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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required]
FOR THE YEAR ENDED DECEMBER 31, 1996
Commission file number 1-3433
THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 38-1285128
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2030 DOW CENTER, MIDLAND, MICHIGAN 48674
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 517-636-1000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, par value $2.50 per share Common Stock registered on the
New York, Midwest and Pacific
Stock Exchanges
Debentures: Debentures registered on the
6.85%, final maturity 2013 New York Stock Exchange
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 [ ].
The aggregate market value of voting stock held by nonaffiliates as of
January 31, 1997, (based upon the closing price of $77.125 per common
share as quoted on the New York Stock Exchange) is approximately
$18,437 million. For purposes of this computation, the shares of voting
stock held by Directors, Officers and the Employees' Retirement Plan
were deemed to be stock held by affiliates. Nonaffiliated common stock
outstanding at January 31, 1997 numbered 239,055,246 shares.
Documents Incorporated by Reference
-----------------------------------
Part III: Proxy Statement for the Annual Meeting of Stockholders to be
held May 15, 1997.
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THE DOW CHEMICAL COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PART I
Page
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 50
PART III
Item 10. Directors and Executive Officers of the Registrant 50
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain Beneficial Owners
and Management 50
Item 13. Certain Relationships and Related Transactions 50
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 50
Signatures 53
-2-
PART I
ITEM 1. BUSINESS
THE COMPANY
The Dow Chemical Company was incorporated in 1947 under Delaware
law and is the successor to a Michigan corporation, of the same
name, organized in 1897. The Company is engaged in the
manufacture and sale of chemicals, plastic materials,
agricultural and consumer products and other specialized products
and services. Its principal executive offices are located at
2030 Dow Center, Midland, Michigan 48674, telephone 517-636-1000.
Except as otherwise indicated by the context, the terms "Company"
or "Dow" as used herein mean The Dow Chemical Company and its
consolidated subsidiaries.
BUSINESS AND PRODUCTS
Corporate Profile
The Corporate Profile is an integral part of Note S to the
Financial Statements.
Dow is a diversified, worldwide manufacturer and supplier of
chemicals, plastics, energy, agricultural products, consumer
goods and environmental services.
Performance Plastics
Global Businesses:
Adhesives, Sealants and Coatings
Engineering Plastics
Epoxy Products and Intermediates
Fabricated Products
Insite Technology Licensing
Polyurethanes
Dow's Performance Plastics businesses provide customers with
high-performance polymers and products to meet specialized needs.
The company offers the broadest range of engineering
thermoplastic and thermoset materials of any manufacturer.
Polyurethane products, like Voranol polyether polyols and
isocyanates, are used by such industries as automotive,
furniture, and building and construction. Dow is the leading
producer globally of allyl chloride and epichlorohydrin, which
are basic products for the epoxy product chain. Dow's epoxy
products and intermediates are used in a variety of applications,
including the protective coatings, electronics and personal care
industries. Engineering plastics products, like Calibre
polycarbonate resins, Magnum ABS resins and Pulse engineering
resins, serve such industries as appliance, automotive and
electronics. The Adhesives, Sealants and Coatings business
manufactures products like Betaseal window adhesives. Insite
technology enables Dow and Dow's customers to produce a range of
plastics that perform better and are easier to process. Styrofoam
brand plastic foam, used in the building and construction
industry, is the flagship brand for the Fabricated Products
business.
Performance Chemicals
Global Businesses:
Specialty Chemicals
Emulsion Polymers
DowElanco
Dow's Performance Chemicals businesses provide specialized
products used by customers in a variety of industries, including
automotive, consumer products, food processing, pulp and paper,
and crop protection. The Specialty Chemicals business includes
products like Drytech superabsorbent polymers, used to produce
thinner, more absorbent disposable diapers; Methocel
multifunctional food gums, used in formulations where there is a
need to replace fat, retain moisture and contribute to pleasing
texture; and Dowtherm fluids, heat fluids used to control process
temperature. The Emulsion Polymers business includes latex
coatings and binders, which are used in the building and
construction and the pulp and paper industries. Dow is the
largest and most globally diverse of the styrene butadiene latex
suppliers and is the largest supplier of latex to the paper
industry. Dow produces acrylic latex for use in paints and other
architectural coatings. DowElanco produces agricultural products
like Broadstrike herbicides and Dursban and Lorsban insecticides,
which are used in crop protection and production and for
industrial pest control. The company is also a front-runner in
the development of natural insect control techniques.
-3-
Plastics
Global Businesses:
Polyethylene
Polyethylene Terephthalate (PET)
Polystyrene
Polypropylene
Dow ranks among the largest plastics producers in the world. The
company supplies products to a variety of industries, including
electronics, durable goods, food service, health care, packaging
and recreation. Dow is the leading producer of polyethylene, such
as low-density polyethylene and Dowlex linear low-density
polyethylene, and polystyrene, such as Styron polystyrene and Aim
advanced styrenic resins. The company has recently entered both
the polypropylene and polyethylene terephthalate (PET) markets,
the two fastest growing polymers in the world, supplying the
automotive and packaging industries, respectively.
Chemicals and Metals
Global Businesses:
Chemicals and Metals
Dow's Chemicals and Metals products are sold to a wide variety
of industries, ranging from food processing to automotive, that
use them as either processing aids or raw materials. Dow is the
world's largest chlorine and caustic soda manufacturer, with
about twice as much capacity as the next largest producer. Some
uses of chlorine include pharmaceuticals, water purification and
the manufacture of plastics. Caustic soda is used in detergents,
pulp and paper, petroleum refining and the manufacture of
aluminum. Other important products include chloromethanes,
ethylene dichloride, ethylene glycol, ethylene oxide, magnesium,
perchloroethylene, propylene glycol, propylene oxide,
trichloroethylene and vinyl chloride monomer.
Hydrocarbons and Energy
Global Businesses:
Hydrocarbons and Energy
Dow is the world leader in olefins and styrene production. This
segment encompasses procurement of fuels and crude oil-based raw
materials as well as the production of olefins, aromatics,
styrene and cogenerated power and steam for use in the Company's
operations. Destec Energy, Inc., a Dow subsidiary, is one of the
larger independent power producers in the world. It develops
independent power projects and sells electrical and thermal
energy.
Diversified Businesses and Unallocated
Global Businesses:
DowBrands
New Businesses
DowBrands produces household products such as Dow bathroom
cleaner with Scrubbing Bubbles, Fantastik all-purpose cleaner,
Spray'N Wash tough stain remover, Glass Plus multi-surface
cleaner, Saran Wrap plastic film and Ziploc plastic bags. New
Businesses consists of Radian International LLC, Advanced
Materials, technology licensing and new developments. Radian
International LLC provides a broad array of environmental and
chemical management services. Advanced Materials develops and
markets electronic and structural materials such as Cyclotene
dielectric resins, tungsten carbide and aluminum nitride powders.
Insurance and Finance, including Dorinco Reinsurance Company, and
other Dow financial companies and holdings, are reported in this
segment. Activities and overhead cost variances not allocated to
other segments are included in Unallocated.
Industry Segments and Geographic Area Results
See Note S to the Financial Statements for a discussion of
sales, operating income and identifiable assets by industry
segment and geographic area.
-4-
Raw Materials
The Company operates in an integrated manufacturing environment.
Basic raw materials are processed through many stages to produce
a number of products that are sold as finished goods at various
points in those processes.
The two major raw material streams that feed the integrated
production of the Company's finished goods are Chlor-Alkali and
Hydrocarbon based raw materials.
Salt, limestone and natural brine are the base raw materials
used in the production of Chlor-Alkali products and derivatives.
The Company owns salt deposits in Louisiana, Michigan and Texas;
Alberta, Canada; Brazil; and Germany. The Company also owns
natural brine deposits in Michigan and limestone deposits in
Texas.
Hydrocarbon raw materials include liquefied petroleum gases
(LPG), crude oil, naphtha, natural gas, benzene, fuel oil and
coal. These raw materials are used in the production of both
saleable products and energy. Expenditures for these raw
materials accounted for 28% of the Company's operating costs and
expenses for the year ended December 31, 1996. These raw
materials are purchased by the Company both on long-term
contracts and as they become available on global markets. The
Company owns the rights to deposits of lignite in Texas and
Louisiana, and natural gas deposits in Germany.
Other significant raw materials include ammonia, acrylonitrile,
aniline, bisphenol, cellulose, octene, organic acids, and toluene
diamine. These raw materials are purchased by the Company both on
long-term contracts and as they become available on global
markets.
The Company has, and expects to continue to have, adequate
supplies of raw materials during 1997 and subsequent years.
Method of Distribution
All products and services are marketed primarily through the
Company's sales force, although in some markets more emphasis is
placed upon sale through distributors. No significant portion of
the business of any industry segment is dependent upon a single
customer.
Competition
The Company experiences substantial competition in each of its
industry segments. During 1996, the Company was the second
largest chemical company in the United States in terms of sales
and in the top five worldwide in terms of sales. The chemical
industry has been historically competitive and this condition is
expected to continue. The chemical divisions of the major
international oil companies also provide substantial competition
both in the United States and abroad. The Company competes
worldwide on the basis of quality, price and customer service.
Patents, Licenses and Trademarks
The Company consistently applies for and obtains United States
and foreign patents. At December 31, 1996 the Company owned
approximately 3,300 active United States patents and
approximately 6,900 active foreign patents, which can be
classified as follows: chemicals, 900 United States and 1,500
foreign; plastics, 1,300 United States and 2,700 foreign;
fabricated products, 400 United States and 1,000 foreign; and new
businesses, 700 United States and 1,600 foreign. Dow's primary
purpose in obtaining patents is to protect the results of its
research for use in operations and licensing. Dow is also party
to a substantial number of patent licenses and other technology
agreements. The Company had patent and technology royalty income
of $26 million in 1996, $23 million in 1995 and $21 million in
1994, and incurred royalties to others of $5 million in 1996, $6
million in 1995, and $8 million in 1994. Dow also has a
substantial number of trademarks and trademark registrations in
the United States and in other countries, including the "Dow in
Diamond" trademark. Although the Company considers that, in the
aggregate, its patents, licenses and trademarks constitute a
valuable asset, it does not regard its business as being
materially dependent upon any single patent, license or
trademark.
-5-
Research and Development
The Company is engaged in a continuous program of basic and
applied research to develop new products and processes, to
improve and refine existing products and processes and to develop
new applications for existing products. Research and Development
expenses were $761 million in 1996 compared to $808 million in
1995 and $783 million in 1994. The Company employs approximately
5,200 people in various research and development activities.
Other Activities
Dow engages in the property and casualty insurance and reinsurance
business through its Liana Limited subsidiaries.
