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 September 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 September 30, 1999
----- ------------------
Common Stock, $2.50 219,297,129 shares
par value
<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 10
Financial Condition and Results of Operations
Disclosure Regarding Forward-Looking Information 10
Third Quarter Earnings Announcement 10
Acquisitions and Divestitures 12
Changes in Financial Condition 13
Results of Operations 14
Accounting Policies 19
Year 2000 Readiness Disclosure 19
Euro Conversion 20
Item 3. Quantitative and Qualitative Disclosures About 21
Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
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 Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
In millions, except for share amounts (Unaudited) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $4,693 $4,314 $13,729 $14,000
- -------------------------------------------------------------------------------------------------------------
Cost of Sales 3,587 3,258 10,258 10,451
Research and development expenses 203 198 618 580
Selling, general and administrative expenses 381 401 1,145 1,244
Amortization of intangibles 27 23 81 62
Purchased in-process research and development charges (Note B) - - - 350
Special charges (Note C) - (24) - 306
Insurance and finance company operations, pretax income 21 25 82 83
Equity in earnings of nonconsolidated affiliates 15 28 62 78
Sundry income - net (Note D) 53 53 210 907
- -------------------------------------------------------------------------------------------------------------
Earnings before Interest, Income Taxes and Minority Interest 584 564 1,981 2,075
- -------------------------------------------------------------------------------------------------------------
Interest income 29 34 81 100
Interest expense and amortization of debt discount 93 121 334 370
- -------------------------------------------------------------------------------------------------------------
Income before Income Taxes and Minority Interests 520 477 1,728 1,805
- -------------------------------------------------------------------------------------------------------------
Provision for taxes on income 182 158 613 632
Minority interests' share in income 17 4 52 9
Preferred stock dividends 1 1 4 4
- -------------------------------------------------------------------------------------------------------------
Net Income Available for Common Stockholders $320 $314 $1,059 $1,160
- -------------------------------------------------------------------------------------------------------------
Share Data
Earnings per common share - basic $1.46 $1.41 $4.81 $5.17
Earnings per common share - diluted $1.44 $1.40 $4.74 $5.10
Common stock dividends declared per share $0.87 $0.87 $2.61 $2.61
Weighted-average common shares outstanding - basic 219.4 222.7 220.1 224.3
Weighted-average common shares outstanding - diluted 224.0 226.2 224.2 228.2
- -------------------------------------------------------------------------------------------------------------
Depreciation $273 $272 $830 $814
- -------------------------------------------------------------------------------------------------------------
Capital Expenditures $353 $365 $950 $994
- -------------------------------------------------------------------------------------------------------------
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. In the third quarter of 1998, this charge was reduced by $24 million.
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.
Note E: During the third quarter of 1999, a third party contributed $500 million for a preferred interest in a newly formed
consolidated subsidiary of the Company.
</TABLE>
<PAGE> --- Page 3 ---
<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
Sept. 30, Dec. 31,
In millions (Unaudited) 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
- -------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $369 $123
Marketable securities and interest-bearing deposits 672 267
Accounts and notes receivable:
Trade (less allowance for doubtful receivables - 1999, $132; 1998, $93) 2,223 2,787
Other 1,889 1,750
Inventories:
Finished and work in process 2,168 2,245
Material and supplies 591 565
Deferred income tax assets - current 255 303
-----------------------------------------------------------------------------------------------------------
Total current assets 8,167 8,040
- -------------------------------------------------------------------------------------------------------------
Investments
Investment in nonconsolidated affiliates 1,371 1,311
Other investments 2,239 2,191
Noncurrent receivables 400 424
-----------------------------------------------------------------------------------------------------------
Total investments 4,010 3,926
- -------------------------------------------------------------------------------------------------------------
Property
Property 24,097 24,435
Less accumulated depreciation 15,730 15,988
-----------------------------------------------------------------------------------------------------------
Net property 8,367 8,447
- -------------------------------------------------------------------------------------------------------------
Other Assets
Goodwill (net of accumulated amortization - 1999, $292; 1998, $246) 1,629 1,641
Deferred income tax assets - noncurrent 583 684
Deferred charges and other assets 1,116 1,092
-----------------------------------------------------------------------------------------------------------
Total other assets 3,328 3,417
- -------------------------------------------------------------------------------------------------------------
Total Assets $23,872 $23,830
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> --- Page 4 ---
<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
- -------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
Sept. 30, Dec. 31,
In millions (Unaudited) 1999 1998
- -------------------------------------------------------------------------------------------------------------
<S>
Liabilities and Stockholders' Equity <C> <C>
- -------------------------------------------------------------------------------------------------------------
Current Liabilities
Notes payable $921 $1,526
Long-term debt due within one year 213 300
Accounts payable:
Trade 1,695 1,682
Other 882 981
Income taxes payable 210 290
Deferred income tax liabilities - current 40 71
Dividends payable 193 192
Accrued and other current liabilities 1,970 1,800
-----------------------------------------------------------------------------------------------------------
Total current liabilities 6,124 6,842
- -------------------------------------------------------------------------------------------------------------
Long-Term Debt 4,130 4,051
- -------------------------------------------------------------------------------------------------------------
Other Noncurrent Liabilities
Deferred income tax liabilities - noncurrent 809 747
Pension and other postretirement benefits - noncurrent 1,882 1,903
Other noncurrent obligations 2,286 2,283
-----------------------------------------------------------------------------------------------------------
Total other noncurrent liabilities 4,977 4,933
- -------------------------------------------------------------------------------------------------------------
Minority Interest in Subsidiaries 413 532
- -------------------------------------------------------------------------------------------------------------
Preferred Securities of Subsidiary (Note E) 509 -
- -------------------------------------------------------------------------------------------------------------
Temporary Equity
Preferred stock at redemption value 114 117
Guaranteed ESOP obligation (74) (74)
-----------------------------------------------------------------------------------------------------------
