of the Company
terminated its 1997 authorization to repurchase Dow stock.
On August 4, 1999, the Company and Union Carbide Corporation
announced a definitive merger agreement for a tax-free, stock-for-
stock transaction, creating the world's second largest chemical
company. Under the agreement, Union Carbide shareholders will
receive 0.537 shares of Dow stock for each share of Union Carbide
stock they own. Based upon Dow's closing price of $124 11/16 on
August 3, 1999, the transaction is valued at $66.96 per Union
Carbide share, or $11.6 billion in aggregate including the
assumption of $2.3 billion of net debt. The transaction is
expected to be accounted for as a pooling of interests.
ACCOUNTING POLICIES
Effective January 1, 1999, the Company adopted American Institute
of Certified Public Accountants (AICPA) Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This standard requires
capitalization of certain internal-use computer software costs.
The Company previously expensed such costs as incurred;
therefore, the adoption of this statement resulted in a
favorable, though immaterial, impact on earnings in the first
half of 1999. The effect on the full year is also expected to be
immaterial.
The Company also adopted AICPA SOP 98-5, "Reporting on the
Costs of Start-Up Activities," which provides guidance on the
financial reporting of start-up costs and organization costs,
requiring those costs to be expensed as incurred. The Company's
existing policy regarding the treatment of these costs was
substantially consistent with SOP 98-5; therefore, the adoption
of this standard on January 1, 1999 did not have a material
impact on the Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires an entity to
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at
fair value. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133." SFAS
No. 133 is now effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. The Company expects to adopt
this standard on January 1, 2001. Determination of the impact of
adoption has not been made.
YEAR 2000 READINESS DISCLOSURE
State of Readiness
The Company's Year 2000 (Y2K) project, which began in early 1997,
is a global effort covering information systems, process control
and embedded systems for all of the Company's businesses. The
project is designed to address, through use of reasonable
commercial efforts, the risk that certain internal or external
systems may inaccurately interpret dates after December 31, 1999.
The project is led by a senior director of Information Systems
who reports to the Chief Information Officer and an executive
steering team, and is managed by a global team consisting of
technical, functional and business leaders. Since early 1997, the
Audit Committee of the Company's Board of Directors has received
quarterly reports on the team's plan and progress. Most of the
Company's business systems have already been upgraded and tested
and the project is substantially complete.
The first two phases of the Y2K project have been completed.
Phase I, the Business Study, established an awareness of the
problem and developed the overall strategy. During Phase II, the
Project Study, the Company inventoried and assessed applications,
infrastructure and embedded systems for Y2K problems; selected
the remediation tools; and prioritized the remediation projects.
The plans resulting from these studies continue to be updated as
new information becomes available.
Phase III, Remediation, includes the efforts to upgrade, test
for Y2K readiness and implement needed changes and new systems.
This phase is in progress and almost all elements, as noted
below, were completed at June 30, 1999. Phase IV, Business
Contingency Planning, is also in progress and, as discussed
below, any necessary plans will be implemented as needed.
<PAGE> --- Page 18 ---
Year 2000 Readiness Disclosure (Continued)
The Information Systems infrastructure team is responsible for
Y2K remediation of hardware, systems software and the
telecommunications network. The remediation phase was
approximately 98 percent complete at the end of the second
quarter.
The Information Systems applications software organization is
responsible for the remediation of applications and, at June 30,
1999, the remediation phase was also approximately 98 percent
complete. The Company's implementation of enterprise-wide
financial and operational systems and standardized desktop
computing during the last several years has facilitated this
effort. Two application replacement projects are in progress; one
is expected to be completed during the third quarter of 1999 and
the other is expected to be completed in October 1999. Neither of
these applications is considered mission-critical. Operational
contingency plans have, however, been developed should either of
these projects miss its planned completion date.
The Company has common process control systems in more than 80
percent of its plants globally and, during the project study,
determined that approximately 10 percent of these common systems
needed to be remediated. Remediation of these systems is
progressing as planned and completion is anticipated during the
third quarter. The remaining 20 percent of the Company's process
control systems are commercial systems. At the end of the second
quarter, more than 97 percent of the commercial control systems
had been remediated and tested. Remediation of some process
control systems will extend into the third quarter of 1999 due to
plant shutdown schedules.
Remediation of the Company's embedded systems, such as
laboratory equipment, air conditioners and elevators is complete,
as planned.
Remediation activity in a recently acquired company in South
Africa, for which a Y2K program had not been initiated prior to
the date of acquisition, is well underway and at June 30, 1999
was 93 percent complete. The Company expects that all planned Y2K
preparations in this subsidiary will be completed by September
30, 1999. For the Latin American operations of another recent
acquisition, remediation efforts are approximately 80 percent
complete and are anticipated to be 100 percent complete by the
end of August.