Principal Partly Owned Companies
Principal companies in which Dow owns a 50 percent interest
include DuPont Dow Elastomers L.L.C., which manufactures and
markets thermoset and thermoplastic elastomer products; Dow-
United Technologies Composite Products, Inc., a manufacturer of
composite products; Gurit-Essex, A.G., a Swiss company, which
supplies European automobile manufacturers with proprietary
specialty products; and Dow Corning Corporation, a manufacturer
of silicone and silicone products, which voluntarily filed for
protection under Chapter 11 of the United States Bankruptcy Code
(see Note Q to the Financial Statements). In addition, Dow has a
45 percent interest in Total Raffinaderij Nederland N.V., which
provides feedstocks for Dow's major petrochemical site at
Terneuzen, the Netherlands, and also services the Benelux and
nearby markets.
Protection of the Environment
Matters pertaining to the environment are discussed in Legal
Proceedings, Management's Discussion and Analysis of Financial
Condition and Results of Operations and Notes A and Q to the
Financial Statements.
Financial Information About Foreign and Domestic Operations and
Export Sales
In 1996, the Company derived 56 percent of its sales and had 47
percent of its property investment outside the United States.
While the Company's international operations may be subject to a
number of additional risks, such as changes in currency exchange
rates, the Company does not regard its foreign operations, on the
whole, as carrying any greater risk than its operations in the
United States. Information on sales, operating income and
identifiable assets by geographic area for each of the last three
years appears in Note S to the Financial Statements and a
discussion of the Company's risk management program for foreign
exchange and interest rate risk management appears in Note J to
the Financial Statements.
Number of Products
Dow manufactures and supplies more than 2,400 product families
and services and no single one accounted for more than 5 percent
of the Company's consolidated sales in 1996. No significant
portion of the business of any industry segment is dependent upon
a single customer.
Employees
The personnel count at December 31, 1996 was 40,289 versus 39,537
at the end of 1995, and 53,730 at the end of 1994. The large
reduction from 1994 reflected the sale of Dow's pharmaceutical
businesses. The increase in 1996 over 1995 included the impact of
new acquisitions which increased the personnel census by
approximately 3,100. Taking these two factors into account, the
personnel count has shown a substantial reduction in each year
due to continuing rationalization and work process improvements
throughout the company.
-6-
ITEM 2. PROPERTIES
The Company operates 115 manufacturing sites in 37 countries. The
Company considers that its properties are in good operating condition
and that its machinery and equipment have been well maintained. The
Company's Chemicals and Plastics production facilities and plants
operated at approximately 89 percent of capacity during 1996. The
following are the major production sites:
United States: Midland, Michigan; Freeport, Texas; Pittsburg,
California; Plaquemine, Louisiana.
Canada: Sarnia, Ontario; Fort Saskatchewan, Alberta.
Germany: Stade; Rheinmuenster.
France: Drusenheim.
The Netherlands: Terneuzen.
Spain: Tarragona.
Argentina: Bahia Blanca.
Brazil: Aratu.
Including the major production facilities, the Company has plants and
holdings in the following geographic areas:
United States: 40 manufacturing locations in 16 states.
Canada: 7 manufacturing locations in 3 provinces.
Europe: 28 manufacturing locations in 15 countries.
Latin America: 16 manufacturing locations in 8 countries.
Pacific: 24 manufacturing locations in 12 countries.
All of the above Dow plants are owned in fee, subject to certain
easements of other persons which, in the opinion of Management, do not
substantially interfere with the continued use of such properties or
materially affect their value.
A summary of plant properties, classified by type, is contained in
Note G to the Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Breast Implant Matters
The Company and Corning Incorporated ("Corning") are each 50 percent
stockholders in Dow Corning Corporation ("Dow Corning"). Dow Corning,
and in many cases the Company and Corning as well, have been sued in a
number of individual and class actions by plaintiffs seeking damages,
punitive damages and injunctive relief in connection with injuries
purportedly resulting from alleged defects in silicone breast
implants. In addition, certain stockholders of the Company have filed
separate consolidated class action complaints alleging that the
Company, Dow Corning or some of their respective Directors violated
duties imposed by the federal securities laws regarding disclosure of
alleged defects in silicone breast implants. The Company and one of
its former officers have also been sued in two separate class action
complaints (now consolidated) alleging that the defendants violated
duties imposed by the federal securities laws regarding disclosure of
information material to a reasonable investor's assessment of the
magnitude of the Company's exposure to direct liability in silicone
breast implant litigation. In a separate action, a Corning
stockholder has sued certain Dow Corning Directors (including certain
former and current Company Directors) alleging breaches of state law
duties relating to the manufacture and marketing of silicone breast
implants and seeking to recover unquantified money damages
derivatively on Corning's behalf.
Two separate derivative actions have been brought in the federal
court, Southern District of New York, by Company stockholders
purportedly on the Company's behalf. In Kas, et al. v. Butler, et
al., two Company stockholders brought suit in 1992, naming as
defendants all persons who were serving the Company as Directors on
December 31, 1990, certain Dow Corning Directors, Dow Corning, Corning
and certain Dow Corning officers, seeking derivatively on the
Company's behalf unquantified money damages. In Rubinstein, et al. v.
Ludington, et al., four Company stockholders brought suit in 1992,
naming as defendants Dow Corning's Directors who were also Company
Directors and certain former Company Directors, also seeking
derivatively on the Company's behalf unquantified money damages.
Plaintiffs in both cases subsequently made demands that the Company's
Board bring suit on behalf of the Company. After the Board rejected
those demands, the plaintiffs refiled their complaints alleging that
the demands were wrongfully rejected.
On 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.
-7-
Breast Implant Matters (Continued)
In January 1994, Dow Corning announced a pretax charge of $640
million ($415 million after tax) for the fourth quarter of 1993. In
January 1995, Dow Corning announced a pretax charge of $241 million
($152 million after tax) for the fourth quarter of 1994. These
charges included Dow Corning's best estimate of its potential
liability for breast implant litigation based on a global Breast
Implant Litigation Settlement Agreement (the "Settlement Agreement");
litigation and claims outside the Settlement Agreement; and provisions
for legal, administrative and research costs related to breast
implants. The charges for 1993 and 1994 included pretax amounts of
$1,240 million and $441 million, respectively, less expected insurance
recoveries of $600 million and $200 million, respectively. The 1993
amounts reported by Dow Corning were determined on a present value
basis. On an undiscounted basis, the estimated liability above for
1993 was $2,300 million less expected insurance recoveries of $1,200
million. As a result of the Dow Corning actions, the Company recorded
its 50 percent share of the charges, net of tax benefits available to
the Company. The impact on the Company's net income was a charge of
$192 million for 1993 and a charge of $70 million for 1994.
Dow Corning reported an after-tax net loss of $167 million for the
second quarter of 1995, of which the Company's share amounted to $83
million. Dow Corning's second quarter loss was a result of a $221
million after-tax charge taken to reflect a change in accounting
method from the present value basis noted above to an undiscounted
basis resulting from the uncertainties associated with its Chapter 11
filing. As a result of Dow Corning's 1995 second quarter loss and
Chapter 11 filing, the Company recognized a pretax charge against
income of $330 million for the second quarter of 1995, fully reserved
its investment in Dow Corning and will not recognize its 50 percent
share of future equity earnings while Dow Corning remains in Chapter
11.
On September 1, 1994, Judge Sam C. Pointer, Jr. of the United States
District Court for the Northern District of Alabama approved the
Settlement Agreement pursuant to which plaintiffs choosing to
participate in the Settlement Agreement released the Company from
liability. The Company was not a participant in the Settlement
Agreement nor was it required to contribute to the settlement. On
October 7, 1995, Judge Pointer issued an order which concluded that
the Settlement Agreement was not workable in its then-current form
because the funds committed to it by industry participants were
inadequate. The order provided that plaintiffs who had previously
agreed to participate in the Settlement Agreement could opt out after
November 30, 1995.
The Company's maximum exposure for breast implant product liability
claims against Dow Corning is limited to its investment in Dow Corning
which, after the second quarter charge noted above, is zero. As a
result, any future charges by Dow Corning related to such claims or as
a result of the Chapter 11 proceeding would not have an adverse impact
on the Company's consolidated financial statements.
The Company is separately named as a defendant in over 13,000 breast
implant product liability cases. In these situations, plaintiffs have
alleged that the Company should be liable for Dow Corning's alleged
torts based on the Company's 50 percent stock ownership in Dow Corning
and that the Company should be liable by virtue of alleged "direct
participation" by the Company or its agents in Dow Corning's breast
implant business. These latter, direct participation claims include
counts sounding in strict liability, fraud, aiding and abetting,
conspiracy, concert of action and negligence.
Judge Pointer has been appointed by the Federal Judicial Panel on
Multidistrict Litigation to oversee all of the product liability cases
involving silicone breast implants filed in the U.S. federal courts.
Initially, in a ruling issued on December 1, 1993, Judge Pointer
granted the Company's motion for summary judgment, finding that there
was no basis on which a jury could conclude that the Company was
liable for any claimed defects in the breast implants manufactured by
Dow Corning. In an interlocutory opinion issued on April 25, 1995,
however, Judge Pointer affirmed his December 1993 ruling as to
plaintiffs' corporate control claims but vacated that ruling as to
plaintiffs' direct participation claims.
In his opinion, Judge Pointer reaffirmed the view he had expressed
in his December 1993 ruling that the Company is a separate,
independent entity from Dow Corning and therefore has no legal
responsibility as a result of its ownership of Dow Corning stock for
Dow Corning's breast implant business. However, Judge Pointer stated
that, under the law of at least some states (although not necessarily
all states), actions allegedly taken by the Company independent of its
role as a stockholder in Dow Corning could give rise to liability
under a negligence theory. Judge Pointer declined to address
plaintiffs' other legal theories, including strict liability, fraud,
aiding and abetting, conspiracy and concert of action. It is
impossible to predict the outcome or to estimate the cost to the
Company of resolving any of the federal product liability cases. The
Company has filed claims with insurance carriers to recover in the
event it is held liable in the federal (or any other) breast implant
litigation.
After Judge Pointer's initial ruling in December 1993, summary
judgment was granted to the Company in approximately 4,000 breast
implant cases pending in state courts in California, Indiana,
Michigan, New Jersey and New York, and over 100 actions in
Pennsylvania were dismissed. Of these rulings, the California ruling
was final and was appealed. On September 25, 1996, the California
Court of Appeals for the 4th District affirmed the trial court's order
granting summary judgment to the Company. On January 15, 1997, the
California Supreme Court granted plaintiffs' petition for a review of
that order. The Michigan ruling was made final on March 20, 1997. This
decision may be appealed by plaintiffs. The New Jersey ruling has been
reconsidered and all claims were again dismissed, except the negligence
claim. Plaintiffs in New York filed a motion to reconsider based on
Judge Pointer's April 25, 1995 ruling. On September 22, 1995, Judge
Lobis, presiding over the consolidated New York breast implant
litigation, dismissed all counts of all cases filed against the Company in
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Breast Implant Matters (Continued)
New York on the ground that no reasonable jury could find against the
Company. On May 28, 1996, the New York Supreme Court Appellate
Division affirmed the lower court's dismissal of all claims against
the Company. New York's highest court subsequently denied plaintiffs'
petition for review, and the order dismissing all claims against the
Company is now final. Other rulings that are not final decisions are
also subject to reconsideration by the trial courts. The Company
expects that plaintiffs will file motions to reconsider in some states
as a result of Judge Pointer's April 25 decision. The Company remains
a defendant in other breast implant product liability cases originally
brought in state courts and continues to be named as a defendant as
cases are filed in various courts. On October 20, 1996, in a Louisiana
state court breast implant case styled Spitzfaden v. Dow Corning, et
al., the court entered an order maintaining certification of a class
of Louisiana plaintiffs consisting of recipients of Dow Corning breast
implants who, as of January 15, 1997, (i) are residents of Louisiana,
(ii) are former residents of Louisiana who are represented by
Louisiana counsel, or (iii) received their implants in Louisiana and
are represented by Louisiana counsel, together with the spouses and
children of such plaintiffs, and representatives of the estates of
class members who are deceased. The trial of the first phase of this
case commenced on March 17, 1997. It is impossible to predict the
outcome or to estimate the cost to the Company of resolving any of the
state product liability cases.