Total temporary equity 40 43
- -------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock 818 818
Additional paid-in capital 898 718
Retained earnings 13,372 12,887
Accumulated other comprehensive income (353) (347)
Treasury stock, at cost (7,056) (6,647)
-----------------------------------------------------------------------------------------------------------
Net stockholders' equity 7,679 7,429
- -------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $23,872 $23,830
- -------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
<PAGE> --- Page 5 ---
<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
- -----------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows Nine Months Ended
Sept. 30, Sept. 30,
In millions (Unaudited) 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income available for common stockholders $1,059 $1,160
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 934 877
Purchased in-process research & development - 350
Special charge - 306
Provision for deferred income tax 164 21
Undistributed earnings of nonconsolidated affiliates (33) (64)
Minority interests' share in income 52 9
Net gain on sale of consolidated companies (22) (816)
Net gain on sales of property (49) (38)
Other net (gain) loss (78) 9
Changes in assets and liabilities that provided (used) cash:
Accounts receivable 455 370
Inventories 52 105
Accounts payable (86) (292)
Other assets and liabilities 260 (100)
------------------------------------------------------------------------------------------------
Cash provided by operating activities 2,708 1,897
- -----------------------------------------------------------------------------------------------------
Investing Activities
Capital expenditures (950) (994)
Proceeds from sales of property 102 82
Purchases of consolidated companies (101) (357)
Proceeds from sale of consolidated companies 35 1,300
Purchases from outside investors in limited partnership - (210)
Proceeds from outside investors in limited partnership - 200
Investments in nonconsolidated affiliates (91) (41)
Purchases of investments (2,744) (3,084)
Proceeds from sales of investments 2,340 3,031
------------------------------------------------------------------------------------------------
Cash used in investing activities (1,409) (73)
- -----------------------------------------------------------------------------------------------------
Financing Activities
Changes in short-term notes payable (578) (545)
Payments on long-term debt (280) (431)
Proceeds from issuance of long-term debt 300 256
Purchases of treasury stock (428) (604)
Proceeds from sales of common stock 149 112
Purchase of subsidiary preferred stock (102) -
Proceeds from issuance of preferred securities of subsidiary 500 -
Distributions to minority interests (32) (23)
Dividends paid to stockholders (577) (590)
------------------------------------------------------------------------------------------------
Cash used in financing activities (1,048) (1,825)
- -----------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (5) (8)
- -----------------------------------------------------------------------------------------------------
Summary
Increase (decrease) in cash and cash equivalents 246 (9)
Cash and cash equivalents at beginning of year 123 235
------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $369 $226
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
The Dow Chemical Company and Subsidiaries
- -----------------------------------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
In millions (Unaudited) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income Available for Common Stockholders $320 $314 $1,059 $1,160
- -----------------------------------------------------------------------------------------------------
Other Comprehensive Income, Net of Tax
Unrealized gains (losses) on investments (41) (153) 59 (212)
Income, Net of Tax Cumulative translation adjustment (12) 14 (65) 9
Minimum pension liability - - - -
-----------------------------------------------------------------------------------------------
Total other comprehensive income (53) (139) (6) (203)
- -----------------------------------------------------------------------------------------------------
Comprehensive Income $267 $175 $1,053 $957
- -----------------------------------------------------------------------------------------------------
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 Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
In millons (Unaudited) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating segment sales
Performance Plastics $1,302 $1,254 $3,862 $3,800
Performance Chemicals 674 663 1,971 1,965
Agricultural Products 399 424 1,732 1,831
Plastics 1,170 915 3,110 2,905
Chemicals 607 555 1,660 1,817
Hydrocarbons and Energy 469 367 1,141 1,153
Unallocated and Other 72 136 253 529
- --------------------------------------------------------------------------------------------------------------------
Total $4,693 $4,314 $13,729 $14,000
- --------------------------------------------------------------------------------------------------------------------
Operating segment EBIT
Performance Plastics $248 $300 $815 $841
Performance Chemicals 108 136 381 334
Agricultural Products (35) (45) 205 (183)
Plastics 207 132 437 549
Chemicals 101 69 290 215
Hydrocarbons and Energy (17) 19 (7) (13)
Unallocated and Other (28) (47) (140) 332
- --------------------------------------------------------------------------------------------------------------------
Total $584 $564 $1,981 $2,075
- --------------------------------------------------------------------------------------------------------------------
Operating segment intersegment revenues
Performance Plastics $3 $4 $9 $12
Performance Chemicals 3 2 10 7
Plastics (1) - 1 2
Chemicals 5 10 19 33
Unallocated and Other (10) (16) (39) (54)
- --------------------------------------------------------------------------------------------------------------------
Total - - - -
- --------------------------------------------------------------------------------------------------------------------
Geographic area sales
United States $1,821 $1,743 $5,577 $5,710
Europe 1,572 1,427 4,663 4,830
Rest of World 1,300 1,144 3,489 3,460
- --------------------------------------------------------------------------------------------------------------------
Total $4,693 $4,314 $13,729 $14,000
- --------------------------------------------------------------------------------------------------------------------
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 Nine Months Ended
Sept. 30, 1999 Sept. 30, 1999
Percentage change from prior year Volume Price Total Volume Price Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating segments
Performance Plastics 9% (5)% 4% 7% (5)% 2%
Performance Chemicals 6% (4)% 2% 3% (3)% 0%
Agricultural Products (2)% (4)% (6)% (2)% (3)% (5)%
Plastics 18% 10% 28% 14% (7)% 7%
Chemicals 7% 2% 9% 0% (9)% (9)%
Hydrocarbons and Energy 5% 23% 28% (1)% 0% (1)%
- ---------------------------------------------------------------------------------------------------------------------
Total 7% 2% 9% 3% (5)% (2)%
- ---------------------------------------------------------------------------------------------------------------------
Geographic areas
United States 1% 3% 4% 0% (2)% (2)%
Europe 10% 0% 10% 4% (7)% (3)%
Rest of World 13% 1% 14% 7% (6)% 1%
- ---------------------------------------------------------------------------------------------------------------------
Total 7% 2% 9% 3% (5)% (2)%
- ---------------------------------------------------------------------------------------------------------------------
</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 $335 million at
September 30, 1999, for environmental matters, including $7
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.
