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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
FOR THE YEAR ENDED DECEMBER 31, 1997
Commission file number 1-3433
THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 38-1285128
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2030 DOW CENTER, MIDLAND, MICHIGAN 48674
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 517-636-1000
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, 6.85%, final maturity 2013 Debentures registered on the
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 30, 1998, (based upon the closing price of
$90.00 per common share as quoted on the New York Stock Exchange)
is approximately $20,107 million. For purposes of this
computation, the shares of voting stock held by Directors,
Officers and the Dow Employees' Pension Plan Trust were deemed to
be stock held by affiliates. Nonaffiliated common stock
outstanding at January 30, 1998 numbered 223,413,749 shares. Total
common stock outstanding at January 30, 1998 numbered 225,744,348.
Documents Incorporated by Reference
-----------------------------------
Part III: Proxy Statement for the Annual Meeting of Stockholders
to be held May 14, 1998.
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THE DOW CHEMICAL COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PART I
Page
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 20
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 48
PART III
Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 48
Item 12. Security Ownership of Certain Beneficial Owners and Management 48
Item 13. Certain Relationships and Related Transactions 48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 48
Signatures 51
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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 and agricultural products.
Performance Plastics
- 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. Dow offers the
broadest range of engineering thermoplastic and thermoset
materials of any manufacturer. The Adhesives, Sealants and
Coatings business manufactures products like Betaseal window
adhesives. Engineering Plastics products, like Magnum ABS
resins and Pulse engineering resins, serve such industries as
appliance, automotive and electronics. Dow is the leading
producer globally of allyl chloride and epichlorohydrin, basic
products in the epoxy product chain. Dow's Epoxy Products and
Intermediates are used in a variety of applications, from
protective coatings and electronics to personal care products.
Styrofoam brand plastic foam, used in the building and
construction industry, is the flagship brand for the
Fabricated Products business. Insite technology enables Dow
and Dow's customers to produce a range of plastics that
perform better and are easier to process. Polyurethane
products, like Voranol polyether polyols and isocyanates, are
used by such industries as automotive, furniture, and building
and construction.
Performance Chemicals
- Specialty Chemicals
- Emulsion Polymers
- Dow AgroSciences
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 Drytech superabsorbent polymers, used to
produce thinner, more absorbent disposable diapers, and
Methocel multifunctional food gums, used in formulations to
replace fat and retain moisture. The Emulsion Polymers
business includes latex coatings and binders, used in the
paper, carpet, paint and adhesives industries. Dow is the
largest, 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 architectural,
industrial and roadmarking paints and for pressure sensitive
adhesives. Dow AgroSciences LLC produces agricultural
products, such as Broadstrike herbicides and Dursban and
Lorsban insecticides, used in crop protection and production
and for industrial pest control. Dow AgroSciences has a
controlling interest in Mycogen Corp., a diversified
agribusiness and biotechnology company.
Plastics
- 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. The company is also the
largest global producer of polystyrene, including Styron
polystyrene and Aim advanced styrenic resins. Dow participates
in both the polypropylene and polyethylene terephthalate
businesses, the two fastest growing polymers in the world,
supplying the automotive and packaging industries.
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Chemicals and Metals
Dow's Chemicals and Metals products are used either as
processing aids or as raw materials for a wide variety of
industries, from food processing to automotive. 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
Dow is the world leader in the production of olefins and
styrene. This segment encompasses the 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.
Diversified Businesses and Unallocated
- DowBrands
- New Businesses
DowBrands, the consumer products business, was sold in early
1998. New Businesses consists of Radian International LLC,
Advanced Materials, technology licensing and new developments.
Radian provides a broad array of environmental and chemical
management services. Advanced Materials develops and markets
electronic and structural materials such as Cyclotene advanced
electronics resins 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.
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 chlorine- 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 29% of the Company's operating costs and
expenses for the year ended December 31, 1997. These raw
materials are purchased by the Company both on long-term
contracts and as they become available on a global basis.
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 basis.
The Company has, and expects to continue to have, adequate
supplies of raw materials during 1998 and subsequent years.
Method of Distribution
All products and services are marketed primarily through the
Company's sales force, although in some instances more emphasis
is placed upon saless 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 1997, the Company was the second
largest chemical company in the United States 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.
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Patents, Licenses and Trademarks
The Company consistently applies for and obtains United States
and foreign patents. At December 31, 1997 the Company owned
approximately 2,900 active United States patents and
approximately 6,600 active foreign patents, which can be
classified as follows: chemicals, 600 United States and 1,300
foreign; plastics, 1,200 United States and 2,600 foreign;
fabricated products, 350 United States and 1,000 foreign; and new
businesses, 600 United States and 1,500 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 $47 million in 1997, $26 million in 1996 and
$23 million in 1995, and incurred royalties to others of $5
million in 1997, $5 million in 1996, and $6 million in 1995. 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.
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 $785 million in 1997 compared to $761 million in
1996 and $808 million in 1995. The Company employs approximately
5,500 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). 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.
During 1997, Dow completed the acquisition of an 80 percent
interest in Buna Sow Leuna Olefinverbund (BSL), a former East
German integrated chemical complex. Bundesanstalt fuer
vereinigungsbedingte Sonderaufgaben (BvS) will maintain a 20
percent ownership until the end of the restructuring period,
which is expected to be June 2000. The Company expects to include
the financial results of BSL as a nonconsolidated affiliate until
the end of the restructuring period. This acquisition will offer
Dow both new products (e.g. polypropylene, acrylic acid and
synthetic rubber) and expanded geographic reach for core chlorine-
and hydrocarbon-based chemicals and plastics.
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 1997, the Company derived 56 percent of its sales and had 46
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
Management's Discussion and Analysis of Financial Conditions and
Results of Operations and 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 1997. No significant
portion of the business of any industry segment is dependent upon
a single customer.
Employees
The personnel count at December 31, 1997 was 42,861 versus 40,289
at the end of 1996, and 39,537 at the end of 1995.
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ITEM 2. PROPERTIES
The Company operates 114 manufacturing sites in 33 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 1997. 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: 39 manufacturing locations in 19 states.
Canada: 6 manufacturing locations in 3 provinces.
Europe: 41 manufacturing locations in 16 countries.
Latin America: 14 manufacturing locations in 6 countries.
Pacific: 14 manufacturing locations in 9 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 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, the Company and/or Corning have been sued in a
number of individual and class actions by plaintiffs seeking
damages, punitive damages and injunctive relief in connection
with injuries purportedly resulting from alleged defects in
silicone breast implants. In addition, certain stockholders of
the Company have filed separate consolidated class action
complaints alleging that the Company, Dow Corning or some of
their respective Directors violated duties imposed by the federal
securities laws regarding disclosure of alleged defects in
silicone breast implants. All individual defendants in this case
have been dismissed without prejudice. The Company and one of its
former officers have also been sued in two separate class action
complaints (now consolidated) alleging that the defendants
violated duties imposed by the federal securities laws regarding
disclosure of information material to a reasonable investor's
assessment of the magnitude of the Company's exposure to direct
liability in silicone breast implant litigation.
On May 15, 1995, Dow Corning announced that it had voluntarily
filed for protection under Chapter 11 of the United States
Bankruptcy Code. Under Chapter 11, all claims against Dow
Corning (although not against its co-defendants) are
automatically stayed.
It is impossible to predict the outcome of each of the above
described legal actions. However, it is the opinion of the
Company's management that the possibility that these actions will
have a material adverse impact on the Company's consolidated
financial statements is remote, except as described below.
In January 1994, Dow Corning announced a pretax charge of $640
million ($415 million after tax) for the fourth quarter of 1993.
In January 1995, Dow Corning announced a pretax charge of $241
million ($152 million after tax) for the fourth quarter of 1994.