The Company is also a defendant in ten federal silicone jaw implant
cases involving implants manufactured by Dow Corning. Federal
District Court Judge Paul A. Magnuson has been appointed by the
Federal Judicial Panel on Multidistrict Litigation to oversee all of
the product liability cases involving silicone jaw implants filed in
the U.S. federal courts. On March 31, 1995, Judge Magnuson granted
the Company's motion for summary judgment, concluding, based on
virtually the same arguments that were presented to Judge Pointer,
that no reasonable jury could find in favor of plaintiffs on any of
their claims against the Company. On June 13, 1995, Judge Magnuson
denied plaintiffs' motion to reconsider his ruling based on Judge
Pointer's April 25 decision, and granted the Company's request to
enter a final judgment in its favor. Plaintiffs have appealed the
final judgment to the U.S. Court of Appeals for the Eighth Circuit.
On November 3, 1994, Judge Michael Schneider, presiding in the
consolidated breast implant cases in Harris County, Texas, granted in
part and denied in part the Company's motion for summary judgment.
Judge Schneider granted the Company's motion as to (i) all claims
based on the Company's stockholder status in Dow Corning, (ii) the
claim that the Company was liable in negligence for failing to
supervise Dow Corning, and (iii) plaintiffs' licensor-licensee claim.
Judge Schneider denied the Company's motion with regard to plaintiffs'
claims sounding in fraud, aiding and abetting, conspiracy, certain
negligence claims and a claim brought under the Texas Deceptive Trade
Practices Act. As a result, the Company remains a defendant as to
such claims in the Harris County product liability cases. In those
cases (and in cases brought in certain other jurisdictions including
those before Judge Pointer), the Company has filed cross-claims
against Dow Corning on the ground that if the Company and Dow Corning
are found jointly and severally liable, Dow Corning should bear
appropriate responsibility for the injuries judged to be caused by its
product. In certain jurisdictions, the Company has also filed
similar cross-claims against Corning. It is impossible to predict the
outcome or to estimate the cost to the Company of resolving any of the
Harris County product liability cases.
In an order dated December 1, 1994, Judge Frank Andrews, presiding
in the consolidated breast implant cases in Dallas County, Texas,
granted the Company's motion for summary judgment "in all respects
except as to theories of conspiracy and strict liability as a
component supplier." As a result, the Company remains a defendant as
to such claims in the Dallas County product liability cases. It is
impossible to predict the outcome or to estimate the cost to the
Company of resolving any of these actions.
Three breast implant product liability cases brought against the
Company have now been tried to judgment. In February 1995, a Harris
County jury exonerated the Company in one case and found the Company
jointly and severally liable with Dow Corning for $5.23 million on a
single count in a second case. After the verdict, however, the Court
overturned the jury's verdict and entered judgment for the Company.
On October 30, 1995 a state court jury in Reno, Nevada found the
Company liable for $4.15 million in compensatory damages and $10
million in punitive damages. The Company has appealed the verdict.
The Company has filed a claim in Dow Corning's bankruptcy proceedings
to recover from Dow Corning its share of any monies the Company might
pay as a result of the Nevada verdict.
With the principal exception of the cases filed in Michigan and
approximately 500 cases filed in Texas, Dow Corning or the Company
have removed virtually all cases originally filed in state courts
across the country to various federal courts. The removed cases have
been, in most instances, transferred to Judge Pointer for pre-trial
proceedings. Plaintiffs have asked Judge Pointer to remand those
cases back to their states of origin, and the Company has opposed that
motion. On April 9, 1996, the United States Court of Appeals for the
Sixth Circuit ruled that because silicone gel breast implant claims
against the Company (and certain other parties) were "related to" Dow
Corning's bankruptcy, the federal District Court for the Eastern
District of Michigan had the power to transfer such claims, including
claims currently pending before Judge Pointer, to itself and ordered
that Court to decide whether to make such a transfer. On July 30,
1996, the District Court declined to order such a transfer. The
Company has appealed that decision.
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
-9-
Breast Implant Matters (Continued)
Company's management believes that there is no merit to plaintiffs'
claims that the Company is liable for alleged defects in Dow Corning's
silicone products because of the Company's alleged direct
participation in the development of those products, and the Company
intends to contest those claims vigorously. Management believes that
the possibility is remote that a resolution of plaintiffs' direct
participation claims, including the vigorous defense against those
claims, will have a material adverse impact on the Company's financial
position or cash flows. Nevertheless, in light of Judge Pointer's
April 25 ruling, it is possible that a resolution of plaintiffs'
direct participation claims, including the vigorous defense against
those claims, could have a material adverse impact on the Company's
net income for a particular period, although it is impossible at this
time to estimate the range or amount of any such impact.
Seldane
In July 1992, two class actions lawsuits were filed in the United
States District Court for the Western District of Missouri alleging
that Marion Merrell Dow Inc. ("MMD"), then a subsidiary of the
Company, violated the federal securities laws as a result of alleged
false statements and omissions regarding the drug Seldane. The suits,
which were brought by purchasers of MMD stock and sought unquantified
damages, also named the Company as a defendant, principally because of
its status as an alleged "controlling person" of MMD. In addition to
seeking recovery against MMD and the Company, the suits named as
defendants a variety of entities and individuals including certain
Directors of MMD (some of whom are also Directors of the Company) and
certain underwriters of a 1992 offering of MMD stock. Subsequently,
plaintiffs filed a consolidated amended class action complaint in the
same court consolidating the two previously filed complaints and
captioned In re Marion Merrell Dow Securities Litigation. The
consolidated amended class action complaint does not name the Company
as a defendant but reserves the right to name the Company in the
future should discovery disclose a basis for doing so. In December
1992, plaintiffs and the Company entered into an agreement
conditionally tolling the statute of limitations as to any action
against the Company.
In addition, in July 1992, a derivative suit captioned Harris J.
Sklar v. Ewing M. Kauffman, et al. was filed in the Court of Chancery
of the State of Delaware against MMD (as nominal defendant) and
certain past and present Directors of MMD, including Messrs. Falla,
Popoff and Stavropoulos, who are also Directors of the Company. The
suit sought unquantified damages allegedly suffered by MMD as a result
of alleged breaches of fiduciary duty and waste of corporate assets by
its Directors in connection with the marketing of Seldane and alleged
disclosures and omissions regarding Seldane made to consumers and to
the investing public. On February 28, 1993, the Court entered an
order dismissing without prejudice the complaint as against all
defendants.
Management believes that the above actions are without merit.
Furthermore, it is the opinion of the Company's management that the
possibility that litigation of these claims would materially impact
the Company's consolidated financial statements is remote.
Environmental Matters
On May 31, 1994, the EPA filed an action against the Company alleging
violations of the Clean Water Act at the Company's Ludington, Michigan
site. Proposed civil fines total $125,000.
On August 11, 1995, the EPA filed an administrative enforcement
action against the Company in connection with the Company's report of
exceedances of its limits for the discharge of phosphorus and certain
other chemicals to the Tittabawassee River for several months in 1994
and 1995. No demand for monetary sanctions was made. Based on the
same facts, Michigan's Attorney General and the Michigan Department of
Natural Resources filed an action against the Company on August 18,
1995 in the Circuit Court for Ingham County, Michigan and on September
23, 1996, the Company paid a court ordered civil penalty of $100,000.
A third action, also based on the same facts, was filed on August 15,
1995 in the U.S. District Court for the Eastern District of Michigan
by PIRGIM Public Interest Lobby. That action seeks the payment of a
$10,775,000 civil penalty plus costs and attorney fees.
In February 1996, the Michigan Department of Environmental Quality
demanded payment of $258,000 in civil penalties associated with a
notice of Violation and Proposed Consent Order issued on November 16,
1995, for alleged violations of hazardous waste regulations. Pursuant
to a Consent Order entered into on November 8, 1996, the Company paid
a civil penalty of $25,000 plus $7,000 in compensation for the costs
of surveillance and enforcement.
Dow Chemical Canada Inc. ("Dow Canada"), a wholly owned subsidiary
of the Company, has been investigated by Alberta Environment
Protection with respect to two violations of the Ozone-Depleting
Substances Regulation alleged to have occurred on May 31, 1995, and
March 26, 1996. On November 18, 1996, Dow Canada paid a fine of
$150,000 (Canadian) in addition to alternative sentencing payments of
$75,000 (Canadian) paid in trust to each of The University of Alberta
and the Environmental Law Committee.
The Company entered into a Consent Order on February 11, 1997, with
respect to Notices of Violation issued by the Michigan Department of
Environmental Quality alleging that failure of the Company's
groundwater intercept system had resulted in the release of
contaminated groundwater to the Tittabawasse River. In addition to
system upgrades and other work, the Company agreed to pay a civil fine
of $800,000 and $133,000 in compensation for the costs of surveillance
and enforcement.
-10-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal market for the Company's common stock is the New York
Stock Exchange. On February 13, 1997, the Company declared a cash
dividend of 75 cents per share, payable April 30, 1997, to stockholders
of record on March 31, 1997. This will be the 341st consecutive
quarterly dividend since 1912. There were 103,753 common stockholders
of record as of March 17, 1997. The Company estimates that there are an
additional 130,000 stockholders whose shares are held in nominee names,
or in dividend reinvestment accounts without underlying registered
shares.
Quarterly market and dividend information can be found in Part II,
Item 8 (Supplementary Data) on page 49.