THIRD QUARTER EARNINGS ANNOUNCEMENT (OCTOBER 21, 1999)
DOW REPORTS HIGHER EARNINGS AND SALES FOR THIRD QUARTER
- ------------------------------------------------------------------------
Third Quarter of 1999 Highlights
- - Earnings were $1.44 per share, an 8 percent increase from
third quarter 1998 earnings per share of $1.33 excluding unusual
items.
- - Sales for the quarter were $4.7 billion, up 9 percent from a
year ago. Both volume and price improved - by 7 percent and 2
percent respectively.
- - EBIT was $584 million for the quarter versus $540 million,
excluding unusual items, for third quarter 1998 - a gain of 8
percent.
- ------------------------------------------------------------------------
(In millions, except for per share amounts
3 Months Ended 9 Months Ended
September 30 September 30
- ------------------------------------------------------------------------
1999 1998 1999 1998
--------------------------------
Net Sales $4,693 $4,314 $13,729 $14,000
Earnings Before Interest, Income Taxes
and Minority Interests (EBIT) $584 $564 $1,981 $2,075
Earnings Per Common Share $1.44 $1.40 $4.74 $5.10
Excluding unusual items:
EBIT $584 $540 $1,981 $2,023
Earnings Per Common Share $1.44 $1.33 $4.74 $4.96
- ------------------------------------------------------------------------
Review of Third Quarter Results
The Dow Chemical Company today announced higher sales and
earnings compared with the same quarter a year ago. The company
reported sales of $4.7 billion, earnings before interest, income
taxes and minority interests (EBIT) of $584 million and net
income of $320 million. Earnings per share of $1.44 were up 8
percent, excluding unusual items from third quarter 1998.
The company's higher earnings were achieved despite a 30
percent spike in feedstock and energy costs from the same period
a year ago, according to J. Pedro Reinhard, executive vice
president and chief financial officer. "These strong results
truly differentiate Dow and reflect our ability to withstand
significant increases in feedstock costs through our diversified
business portfolio and geographic mix, operational excellence and
cost reductions." He added, "The fact that we have achieved
favorable year-to-year comparisons in sales and earnings
underscores that Dow will earn a positive economic profit this
year."
<PAGE> --- Page 10 ---
Third Quarter Earnings Announcement (October 21, 1999) (Continued)
Sales increased by 9 percent, while EBIT grew 8 percent
excluding 1998 unusual items. Dow's volume climbed 7 percent -
the highest year-over-year growth since second quarter 1997.
Double-digit volume growth was achieved in Asia and Europe as
well as in the Plastics segment.
Price rose by 2 percent compared with the same quarter a year
ago and by 5 percent versus last quarter. Price increases in the
basics segments more than offset declines in the performance
businesses.
On a year-to-date basis excluding 1998 unusual items, EBIT for
Dow's combined performance segments was up 2 percent,
contributing more than 60 percent of the company's total
earnings. For the quarter, EBIT declined from the same period a
year ago reflecting higher feedstock costs and price
deterioration, which were only partially offset by increased
volume. Performance Plastics sales increased to $1.3 billion,
reflecting a 9 percent growth in volume with strongest gains in
Engineering Plastics and Adhesives, Sealants and Coatings. Sales
in Performance Chemicals rose to $674 million, bolstered by a 6
percent increase in volume. Exhibiting normal third quarter
seasonality, EBIT for the Agricultural Products segment was
negative, though up from the third quarter of 1998 due to a
strong focus on productivity improvements.
In the Chemicals and Plastics segments, improved productivity,
strong demand and some price recovery more than offset higher
feedstock and energy costs. The Chemicals segment turned in EBIT
of $101 million, an increase of 46 percent from the same period a
year ago. In the Plastics segment, EBIT improved by 57 percent
from third quarter 1998 to $207 million, on volume gains of 18
percent coupled with a 10 percent increase in price. This latter
segment drew particular strength from its differentiated product
mix focused on higher value markets and high growth customers.
"We are very pleased with the quarter's results, which again
demonstrate Dow's resilience based on our global business
leadership positions and low-cost structure," said Reinhard. "We
look forward to continuing this strong performance supported by
improving global economic conditions. Dow is delivering on its
commitments and remains focused on implementing its strategy to
achieve aggressive value growth."