These charges included Dow Corning's best estimate of its
potential liability for breast implant litigation based on a
global Breast Implant Litigation Settlement Agreement (the
"Settlement Agreement"); litigation and claims outside the
Settlement Agreement; and provisions for legal, administrative
and research costs related to breast implants. The charges for
1993 and 1994 included pretax amounts of $1,240 million and $441
million, respectively, less expected insurance recoveries of $600
million and $200 million, respectively. The 1993 amounts
reported by Dow Corning were determined on a present value basis.
On an undiscounted basis, the estimated liability noted above for
1993 was $2,300 million less expected insurance recoveries of
$1,200 million. As a result of the Dow Corning actions, the
Company recorded its 50 percent share of the charges, net of tax
benefits available to the Company. The impact on the Company's
net income was a charge of $192 million for 1993 and a charge of
$70 million for 1994.
--- Page 6 ---
Breast Implant Matters (Continued)
Dow Corning reported an after-tax net loss of $167 million for
the second quarter of 1995, of which the Company's share amounted
to $83 million. Dow Corning's second quarter loss was a result
of a $221 million after-tax charge taken to reflect a change in
accounting method from the present value basis noted above to an
undiscounted basis resulting from the uncertainties associated
with its Chapter 11 filing. As a result of Dow Corning's 1995
second quarter loss and Chapter 11 filing, the Company recognized
a pretax charge against income of $330 million for the second
quarter of 1995, fully reserved its investment in Dow Corning and
is not recognizing its 50 percent share of equity earnings while
Dow Corning remains in Chapter 11.
On September 1, 1994, Judge Sam C. Pointer, Jr. of the United
States District Court for the Northern District of Alabama
approved the Settlement Agreement pursuant to which plaintiffs
choosing to participate in the Settlement Agreement released the
Company from liability. The Company was not a participant in the
Settlement Agreement nor was it required to contribute to the
settlement. On October 7, 1995, Judge Pointer issued an order
which concluded that the Settlement Agreement was not workable in
its then-current form because the funds committed to it by
industry participants were inadequate. The order provided that
plaintiffs who had previously agreed to participate in the
Settlement Agreement could opt out after November 30, 1995.
The Company's maximum exposure for breast implant product
liability claims asserted against Dow Corning is limited to its
investment in Dow Corning which, after the second quarter charge
noted above, is zero. As a result, any future charges by Dow
Corning related to such claims or as a result of the Chapter 11
proceeding would not have an adverse impact on the Company's
consolidated financial statements.
The Company is separately named as a defendant in over 13,000
breast implant product liability cases. In these situations,
plaintiffs have alleged that the Company should be liable for Dow
Corning's alleged torts based on the Company's 50 percent stock
ownership in Dow Corning and that the Company should be liable by
virtue of alleged "direct participation" by the Company or its
agents in Dow Corning's breast implant business. These latter,
direct participation claims include counts sounding in strict
liability, fraud, aiding and abetting, conspiracy, concert of
action and negligence.
Judge Pointer has been appointed by the Federal Judicial Panel
on Multidistrict Litigation to oversee all of the product
liability cases involving silicone breast implants filed in the
U.S. federal courts. Initially, in a ruling issued on December 1,
1993, Judge Pointer granted the Company's motion for summary
judgment, finding that there was no basis on which a jury could
conclude that the Company was liable for any claimed defects in
the breast implants manufactured by Dow Corning. In an
interlocutory opinion issued on April 25, 1995, Judge Pointer
affirmed his December 1993 ruling as to plaintiffs' corporate
control claims but vacated that ruling as to plaintiffs' direct
participation claims.
In his opinion, Judge Pointer reaffirmed the view he had
expressed in his December 1993 ruling that the Company is a
separate, independent entity from Dow Corning and therefore has
no legal responsibility as a result of its ownership of Dow
Corning stock for Dow Corning's breast implant business. However,
Judge Pointer stated that, under the law of at least some states
(although not necessarily all states), actions allegedly taken by
the Company independent of its role as a stockholder in Dow
Corning could give rise to liability under a negligence theory.
Judge Pointer declined to address plaintiffs' other legal
theories, including strict liability, fraud, aiding and abetting,
conspiracy and concert of action. It is impossible to predict
the outcome or to estimate the cost to the Company of resolving
any of the federal product liability cases. The Company has filed
claims with insurance carriers to recover in the event it is held
liable in the federal (or any other) breast implant litigation.
After Judge Pointer's initial ruling in December 1993, summary
judgment was granted to the Company in approximately 4,000 breast
implant cases pending in state courts in California, Indiana,
Michigan, New Jersey and New York, and over 100 actions in
Pennsylvania were dismissed. Of these rulings, the California
ruling was final and was appealed. On September 25, 1996, the
California Court of Appeals for the 4th District affirmed the
trial court's order granting summary judgment to the Company. On
January 15, 1997, the California Supreme Court granted
plaintiffs' petition for a review of that order. The Michigan
ruling was made final on March 20, 1997. This decision has been
appealed by plaintiffs. The New Jersey ruling has been
reconsidered and all claims were again dismissed, except the
negligence claim. Plaintiffs in New York filed a motion to
reconsider based on Judge Pointer's April 25, 1995 ruling. On
September 22, 1995, Judge Lobis, presiding over the consolidated
New York breast implant litigation, dismissed all counts of all
cases filed against the Company in New York on the ground that no
reasonable jury could find against the Company. On May 28, 1996,
the New York Supreme Court Appellate Division affirmed the lower
court's dismissal of all claims against the Company. New York's
highest court subsequently denied plaintiffs' petition for
review, and the order dismissing all claims against the Company
is now final. Other rulings that are not final decisions are also
subject to reconsideration. On October 20, 1996, in a Louisiana
state court breast implant case styled Spitzfaden v. Dow Corning,
et al., the court entered an order maintaining certification of a
class of Louisiana plaintiffs consisting of recipients of Dow
Corning breast implants who, as of January 15, 1997, (i) are
residents of Louisiana, (ii) are former residents of Louisiana
who are represented by Louisiana counsel, or (iii) received their
implants in Louisiana and are represented by Louisiana counsel,
together with the spouses and children of such plaintiffs, and
representatives of the estates of class members who are deceased.
On August 18, 1997, at the conclusion of the first of four phases
of this case, the jury found in part that the Company had been
negligent in the testing and/or research of silicone, had
misrepresented and concealed unspecified hazards associated with
using silicone in the human body and had conspired with
--- Page 7 ---
Breast Implant Matters (Continued)
Dow Corning to misrepresent or conceal such hazards. The Company
has appealed the jury's verdict. On December 1, 1997, the trial
court decertified the class. Plaintiffs have challenged the
decertification order and are opposing the Company's right to
appeal the Phase I verdict. Both matters are now pending in the
Louisiana Supreme Court. Phase II of the Spitzfaden case will
commence, if at all, only after these matters are resolved. The
Company remains a defendant in other breast implant product
liability cases originally brought in state courts and continues
to be named as a defendant as cases are filed in various courts
which are then transferred to the United States District Court,
Eastern District of Michigan. It is impossible to predict the
outcome or to estimate the cost to the Company of resolving any
of the product liability cases described above.
The Company was also a defendant in ten federal silicone jaw
implant cases involving implants manufactured by Dow Corning.
Federal District Court Judge Paul A. Magnuson has been appointed
by the Federal Judicial Panel on Multidistrict Litigation to
oversee all of the product liability cases involving silicone jaw
implants filed in the U.S. federal courts. On March 31, 1995,
Judge Magnuson granted the Company's motion for summary judgment,
concluding, based on virtually the same arguments that were
presented to Judge Pointer, that no reasonable jury could find in
favor of plaintiffs on any of their claims against the Company.