-11-
ITEM 6. SELECTED FINANCIAL DATA
The Dow Chemical Company and Subsidiaries
Five-year Summary of Selected Financial Data
In millions, except as noted Unaudited 1996 1995 1994 1993 1992
Summary of Operations (3)
Net sales $20,053 $20,200 $16,742 $15,052 $15,493
Cost of sales 14,108 13,337 12,131 11,370 11,862
Insurance and finance company operations,
pretax (income) (78) (61) (40) (98) (15)
Research and development expenses 761 808 783 786 799
Promotion and advertising expenses 370 416 411 367 381
Selling and administrative expenses 1,766 1,771 1,594 1,485 1,583
Amortization of intangibles 39 38 43 68 45
Special charge 0 0 0 0 433
--------------------------------------
Operating income 3,087 3,891 1,820 1,074 405
Investment and sundry income 405 (222) 77 462 145
Interest expense-net (204) (140) (271) (278) (443)
--------------------------------------
Income before provision for taxes on
income and minority interests 3,288 3,529 1,626 1,258 107
Provision for taxes on income 1,187 1,442 654 514 67
Minority interests' share in income 194 196 200 171 120
Preferred stock dividends 7 7 7 7 7
--------------------------------------
Income from continuing operations 1,900 1,884 765 566 (87)
Cumulative effect of accounting change - - - - (765)
Discontinued operations net of taxes on income - 187 166 71 356
- ------------------------------------------------------------------------------------------------
Net income (loss) available for common stockholders 1,900 2,071 931 637 (496)
- ------------------------------------------------------------------------------------------------
Per share of common stock (dollars):
Income from continuing operations $7.71 $7.03 $2.77 $2.07 ($0.32)
Net income available for common stockholde $7.71 $7.72 $3.37 $2.33 $0.99
Cash dividends declared $3.00 $2.90 $2.60 $2.60 $2.60
Cash dividends paid $3.00 $2.80 $2.60 $2.60 $2.60
Average common shares outstanding (thousands) 246,329 268,243 276,094 273,620 271,647
Convertible preferred shares outstanding (thousands) 1,482 1,521 1,549 1,567 1,586
- -----------------------------------------------------------------------------------------------
Year-end Financial Position
Total assets $24,673 $23,582 $26,545 $25,505 $25,360
Working capital 3,826 4,953 2,075 2,001 1,802
Property-gross 23,737 23,218 23,210 21,608 21,444
Property-net 8,484 8,113 8,726 8,580 8,801
Long-term obligations and redeemable preferred stock 4,230 4,733 5,325 5,918 6,201
Total debt 5,468 5,403 6,578 6,944 7,469
Net stockholders' equity 7,954 7,361 8,212 8,034 8,064
- -----------------------------------------------------------------------------------------------
Financial Ratios
Research and development expenses as percent 3.8% 4.0% 4.7% 5.2% 5.2%
Income before provision for taxes and minority
interests as percent of net sales (3) 16.4% 17.5% 9.7% 8.4% 0.7%
Return on stockholders' equity (1) 23.8% 26.9% 11.3% 7.9% 3.3%
Book value per common stock (dollars) $33.13 $30.69 $29.71 $29.33 $29.62
Debt as a percentage of total capitalization 35.2% 36.3% 38.0% 39.8% 42.5%
- -----------------------------------------------------------------------------------------------
General
Capital expenditures $1,344 $1,417 $1,183 $1,397 $1,595
Depreciation (3) 1,259 1,369 1,224 1,252 1,260
Wages and salaries paid 2,944 2,734 3,239 3,332 3,263
Cost of employee benefits 700 696 832 887 938
Number of employees at year-end (thousands) 40.3 39.5 53.7 55.4 61.4
Number of stockholders of record at year-end 104.6 111.1 114.5 102.5 105.9
- -----------------------------------------------------------------------------------------------
(1) Before cumulative effect of accounting change in 1992.
(2) Stockholders of record as reported by the transfer agent. The Company estimates that there
are an additional 130,000 stockholders whose shares are held in nominee names,
or in dividend reinvestment accounts without underlying registered shares.
(3) Restated for the sale of the pharmaceutical businesses in 1995.
-12-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Dow's 1996 sales were $20.1 billion, nearing the record sales of $20.2
billion achieved in 1995 and up 20 percent from 1994's sales of $16.7
billion. Dow's 1996 sales reflected a 7 percent volume gain which
largely offset an 8 percent price decline (see Sales Price and Volume
table on page 18). The company experienced steady demand growth
throughout the year with volume up across all segments and
geographies. Volume growth was particularly strong in Latin America as
a result of strategic acquisitions. Selling prices were down in all
segments with the exception of Diversified Businesses.
Sales in the United States (U.S.) accounted for 44 percent of the
total sales in 1996, 45 percent in 1995 and 48 percent in 1994. Sales
and other data by industry segment and geographic area are provided in
Note S to the Financial Statements.
The following paragraphs discuss the current performance and
outlook of each of the company's business segments. The forward-
looking statements contained therein involve risks and uncertainties
that affect the company's operations, markets, products, services,
prices and other factors as discussed in filings with the Securities
and Exchange Commission (SEC). These risks and uncertainties include,
but are not limited to, economic, competitive, governmental and
technological factors.
PERFORMANCE PLASTICS
Sales for Performance Plastics were $5.3 billion compared with $5.4
billion in 1995 and $4.5 billion in 1994. A volume gain of 3 percent
partially offset a price decline of 4 percent compared with the
previous year.
Operating income rose 11 percent to a record $1.2 billion in 1996.
Operating income was $1.1 billion and $611 million for 1995 and 1994,
respectively.
During 1996, Polyurethanes experienced record sales and profits,
fueled in part by strong demand in Latin America. To meet increasing
global demand, Dow's polyol facilities in Freeport, Texas and
Terneuzen, the Netherlands added 150 million pounds (68,000 metric
tons) of capacity through low-capital debottlenecking projects. The
business also added 100 million pounds (45,000 metric tons) of
diphenylmethane diisocyanate (MDI) capacity to meet demand which is
predicted to grow at about 6 percent per year.
Sales of Epoxy and Intermediate products were about flat with 1995
levels. Higher volume offset price declines caused by competitive
pressures in key markets. Improved productivity and lower
manufacturing costs yielded savings to the business and contributed to
record profitability despite pricing pressures.
Engineering Plastics experienced flat sales but higher operating
income in 1996 compared with the previous year. Prices softened for
ABS and polycarbonate in response to customer inventory reductions and
in anticipation of additional capacity coming on line in 1997.
Polycarbonate demand is forecasted to grow at above 5 percent per
annum in the coming years. To meet this growth, Dow will build a
second Calibre polycarbonate plant in Stade, Germany. The plant is
scheduled to start up in the first quarter of 1999. The company also
entered into a long-term agreement to supply DSM Engineering Plastics
with polycarbonate. By the first quarter of 1998, Dow will almost
double its production capacity at LaPorte, Texas for thermoplastic
polyurethane to meet growing demand in North America and Europe.
DuPont Dow Elastomers L.L.C. successfully started operations in
April 1996, combining Dow's Insite technology with DuPont's elastomer
business to form a $1 billion corporation. Dow also announced an
agreement with BP Chemicals to develop and make available for
licensing a combination of BP's Innovene gas-phase polyethylene
process and Dow's Insite technology.
The Adhesives, Sealants and Coatings business achieved record sales
and profits in 1996 on the strength of geographic expansion and
alignment with strategic customers. Rapid global expansion is
occurring in the Systems House polyurethane formulation business.
Operations were established in 1996 in Mexico, Poland and Egypt. In
1997, operations will begin in Brazil and China.
To capture growth in emerging economies, Essex Specialty Products,
a wholly owned subsidiary of Dow, began new commercial activities in
China and Korea in 1996. In 1997, expansion into Latin America, India
and Thailand will occur.
Fabricated Products posted record profits in 1996 on the strength
of volume increases which offset modest price declines. The price
declines were fueled by the entry of local competitors into regional
markets and the globalization of some competing manufacturers. Europe
had a particularly strong year, partially the result of successful
expansion into Eastern Europe and the Middle East. In Europe, two
Styrofoam brand housing insulation production plants were converted to
use a carbon dioxide blowing agent, making available a new line of
insulation material. In North America, first year sales of Duramate
insulation exceeded expectations.
-13-
PERFORMANCE PLASTICS (Continued)
Outlook for 1997
The Performance Plastics segment is expected to continue to generate
significant economic profit in the coming year.
Polyurethanes volume is anticipated to grow by about 6 percent in
1997; however, pricing pressure will be greater compared with the
previous year.
The Epoxy and Intermediates business is expected to grow at a
slightly higher rate than world GDP in 1997. Global competition will
likely lead to increased pricing pressures. However, prices in key
product areas such as epichlorohydrin should stabilize. The business
will continue its activities to secure a strong platform for future
growth in Asia Pacific and expand its position in Latin America.
Engineering Plastics anticipates another strong year with solid
volume growth. Pricing will continue to be a challenge for the
business, especially for polycarbonate and ABS resin.
The Adhesives, Sealants and Coatings business expects to experience
double-digit growth in 1997. The business will continue to explore
value-creating opportunities to leverage Dow's material science and
process capabilities with customers who wish to improve their
manufacturing and assembly activities.
Sales volume for Fabricated Products should increase as a result of
continued geographic expansion, especially into emerging markets. The
competitive market environment experienced in 1996 is expected to
continue into 1997, which will likely result in a slight price
decline.
PERFORMANCE CHEMICALS
Sales for Performance Chemicals were $4.2 billion in 1996, flat with
$4.2 billion a year ago. Sales for 1994 were $3.7 billion. The segment
experienced a volume gain of 4 percent and a price decline of 4
percent in 1996 compared with a year ago.
Operating income was up 8 percent to a record-setting $721 million
from $670 million in 1995. In 1994, operating income was $514 million.
Emulsion Polymers posted flat sales and profits in 1996 compared
with the previous year, as higher volume was offset by lower prices.
The business continued its productivity drive in 1996, successfully
lowering manufacturing costs for the fifth consecutive year. Demand
for styrene butadiene (S/B) latex was soft in the first half of 1996
due to the paper industry's high inventories of coated paper, but
recovered in the latter half of the year with increased market
penetration. With some regional exceptions, global growth in the
carpet industry was flat. Pricing for S/B latex weakened primarily due
to declines in the prices of key raw materials.
Dow acrylic latex volumes grew in both North America and Europe,
based on broadening product acceptance in selected coatings and
adhesives applications.
Specialty Chemicals set records for sales and operating income.
Volume was up due to strong demand for superabsorbents, polyglycols
and oxygenated solvents. Prices softened somewhat due to competitive
pressures in superabsorbents and oxygenated solvents.
Many of the individual businesses within Specialty Chemicals
recorded sales and operating income records. These included: Methocel
cellulose ethers, oxygenated solvents, polyglycols, Versene chelants,
Gas/Spec solvents and services, quaternaries and
divinylbenzene/vinylbenzyl chloride (DVB/VBC).
Specialty Chemicals made a number of capacity additions and
portfolio changes during the year as the business continued to pursue
its goal of doubling its value by the year 2000. In March 1996,
diphenyl oxide (DPO) production technology was installed in Freeport,
Texas, yielding dramatic cost reductions. The new technology replaced
an older plant in Michigan which was shut down in the second quarter
of 1996. Plant capacity for DVB, which supplies the ion exchange
industry, was increased in response to global contracts. Methocel
cellulose ethers capacity was added in Europe and North America. The
Liquid Separations business underwent considerable restructuring
resulting in the consolidation of operations. The Gas Separation
business was sold in the first half of 1996 and the Acrylamide
Monomers business was restructured in the second quarter through a
technology transfer and contract manufacturing agreement with SNF
Floerger.