The Company's assessment of critical suppliers is ongoing, and
risk management actions and contingency plans are being
developed, as necessary. Approximately 98 percent of critical
suppliers have been assessed, and communications are ongoing with
a number of these critical suppliers, primarily in Asia Pacific
and Eastern Europe, who have indicated that they may not be Y2K
compliant before the year 2000. Contingency plans, such as
building inventories and switching suppliers, are being developed
for a number of these critical suppliers, and will be executed in
1999, if necessary.
The Company's assessment of customer readiness is in progress,
with completion anticipated by the end of August 1999.
Costs
Project costs are expected to be approximately $70 million, over
three years, and are not considered material to the Company's
consolidated financial statements. Total project costs incurred
to date were approximately $65 million at the end of the second
quarter of 1999. The Y2K effort is being supported by a
reallocation of existing resources. Capital equipment replacement
costs are expected to be an additional $5 million.
Risks
Failure to adequately address critical Y2K issues by the Company,
its suppliers and/or its customers could result in interruptions
of normal business work operations. Such interruptions could
materially and adversely affect the Company's results of
operations, liquidity and financial condition; however, the
Company's program to address these is on schedule to meet a
completion date ahead of the year 2000. The Company is assessing
external sources of risk and developing contingency plans to
address both internal and external identifiable risks through
commercially reasonable efforts.
The Company's risk assessment data plus recent external
studies indicate that electric power and utilities may be a
significant external source of risk. Efforts are underway to
validate the impact on the Company's operations and to develop
specific contingency plans for those sites found to be at higher
risk. Telecommunications providers in certain Asian, Latin
American and Eastern European countries have also been identified
as sources of risk. To manage this risk, technical alternatives
are being assessed where economically justified and manual
workarounds will be implemented, if necessary. As an example, we
have implemented backup telecommunications facilities in one
country where we have significant manufacturing operations and
where there is a concern about the readiness of the
telecommunications infrastructure and are considering similar
telecommunications backup facilities in another country.
While the risks discussed herein have a possible material
impact, the risk management actions and contingency plans that
are being developed and implemented will significantly reduce the
probability and potential impact of these identified risks.
<PAGE> --- Page 19 ---
Year 2000 Readiness Disclosure (Continued)
Contingency Plans
In addition to the specific risk management actions and
contingency plans outlined in the previous sections, a business
contingency planning process has identified additional prudent
steps that may be necessary to prepare for unexpected, but
credible, scenarios. A senior supply-chain project manager is
leading this business contingency planning effort during 1999.
EURO CONVERSION
On January 1, 1999, the Euro was adopted as the national currency
of 11 European Union member nations. During a three-year
transition period, the Euro will be used as a non-cash
transactional currency. The Company began conducting business in
the Euro on January 1, 1999, and will change its functional
currencies during the three-year transition period. The
conversion to the Euro is not expected to have a significant
operational impact or a material impact on the results of
operations, financial position, or liquidity of its European
businesses.
ITEM 3. QUANTITATIVE 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 Euro, 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 objectives of interest rate risk management are 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 these objectives. 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. Cracker 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.
Dow has a portfolio of equity securities derived from its
acquisition and divestiture activity. 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 immaterial in comparison to 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 average daily VAR, using a 95 percent confidence
level at December 31, 1998 and 1997, for foreign exchange,
interest rate and equity exposures, net of hedges, was: foreign
exchange - $4 million and $12 million; interest rate - $23
million and $23 million; and equity - $6 million and $3 million,
respectively. Management believes there have been no material
changes in market risk or in risk management policies subsequent
to December 31, 1998.
<PAGE> --- Page 20 ---
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 in the federal district court for the Southern
District of New York 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 were also sued in two separate class
action complaints (subsequently consolidated in the federal
district court for the Eastern District of Michigan under the
caption ZSA v. Dow Chemical) 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 February 1,
1999, the Court entered a Stipulated Order in ZSA v. Dow Chemical
dismissing the claims of the named plaintiffs with prejudice and
dismissing the claims of the class, which had never been
certified, without prejudice.
On May 15, 1995, Dow Corning announced that it had voluntarily
filed for protection under Chapter 11 of the United States
Bankruptcy Code. Under Chapter 11, all claims against Dow
Corning (although not against its co-defendants) are
automatically stayed.