On June 13, 1995, Judge Magnuson denied plaintiffs' motion to
reconsider his ruling based on Judge Pointer's April 25, 1995
decision, and granted the Company's request to enter a final
judgment in its favor. The United States Court of Appeals for the
Eighth Circuit affirmed the summary judgment in favor of the
Company on May 16, 1997. That judgment is now final.
On November 3, 1994, Judge Michael Schneider, presiding in the
consolidated breast implant cases in Harris County, Texas,
granted in part and denied in part the Company's motion for
summary judgment. Judge Schneider granted the Company's motion as
to (i) all claims based on the Company's stockholder status in
Dow Corning, (ii) the claim that the Company was liable in
negligence for failing to supervise Dow Corning, and (iii)
plaintiffs' licensor-licensee claim. Judge Schneider denied the
Company's motion with regard to plaintiffs' claims sounding in
fraud, aiding and abetting, conspiracy, certain negligence claims
and a claim brought under the Texas Deceptive Trade Practices
Act. As a result, the Company remains a defendant as to such
claims in the Harris County product liability cases. In those
cases (and in cases brought in certain other jurisdictions
including those before Judge Pointer), the Company has filed
cross-claims against Dow Corning on the ground that if the
Company and Dow Corning are found jointly and severally liable,
Dow Corning should bear appropriate responsibility for the
injuries judged to be caused by its product. In certain
jurisdictions, the Company has also filed cross-claims and/or
third party claims against Corning. It is impossible to predict
the outcome or to estimate the cost to the Company of resolving
any of the Harris County product liability cases.
In an order dated December 1, 1994, Judge Frank Andrews,
presiding in the consolidated breast implant cases in Dallas
County, Texas, granted the Company's motion for summary judgment
"in all respects except as to theories of conspiracy and strict
liability as a component supplier." As a result, the Company
remains a defendant as to such claims in the Dallas County
product liability cases. It is impossible to predict the outcome
or to estimate the cost to the Company of resolving any of these
actions.
In addition to the jury findings in the first phase of the
Louisiana state case noted above, three breast implant product
liability cases brought against the Company have now been tried
to judgment. In February 1995, a Harris County jury exonerated
the Company in one case and found the Company jointly and
severally liable with Dow Corning for $5.23 million on a single
count in a second case. After the verdict, however, the Court
overturned the jury's verdict and entered judgment for the
Company. On October 30, 1995 a state court jury in Reno, Nevada
found the Company liable for $4.15 million in compensatory
damages and $10 million in punitive damages. The Company has
appealed the verdict. The Company has filed a claim in Dow
Corning's bankruptcy proceedings to recover from Dow Corning its
share of any monies the Company might pay as a result of the
Nevada verdict or any other adverse decision related to Dow
Corning's products.
On May 13, 1997, United States District Court Judge Denise Page
Hood ordered that all breast implant claims currently pending
against the Company as to which judgment had not been entered,
whether pending in state or federal courts, be transferred to the
United States District Court, Eastern District of Michigan
pursuant to a decision issued by the United States Court of
Appeals for the Sixth Circuit on May 8, 1997. On August 1, 1997,
Judge Hood issued her case management order with respect to the
transferred claims, and ordered that all implant claims later
filed in federal or state courts against the Company should
likewise be transferred. On August 5, 1997, the Tort Committee in
Dow Corning's bankruptcy case filed a petition for a writ of
certiorari with the United States Supreme Court seeking review of
the May 8, 1997 decision of the Sixth Circuit. On November 10,
1997, the Supreme Court denied the Tort Committee's petition.
Judge Hood's May 13 order transferred the Louisiana state court
breast implant case, Spitzfaden v. Dow Corning, et al., to the
United States District Court, Eastern District of Michigan. The
plaintiffs in that case filed an emergency motion to transfer, or
abstain and remand, the case back to the Louisiana state court.
On May 21, 1997, Judge Hood "abstain(ed) from the claims involved
in Phases I and II" of that case resulting in its return to the
Louisiana state court and the resumption of the trial. The
Company has sought review of Judge Hood's May 21 decision by the
United States Court of Appeals for the Sixth Circuit.
It is the opinion of the Company's management that the
possibility is remote that plaintiffs will prevail on the theory
that the Company should be liable in the breast implant
litigation because of its stockholder relationship with Dow
Corning. The Company's management believes that there is no merit
to plaintiffs' claims that the Company is liable for alleged
defects in
--- Page 8 ---
Breast Implant Matters (Continued)
Dow Corning's silicone products because of the Company's alleged
direct participation in the development of those products, and
the Company intends to contest those claims vigorously.
Management believes that the possibility is remote that a
resolution of plaintiffs' direct participation claims, including
the vigorous defense against those claims, will have a material
adverse impact on the Company's financial position or cash flows.
Nevertheless, in light of Judge Pointer's April 25, 1995 ruling,
it is possible that a resolution of plaintiffs' direct
participation claims, including the vigorous defense against
those claims, could have a material adverse impact on the
Company's net income for a particular period, although it is
impossible at this time to estimate the range or amount of any
such impact.
Environmental Matters
On 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. On December 23, 1997,
the court approved a settlement of this action in which the
Company paid a civil penalty of $100,000 to the United States
Treasury. Separately, the Company has agreed to pay $800,000 to
an escrow fund to be used for environmental projects in the
Saginaw Bay Watershed, and $450,000 in costs and attorney fees.
The Company paid $100,000 to the Michigan Department of
Environmental Quality ("MDEQ") on October 1, 1997, pursuant to an
Administrative Consent Order dated as of July 21, 1997, as
partial reimbursement for MDEQ investigation and oversight costs
related to the Company's operation of its waste water treatment
plant. Two additional payments of $100,000 each are due on
October 1, 1998 and October 1, 1999.
On September 17, 1997, the United States Environmental
Protection Agency filed a complaint against the Company alleging
violations of various sections of the Clean Air Act, the Clean
Water Act, the Emergency Planning and Community Right-to-Know Act
and the Resource Conservation and Recovery Act. On January
9,1998, the Company paid a fine of $288,100 pursuant to a Consent
Agreement/Consent Order in this matter.
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 1997.
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 12, 1998, the Company declared a
cash dividend of 87 cents per share, payable April 30, 1998, to
stockholders of record on March 31, 1998. This will be the 345th
consecutive quarterly dividend since 1912. There were 95,931
common stockholders of record as of March 16, 1998. The Company
estimates that there were an additional 105,000 stockholders
whose shares were held in nominee names at December 31, 1997.
Quarterly market and dividend information can be found in Part
II, Item 8 (Financial Statements & Supplementary Data) on page
47.