DowElanco, a global agricultural chemicals joint venture between
Dow and Eli Lilly, experienced its fifth consecutive year of record
profits. Increased competition in older products was offset by growth
in new technology products. During 1996, DowElanco took a major
strategic step by purchasing controlling equity interest in Mycogen, a
world leader in the development of Bt (Bacillus thuringiensis) insect-
resistant seed technology, thus increasing its participation in the
biotechnology sector.
Sales of DowElanco's Sentricon termite colony elimination system,
first commercially sold in 1995, achieved a seven-fold increase in
1996. The revolutionary system uses small amounts of chemical bait
only when termites are detected. It has been proven to eliminate
entire termite colonies and provides protection for structures around
the world.
The past year also saw the launch in Japan of Clincher, DowElanco's
new grass herbicide for rice, with extensions into other Asian
countries planned for 1997.
-14-
PERFORMANCE CHEMICALS (Continued)
Outlook for 1997
Performance Chemicals is expected to have another good year in 1997
with higher volume growth in each of its businesses.
Emulsion Polymers should experience above average volume growth
because of its low-cost position, success in supplying several new
coated paper machine start-ups and customers' increased acceptance of
Dow's acrylic latex family of products. The competitive environment
will remain challenging and prices are expected to soften.
Specialty Chemicals anticipates another good year based on
increased sales demand combined with ongoing productivity improvements
and business portfolio restructuring. The business will continue to
look for value-creating acquisitions that will help meet its growth
targets.
In 1997, DowElanco plans to launch its new Tracer insect control
product into the U.S. cotton industry, subject to Environmental
Protection Agency (EPA) registration. The first of a class of
chemicals derived from naturally occurring organisms, Tracer provides
effective control of caterpillars without harming beneficial insects,
making it an excellent fit for integrated pest management programs.
DowElanco expects to increase capacity for Tracer in 1997 to support a
global launch of the product.
PLASTICS
Plastics reported sales of $3.9 billion in 1996, down 2 percent from
the previous year. In 1994, sales were $3.1 billion. Volume increased
17 percent versus last year, largely offsetting a price decline of 19
percent. Sales were up in 1995 over 1994 due to a 29 percent increase
in prices. Strategic acquisitions in Latin America contributed to the
significant volume growth in 1996.
Operating income was $794 million versus $1.5 billion in 1995. In
1994, operating income was $531 million.
Dow's Polyethylene business saw significant volume growth in 1996.
Both the industry's and Dow's supply capabilities were balanced due to
a combination of high demand and planned and unscheduled plant
outages. Prices were down compared to the prior year. However, in the
fourth quarter of 1996 year-over-year price comparisons were
favorable, reflecting both the balanced supply situation as well as
higher feedstock costs.
The business continues to expand and upgrade existing assets to
meet global demand for products made via Dow's value-adding Insite
technology. A new 145-million-pound (66,000 metric ton) polyethylene
train came on line in June 1996, at Dow's Tarragona, Spain facility.
The train is dedicated to the production of materials made via Insite
technology and will manufacture Dow's new enhanced polyethylene (EPE)
when that product is launched in 1997. Additionally, Dow converted one
of its world scale trains in Plaquemine, Louisiana to be capable of
producing Insite technology based polyethylene resins.
Leveraging its low-cost feedstock position in Alberta, Canada, the
Polyethylene business announced that it will add a 550-million-pound
(250,000 metric ton) train to its manufacturing facility in Fort
Saskatchewan, Alberta. The expansion will bring the facility's total
capacity to more than 1.4 billion pounds (636,000 metric tons) per
year and will help Dow meet the projected annual global demand growth
for polyethylene of 6 percent. The new train will start production in
1998 or 1999.
As part of its strategy for capturing growth in emerging markets,
Dow will build its first Asian polyethylene production facility in
Thailand through a joint venture with the Siam Cement Group. The plant
will have a 660-million-pound (300,000 metric ton) capacity and is
expected to begin operations in 1999. The plant will be capable of
producing both traditional Dowlex as well as resins made via Insite
technology.
In 1996, Dow's Polystyrene business faced downward pricing
pressure, especially in Asia Pacific. This followed the 1995 peak of
the price cycle for polystyrene and styrene monomer. By year-end,
pricing had stabilized in most geographies, with most areas announcing
price increases in December for 1997 implementation. The business
experienced solid volume growth during 1996.
In September 1996, Dow acquired controlling interest in Estireno do
Nordeste (EDN). This makes Dow the largest polystyrene producer in
Latin America.
In Asia Pacific, Dow's joint venture with Asahi Chemical, Styron
Asia Limited, plans to build a world-scale polystyrene plant in China
at Zhangjiagang. The plant is expected to be operational by the year
2000.
Dow entered the polypropylene business in 1996 with the intent of
becoming a leading global supplier within ten years. The business
believes that product differentiation will be the key to its long-term
success and profitability and therefore has made a commitment to apply
Insite technology to the manufacture of polypropylene. Dow's entry
strategy includes the licensing of Spheripol process technology from
Technipol, a subsidiary of Montell Polyolefins, and supply agreements
with Montell. Dow's first polypropylene plant, with a 440-million-
pound (200,000 metric ton) capacity, will be built in Schkopau,
Germany at the BSL site and is expected to come on line in 1998. A
second plant will be built in Tarragona, Spain by the year 2000.
Global demand for PET remained strong during the year, although the
typical summer peak in demand did not materialize. In Europe, where
Dow is involved via its INCA subsidiary, PET industry demand increased
by 11 percent versus 1995. Despite the healthy demand, prices
decreased throughout the second and third quarter due to industry
overbuilding, imports from Asia, and customer de-stocking. INCA had a
successful year in PTA technology licensing.
-15-
PLASTICS (Continued)
Outlook for 1997
The economic indicators for 1997 point to continued strong demand for
polyethylene. Pricing is expected to be relatively stable against a
background of low customer inventories, higher feedstock prices and
new industry capacity additions scheduled for late in the year.
Increased demand and additional sales in Latin America through the
EDN privatization are expected to result in double-digit volume growth
for polystyrene in 1997.
Anticipated global demand growth for polypropylene in 1997 is
forecasted to exceed 1996 by 8 percent with steady growth in
traditional market applications as well as new development
opportunities.
Global demand for PET is expected to increase more than 10 percent
in 1997. The oversupply situation is not forecasted to improve
significantly. However, with demand picking up toward the end of 1996
and with low customer inventories, there are indications that prices
may improve during the first half of 1997. It is also expected that
the oversupply situation will lead to rationalization of PET
capacities and realignment within the industry.
Capacity additions in ethylene and styrene by year-end may create a
more challenging pricing environment for Plastics.
CHEMICALS AND METALS
Chemicals and Metals posted sales of $3.1 billion in 1996 compared to
$3.3 billion in 1995 and $2.5 billion in 1994. Prices declined 10
percent and volume rose 4 percent during the year.
Operating income was $737 million compared to $1.1 billion in 1995
and $337 million in 1994.
Stronger than expected volume growth for vinyl chloride monomer
(VCM) and solid growth for other chlorine derivatives pushed global
chlor-alkali industry operating rates to high levels. This resulted in
significant increases in chlorine values during 1996. Increasing
chlorine values, sustained ethylene values and robust demand led to a
rebound in vinyl chloride volumes and price from the last half of
1995. High global chlor-alkali operating rates, along with somewhat
reduced demand for caustic soda by the global pulp and paper industry,
led to declining caustic soda prices during 1996.
In the last quarter of 1996, Dow brought on line 440 million pounds
(200,000 metric tons) of chlorine capacity in Freeport, Texas and 260
million pounds (118,000 metric tons) in Stade, Germany. The Stade
expansion represents Dow's first commercial use of membrane cell
technology. The additional capacity meets Dow's increased internal
chlorine demand, supporting derivative businesses.
Dow's VCM capacity was increased by 440 million pounds (200,000
metric tons) in 1996 through an incremental expansion in Texas and
technology improvements at other locations. This increase allows Dow
to grow with the total market and satisfy increasing customer demand.
Propylene Oxide (PO) and Derivatives experienced significant volume
growth in North America, aided by a continued strong economy.
Propylene prices for the year were lower than in 1995. This lower raw
material cost, along with balanced supply and demand and stable market
prices for propylene glycol, enhanced the profitability of the
business. An additional 300 million pounds (136,000 metric tons) of PO
capacity was added at Freeport, Texas and Stade, Germany during 1996
to support strong derivative demand driven by growth in durable goods.
Chlorinated Organics saw pricing firm up for its chloromethane
products. Supply/demand began to move toward a better balance for
perchloroethylene and carbon tetrachloride late in 1996.
Magnesium and Fabricated Metals faced new competition from Israel,
China and Russia which continued to put downward pressure on prices.
The Cal/Mag business saw strong demand for Peladow calcium chloride
as users replenished inventories that were depleted during the harsh
winter last season. Prices have been strong.
Outlook for 1997
VCM and other chlorine derivatives are expected to continue to grow
significantly in the first half of 1997. Values for chlorine, ethylene
and vinyl chloride should remain stable during that same period.
Caustic soda prices will be significantly lower in the first half of
1997 than in 1996.
PO and Derivatives will face a difficult year with rising propylene
prices. However, continued cost and expense reductions will mitigate
these market factors. An additional 100 million pounds (45,000 metric
tons) of PO capacity will be added in Aratu, Brazil in the first
quarter of 1997.
Leveraging Dow's low cost Canadian ethylene position, Ethylene
Oxide (EO) and Derivatives plans to add 85 million pounds (39,000
metric tons) of EO and 125 million pounds (57,000 metric tons) of
ethylene glycol capacity in Fort Saskatchewan, Alberta in the fourth
quarter of 1997.
-16-
HYDROCARBONS AND ENERGY
Hydrocarbons and Energy sales were up 3 percent to $2.4 billion
compared to 1995 and up 20 percent from $2 billion in 1994. This
segment experienced volume gains of 9 percent and price declines of 6
percent versus the previous year.
Hydrocarbons and Energy reported an operating loss of $57 million,
compared to an operating loss of $83 million in 1995. In 1994, the
segment posted operating income of $74 million.
The average crude oil price increased 17 percent over 1995, with
the increase taking place in the second half of 1996. As a result, the
cost of liquid feedstocks increased approximately 26 percent. Low
inventories and cold winter weather caused natural gas prices in the
U.S. Gulf Coast to rise. The combination of these factors caused
prices for light feedstocks (e.g., propane and ethane) to reach record
highs.
Dow's feedstock flexibility and global sourcing, including
maximizing its low-cost position in Canada, allowed the company to
optimize feedstock acquisition costs.
Ethylene markets recovered from a low at the end of 1995 with
improving industry operating rates which supported significant price
recovery through the year.