It is impossible to predict the outcome of each of the above
described legal actions. However, it is the opinion of the
Company's management that the possibility that these actions will
have a material adverse impact on the Company's consolidated
financial statements is remote, except as described below.
In January 1994, Dow Corning announced a pretax charge of $640
million ($415 million after tax) for the fourth quarter of 1993.
In January 1995, Dow Corning announced a pretax charge of $241
million ($152 million after tax) for the fourth quarter of 1994.
These charges included Dow Corning's best estimate of its
potential liability for breast implant litigation based on a
global Breast Implant Litigation Settlement Agreement (the
"Settlement Agreement"); litigation and claims outside the
Settlement Agreement; and provisions for legal, administrative
and research costs related to breast implants. The charges for
1993 and 1994 included pretax amounts of $1,240 million and $441
million, respectively, less expected insurance recoveries of $600
million and $200 million, respectively. The 1993 amounts
reported by Dow Corning were determined on a present value basis.
On an undiscounted basis, the estimated liability 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 1995 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.
<PAGE> --- Page 21 ---
Legal Proceedings (Continued)
The Company is separately named as a defendant in over 14,000
breast implant product liability cases. In these situations,
plaintiffs have alleged that the Company should be liable for Dow
Corning's alleged torts based on the Company's 50 percent stock
ownership in Dow Corning and that the Company should be liable by
virtue of alleged "direct participation" by the Company or its
agents in Dow Corning's breast implant business. These latter,
direct participation claims include counts sounding in strict
liability, fraud, aiding and abetting, conspiracy, concert of
action and negligence.
Judge Pointer has been appointed by the Federal Judicial Panel
on Multidistrict Litigation to oversee all of the product
liability cases involving silicone breast implants filed in the
U.S. federal courts. Initially, in a ruling issued on December 1,
1993, Judge Pointer granted the Company's motion for summary
judgment, finding that there was no basis on which a jury could
conclude that the Company was liable for any claimed defects in
the breast implants manufactured by Dow Corning. In an
interlocutory opinion issued on April 25, 1995, Judge Pointer
affirmed his December 1993 ruling as to plaintiffs' corporate
control claims but vacated that ruling as to plaintiffs' direct
participation claims.
In his opinion, Judge Pointer reaffirmed the view he had
expressed in his December 1993 ruling that the Company is a
separate, independent entity from Dow Corning and therefore has
no legal responsibility as a result of its ownership of Dow
Corning stock for Dow Corning's breast implant business. However,
Judge Pointer stated that, under the law of at least some states
(although not necessarily all states), actions allegedly taken by
the Company independent of its role as a stockholder in Dow
Corning could give rise to liability under a negligence theory.
Judge Pointer declined to address plaintiffs' other legal
theories, including strict liability, fraud, aiding and abetting,
conspiracy and concert of action. It is impossible to predict
the outcome or to estimate the cost to the Company of resolving
any of the federal product liability cases. The Company has filed
claims with insurance carriers to recover in the event it is held
liable in the federal (or any other) breast implant litigation.
After Judge Pointer's initial ruling in December 1993, summary
judgment was granted to the Company in approximately 4,000 breast
implant cases pending in state courts in California, Indiana,
Michigan, New Jersey and New York, and over 100 actions in
Pennsylvania were dismissed. Of these rulings, the California
ruling was final and was appealed. On September 25, 1996, the
California Court of Appeal for the 4th District affirmed the
trial court's order granting summary judgment to the Company. On
July 9, 1998, the California Supreme Court affirmed the decision
of the Court of Appeal, and the California summary judgment order
in favor of the Company is now final. 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. The parties have since entered into a
confidential settlement, the terms of which are dependent on the
outcome of the appeal and are reflected, in part, in the Joint
Plan (defined below). Any settlement amounts paid by the Company
will be reimbursed by Dow Corning in accordance with the terms of
the Joint Plan if the Joint Plan becomes effective. Further
action in the Spitzfaden case itself will commence, if at all,
only after the resolution of the pending appeal. 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.
<PAGE> --- Page 22 ---
Legal Proceedings (Continued)
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.
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. On December 31,
1998, the Nevada Supreme Court reversed and vacated the $10
million punitive damages award and affirmed the $4.15 million
compensatory damages award. The Company filed a motion asking the
Court to reconsider that portion of its opinion affirming the
compensatory damages award. On February 12, 1999, that motion was
denied. Subsequently, the parties negotiated a confidential
settlement and the case has been dismissed with prejudice. The
Company will be reimbursed by Dow Corning for all settlement
amounts paid, in accordance with the terms of the Joint Plan if
the Joint Plan becomes effective.