--- Page 9 ---
ITEM 6. SELECTED FINANCIAL DATA
The Dow Chemical Company and Subsidiaries
Five-year Summary of Selected Financial Data
In millions, except as noted Unaudited 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
Summary of Operations (1)
Net sales $20,018 $20,053 $20,200 $16,742 $15,052
Cost of sales 14,679 14,108 13,337 12,131 11,370
Insurance and finance company operations,
pretax income (113) (78) (61) (40) (98)
Research and development expenses 785 761 808 783 786
Promotion and advertising expenses 371 370 416 411 367
Selling and administrative expenses 1,509 1,766 1,771 1,594 1,485
Amortization of intangibles 61 39 38 43 68
------------------------------------------------
Operating income 2,726 3,087 3,891 1,820 1,074
Investment and sundry income (expense) 511 405 (222) 77 462
Interest expense - net (289) (204) (140) (271) (278)
------------------------------------------------
Income before provision for taxes on
income and minority interests 2,948 3,288 3,529 1,626 1,258
Provision for taxes on income 1,041 1,187 1,442 654 514
Minority interests' share in income 99 194 196 200 171
Preferred stock dividends 6 7 7 7 7
------------------------------------------------
Income from continuing operations 1,802 1,900 1,884 765 566
Discontinued operations net of taxes on income 0 0 187 166 71
---------------------------------------------------------------------------------------------------------
Net income available for common stockholders 1,802 1,900 2,071 931 637
---------------------------------------------------------------------------------------------------------
Per share of common stock (dollars):
Income from continuing operations $7.81 $7.71 $7.03 $2.77 $2.07
Net income available for common stockholders $7.81 $7.71 $7.72 $3.37 $2.33
Income from continuing operations -
assuming dilution $7.70 $7.60 $6.93 $2.75 $2.05
Net income available for common stockholders -
assuming dilution $7.70 $7.60 $7.61 $3.34 $2.31
Cash dividends declared $3.36 $3.00 $2.90 $2.60 $2.60
Cash dividends paid $3.24 $3.00 $2.80 $2.60 $2.60
Weighted-average common shares outstanding 230.6 246.3 268.2 276.1 273.6
Convertible preferred shares outstanding 1.4 1.5 1.5 1.5 1.6
- ----------------------------------------------------------------------------------------------------------
Year-end Financial Position
Total assets $24,040 $24,673 $23,582 $26,545 $25,505
Working capital 1,300 3,826 4,953 2,075 2,001
Property - gross 23,345 23,737 23,218 23,210 21,608
Property - net 8,052 8,484 8,113 8,726 8,580
Long-term obligations and redeemable preferred stock 4,245 4,230 4,733 5,325 5,918
Total debt 6,258 5,468 5,403 6,578 6,944
Net stockholders' equity 7,626 7,954 7,361 8,212 8,034
- ----------------------------------------------------------------------------------------------------------
Financial Ratios
Research and development expenses as percent
of net sales (1) 3.9% 3.8% 4.0% 4.7% 5.2%
Income before provision for taxes and minority
interests as percent of net sales (1) 14.7% 16.4% 17.5% 9.7% 8.4%
Return on stockholders' equity 23.5% 23.8% 26.9% 11.3% 7.9%
Book value per common stock (dollars) $34.04 $33.13 $30.69 $29.71 $29.33
Debt as a percent of total capitalization 42.8% 35.2% 36.3% 38.0% 39.8%
- ----------------------------------------------------------------------------------------------------------
General
Capital expenditures $1,198 $1,344 $1,417 $1,183 $1,397
Depreciation (1) 1,208 1,259 1,369 1,224 1,252
Wages and salaries paid 2,882 2,944 2,734 3,239 3,332
Cost of employee benefits 666 700 696 832 887
Number of employees at year-end (thousands) 42.9 40.3 39.5 53.7 55.4
Number of stockholders of record at year-end
(thousands) (2) 97.2 104.6 111.1 114.5 102.5
- ----------------------------------------------------------------------------------------------------------
(1) Restated for the sale of the pharmaceutical businesses in 1995.
(2) Stockholders of record as reported by the transfer agent. The Company estimates that there were
an additional 105,000 stockholders whose shares were held in nominee names at December 31, 1997.
--- Page 10 ---
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
In 1997, Dow's sales were $20.0 billion, down slightly from $20.1
billion in 1996 and from record sales of $20.2 billion in 1995.
Total sales reflected a 4 percent volume gain, offsetting a 4
percent combined negative impact of price and currency (see Sales
Price and Volume table on page 18). The company performed well in
1997, extending its high level of earnings per share for a third
consecutive year. The performance segments experienced strong
demand growth, including a 14 percent volume gain in Performance
Chemicals. Selling prices were down in all segments with the
exception of Hydrocarbons and Energy.
Sales in the United States accounted for 44 percent of total
sales in 1997, 44 percent in 1996 and 45 percent in 1995. Sales
and other data by industry segment and geographic area are
provided in Note S to the Financial Statements.
Dow completed several significant acquisitions in 1997,
including its purchase of an 80 percent stake in Buna Sow Leuna
Olefinverbund (BSL), the remaining 40 percent ownership in
DowElanco (now Dow AgroSciences LLC), and 100 percent of
Sentrachem Limited. In addition, the company completed the sale
of Destec Energy, Inc. and signed agreements for S.C. Johnson &
Son, Inc. to acquire DowBrands. Details for most of these events
are included in the text for the respective industry segments.
The comprehensive restructuring program at BSL calls for the
expansion and renovation of some existing facilities, the
demolition of noncompetitive plants, and the construction of new
facilities for various products, including polyethylene,
polypropylene and acrylic acid. In 1997, BSL completed the
expansion of the ethylene cracker at Boehlen and started operating
a naphtha pipeline from Rostock to Boehlen to ensure a reliable
supply of raw materials from world markets.
Dow expects 1998 to be a challenging year, in part because the
global economic outlook will be affected by the outcome of the
Asia Pacific financial crisis. However, Dow's improved product
mix and continued expense control will help the company make
further progress toward its financial objectives.
This discussion and analysis section covers the current
performance and outlook of the company and each of its industry
segments. The forward-looking statements contained herein involve
risks and uncertainties that may affect the company's operations,
markets, products, services, prices and other factors as
discussed in filings with the Securities and Exchange Commission.
These risks and uncertainties include, but are not limited to,
economic, competitive, governmental and technological factors.
PERFORMANCE PLASTICS
Sales for Performance Plastics were $5.25 billion in 1997, down
slightly from 1996 sales of $5.3 billion and 1995 sales of $5.4
billion. An overall volume gain of 6 percent largely offset a
price decline of 8 percent compared with the previous year. In
1996, the segment showed a 3 percent volume gain and a 4 percent
price decline versus 1995.
Operating income for Performance Plastics was $922 million in
1997, down from a record operating income of $1.2 billion in 1996
and $1.1 billion in 1995.
Sales for Adhesives, Sealants and Coatings grew 8 percent in
1997. Dow is expanding its capabilities for customer tailored
solutions in new markets through the existing Systems House
business, which supplies fully formulated customized polyurethane
systems, and Essex Specialty Products, a wholly owned Dow
subsidiary. In 1997, new Systems House formulation operations
started up in Brazil and Egypt. Essex Specialty Products formed
Sound Alliance LLC with Cascade Engineering, Inc. to provide
automotive acoustical systems.
Engineering Plastics posted 11 percent volume growth in 1997.
Prices softened for ABS, polycarbonate and engineering compounds
during the first half of the year and held at lower levels during
the second half, contributing to reduced profitability compared
with the previous year. In 1998, Dow will almost double its
thermoplastic polyurethane production capacity at LaPorte, Texas,
to meet growing demand in North America and Europe for this high-
margin product.
Epoxy Products and Intermediates recorded volume growth of 9
percent in 1997, offsetting a 7 percent price decline resulting
from competitive pressures in key markets. To meet increasing
global demand, Dow expanded the epichlorohydrin plant in
Freeport, Texas, and the liquid epoxy resins facility in Stade,
Germany.
Fabricated Products continued to experience an intensified
competitive climate in 1997 due to increased local competition in
regional markets and the globalization of competing
manufacturers. A 2 percent volume decline combined with a 7
percent decline in price and currency reduced profitability for
the business in 1997, down from record profits in 1996. These
results reflected the slower pace of residential construction in
some regions, particularly in Japan. However, the business gained
volume in the U.S. commercial and roofing sectors and recorded 12
percent demand growth for building materials in Europe.
In 1997, DuPont Dow Elastomers L.L.C. continued its drive to
combine Insite technology developed by Dow with DuPont's
elastomer business to establish a leadership position in
elastomer technology. Dow's joint development agreement with BP
Chemicals to pursue a technical collaboration between Innovene
gas-phase polyethylene process and Insite technology also
reported progress in 1997.
--- Page 11 ---
PERFORMANCE PLASTICS (Continued)
In 1997, Polyurethanes experienced 7 percent volume growth
offset by weaker prices compared with 1996. In 1996, the business
posted record sales and profits, fueled in part by strong demand
in Latin America. To improve its competitive cost position, Dow
added aniline capacity at Boehlen, Germany, in 1997, and an
additional plant to produce toluene diisocyanate (TDI) will start
up in Freeport, Texas, in 1998.