Spot styrene prices rose from their low position of the second half
of 1995. Global demand supported average industry operating rates of
around 90 percent. Capacity added in 1996 was readily absorbed by the
market, but the average pricing over the year reflected planned
capacity additions for 1997 and beyond.
In 1996, Dow finalized its acquisition of 63 percent of
Petroquimica Bahia Blanca (PBB) in Argentina. The acquisition includes
a 540-million-pound (245,000 metric ton) ethylene plant. In 1996, the
plant ran very well posting a new production record.
To optimize Dow's low-cost position in Canada, the ethylene unit in
Fort Saskatchewan, Alberta will be expanded to meet increased
downstream derivative demand. The additional capacity will come on
line in the fourth quarter of 1998.
During the year, Dow added 110 million pounds (50,000 metric tons)
of styrene capacity at its manufacturing facility in Terneuzen, the
Netherlands. In Thailand, the Dow/Siam Cement joint venture styrene
unit entered its start-up phase in December. The capacity of the unit
is in excess of 440 million pounds (200,000 metric tons). In addition,
Dow acquired a 330-million-pound (150,000 metric ton) styrene plant
through its purchase of controlling interest in Brazil's EDN.
In 1996, the company sold a portion of its stake in Oasis Pipeline
as part of its active portfolio management.
Independent power producer Destec Energy, Inc., a publicly traded
Dow subsidiary (about 80 percent owned), reported revenues for 1996 of
$578 million, compared with $641 million in 1995 and $727 million in
1994. Destec's 1996 earnings were up 23 percent, and cash flows from
operating activities and equity distributions increased 56 percent
compared to 1995.
Destec's 1996 results reflected the successful repositioning of its
business from a domestic-based power project developer to a global
developer, producer and marketer of power. Approximately one-third of
Destec's 1996 gross margin was contributed by its international
business. The operating facilities in which Destec owns an interest
also contributed greatly to increased earnings, as evidenced by a 57
percent increase in equity earnings for the year compared with 1995.
In October 1996, Destec announced that its Board of Directors had
retained Morgan Stanley & Co. to explore strategic alternatives to
maximize stockholder value, including a possible sale of Destec.
Outlook for 1997
Crude oil, energy and feedstock prices are expected to plateau in the
first half of 1997 and then begin to move down.
Ethylene demand is expected to grow steadily causing operating
rates to rise. This will lead to significant price increases and
improved margins. However, new ethylene capacity additions during the
latter part of 1997 may negatively affect operating rates and exert
downward pressure on prices.
The styrene industry is currently operating at high rates. Capacity
additions in Asia Pacific during 1997 are expected to lead to a
reduction in average industry operating rates, keeping global styrene
pricing near its present low level.
Dow's net global purchase positions in ethylene and styrene will
likely allow continuous full utilization of Dow's available capacity,
thus improving the relative cost position versus the industry
averages.
-17-
DIVERSIFIED BUSINESSES AND UNALLOCATED
Sales for this segment were $1.1 billion, $966 million, and $953
million in 1996, 1995 and 1994, respectively.
The segment posted an operating loss of $275 million, an $88
million improvement from the prior year. The operating loss in 1994
was $247 million. The operating results of this segment were comprised
primarily of research and other expenses related to new developmental
activities in New Businesses, severance cost and overhead cost
variances not allocated to other segments. The company's total
severance cost was $139 million of which $127 million was assigned to
this segment for 1996 compared with $181 million in 1995 and $124
million in 1994. Segment costs were partially offset by pretax income
from insurance and finance company operations and DowBrands.
DowBrands, Dow's consumer products affiliate, registered a
significant profit improvement. Sales in 1996 showed a decline due
primarily to the sale of the Personal Care business in November 1995.
The core North American Home Food Management business grew 9
percent versus the previous year. Improved capacity utilization and
reduced manufacturing costs had a positive profit impact.
In the Home Care products value center profitability improved
substantially due primarily to the re-launch of all specialty cleaners
under the Dow mega-brand strategy, the introduction of several new
products, the consolidation to the new Urbana, Ohio manufacturing site
and an aggressive cost control program.
Cofresco, a joint venture between DowBrands and Melitta Bentz KG,
was finalized in October, creating a leadership position in Home Food
Management across Europe. DowBrands also began an affiliation with
Asahi Chemical Industry Co., Ltd. in Japan. Asahi will import, market
and sell Ziploc brand plastic bags in Japan.
Radian International LLC, Dow's environmental services joint
venture, faced significant pricing pressure in 1996 which negatively
impacted its performance.
The New Businesses unit introduced new products for the electronics
industry including SCAN silica coated aluminum nitride and a ceramic
material for use in computer hard drives.
Outlook for 1997
DowBrands performance should continue to improve as a result of
restructuring which has created a leaner, more focused organization
with a clear growth strategy.
The environmental services industry will continue to operate in a
very competitive climate.
COMPANY SUMMARY
Operating Income
Operating income was $3.1 billion in 1996, down 20 percent from $3.9
billion in 1995 and increased 70 percent from $1.8 billion in 1994.
Gross margin decreased by $918 million versus 1995, primarily as a
result of lower selling prices and higher feedstock and energy costs.
Sales Price and Volume
1996 1995 1994
- -----------------------------------------------------------------------------------------------
Percentage changes Price Volume Total Price Volume Total Price Volume Total
from prior year
- -----------------------------------------------------------------------------------------------
Geographic Areas:
United States (6)% 3% (3)% 12% - 12% 1% 7% 8%
Europe (11) 10 (1) 25 8% 33 4 8 12
Rest of World (8) 11 3 16 8 24 3 15 18
All Areas (8)% 7% (1)% 17% 4% 21% 3% 8% 11%
- -----------------------------------------------------------------------------------------------
Industry Segments:
Performance Plastics (4)% 3% (1)% 13% 5% 18% (1)% 11% 10%
Performance Chemicals (4) 4 - 6 9 15 (1) 9 8
Plastics (19) 17 (2) 29 (1) 28 12 10 22
Chemicals and Metals (10) 4 (6) 33 1 34 4 3 7
Hydrocarbons and Energy (6) 9 3 9 7 16 6 7 13
Diversified Businesses
and Unallocated 5 5 10 - 1 1 (2) 5 3
All Segments (8)% 7% (1)% 17% 4% 21% 3% 8% 11%
-18-
OPERATING INCOME (Continued)
The ratio of operating income to sales was 15 percent in 1996,
versus 19 percent in 1995 and 11 percent in 1994. The decrease of $804
million in operating income for 1996 versus 1995 was due mainly to
approximately $2 billion in lower sales prices and higher feedstock
and energy costs that was partially offset by $1.2 billion impact of
volume growth, improved productivity, business portfolio restructuring
and lower costs. Operating income was reduced across all geographic
segments because the sales price decline was global. The United States
contributed 40 percent of the total operating income in 1996 compared
to 41 percent in 1995 and 56 percent in 1994. Operating income in
Europe was $783 million in 1996 versus $1.1 billion in 1995 and $237
million in 1994. Operating income from Rest of World was $1.1 billion
in 1996, down from $1.2 billion in 1995 and up from $559 million in
1994.
Operating Costs and Expenses
Cost Components as a Percent of Total 1996 1995 1994
- ------------------------------------------------------------------------
Hydrocarbons and energy 28% 25% 26%
Wages, salaries and employee benefits 21 21 22
Maintenance 4 5 6
Depreciation 7 8 8
Supplies, services and other raw materials 40 41 38
- ------------------------------------------------------------------------
Total 100% 100% 100%
Dow's global plant operating rate was 89 percent of capacity, down
from 92 percent in 1995 and 1994. The 1996 sales volume growth of 7
percent over 1995 was achieved through a mixture of new capacity and
sustained growth across all segments. Depreciation expense was $1.3
billion in 1996, $1.4 billion in 1995 and $1.2 billion in 1994.
Research and development, promotion and advertising, and selling
and administrative expenses of $2.9 billion in 1996 decreased $98
million from $3.0 billion in 1995 and increased $109 million from $2.8
billion in 1994. The decrease of 1996 from 1995 reflected Dow's
ongoing drive to improve productivity.
Research and development expenses were $761 million for 1996, down
6 percent compared with 1995 and down 3 percent compared with 1994.
Promotion and advertising expenses of $370 million were down 11
percent from $416 million in 1995 and down 10 percent from $411
million in 1994.
Selling and administrative expenses for 1996 were $1.8 billion,
flat with 1995 and up 11 percent from $1.6 billion in 1994. The
increase in 1995 over 1994 was primarily the result of variable
compensation increase based on the improved company earnings and the
negative impact of exchange rate changes on expenses incurred outside
the U.S. Selling and administrative expenses represented 9 percent of
sales in 1996 and 1995 versus 10 percent in 1994.
The personnel count was 40,289 at December 31, 1996, 39,537 at the
end of 1995 and 53,730 at the end of 1994. The large reduction from
1994 reflected the sale of Dow's pharmaceutical businesses. The
increase in 1996 over 1995 included the impacts of new acquisitions
which increased the personnel census by approximately 3,100. Taking
these two factors into account, the personnel count has shown a
substantial reduction in each year due to continuing rationalization
and work process improvements throughout the company.
Net Income
Net income available for common stockholders in 1996 was $1.9 billion
or $7.71 per share compared with $2.1 billion or $7.72 per share in
1995, and $931 million or $3.37 per share in 1994.
The following table summarizes the impact of special items on
earnings per common share:
1996 1995 1994
- -----------------------------------------------------------------------
Impact of Dow Corning Corporation
related charges - $(1.24) $ (.25)
Discontinued operations - .69 60
Other earnings $ 7.71 8.27 3.02
- ------------------------------------------------------------------------
Net earnings per common share $ 7.71 $ 7.72 $ 3.37
- ------------------------------------------------------------------------
-19-
NET INCOME (Continued)
Dow's share of the earnings of 20%-50% owned companies amounted to
$66 million compared with $70 million in 1995 and $29 million in 1994.
The company has not recorded its share of equity earnings in Dow
Corning since the first quarter of 1995 due to Dow Corning's filing
for protection under Chapter 11 and the company's write-down of its
investment as discussed below. Dow Corning reported net losses of $7
million in 1994 which reflected after tax charges against income
related to breast implant litigation of $152 million. The negative
impact of these charges on Dow's net income was $70 million or 25
cents per share in 1994. See Note Q to the Financial Statements for
further discussion of breast implant litigation.
Interest expense (including capitalized interest) and amortization
of debt discount increased $60 million to $494 million in 1996, up 14
percent from $434 million in 1995 and up 36 percent from $362 million
in 1994. The apparent increase in 1996 compared with 1995 and 1994 was
primarily due to the apportionment of interest to discontinued
operations in the 1995 and 1994 results (see Note C to the Financial
Statements).