The Dow Chemical Company is a global science and technology based
company that develops and manufactures a portfolio of chemical,
plastic and agricultural products and services for customers in
168 countries around the world. With annual sales of more than
$18 billion, Dow conducts its operations through 14 global
businesses employing 39,000 people and supplies more than 3,500
products.
<PAGE> --- Page 11 ---
ACQUISITIONS AND DIVESTITURES
In April 1995, the Company signed an agreement with Bundesanstalt
fuer vereinigungsbedingte Sonderaufgaben (BvS) for the
privatization of three state-owned chemical companies in eastern
Germany (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 $137 million. BvS
is providing certain incentives during the restructuring period
to cover portions of the reconstruction program and has retained
environmental cleanup obligations for existing facilities.
Incentives relating to property construction reduce the basis of
such property. Incentives relating to expenses during the
reconstruction period are recognized as such expenses are
incurred. The Company expects to include the financial results of
BSL as a nonconsolidated affiliate until the end of the
restructuring period.
In 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
2000, with no material effect on its consolidated financial
statements.
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. On
October 1, 1999, the Company executed the purchase agreement to
acquire ANGUS Chemical. 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 4, 1999, the Company and Union Carbide Corporation
announced a definitive merger agreement for a tax-free, stock-for-
stock transaction. Under the agreement, Union Carbide
shareholders will receive 0.537 of a share 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 merger
is subject to certain conditions including approval by Union
Carbide shareholders and review by antitrust regulatory
authorities in the United States, Europe and Canada. The
transaction is expected to be accounted for as a pooling-of-
interests.
See the sections entitled "Purchased In-process Research and
Development" and "Special Charge" on page 17 regarding certain
charges recorded during 1998 related to acquisitions and
divestitures.
<PAGE> --- Page 12 ---
CHANGES IN FINANCIAL CONDITION
The following tables represent total debt, working capital and
certain balance sheet ratios at September 30, 1999 versus
December 31, 1998:
Sept. 30, Dec. 31, Increase
In millions 1999 1998 (Decrease)
- -------------------------------------------------------------------
Notes payable $ 921 $1,526 $(605)
Long-term debt due within one year 213 300 (87)
Long-term debt 4,130 4,051 79
- -------------------------------------------------------------------
Total debt $5,264 $5,877 $(613)
- -------------------------------------------------------------------
At September 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 $1.0 billion are available for use by foreign
subsidiaries.
On November 9, 1999, the Company issued $1.0 billion in 30-
year senior unsecured debentures for general corporate purposes,
drawing that amount from a $2.5 billion shelf registration
statement filed with the U.S. Securities and Exchange Commission
on October 8, 1999.
Sept. 30, Dec. 31, Increase
In millions 1999 1998 (Decrease)
- -------------------------------------------------------------------
Cash and cash equivalents $ 369 $ 123 $ 246
Marketable securities and 672 267 405
interest-bearing deposits
Accounts and notes receivable - net 4,112 4,537 (425)
Inventories:
Finished and work in process 2,168 2,245 (77)
Materials and supplies 591 565 26
Deferred income tax assets - current 255 303 (48)
- -------------------------------------------------------------------
Total current assets 8,167 8,040 127
- -------------------------------------------------------------------
Total current liabilities 6,124 6,842 (718)
- -------------------------------------------------------------------
Working capital $2,043 $1,198 $ 845
- -------------------------------------------------------------------
Operating activities provided cash of $2.7 billion for the
nine months ended September 30, 1999. Included in this amount was
the sale of U.S. trade receivables totaling $450 million late in
the third quarter. The issuance of preferred securities by a
newly formed subsidiary of the Company provided an additional
$500 million this quarter. Cash was used to reduce total debt
$613 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 $428 million, and for capital expenditures and other
normal activities. Activities for the quarter resulted in a
temporary increase in cash, cash equivalents, marketable
securities and interest-bearing deposits of $651 million. On
October 1, 1999, cash was used to acquire ANGUS Chemical. (See
the Consolidated Statements of Cash Flows and Acquisitions and
Divestitures for more detail.)
Sept.30, Dec. 31,
Balance Sheet Ratios 1999 1998
- -------------------------------------------------------------------
Current assets over current liabilities 1.3:1 1.2:1
Days-sales-outstanding-in-receivables 46 49
Days-sales-in-inventory 71 72
Debt as a percentage of total capitalization 37.9% 42.3%
- -------------------------------------------------------------------
Prior to the announcement of the merger agreement with Union
Carbide this quarter, the Company purchased 0.9 million shares of
common stock as part of its overall stock repurchase program,
bringing the year to date total to 3.7 million shares. Due to the
pending merger, on August 3, 1999, the Board of Directors of the
Company terminated its 1997 authorization to repurchase Dow
stock. The Company's average shares outstanding for the first
nine months of 1999 were 220 million, a decrease of 2 percent
from the average shares outstanding for the first nine months of
1998.
On October 29, 1999, the Company paid a quarterly dividend of
87 cents per share to shareholders of record on September 30,
1999. This was the 351st consecutive quarterly dividend since
1912 and in each instance Dow has maintained or increased the
dividend.