Outlook for 1998
The Performance Plastics segment expects continued solid
performance in 1998 in the face of continued declining prices for
many products.
Engineering Plastics expects another year of solid volume
growth, with strong growth rates anticipated for polycarbonate
and thermoplastic polyurethanes. Additional industry capacity
will likely place greater pressure on prices in 1998. However,
reduced conversion costs and operating expenses will help offset
price declines.
Epoxy Products and Intermediates anticipates modest volume
growth in 1998. Intensified global competition in key markets and
increased Asia Pacific exports will likely result in continued
pricing pressures. Europe shows promise for demand growth in the
first half of the year with some upward pricing momentum.
Sales volume for Fabricated Products should increase as a
result of continued geographic expansion, especially into
emerging markets. The competitive market environment is expected
to continue into 1998. Demand for Fabricated Products will
continue to be influenced by general economic activity, including
housing starts, demand for durable goods and more stringent
energy insulation standards worldwide.
Polyurethanes anticipates additional volume growth in 1998.
However, continued pricing pressures will likely impact overall
results.
PERFORMANCE CHEMICALS
Sales for Performance Chemicals were up strongly to $4.6 billion
in 1997, compared with $4.3 billion in 1996 and $4.3 billion in
1995. The segment experienced a volume gain of 14 percent,
outweighing a combined unfavorable impact of price and currency
of 8 percent in 1997 compared with a year ago. In 1996, sales
reflected a 4 percent volume gain offset by a 4 percent decline
in prices versus 1995.
Operating income was $635 million in 1997, down from a record
$721 million in 1996. In 1995, operating income was $670 million.
In 1997, Emulsion Polymers posted a 16 percent increase in
volume compared with the previous year, offsetting a 12 percent
decline due to price and currency. In 1996, higher volume was
also offset by lower prices. Demand for styrene butadiene (S/B)
latex was strong, particularly in the coated paper industry.
Prices for S/B latex softened due to lower market prices for
styrene monomer in 1997 and the intense competitive environment
in Europe.
Specialty Chemicals again set global records for sales and
operating income despite declining local prices and the strong
dollar. Sales were $1.7 billion in 1997 as volume increased 9
percent, offsetting a combined unfavorable price and currency
impact of 4 percent. Volume was up due to strong demand for
alkanolamines, chelants, diphenyl oxide, heat transfer fluids,
surfactants, polyglycols and antimicrobials. Prices softened
versus 1996 due to competitive pressures in liquid separations,
oxygenated solvents, superabsorbents and ethyleneamines.
Many of the individual businesses within Specialty Chemicals
set sales and operating income records, including liquid
separations, Methocel cellulose ethers, oxygenated solvents,
polyglycols, chelants, alkanolamines, quaternaries and
ethyleneamines. Dow will invest $30 million during the next three
years to upgrade its chelants manufacturing facility in Freeport,
Texas.
In 1997, Dow strengthened its position in agricultural
products by acquiring Eli Lilly and Company's 40 percent share in
DowElanco. Renamed Dow AgroSciences, the company is now a wholly
owned Dow subsidiary. Sales for agricultural products increased
11 percent in 1997, partly due to the consolidation of Mycogen
after Dow's ownership exceeded 50 percent.
Growth in new technology offerings in 1997 offset increased
competition in older products and the negative impact of
currency. The launch of Tracer and Success insect control
products in the United States and Fortress fungicide in Europe
exceeded expectations.
Dow AgroSciences also increased its focus on biotechnology.
The business increased sales of Mycogen's insect-resistant seeds
and collaborated with partners to develop new crop enhancement
traits. It developed and plans to launch high-oil corn through
Mycogen and through agreements with Indiana-based Seed Genetics,
Inc. and others.
The business will incorporate the agricultural products
business of Sanachem through Dow's acquisition of Sentrachem in
late 1997. Sanachem, the world's third largest manufacturer of
generic crop protection and pest control products, boasts more
than $200 million in annual sales, 500 registrations worldwide
and a product line that includes glyphosate, triazines, mancozeb,
aldicarb, carbofuran and phenoxies.
--- Page 12 ---
PERFORMANCE CHEMICALS (Continued)
Outlook for 1998
Performance Chemicals is expected to post solid results in 1998
with continued volume growth in each of its businesses.
Demand for Emulsion Polymers will likely remain strong in
1998. Overall, prices should stabilize at the low point of the
styrene monomer cycle, but competitive pressures in Europe will
likely continue. Currency effects and tempered growth rates will
have a modest effect on global business performance. Dow's low-
cost position and customers' increasing demand for Dow S/B latex
and solution S/B rubber are expected to bolster the year's
results.
Increased sales demand combined with ongoing productivity
improvements should result in strong performance for Specialty
Chemicals again in 1998. The addition of Hampshire Chemicals
through Dow's acquisition of Sentrachem is expected to further
improve performance.
Dow AgroSciences anticipates continued growth in 1998 through
new technology offerings, increased participation in
biotechnology, and the addition of the generic crop protection
business of Sanachem. The business is also in the process of
launching two new soybean herbicides: FirstRate, with unique
applications in U.S. soybean programs, and Spider, with newly
granted approvals in Brazil and Argentina.
PLASTICS
Plastics reported sales of $4.1 billion in 1997, up 7 percent
from 1996. Volume increased 8 percent versus last year, and
prices stabilized, declining only 1 percent. In 1996, sales were
$3.9 billion, flat with 1995, as a 19 percent price decline
offset a 17 percent volume gain.
Operating income for Plastics increased 6 percent to $845
million in 1997. Operating income was $794 million in 1996 and
$1.5 billion in 1995.
Dow's Polyethylene business reported significant volume growth
and price improvements in 1997. Volume increased 6 percent
compared with the previous year. Prices increased more than 4
percent despite unfavorable currency impacts as delays in new
capacities and plant outages helped maintain prices at levels
higher than anticipated. Growth was particularly robust in Latin
America, where polyethylene sales increased by more than 20
percent versus 1996. Volume growth in Europe was also strong.
Record sales were reported in low and linear low density
polyethylene and Affinity polyolefin plastomers.
In 1997, Dow launched Elite enhanced polyethylene resins,
which deliver unique combinations of enhanced property
performance for a variety of packaging and other applications. So
far, Dow has introduced four commercial grades of Elite resins,
and nine more grades are in market development.
To meet increasing global demand from Dow's polyethylene
customers, two new solution polyethylene plants are scheduled to
start up in 1998. Both facilitiesat Schkopau, Germany, and at
Fort Saskatchewan, Alberta, Canadawill be able to produce both
traditional Dowlex polyethylene resins and resins made using
Insite technology.
Incorporating its 1996 acquisition of Estireno do Nordeste
(EDN) in Brazil, Dow's Polystyrene business recorded 11 percent
volume growth in 1997 in the face of another year of downward
pricing pressure for the polystyrene industry since the 1995
peak. Dow continued with plans to expand its polystyrene business
to maintain a global leadership position, using breakthrough
proprietary technology to improve productivity and gain
incremental capacity expansions as market demand increases.
In Latin America, Dow consolidated its position with EDN to
become the largest polystyrene producer in both Brazil and Latin
America. The business announced plans to improve productivity at
EDN's Guaruja, Brazil, facility. In Asia Pacific, Dow officially
opened a polystyrene facility at Map Ta Phut, Thailand, with its
joint venture partner, The Siam Cement Group.
In 1997, Dow and Cargill, Inc. formed Cargill Dow Polymers
LLC, a 50:50 limited liability company, to develop and market
polylactic acid (PLA) polymers. PLA polymers are a new polymer
family derived from renewable agricultural resources, such as
corn and sugar beets, and are targeted for applications including
cast films, fibers and non-wovens, blown films and rigid
containers.