Interest income and foreign exchange-net in 1996 was flat at $286
million in 1996 compared to $289 million in 1995, an increase of $188
million versus $98 million in 1994. The gain in 1996 and 1995 versus
1994 was primarily attributable to the investment of the cash received
from the sale of the pharmaceutical businesses. For a discussion of
the company's risk management program for both foreign currency and
interest rate risk, see Note J to the Financial Statements.
The loss on investments of $330 million in 1995 was due to the
company's write-down of its investment in Dow Corning as a result of
Dow Corning's decision to file for Chapter 11 (see Note Q to the
Financial Statements). In 1994, Dow recorded a loss on investments of
$42 million. The loss was due to a $132 million pretax charge related
to the pending sale of the Personal Care business of DowBrands.
Partially offsetting this charge was a pretax gain of $90 million
recorded by the company on the sale of its common shares of Magma
Power Company, primarily as a result of the merger agreement between
Magma and California Energy Company, Inc. Acquisitions and
divestitures are discussed in Note C to the Financial Statements.
Sundry income increased to $343 million in 1996 versus $43 million
in 1995 and $83 million in 1994. During 1996, Dow sold or restructured
its interest in a number of businesses, including Boride Products,
Crestar Energy, and Cynara. In addition, the company realized a pretax
gain of $120 million for the year through the sale of a portion of its
ownership in Oasis Pipeline.
The provision for taxes on income was $1.2 billion in 1996 versus
$1.4 billion in 1995 and $654 million in 1994. Dow's overall effective
tax rate for 1996 was 36.1 percent versus 40.9 percent for 1995 and
40.2 percent for 1994. The underlying factors affecting Dow's overall
effective tax rates are discussed in Note D to the Financial
Statements. U.S. and other tax law and rate changes during the year
did not have a material impact on Dow.
Minority interests' share of net income in 1996 was $194 million
compared with $196 million in 1995 and $200 million in 1994 (see Note
K to the Financial Statements).
Discontinued operations accounted for an after tax gain of $187
million in 1995, $169 million of which resulted from the sale of Dow's
shares of Marion Merrell Dow Inc. to Hoechst A.G. for $5.1 billion and
the sale of the company's Latin American pharmaceutical businesses to
Roussel Uclaf S.A. for $133 million in the second quarter of 1995. A
further $18 million income after tax was earned from the operations of
the pharmaceutical businesses in the first quarter of 1995. Provision
for taxes related to discontinued operations was $418 million, $382
million on the sale and $36 million from operations. The income, net
of taxes, from discontinued operations in 1994 was $166 million with
provision for taxes of $125 million (see Note C to the Financial
Statements).
Dividends
The Board of Directors has announced a quarterly dividend of 75 cents
per share, payable April 30, 1997 to stockholders of record on March
31, 1997. This will be the 341st consecutive quarterly dividend since
1912. Dow has maintained or increased the dividend throughout that
time. The company declared dividends of $3.00 per share in 1996, $2.90
per share in 1995 and $2.60 per share in 1994.
-20-
Environment
Dow's global operations are subject to increasingly stringent laws and
government regulations related to environmental protection and
remediation. Dow's environmental responsibilities and potential
liabilities receive direct and ongoing scrutiny by management to
ensure compliance with these laws and regulations. Dow's Environmental
Management Standard clearly defines the overall environmental
management system, performance objectives and design requirements
needed to minimize the long-term cost of environmental protection as
well as to comply with these laws and regulations. This standard was
reviewed, revised and re-communicated throughout the organization in
1995. It is Dow's stated policy that all global operations and
products meet Dow's Environmental Management Standard or their
country's laws and regulations, which-ever is more stringent.
Assessments are used by management to continually measure and report
Dow's progress against this standard and its performance objectives.
It has been Dow's policy to adhere to a waste management hierarchy
that minimizes the impact of wastes and emissions on the environment.
First, Dow works to eliminate or minimize the generation of waste and
emissions at the source through research, process design, plant
operations and maintenance. Second, Dow finds ways to reuse and
recycle materials. Finally, unusable or non-recyclable hazardous waste
is treated before disposal to eliminate or reduce the hazardous nature
and volume of the waste. Treatment may include destruction by
chemical, physical, biological or thermal (incineration) means.
Disposal of waste materials in landfills is considered only after all
other options have been thoroughly evaluated. Dow has specific
requirements for wastes that are transferred to non-Dow facilities.
Wastes that are recycled, treated or recovered for energy off-site
represent less than 1 percent of the total amount of wastes reported
as part of the Pollution Prevention Act.
Dow's policy of treating its wastes on-site has resulted in less
than 10 percent of its total environmental liability being directed at
remediation under federal or state "Superfund" statutes. Dow's focused
approach to waste and emission reduction resulted in achieving its
public commitment to reduce global emissions of 17 priority compounds
(as defined by the U.S. Environmental Protection Agency's 33/50
program) and emissions of an expanded list of compounds (defined by
each geographic area) by 50 percent by 1995 (1988 base year). Global
reductions of 65 percent and 53 percent, respectively, were achieved
one year ahead of schedule in 1994. In 1996, Dow announced a number of
voluntary global environment, health and safety (EH&S) goals for the
year 2005. Included are goals to reduce emissions and wastes by 50
percent (1994 base year) and EH&S incidents by 90 percent. After two
years, the company appears to be on track to achieving these goals.
All of the goals, as well as other performance data, can be found in
Dow's 1996 EH&S progress report.
In December 1996, Raven Group Ltd. (Raven) was formed to manage
certain of the company's environmental remediation projects. Dow owns
85 percent of the joint venture and The EOP Group, Inc., an
environmental consulting firm, owns the remaining 15 percent. Raven
will be responsible for providing strategic management to identify
cost-effective remediation solutions at Dow's U.S. manufacturing
facilities.
The costs of site remediation are accrued as a part of the shutdown
of a facility or, in the case of a landfill, over its useful life. The
nature of such remediation includes the cleanup of soil contamination
and the closure of landfills and other waste management facilities.
The policies adopted to reflect properly the monetary impacts of
environmental matters are discussed in Note A to the Financial
Statements. To assess the impact on the financial statements,
environmental experts review currently available facts to evaluate the
probability and scope of potential liabilities. Inherent uncertainties
exist in such evaluations primarily due to unknown conditions,
changing governmental regulations and legal standards regarding
liability, and evolving technologies for handling site remediation and
restoration. These liabilities are adjusted periodically as
remediation efforts progress or as additional technical or legal
information becomes available.
Dow has been named as a potentially responsible party (PRP) under
federal or state Superfund statutes at approximately 55 sites. Dow
readily cooperates in remediation at sites where its liability is
clear, thereby minimizing legal and administrative costs. However, at
several of these Superfund sites, Dow has had no known involvement and
is contesting all liability; at many others, Dow disputes major
liability, believing its responsibility to be de minimis. Because
current law imposes joint and several liability upon each party at a
Superfund site, Dow has evaluated its potential liability in light of
the number of other companies which have also been named PRPs at each
site, the estimated apportionment of costs among all PRPs and the
financial ability and commitment of each to pay its expected share.
Management has estimated that the company's probable liability for
the remediation of Superfund sites at December 31, 1996 was $15
million, which has been accrued. In addition, receivables of $17
million for probable third-party recoveries have been recorded related
to these sites. Other recoveries for past expenditures are possible
since Dow has numerous insurance policies secured from many carriers
at various times that may provide coverage at different levels for
environmental liabilities. The company is currently involved in
litigation to determine the scope and extent of such coverage. Dow has
not recorded any receivables for these possible recoveries.
In addition to the Superfund-related liability referenced above,
Dow had an accrued liability of $250 million at December 31, 1996
representing the total probable costs that the company could incur
related to the remediation of current or former Dow-owned sites. The
company had not recorded as a receivable any third-party recovery
related to these sites.
-21-
ENVIRONMENT (Continued)
In total, Dow's accrued liability for probable environmental
remediation and restoration costs was $265 million at December 31,
1996, as compared with $275 million at the end of 1995. This is
management's best estimate of these liabilities, although possible
costs for environmental remediation and restoration could range up to
twice that amount.
The amounts charged to income on a pretax basis related to
environmental remediation totaled $60 million in 1996, $89 million in
1995 and $64 million in 1994. Capital expenditures for environmental
protection were $80 million in 1996, $80 million in 1995 and $103
million in 1994 and they are currently projected at $100 million in
1997 and $100 million in 1998.
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.
Capital Expenditures
Capital spending for the year was $1.3 billion, down 5 percent from
$1.4 billion in 1995 and up 14 percent from $1.2 billion in 1994.
Capital spending in 1994 included spending in pharmaceuticals of $109
million. In 1996, approximately 34 percent of the company's capital
expenditures was directed toward additional capacity for new and
existing products, while about 8 percent was committed to projects
related to environmental protection, safety and loss prevention, and
industrial hygiene. The remaining capital was utilized to maintain the
company's existing asset base, including projects related to
productivity improvements, energy conservation and facilities support.
Major projects underway during 1996 included a new facility in Harbor
Beach in the U.S. to produce Tracer insect control product; tie-ins to
a new energy co-generation facility in Terneuzen, the Netherlands; a
new aniline facility in Boehlen, Germany; an expansion of the VCM
facilities in Fort Saskatchewan, Canada; and a membrane chlorine
expansion in Stade, Germany. Because the company designs and builds
most of its capital projects in-house, it had no major capital
commitments, other than for the purchase of materials from
fabricators.
Liquidity and Capital Resources
Operating activities provided $3.4 billion in cash in 1996, as
compared with $3.3 billion in 1995 and $2.7 billion in 1994 (see the
Consolidated Statements of Cash Flows). The items affecting operating
activities are discussed in the operating income and net income
analyses. Investing activities used $2.2 billion cash in 1996,
provided $2.9 billion in 1995 and used $1.3 billion in 1994. The
difference of $5.1 billion cash between 1995 and 1996 was due to the
sale of the pharmaceutical businesses in 1995. This sale of Marion
Merrell Dow Inc. (MMDI) to Hoechst A.G. in 1995 for $5.1 billion had a
very positive effect on the liquidity and capital resources of the
company.
Total working capital at year-end was $3.8 billion versus $5.0
billion at the end of 1995. Cash, cash equivalents, marketable
securities and interest-bearing deposits decreased by $1.1 billion,
which can be attributed to the company's ongoing share repurchase
program. Inventories and trade receivables increased $323 million in
1996. Days-sales-in-inventory, however, were down 3 days to 87 days,
versus 90 days in 1995 and increased 7 days versus 80 days in 1994.
Days-sales-outstanding-in-receivables were 45 days, 47 days and 52
days for 1996, 1995 and 1994, respectively.
Short-term borrowings at December 31, 1996 were $665 million, an
increase of $342 million from year-end 1995. Long-term debt due within
one year increased $232 million to $607 million at the end of 1996
compared with $375 million at the end of 1995. Long-term debt due in
1997 will be funded by operating cash flows. Accounts payable
increased by $74 million to $2.3 billion and income taxes payable
decreased $224 million during the year.