<PAGE> --- Page 13 ---
RESULTS OF OPERATIONS
Following are selected data for the three months and nine months
ended September 30, 1999 and 1998:
Three Months Ended Nine Months Ended
-------------------- --------------------
Dollars in millions, except Sept. 30, Sept. 30, Sept. 30, Sept. 30,
for share amount 1999 1998 1999 1998
- ----------------------------------------------------------------------------
Sales $4,693 $4,314 $13,729 $14,000
Cost of sales 3,587 3,258 10,258 10,451
% of sales 76% 76% 75% 75%
Research and development, selling
general and adminstrative expense 584 599 1,763 1,824
Earnings before interest, income
taxes and minority interests (EBIT) 584 564 1,981 2,075
% of sales 12% 13% 14% 15%
Earnings before interest, income
taxes and minority interests
excluding unusual items 584 540 1,981 2,023
% of sales 12% 13% 14% 14%
Effective tax rate 35.0% 33.1% 35.5% 35.0%
Net income available for
common stockholders $320 $314 $1,059 $1,160
Earnings per common share - basic $1.46 $1.41 $4.81 $5.17
Earnings per common share - diluted $1.44 $1.40 $4.74 $5.10
Operating rate percentage 91% 83% 88% 86%
Net sales for the third quarter of 1999 were $4.7 billion, up 9
percent from $4.3 billion in the third quarter of last year, with
increases in both volume and price. Volume growth contributed 7
percent, representing the highest year-over-year volume increase
since the second quarter of 1997. Price increases contributed
another 2 percent compared with last year, with increases in the
basic segments more than offsetting declines in the performance
businesses. Considering the effect of acquisitions and
divestitures, volume improved 8 percent from last year. Volume
was up in all operating segments except Agricultural Products,
and was particularly strong in Plastics, up 18 percent due
primarily to double-digit growth in polyethylene. Agricultural
Products volume was down 2 percent due to adverse worldwide
industry conditions. Overall, volume was up in all geographic
areas, although only slightly in the United States due to the
1998 divestitures of the magnesium business and Radian
International. Volume was strong in Europe, up 10 percent, and in
Rest of World, up 13 percent, driven by a 35 percent volume
increase in Asia Pacific over last year's depressed levels. Net
sales of $13.7 billion for the first three quarters of 1999 were
down 2 percent from $14.0 billion last year, as a 3 percent gain
in volume was more than offset by a 5 percent decline in prices.
Expenses, which include research and development (R&D),
selling, general and administrative expenses, were $584 million,
down $15 million from the third quarter of 1998. R&D was up 3
percent versus last year, supporting our growth initiatives in
biotechnology. Selling, general and administrative were down 5
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 third quarter was $320 million, $1.44 per
share (diluted), up from last year's net income of $314 million,
$1.40 per share (diluted). Net income was up despite a 30 percent
increase in hydrocarbon and energy costs versus last year, due to
improved product mix, increased prices and continued productivity
gains. Year to date, net income was $1,059 million, $4.74 per
share (diluted), compared with $1,160 million, $5.10 per share
(diluted), last year. Net income last year included a net
positive impact of $0.14 per share for unusual items, including
the gain on the sale of the DowBrands business, offset by several
unusual charges recorded in the first quarter, and an adjustment
to the first quarter special charge recorded in the third
quarter. The unusual charges included charges for purchased in-
process research and development, severance costs, asset write-
downs and environmental remediation costs.
<PAGE> -- Page 14 ---
Results of Operations (Continued)
PERFORMANCE PLASTICS
Performance Plastics sales of $1,302 million were up 4 percent
compared with sales for the third quarter of 1998, due to volume
growth of 9 percent partially offset by price declines of 5
percent. Third quarter EBIT for the segment declined 17 percent
to $248 million from $300 million a year ago, as volume increases
and productivity improvements were more than offset by declining
prices and higher feedstock costs.
Polyurethanes sales for the third quarter were down slightly
versus the same period last year, due to a 4 percent decline in
prices against a 3 percent increase in volume. Volume was
particularly strong for toluene diisocyanate (TDI) due to the
start up of a new plant in Freeport, Texas, but weak for polyols
due to competitive pressure. Prices were down in all geographic
areas except Asia Pacific, which showed some improvement over
last year. EBIT was flat versus the third quarter of last year as
volume increases and cost reductions helped offset lower prices
and higher raw material costs.
Sales of Epoxies and Intermediates were down 3 percent from a
year ago, with price declines of 8 percent partially offset by a
5 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. EBIT for
the business was down compared with last year, negatively
impacted by product mix, price declines, increased raw material
costs, and shutdown costs.
Engineering Plastics sales for the quarter were up 27 percent
from the same quarter last year, with volume up 36 percent and
prices down 9 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. EBIT for the quarter was down versus the
third quarter of 1998 due to lower prices and higher raw material
costs.
Fabricated Products sales for the third quarter of 1999 were
down slightly from last year, due to a 3 percent decline in
prices, only partially offset by increased volume. Excluding the
effect of the 1998 divestiture of the plastic-lined pipe
business, volume was up 3 percent. Volume for Styrofoam brand
insulation was up in North America due to the strength of the
construction industry. Price declines were experienced in all
geographic areas, except Asia Pacific, but seem to have slowed
during the quarter. EBIT for the quarter was down from last year
due to lower prices and the inclusion of the gain on the sale of
the plastic-lined pipe business last year.