The global market for polypropylene continues to grow faster
than any other commodity polymer, specifically in packaging and
injection molding applications. Pricing was under pressure in the
second half of the year despite rapid growth, due mainly to new
industry capacity in North America. In 1997, Dow introduced a new
tradename, Inspire polypropylene resins. Dow's first
polypropylene plant is expected to start up in early 1998 at
Schkopau, Germany.
In 1997, the polyethylene terephthalate (PET) business
experienced a volume increase of more than 10 percent versus
1996. Dow's plants were fully utilized during the year. Although
industry prices improved in the first half of the year, average
prices for PET in 1997 were approximately 20 percent lower than
in 1996. Dow's new PET plant at Schkopau, Germany, is expected to
start production in late 1998. INCA International SpA of Italy,
in which Dow owns an 80 percent share, continued to see strong
interest in licenses for its purified terephthalic acid (PTA)
technology.
--- Page 13 ---
PLASTICS (Continued)
Outlook for 1998
The economic indicators for 1998 continue to point to strong
demand for polyethylene. Dow expects to use planned capacity
additions to further extend its presence in emerging markets and
strengthen its leadership position in high performance
polyethylene film applications. Prices will be affected as new
industry capacity comes on line.
Polystyrene sales are expected to be flat in 1998 compared
with the previous year. Volume growth from strong demand will
likely offset price declines due to styrene monomer and
polystyrene industry capacity increases. Dow's productivity
improvement initiatives for polystyrene have positioned the
business well for this pricing environment.
Continued demand growth is expected for polypropylene in 1998.
This growth will likely be balanced with capacity additions. The
competitive environment is also expected to lead to continuing
consolidation among key players, particularly in Europe. Dow's
supply arrangements with Montell Polyolefins have resulted in
significant leverage with existing and new customers in North
America and Europe, supporting Dow's entry into polypropylene
globally.
Demand for PET is expected to remain strong in 1998. The
global imbalance of PET supply and demand will likely continue,
keeping pressure on prices. Further industry consolidation is
also expected.
CHEMICALS AND METALS
Chemicals and Metals posted sales of $2.9 billion in 1997
compared with $3.0 billion in 1996 and $3.2 billion in 1995.
Prices declined 2 percent due to the impact of currency and
heightened competitive pressures. Volume fell 2 percent during
the year. In 1996, prices declined 10 percent while volume rose 4
percent versus 1995.
Operating income for Chemicals and Metals was $629 million in
1997 compared with $737 million a year ago. Operating
difficulties at facilities in North America contributed to higher
costs and constrained volume growth for the segment. Operating
income was $1.1 billion in 1995.
Strong demand in the alumina and pulp and paper industries
coupled with unplanned industry plant outages tightened the
supply of caustic soda. This caused prices to move significantly
higher in the second half of the year, although they were down
substantially for 1997 as a whole.
In addition, strong demand for polyvinyl chloride (PVC) in
North America and Asia Pacific, combined with tight chlorine
supplies, led to higher pricing for vinyl chloride monomer (VCM)
in the first half of 1997. Softer demand and increased supply for
VCM in North America and Asia Pacific, as well as slightly lower
ethylene values in the second half of the year, negatively
impacted year-end price and volume.
In 1997, Dow added chlorine capacity at Freeport, Texas, and
Stade, Germany. The business announced further expansions of
membrane chlorine capacity in Stade, Germany, by the end of 1998
and in Freeport, Texas, by mid-1999. The additional capacity is
planned to meet Dow's increased internal chlorine demand,
supporting derivative businesses.
In Canada, Dow added incremental VCM capacity at Fort
Saskatchewan, Alberta, in 1997 for about half the cost of
building a new facility. This increase enables Dow to meet
customers' growing needs in North America and Asia Pacific.
Propylene Oxide (PO) and Derivatives experienced solid demand
for PO in 1997. Demand in North America and Latin America was
stronger than expected, while demand in Asia Pacific declined
late in the year. Through plant debottlenecking, Dow added PO
capacity in Freeport, Texas; Aratu, Brazil; and Stade, Germany,
in 1997.
In 1997, stable pricing and healthy demand for Chlorinated
Organics combined to produce a strong bottom-line result. As the
leading supplier of chlorinated organic products, Dow continues
to evaluate growth opportunities for chloromethanes in Asia
Pacific.
Ethylene Oxide and Derivatives had an excellent year, with
volume growth and rising prices fueling healthy results. In 1997,
the business divested of its European and North American after-
market coolants businesses.
As part of a strategic business review, the company retained
financial advisers in 1997 to explore strategic options for
maximizing the value of the Magnesium/Fabricated Metals business.
No decisions have been made at this time regarding what option
will be pursued in 1998.
Outlook for 1998
Caustic soda is expected to continue to show strong performance
throughout 1998, with the current tight industry supply position
further enhanced by strong growth. PVC demand and pricing in
Europe will likely improve, while growth is expected to slow in
North America. Price pressures are expected in VCM and PVC
primarily due to lower raw material values.
The PO and Derivatives business expects moderate demand growth
compared with 1997. Pricing is expected to stay soft due to
weaker demand in Asia Pacific. Supply and demand should remain
relatively balanced as no significant PO capacity is anticipated
to come on line in 1998.
--- Page 14 ---
HYDROCARBONS AND ENERGY
Hydrocarbons and Energy sales were $2.2 billion in 1997 compared
with $2.4 billion in 1996 and $2.4 billion in 1995. This segment
experienced a volume decline of 13 percent, due entirely to the
sale of Destec Energy, Inc. in the second quarter of 1997. Prices
rose 2 percent versus the previous year.
Hydrocarbons and Energy, which transfers materials to Dow's
derivative businesses at cost, reported a residual operating loss
of $40 million, compared with operating losses of $57 million and
$83 million in 1996 and 1995, respectively.
Dow managed feedstock acquisition costs in 1997 by maximizing
its flexibility and global sourcing. Ethylene prices remained
stronger than anticipated throughout the year. Industry operating
rates were high at ethylene plants in all geographies due to
continued strong demand for ethylene derivatives and unexpected
industry plant outages.
In the first half of 1997, Dow closed a noncompetitive
ethylene facility in Freeport, Texas. To optimize Dow's low-cost
position in Canada, the ethylene unit in Fort Saskatchewan,
Alberta, is being expanded to meet increased downstream
derivative demand. The additional capacity will come on line in
the fourth quarter of 1998.
Styrene prices were under pressure in 1997, rising only
slightly from the industry low in 1996. Global demand supported
average industry operating rates of around 89 percent, although
Dow plants ran at higher rates. In Thailand, Siam Styrene Monomer
Co., the Dow-Siam Cement joint venture, opened a styrene
production facility to meet long-term demand growth for
derivatives. In 1998, Dow will close an ethylbenzene/styrene
manufacturing facility in Sarnia, Ontario, Canada.
In 1997, Dow sold its 80 percent stake in independent power
producer Destec Energy, Inc. to NGC Acquisition Corporation for
$974 million. The sale of Destec is consistent with the company's
strategy to maximize shareholder value by divesting of assets
that do not fit with its long-term strategic objectives.
Outlook for 1998
Crude oil, energy and feedstock prices are expected to decline in
1998 compared with 1997.
New ethylene capacity may change the supply and demand balance
unfavorably, exerting downward pressure on prices. Declining
feedstock prices will help mitigate potential margin declines.
In 1998, the styrene industry will likely experience a
continued supply and demand imbalance. Capacity additions in Asia
Pacific made during 1997 are expected to reduce average industry
operating rates, keeping global styrene pricing near its present
low level.