Long-term debt was $4.2 billion, a decrease of $509 million from
year-end 1995. During the year, $298 million of new long-term debt was
incurred while $733 million was transferred to long-term debt due
within one year. $586 million of long-term debt was retired during
1996.
Total debt was $5.5, $5.4 and $6.6 billion at December 31, 1996,
1995 and 1994, respectively. Net debt, which equals total debt less
cash, cash equivalents, marketable securities and interest-bearing
deposits, was $3.2, $2.0 and $5.4 billion at December 31, 1996, 1995
and 1994, respectively. The debt to total capitalization ratio
decreased to 35 percent at year-end 1996 from 36 percent at the end of
1995 and 38 percent at the end of 1994.
In 1995 and 1996, the Board of Directors authorized the repurchase
of the company's common stock. Due to the cash received from the sale
of the pharmaceutical businesses and the continued strong cash flow
provided by operating activities, $1.2 billion worth of common stock
was purchased in 1996 and $2.1 billion in 1995 versus $38 million in
1994 (see Note L to the Financial Statements).
The company has unused and available credit facilities with various
U.S. and foreign banks totaling $1.9 billion in support of its working
capital requirements and commercial paper borrowings. Additional
unused credit facilities totaling $1.4 billion are available for use
by foreign subsidiaries.
At December 31, 1996, there was a total of $1.4 billion in
available SEC registered debt securities between Dow and Dow Capital
plc., a wholly owned subsidiary, and 50 billion in available Japanese
yen (approximately $430 million) registered with Japan's Ministry of
Finance.
-22-
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Minority interest in subsidiary companies increased during the year
from $1.8 billion in 1995 to $2.1 billion at the end of 1996, mainly
as a result of acquisitions as discussed in Note C to the Financial
Statements.
The company's strong position of $2.3 billion in cash, cash
equivalents, marketable securities and interest-bearing deposits, will
support its involvement in new acquisitions and joint ventures (see
Note C to the Financial Statements). Cash may also be required to
redeem the partners' capital accounts in DowBrands L.P.; either the
company or the outside investors can make this event occur (see Note K
to the Financial Statements). In addition, Eli Lilly holds a put
option which could require the company to purchase Eli Lilly's 40
percent interest in DowElanco (see Note Q to the Financial
Statements).
Subsequent Event
Dow announced on February 18, 1997 that it has agreed, subject to
regulatory approvals, to the merger of Destec Energy, Inc. and NGC
Corporation. More than 80 percent of Destec's shares (45 million) are
currently held by Dow. Under the agreement, NGC will acquire Destec
for $21.65 in cash for each outstanding share of Destec common stock.
Following the merger, Destec will become a wholly owned subsidiary of
NGC.
This action is consistent with Dow's strategy to maximize
shareholder value through the divestment of assets that do not fit its
long-term strategic objectives. Destec is a major, worldwide
independent power developer, producer, and marketer which will fit
strategically with NGC's existing energy focus. Dow plans to use the
majority of the proceeds from this sale for continued stock
repurchases.
-23-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Responsibility for Financial Statements and Independent Auditors' Report
- ---------------------------------------------------------------------------
Management Statement of Responsibility
The management of The Dow Chemical Company and its subsidiaries
prepared the accompanying consolidated financial statements, and has
responsibility for their integrity, objectivity and freedom from
material misstatement or error. These statements were prepared in
accordance with generally accepted accounting principles. The financial
statements include amounts that are based on management's best
estimates and judgments. Management also prepared the other information
in this annual report and is responsible for its accuracy and
consistency with the financial statements. The Board of Directors,
through its Audit Committee, assumes an oversight role with respect to
the preparation of the financial statements.
Management recognizes its responsibility for fostering a strong
ethical climate so that the Company's affairs are conducted according
to the highest standards of personal and corporate conduct. Management
has established and maintains an internal control structure that
provides reasonable assurance as to the integrity and reliability of
the financial statements, the protection of assets from unauthorized
use or disposition, and the prevention and detection of fraudulent
financial reporting.
The internal control structure provides for appropriate division of
responsibility and is documented by written policies and procedures
that are communicated to employees with significant roles in the
financial reporting process and updated as necessary. Management
continually monitors internal controls for compliance. The Company
maintains a strong internal auditing program that independently
assesses the effectiveness of the internal controls and recommends
possible improvements.
Deloitte & Touche LLP, independent auditors, with direct access to
the Board of Directors through its Audit Committee, have audited the
consolidated financial statements prepared by the Company, and their
report follows.
Management has considered recommendations from the internal auditors
and Deloitte & Touche LLP concerning the internal control structure and
has taken actions that are cost-effective in the circumstances to
respond appropriately to these recommendations. Management further
believes the controls are adequate to accomplish the objectives
discussed herein.
- ---------------------------------------------------------------------------
Independent Auditors' Report
To the Stockholders and Board of Directors of
The Dow Chemical Company:
We have audited the accompanying consolidated balance sheets of The Dow
Chemical Company and its subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December
31, 1996. Our audits also included the financial statement schedule
listed at Item 14(a)2. These financial statements and financial
statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of The Dow
Chemical Company and its subsidiaries at December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Midland, Michigan
February 12, 1997
-24-
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
In millions, except for per share amounts 1996 1995 1994
- ----------------------------------------------------------------------------
Net Sales $20,053 $20,200 $16,742
Operating Costs and Expenses
Cost of sales 14,108 13,337 12,131
Insurance and finance company
operations, pretax income (78) (61) (40)
Research and development expenses 761 808 783
Promotion and advertising expenses 370 416 411
Selling and administrative expenses 1,766 1,771 1,594
Amortization of intangibles 39 38 43
-------------------------------------------------------------------------
Total operating costs and expenses 16,966 16,309 14,922
- ----------------------------------------------------------------------------
Operating Income 3,087 3,891 1,820
- ----------------------------------------------------------------------------
Other Income (Expense)
Equity in earnings of
20%-50% owned companies 66 70 29
Interest expense and amortization of debt discount (494) (434) (362)
Interest income and foreign exchange-net 286 289 98
Net loss on investments - (330) (42)
Sundry income-net 343 43 83
-------------------------------------------------------------------------
Total other income (expense) 201 (362) (194)
- ----------------------------------------------------------------------------
Income before Provision for Taxes
on Income and Minority Interests 3,288 3,529 1,626
- ----------------------------------------------------------------------------
Provision for Taxes on Income 1,187 1,442 654
- ----------------------------------------------------------------------------
Minority Interests' Share in Income 194 196 200
- ----------------------------------------------------------------------------
Preferred Stock Dividends 7 7 7
- ----------------------------------------------------------------------------
Income from Continuing Operations 1,900 1,884 765
Discontinued Operations
Income from pharmaceutical businesses,
net of taxes on income - 18 166
Gain on sale of pharmaceutical businesses,
net of taxes on income - 169 -
- ----------------------------------------------------------------------------
Net Income Available for Common Stockholders $1,900 $2,071 $931
- ----------------------------------------------------------------------------
Average Common Shares Outstanding 246.3 268.2 276.1
- ----------------------------------------------------------------------------
Earnings per Common Share from Continuing Operations $7.71 $7.03 $2.77
Earnings per Common Share $7.71 $7.72 $3.37
Common Stock Dividends Declared per Share $3.00 $2.90 $2.60
- ----------------------------------------------------------------------------
See Notes to Financial Statements.
-25-
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
December 31
In millions 1996 1995
- ----------------------------------------------------------------------------
Assets
- ----------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $1,903 $2,839
Marketable securities and interest-bearing deposits 399 611
Accounts and notes receivable:
Trade (less allowance for doubtful receivables-
1996, $71; 1995, $53) 2,985 2,729
Other 1,411 1,380
Inventories:
Finished and work in process 2,267 2,197
Materials and supplies 548 551
Deferred income tax assets-current 317 247
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Total current assets 9,830 10,554
- ----------------------------------------------------------------------------
Investments
Capital stock at cost plus equity in accumulated
earnings of 20%-50% owned companies 1,387 848
Other investments 2,060 1,558
Noncurrent receivables 437 314
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Total investments 3,884 2,720
- ----------------------------------------------------------------------------
Property
Property 23,737 23,218
Less accumulated depreciation 15,253 15,105
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Net property 8,484 8,113
- ----------------------------------------------------------------------------
Other Assets
Goodwill (net of accumulated amortization-
1996, $177; 1995, $177) 899 658
Deferred income tax assets-noncurrent 669 779
Deferred charges and other assets 907 758
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Total other assets 2,475 2,195
- ----------------------------------------------------------------------------
Total Assets $24,673 $23,582
- ----------------------------------------------------------------------------
See Notes to Financial Statements.
-26-
The Dow Chemical Company and Subsidiaries
December 31
In millions, except for share amounts 1996 1995
- ----------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ----------------------------------------------------------------------------
Current Liabilities
Notes payable $665 $323
Long-term debt due within one year 607 375
Accounts payable:
Trade 1,596 1,529
Other 724 717
Income taxes payable 567 791
Deferred income tax liabilities-current 64 55
Dividends payable 184 192
Accrued and other current liabilities 1,597 1,619
-------------------------------------------------------------------------
Total current liabilities 6,004 5,601
- ----------------------------------------------------------------------------
Long-Term Debt 4,196 4,705
- ----------------------------------------------------------------------------
Other Noncurrent Liabilities
Deferred income tax liabilities-noncurrent 1,005 659
Pension and other postretirement benefits-noncurrent 1,896 1,880
Other noncurrent obligations 1,493 1,260
-------------------------------------------------------------------------
Total other noncurrent liabilities 4,394 3,799
- ----------------------------------------------------------------------------
Minority Interest in Subsidiary Companies 2,091 1,775
- ----------------------------------------------------------------------------
Temporary Equity
Temporary equity-other - 313
Preferred stock (authorized 250,000,000 shares of $1.00 par
value each; issued Series A-1996: 1,482,309; 1995:
1,521,175) at redemption value 128 131
Guaranteed ESOP obligation (94) (103)
-------------------------------------------------------------------------
Total temporary equity 34 341
- ----------------------------------------------------------------------------
Stockholders' Equity
Common stock (authorized 500,000,000 shares of $2.50 par
value each; issued 1996 and 1995: 327,125,854) 818 818
Additional paid-in capital 307 315
Retained earnings 11,323 10,159
Unrealized gains on investments 192 62
Cumulative translation (363) (349)
Minimum pension liability (22) -
Treasury stock, at cost (shares 1996: 85,986,616;
1995: 76,168,614) (4,301) (3,644)
-------------------------------------------------------------------------
Net stockholders' equity 7,954 7,361
- ----------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $24,673 $23,582
- ----------------------------------------------------------------------------
See Notes to Financial Statements.
-27-
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
In millions 1996 1995 1994
- ----------------------------------------------------------------------------
Common Stock
Balance at beginning and end of year $818 $818 $818
- ----------------------------------------------------------------------------
Additional Paid-in Capital
Balance at beginning of year 315 326 366
Issuance of treasury stock at less than cost (21) (27) (40)
Proceeds from sales of put options 13 16 -
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