Adhesives, Sealants and Coatings sales for the third quarter
were up 15 percent versus the third quarter of 1998, due to a 19
percent increase in sales volume partially offset by a 4 percent
decline in prices. Volume in the business' Systems Houses was up
significantly with strong growth in Europe, Latin America and
Asia Pacific. Volume was also significantly up for glass bonding
and automotive acoustical systems in North America. Third quarter
EBIT for this business was up slightly compared with last year,
as volume growth and continued cost control more than offset
declining prices and increased raw material costs.
For the first nine months of the year, Performance Plastics
sales were $3,862 million, up 2 percent from $3,800 million last
year. Volume growth of 7 percent during this period was partially
offset by a 5 percent decline in prices. Year to date, EBIT of
$815 million was down 4 percent from $847 million last year,
excluding unusual charges of $6 million recorded in the first
quarter of 1998.
PERFORMANCE CHEMICALS
Third quarter sales for Performance Chemicals were $674 million,
up 2 percent from $663 for the same quarter last year, as a 6
percent improvement in volume more than offset a 4 percent
decline in prices. EBIT for the segment was $108 million this
quarter, down from $136 million due to lower prices and a
significant rise in feedstock costs.
Specialty Chemicals sales for the quarter were up, with a 6
percent increase in volume more than offsetting a 3 percent
decline in prices versus the same quarter last year. Volume was
particularly strong in Asia Pacific, up over 25 percent, and in
Europe. In North America, demand for Methocel cellulose ethers
continued to be strong. Demand for alkanolamines, oxygenated
solvents and the Company's contract manufacturing operations was
also up. Price declines were experienced in all geographic areas
and most product lines. EBIT for the third quarter was down
versus last year due to lower pricing and higher raw material
costs.
Emulsion Polymers sales were down versus the third quarter of
1998 as price declines of 7 percent more than offset a 5 percent
increase in volume. Driven by lower selling prices and higher raw
material costs, EBIT for the quarter was down versus last year.
Sales for the nine months of 1999 for this segment were $1,971
million, flat with last year as a 3 percent increase in volume
was offset by a 3 percent decline in prices. Year to date, EBIT
for this segment was $381 million, up 10 percent versus $346
million last year, excluding unusual charges of $12 million
recorded in the first quarter of 1998.
<PAGE> --- Page 15 ---
Results of Operations (Continued)
AGRICULTURAL PRODUCTS
Sales of Agricultural Products for third quarter 1999 were $399
million, down 6 percent compared with $424 million for the same
quarter last year. Prices declined 4 percent and volume was down
2 percent, due to adverse worldwide industry conditions. The most
significant price declines were seen in Latin America for weed
control products and in North America for chlorpyrifos. Volume
declines were most notable for seeds and insecticides in North
America. Volume improvements were reported for Sentricon Termite
Colony Elimination System. EBIT for the third quarter was a loss
of $35 million, up from a loss of $45 million last year.
Sales for the segment were $1,732 million for the first nine
months of this year, down 5 percent from $1,831 million in 1998,
due to a volume decline of 2 percent and price declines of 3
percent. EBIT of $205 million for the same period was up 13
percent from $181 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 Charges" in the Results of Operations section of
Management's Discussion and Analysis of Financial Condition and
Results of Operations.)
PLASTICS
Plastics sales for the third quarter of 1999 were $1,170 million,
up 28 percent from $915 million a year ago, with improvements in
both volume and price. Volume was up 18 percent; prices were up
10 percent. Despite higher feedstock and energy costs, EBIT of
$207 million for the quarter was up 57 percent from $132 million
last year, due to strong demand and price recovery.
Polyethylene sales were up 31 percent in the third quarter
versus the same period last year. Volume increased 17 percent;
prices increased 14 percent. The increase in prices was the first
year-over-year increase since the second quarter of 1997. Demand
continued to be strong, with volume growth in all geographic
areas. Third 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 the second quarter of this year, results
for Safripol were reported in Unallocated and Other. Third
quarter EBIT for polyethylene was up more than 50 percent from
the same quarter of 1998, due to greater volumes and higher
margins.
Polystyrene sales increased 6 percent in the third quarter
versus the same quarter of 1998. Compared with last year, volume
growth of 9 percent was partially offset by price declines of 3
percent. Demand was up in all geographic areas, except North
America, and was particularly strong in Asia Pacific, up over 30
percent. Prices, while down in Europe and Latin America, showed
some improvement in North America. EBIT for the business was down
compared with third quarter 1998, negatively impacted by lower
selling prices and higher feedstock costs.
Polypropylene sales continued a strong growth trend, with
volume up significantly in Europe and North America. Prices also
improved versus the third quarter last year. EBIT for the quarter
improved versus last year.
Insite EBIT for the third 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 three quarters of 1999 were
$3,110 million, compared with $2,905 for the same period last
year, a 7 percent improvement. During the first nine months of
the year, volume growth of 14 percent was partially offset by a 7
percent decline in prices. Year to date, EBIT was $437 million,
down from $549 million for the first nine months of 1998.
CHEMICALS
Third quarter sales for the Chemicals segment were $607 million,
up from $555 million for the same quarter last year. Volume, up 7
percent, was strong in Asia Pacific and Latin America, but lower
in North America and Europe. Net of sales volume lost by exiting
magnesium-related businesses late last year, volume was up 13
percent. Ethylene glycol (EG) volume was up more than 90 percent
on high seasonal demand, with prices also up versus the same
period last year. Vinyl chloride monomer (VCM) sales were up
significantly with strong volume and increased prices. Caustic
volume for the quarter was up, but prices were down almost 50
percent compared with last year. Overall, prices for the segment
were up 2 percent. EBIT for the quarter was $101 million, up from
$69 million for the same period last year due to improved plant
operations, portfolio changes and higher VCM and EG prices that
more than offset lower caustic prices and higher feedstock and
energy costs.