Dow's net global purchase positions in ethylene and styrene
are expected to allow continuous full utilization of available
capacity, thus improving the company's relative cost position
versus industry averages.
Dow's market energy costs in 1998 will be lower when compared
to 1997 as a result of the liberalization effects in Europe and a
general lower energy pricing scenario.
DIVERSIFIED BUSINESSES AND UNALLOCATED
Sales for this segment were $962 million, $1.1 billion and $966
million in 1997, 1996 and 1995, respectively. The segment
recorded an operating loss of $265 million compared with losses
of $275 million in 1996 and $363 million in 1995.
The operating results of this segment were comprised primarily
of research and other expenses related to new developmental
activities in New Businesses, severance costs and overhead cost
variances not allocated to other segments. The company's total
severance cost was $200 million, nearly all of which was assigned
to this segment for 1997, compared with $127 million in 1996 and
$181 million in 1995. Segment costs were partially offset by
pretax income from insurance and finance company operations and
improved DowBrands results in 1997 compared with the previous
year.
In 1997, the company signed agreements for S.C. Johnson & Son,
Inc. to acquire DowBrands, Dow's consumer products business. The
transaction, completed in January 1998, includes DowBrands' Home
Food Management and Home Care Products units, whose respective
brands became assets of S.C. Johnson & Son, Inc. Reported sales
for DowBrands were lower in 1997 versus the previous year because
the European consumer products business became part of the
Cofresco joint venture in late 1996.
New Businesses consists of environmental services through
Radian International LLC (Radian); Advanced Materials; technology
licensing; and new developments.
In 1997, Radian faced significant pricing pressure due to weak
demand and ongoing consolidation in the remediation and
construction industry.
Advanced Materials expanded production capacity in Midland,
Michigan, for Cyclotene advanced electronics resins. This will
ensure product availability as chip makers adapt their processes
to use this new material suited for higher chip speeds. In 1997,
the company formed Intarsia Corp., an 80:20 joint venture between
Dow and Flextronics International to produce and sell integrated
passive components. In November 1997, Dow also formed Quixtor
Technologies Corp., a wholly owned subsidiary, to manufacture and
sell ceramic disk substrates to the disk drive industry.
Dow's technology licensing platform also gained momentum in
1997. Several significant licensing agreements were concluded
during the year, resulting in a positive impact on net income of
more than $20 million.
--- Page 15 ---
DIVERSIFIED BUSINESSES AND UNALLOCATED (Continued)
Outlook for 1998
Dow received a total of approximately $1.2 billion for the
DowBrands business as a result of its sale to S.C. Johnson & Son,
Inc. in January 1998.
Radian and the environmental services industry will likely
benefit from the outsourcing trend in process-related industries
despite overall weak demand. In January 1998, Hartford Steam
Boiler Inspection and Insurance Company exercised a put option to
sell its 40 percent stake in Radian to Dow. Dow is currently
evaluating strategic options for managing this business.
Advanced Materials expects to capitalize on new opportunities
for aluminum boron carbide substrates and advanced electronics
materials for high-technology markets.
COMPANY SUMMARY
Operating Income
Operating income was $2.7 billion in 1997, down 12 percent from
$3.1 billion in 1996 and 30 percent from $3.9 billion in 1995.
Gross margin decreased by $606 million versus 1996, primarily the
result of lower selling prices and unfavorable currency. 1996
gross margin decreased by $918 million from 1995, primarily due
to lower selling prices and higher feedstock and energy costs.
Sales Price and Volume
1997 1996 1995
---------------------- ---------------------- ----------------------
Percent change from prior year Price Volume Total Price Volume Total Price Volume Total
- -----------------------------------------------------------------------------------------------------------
Geographic Areas:
United States (1)% 1% - (6)% 3% (3)% 12% - 12%
Europe (8) 5 (3)% (11) 10 (1) 25 8% 33
Rest of World (4) 8 4 (8) 11 3 16 8 24
All Areas (4)% 4% - (8)% 7% (1)% 17% 4% 21%
- -----------------------------------------------------------------------------------------------------------
Industry Segments:
Performance Plastics (8)% 6% (2)% (4)% 3% (1)% 13% 5% 18%
Performance Chemicals (8) 14 6 (4) 4 - 6 9 15
Plastics (1) 8 7 (19) 17 (2) 29 (1) 28
Chemicals and Metals (2) (2) (4) (10) 4 (6) 33 1 34
Hydrocarbons and Energy 2 (13) (11) (6) 9 3 9 7 16
Diversified Businesses and
Unallocated - (10) (10) 5 5 10 - 1 1
All Segments (4)% 4% - (8)% 7% (1)% 17% 4% 21%
- -----------------------------------------------------------------------------------------------------------
Sales price includes the impact of currency.
The ratio of operating income to sales was 14 percent in 1997,
versus 15 percent in 1996 and 19 percent in 1995. The decrease of
$361 million in operating income for 1997 versus 1996 was due to
approximately $825 million in lower sales prices, including the
unfavorable impact of currency, partially offset by improved
sales volume, better product mix and lower expenses. The United
States contributed 38 percent of the total operating income in
1997 compared with 40 percent in 1996 and 41 percent in 1995.
Operating income in Europe was $849 million in 1997 versus $783
million in 1996 and $1.1 billion in 1995. Operating income from
the rest of the world was $854 million in 1997, down from $1.1
billion in 1996 and $1.2 billion in 1995.
Operating Costs and Expenses
Cost Components as a Percent of Total: 1997 1996 1995
- ------------------------------------------------------------
Hydrocarbons and energy 29% 28% 25%
Wages, salaries and employee benefits 21 21 21
Maintenance 4 4 5
Depreciation 7 7 8
- ------------------------------------------------------------
Supplies, services and other raw
materials 39 40 41
- ------------------------------------------------------------
Total 100% 100% 100%
--- Page 16 ---
Operating Income (Continued)
Dow's global plant operating rate was 89 percent of capacity,
unchanged from 1996 and down from 92 percent in 1995. The 1997
sales volume increase of 4 percent over 1996 was achieved through
a mixture of new capacity and sustained growth, particularly in
the company's performance segments. Depreciation expense was $1.2
billion in 1997, $1.3 billion in 1996 and $1.4 billion in 1995.
Operating expenses, which include research and development,
promotion and advertising, and selling and administrative
expenses, were $2.7 billion in 1997, a decrease of $232 million
from $2.9 billion in 1996 and $330 million from $3.0 billion in
1995. The lower expenses in 1997 reflected Dow's ongoing
productivity improvements.
Research and development expenses were $785 million for 1997,
up 3 percent compared with 1996, but down 3 percent compared with
1995 spending.
Promotion and advertising expenses of $371 million were flat
versus 1996 and down 11 percent from $416 million in 1995.
Selling and administrative expenses for 1997 were $1.5
billion, down 15 percent from $1.8 billion in 1996 and 1995.
Selling and administrative expenses represented 8 percent of
sales in 1997 versus 9 percent in 1996 and 1995.
The personnel count was 42,861 at December 31, 1997, 40,289 at
the end of 1996 and 39,537 at the end of 1995. The increase in
1997 over 1996 was caused by the addition of approximately 4,400
employees from the acquisition of Sentrachem. 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 each year due to continuing rationalization
and work process improvements throughout the company. The Company
plans to continue its workforce rationalization in 1998.
Net Income
Net income available for common stockholders in 1997 was $1.8
billion or $7.81 per share compared with $1.9 billion or $7.71
per share in 1996 and $2.1 billion or $7.72 per share in 1995.
The following table summarizes the impact of special items on
earnings per common share.