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, 1997 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 sought review of Judge
Hood's May 21 decision by the United States Court of Appeals for
the Sixth Circuit. On June 25, 1998, the Sixth Circuit rejected
the Company's argument that Judge Hood's May 21, 1997 order
returning Phases I and II of the Spitzfaden proceeding to
Louisiana was an abuse of her discretion.
<PAGE> --- Page 23 ---
Legal Proceedings (Continued)
On July 7, 1998, Dow Corning, the Company and Corning, on the
one hand, and the Tort Claimants' Committee in Dow Corning's
bankruptcy on the other, agreed on a binding Term Sheet to
resolve all tort claims involving Dow Corning's silicone medical
products, including the claims against Corning and the Company.
The agreement set forth in the Term Sheet was memorialized in a
Joint Plan of Reorganization (the "Joint Plan") filed by Dow
Corning and the Tort Claimants' Committee on November 9, 1998. On
February 4, 1999, the court approved the disclosure statement
describing the Joint Plan. Before the Joint Plan can become
effective, however, it will be subject to a vote by the
claimants, a confirmation hearing and all relevant provisions of
the Bankruptcy Code. Voting was completed on May 14, 1999, and
the confirmation hearing concluded on July 30, 1999. The
effectiveness of the Joint Plan remains subject to the issuance
of an opinion by the bankruptcy judge confirming the Joint Plan.
Accordingly, there can be no assurances at this time that the
Joint Plan will become effective.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of The Dow Chemical Company
was held on May 13, 1999. At that meeting the following directors
were elected: Jacqueline K. Barton, David T. Buzzelli, Anthony J.
Carbone, Barbara Hackman Franklin and Harold T. Shapiro. In
addition, the terms of the following directors continued after
that meeting: Arnold A. Allemang, John C. Danforth, Willie D.
Davis, Joseph L. Downey, Enrique C. Falla, Allan D. Gilmour,
Michael D. Parker, Frank P. Popoff, J. Pedro Reinhard, William S.
Stavropoulos and Paul G. Stern.
The following table gives a brief description of each matter
voted upon at the above referenced annual meeting and, as
applicable, the number of votes cast for, against or withheld, as
well as the number of abstentions and broker nonvotes.
Description of Matter
- ---------------------
Broker
For Against Withheld Abstentions Nonvotes
------------------------------------------------------
1. Election of Directors:
Class I
-------
Jacqueline K. Barton 186,977,171 n/a 2,870,698 n/a n/a
David T. Buzzelli 186,766,669 n/a 3,081,200 n/a n/a
Anthony J. Carbone 186,737,366 n/a 3,110,503 n/a n/a
Barbara Hackman Franklin 186,871,666 n/a 2,976,203 n/a n/a
Harold T. Shapiro 187,064,533 n/a 2,783,336 n/a n/a
2. Ratification of the
selection of Deloitte &
Touche LLP as the
Company's independent
auditors for 1999 188,862,709 340,985 n/a 644,175 0
n/a - Not applicable
<PAGE> --- Page 24 ---
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
There were no Current Reports on Form 8-K filed by the Company
during the second quarter of 1999.
On August 4, 1999, the Company filed a Current Report on Form
8-K that included the press release describing the proposed
merger of the Company and Union Carbide Corporation.
The following trademarks of The Dow Chemical Company appear in
this report: Insite, Methocel, Styrofoam
The following trademarks of Dow AgroSciences LLC appear in
this report: Gallant, Lontrel, Sentricon
<PAGE> --- Page 25 ---
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
THE DOW CHEMICAL COMPANY
------------------------
Registrant
Date: August 11, 1999
- ----
G. Michael Lynch
----------------
G. Michael Lynch
Vice President &
Controller
<PAGE> --- Page 26 ---
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 218
<SECURITIES> 296
<RECEIVABLES> 2,380
<ALLOWANCES> 120
<INVENTORY> 2,593
<CURRENT-ASSETS> 7,450
<PP&E> 23,721
<DEPRECIATION> 15,495
<TOTAL-ASSETS> 23,105
<CURRENT-LIABILITIES> 5,993
<BONDS> 4,063
<COMMON> 818
115
0
<OTHER-SE> 6,876
<TOTAL-LIABILITY-AND-EQUITY> 23,105
<SALES> 9,036
<TOTAL-REVENUES> 9,036
<CGS> 6,671
<TOTAL-COSTS> 7,843
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (241)
<INCOME-PRETAX> 1,208
<INCOME-TAX> 431
<INCOME-CONTINUING> 739
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 739
<EPS-BASIC> 3.35
<EPS-DILUTED> 3.30
</TABLE>