<PAGE> --- Page 16 ---
Results of Operations (Continued)
For the nine months of 1999, sales for the Chemicals segment
were $1,660 million, down from $1,817 million last year due
almost entirely to a 9 percent decline in prices. EBIT for the
period was $290 million compared with $270 for 1998, excluding
$55 million of unusual items (primarily environmental remediation
charges) recorded in the first quarter of 1998. (See section
entitled "Special Charges" in the Results of Operations section
of Management's Discussion and Analysis of Financial Condition
and Results of Operations.) Cost reductions, better plant
operations and changes in the segment's portfolio have helped to
offset declining prices and maintain EBIT.
HYDROCARBONS AND ENERGY
Sales for Hydrocarbons and Energy for the third quarter of 1999
were $469 million, up from $367 last year mainly due to a 23
percent increase in price. Sales volume was up 5 percent. EBIT
for the quarter was a loss of $17 million, down from EBIT of $19
million last year.
Sales for the first three quarters of 1999 were $1,141
million, down slightly from sales of $1,153 million last year due
to a 1 percent volume decline. EBIT for the first nine months was
a loss of $7 million, compared with a loss of $2 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 Charges" in the Results
of Operations section of Management's Discussion and Analysis of
Financial Condition and Results of Operations.)
UNALLOCATED AND OTHER
EBIT for Unallocated and Other was a loss of $28 million for the
third quarter of 1999, compared with a loss of $47 million last
year. Year to date, EBIT was a loss of $140 million compared with
a loss of $168 million, excluding a net gain of $500 million
recorded in the first three quarters of 1998. Unusual items
recorded last year included a gain on the sale of the DowBrands
business, partially offset by severance costs, asset write-downs
and environmental remediation costs. (See section entitled
"Special Charges" in the Results of Operations section of
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 91 percent for the third quarter of 1999,
up significantly from 83 percent for 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
price 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 Produtos 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 Charges
- ---------------
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 17 ---
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 in 2000. 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 nine months of 1999, $9 million related to the Sentrachem
plan was paid to 129 individuals, leaving an accrued balance of
$4 million for an anticipated additional headcount reduction of
80.
Equity in Earnings of Nonconsolidated Affiliates
- ------------------------------------------------
Equity in earnings of nonconsolidated affiliates was $15 million
in the third quarter of 1999, down from $28 million in the third
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 third
quarter was $53 million, flat versus the third quarter of 1998.
Year to date, sundry income was $210 million compared with $907
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 $64 million for the third quarter, down from $87
million last year. Interest expense was down this quarter due
principally to lower average levels of short-term borrowings
resulting from the use of proceeds from a new low-cost financing
vehicle to reduce commercial paper. (See Changes in Financial
Condition and the section entitled "Minority Interests' Share in
Income" below.)
Provision for Taxes on Income
- -----------------------------
The effective tax rate for the third quarter was 35.0 percent
versus 33.1 percent for the third quarter of 1998. Year to date,
the effective tax rate was 35.5 percent.
Minority Interests' Share in Income
- -----------------------------------
During the quarter, the Company formed a low-cost financing
vehicle that involved the issuance of preferred securities by a
newly formed subsidiary of the Company. The preferred dividends
from this vehicle are reported as minority interest, which was up
$13 million (after tax) from the third quarter of 1998.
Outlook
- -------
The improvement of the global economy is expected to favorably
affect most of the chemical industry. Strong derivative demand
with little new capacity should keep global ethylene balances
tight through year-end and well into the first half of 2000. The
chlor-alkali chain should benefit from improved economic
conditions, keeping markets tight, with upward price bias on
chlorine/VCM. Oil and gas prices likely peaked late in the third
quarter, though the prices for these products are usually
volatile prior to winter. We expect average feedstock costs to be
up slightly in the fourth quarter versus third quarter, with a
downward trend likely in first quarter 2000.
The outlook for most of the performance businesses calls for
generally stable pricing and strong demand continuing from the
third quarter, with raw material costs trending upward. In
Agricultural Products, structural cost reductions should allow
the segment to improve earnings from last year's fourth quarter,
but EBIT will likely remain negative in this seasonally low
quarter.
For polyethylene, strong volume growth should continue, along
with increasing global prices. Polystyrene pricing should improve
following price increase announcements made late in the third
quarter in a tight styrene and polystyrene environment. VCM
pricing should continue to rise on the strength of PVC and
ethylene pricing. Fourth quarter caustic pricing, while expected
to be up in the U.S., should be tempered by weaker supply/demand
balances in Europe and Asia.
Overall, we believe we are on track to achieve our strategic
and financial goals, including earning positive economic profit
at the trough of the chemical cycle.
<PAGE> --- Page 18 ---
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 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.
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, are complete. Phase IV, Business Contingency Planning, is
complete and, as discussed below, any necessary plans are being
implemented as needed.
The Information Systems Y2K remediation of hardware, systems
software, telecommunications network infrastructure and business
applications is more than 99 percent complete. The remaining
Information Systems remediation tasks are anticipated to be
completed in November1999, and are not considered mission
critical. The Company's implementation of enterprise-wide
financial and operational systems and standardized desktop
computing during the last several years has facilitated this
effort.
At the end of the third quarter, more than 99 percent of the
manufacturing process control systems were Y2K ready. None of the
remaining systems are considered mission or business critical.
Remediation and testing of the remaining systems are anticipated
to be complete in November 1999. Timing for the remaining work is
consistent with plant shutdown schedules.
Remediation of the Company's embedded systems, such as
laboratory equipment, air conditioners and elevators is complete,
as planned.
The Company's assessment of critical suppliers is complete,
and risk management actions and contingency plans are being
implemented, as necessary. Contingency plans, such as building
inventories and switching suppliers, have been developed for a
number of these critical suppliers, and are being executed in
1999, as necessary.
The Company's assessment of critical customer readiness is
complete.
<PAGE> --- Page 19 ---
Year 2000 Readiness Disclosure (Continued)
Costs
- -----
Project costs are expected to be approximately $78 million, over
three years, and are not considered material to the Company's
consolidated financial statements. This estimate is up from
previous estimates due mostly to contingency planning efforts and
implementation costs. Total project costs incurred to date were
approximately $73 million at the end of the third quarter of
1999. The remaining costs will be spent primarily for
implementation of specific business and site contingency plans.
The Y2K effort is being supported by a reallocation of existing
resources. In addition to the project costs previously
identified, approximately $6 million has been spent on capital
equipment replacement costs.
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 has assessed
external sources of risk and developed contingency plans to
address both internal and external identifiable risks through
commercially reasonable efforts.
The Company's risk assessment data plus external studies
continue to indicate that electric power and utilities in some
countries may be an external source of risk. Manufacturing sites
have assessed the local impact and developed contingency plans to
manage this risk. Telecommunications providers in certain Asian,
Latin American and Eastern European countries continue to be
identified as sources of risk. To manage this risk, technical
alternatives have been assessed and implemented where
economically justified. Manual workarounds are also being
implemented, as necessary. As an example, we have implemented
full telephone and data backup facilities in one Latin American
country where we have significant manufacturing operations and
where there is a concern about the readiness of the
telecommunications infrastructure. We have also deployed backup
satellite telephone systems in some locations, which can be used
for emergency communications. While the risks discussed herein
have a possible material impact, the risk management actions and
contingency plans that have been developed and are being
implemented will significantly reduce the probability and
potential impact of the identified risks.
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. For instance, a number of plants will be
shut down, or brought to an idle state for a short period of
time, during the year-end rollover due to normal seasonal
operations, inventory management reasons or Y2K-related
decisions, which were made on a business-by-business basis. It is
anticipated that less than 10 percent of the manufacturing
capacity may be temporarily shut down or idled. Also, a corporate
command center is being established to monitor and report
internal and external operational status across the Company
during the critical date period.
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.
<PAGE> --- Page 20 ---
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 21 ---
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 22 ---
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. On September 14, 1999, the Michigan
Court of Appeals affirmed summary judgment in Maples v. The Dow
Chemical Company, a case determinative of all cases pending in
Michigan state court. The time for filing a petition for leave to
appeal to the Michigan Supreme Court has passed with no petition
having been filed. Pursuant to a stipulated order, all cases that
were pending on the state court docket will now be dismissed with
prejudice. Since federal courts in diversity cases are bound to
apply state court interpretations of state law questions, the
Maples affirmance should also result in dismissal of all claims
against the Company pending in federal court and governed by
Michigan law. 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,
<PAGE> --- Page 23 ---
Legal Proceedings (Continued)
Eastern District of Michigan. It is impossible to predict the
outcome or to estimate the cost to the Company of resolving any
of the product liability cases described above.
The Company was also a defendant in ten federal silicone jaw
implant cases involving implants manufactured by Dow Corning.
Federal District Court Judge Paul A. Magnuson has been appointed
by the Federal Judicial Panel on Multidistrict Litigation to
oversee all of the product liability cases involving silicone jaw
implants filed in the U.S. federal courts. On March 31, 1995,
Judge Magnuson granted the Company's motion for summary judgment,
concluding, based on virtually the same arguments that were
presented to Judge Pointer, that no reasonable jury could find in
favor of plaintiffs on any of their claims against the Company.
On June 13, 1995, Judge Magnuson denied plaintiffs' motion to
reconsider his ruling based on Judge Pointer's April 25, 1995
decision, and granted the Company's request to enter a final
judgment in its favor. The United States Court of Appeals for the
Eighth Circuit affirmed the summary judgment in favor of the
Company on May 16, 1997. That judgment is now final.
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 24 ---
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 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.
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.
On October 22, 1999, the Company filed a Current Report on
Form 8-K that included the press release announcing the third
quarter results for the Company.
The following trademarks of The Dow Chemical Company appear in
this report: Insite, Methocel, Styrofoam
The following trademark of Dow AgroSciences LLC appears in
this report: 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: November 11, 1999
- ----
G. Michael Lynch
----------------
G. Michael Lynch
Vice President &
Controller
<PAGE> --- Page 26 ---
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<TOTAL-LIABILITY-AND-EQUITY> 23,872
<SALES> 13,729
<TOTAL-REVENUES> 13,729
<CGS> 10,258
<TOTAL-COSTS> 12,020
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (334)
<INCOME-PRETAX> 1,728
<INCOME-TAX> 613
<INCOME-CONTINUING> 1,059
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,059
<EPS-BASIC> 4.81
<EPS-DILUTED> 4.74
</TABLE>