1997 1996 1995
- ------------------------------------------------------------------------------
Impact of Dow Corning Corporation related charges - - $(1.24)
Discontinued operations - - .69
Impact of sale of Destec Energy, Inc. and other
one-time events $ .23 - -
Other earnings 7.58 $7.71 8.27
- ------------------------------------------------------------------------------
Earnings per common share $7.81 $7.71 $7.72
- ------------------------------------------------------------------------------
Dow's share of the earnings of nonconsolidated affiliates
amounted to $75 million in 1997 compared with $66 million in
1996 and $70 million in 1995. 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 write-down of the company's investment. See Note Q to
the Financial Statements for further discussion of Dow Corning's
breast implant litigation.
Interest expense (including capitalized interest) and
amortization of debt discount decreased $23 million to $471
million in 1997, down 5 percent from $494 million in 1996, but up
9 percent from $434 million in 1995.
Interest income and net foreign exchange in 1997 was $194
million, down 32 percent from $286 million in 1996 and 33 percent
from $289 million in 1995. Higher interest income in the previous
two years was primarily attributable to the investment of the
cash received from the sale of the pharmaceutical businesses in
1995. The decline in interest income for 1997 resulted from the
company's use of cash for acquisitions. Acquisitions and
divestitures are discussed in Note C 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).
Sundry income increased to $424 million in 1997 versus $343
million in 1996 and $43 million in 1995. During the last two
years, Dow sold or restructured its interest in a number of
businesses, including Destec Energy, Inc. in 1997 and
Boride Products, Crestar Energy and Cynara in 1996. In addition,
the company realized a pretax gain of $120 million in 1996
through the sale of a portion of its ownership in Oasis Pipeline.
The provision for taxes on income was $1 billion in 1997
versus $1.2 billion in 1996 and $1.4 billion in 1995. Dow's
overall effective tax rate for 1997 was 35.3 percent versus 36.1
percent for 1996 and 40.9 percent for 1995. 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 1997 was $99
million compared with $194 million in 1996 and $196 million in
1995. The decrease in minority interest versus prior years was
the result of the acquisition of the remaining 40 percent share
in DowElanco (now Dow AgroSciences), the divestiture of Destec
Energy, Inc. and the redemption of partners' capital accounts in
DowBrands L.P. (see Notes C and K to the Financial Statements).
--- Page 17 ---
Net Income (Continued)
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 of 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 (see Note C to the
Financial Statements).
Dividends
The Board of Directors has announced a quarterly dividend of 87
cents per share, payable April 30, 1998, to stockholders of
record on March 31, 1998. This will be the 345th consecutive
quarterly dividend since 1912. Dow has maintained or increased
the dividend throughout that time. The company declared dividends
of $3.36 per share in 1997, $3.00 per share in 1996 and $2.90 per
share in 1995.
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. 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, whichever is more
stringent. Assessments are used by management to continually
measure and report Dow's progress against this standard and its
performance objectives.
Since 1996, the company has received third party certification
at three of its European sites confirming that Dow's
environmental management system meets ISO-14001 and Eco-
Management and Auditing System (EMAS) specifications.
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 2 percent of the total amount of wastes reported as
part of the Pollution Prevention Act. Dow's policy of on-site
waste treatment has resulted in less than 10 percent of its total
environmental liability being directed at remediation under
federal or state Superfund statutes.
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. Most
performance metrics are on or ahead of the goal schedule. The
goals, as well as other performance data, can be found in Dow's
1997 EH&S progress report.
Dow accrues the costs of site remediation for its facilities
based on current law and existing technologies. In the case of a
landfill, Dow accrues the costs over the useful life of the
facility. 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. Raven Group Ltd., a joint venture
established in 1996, provides strategic management to identify
cost-effective solutions for certain remediation liabilities at
Dow's U.S. manufacturing locations. 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 45
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.
--- Page 18 ---
Environment (Continued)
Management has estimated that the company's remaining
liability for the remediation of Superfund sites at December 31,
1997, was $11 million, which has been accrued. In addition,
receivables of $19 million for probable third-party recoveries
have been recorded related to Superfund 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.
In addition to the Superfund-related liability referenced
above, Dow had an accrued liability of $272 million at December
31, 1997, 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.
In total, Dow's accrued liability for probable environmental
remediation and restoration costs was $283 million at December
31, 1997, compared with $265 million at the end of 1996. This is
management's best estimate of the costs for remediation and
restoration with respect to environmental matters for which the
company has accrued liabilities, although the ultimate cost with
respect to these particular matters could range up to twice that
amount.
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.
The amounts charged to income on a pretax basis related to
environmental remediation totaled $90 million in 1997, $60
million in 1996 and $89 million in 1995. The charges for 1997
included future incremental operations, maintenance and
management costs directly related to remediation as a result of
the adoption of a new accounting standard (see Note B to the
Financial Statements). Capital expenditures for environmental
protection were $77 million in 1997, $80 million in 1996 and $80
million in 1995.
Capital Expenditures
Capital spending for the year was $1.2 billion, down 11 percent
from $1.3 billion in 1996 and 15 percent from $1.4 billion in
1995. In 1997, approximately 44 percent of the company's capital
expenditures was directed toward additional capacity for new and
existing products, while about 9 percent was committed to
projects related to environmental protection, safety and loss
prevention, and industrial hygiene. These were up from 34 percent
and 8 percent, respectively, in 1996. 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 1997 included a new TDI plant
in Freeport, Texas; an expansion of the polyethylene facilities
in Fort Saskatchewan, Alberta, Canada; a new aniline facility in
Boehlen, Germany; an ethylene cracker expansion in Bahia Blanca,
Argentina; and an ethylene expansion in Terneuzen, the
Netherlands. 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 $3.7 billion in cash in 1997,
compared with $3.4 billion in 1996 and $3.3 billion in 1995 (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 $3.3 billion in
cash in 1997 and $2.2 billion in 1996, and provided $2.9 billion
in 1995. The increased use of cash during 1997 resulted from the
acquisition of the remaining 40 percent share in DowElanco (now
Dow AgroSciences), the acquisition of Sentrachem, the purchase of
80 percent interest in BSL and the redemption of partners'
capital accounts in DowBrands L.P. (see Notes C and K to the
Financial Statements). Allocation of the purchase price to the
assets acquired and liabilities assumed has not yet been
completed for the DowElanco, Sentrachem and BSL acquisitions.
Final determination of the fair values to be assigned may result
in adjustments to the preliminary values assigned at the dates of
acquisition. Offsetting the use of cash was net cash proceeds of
$907 million generated by the sale of Destec Energy, Inc. in
1997. The swing of $5.1 billion in cash between 1996 and 1995 was
due to the sale of the pharmaceutical businesses in 1995.
Total working capital at year-end was $1.3 billion versus $3.8
billion at the end of 1996. Cash, cash equivalents, marketable
securities and interest-bearing deposits decreased by $1.8
billion primarily due to the aforementioned acquisitions.
Inventories and trade receivables increased $219 million in 1997,
excluding the impact of acquisitions and divestitures. Days-sales-
in-inventory, however, were down three days to 84 days, versus 87
days in 1996 and 90 days in 1995. Days-sales-outstanding-in-
receivables were 47 days, 45 days and 47 days for 1997, 1996 and
1995, respectively. Goodwill at December 31, 1997, was $1.8
billion, an increase of $863 million from year-end 1996,
resulting primarily from the DowElanco and Sentrachem
acquisitions.
Short-term borrowings at December 31, 1997, were $1.7 billion,
an increase of $991 million from year-end 1996. Long-term debt
due within one year decreased $201 million to $406 million at the
end of 1997 compared with $607 million at the end of 1996. Long-
term debt due in 1998 will be funded by operating cash flows.
Accounts payable increased by $371 million to $2.7 billion.
--- Page 19 ---
Liquidity and Capital Resources (Continued)
Long-term debt was $4.2 billion, flat versus year-end 1996.
During the year, $238 million of new long-term debt was incurred
while $273 million was transferred to long-term debt due within
one year. In 1997, $665 million of long-term debt was retired.
Total debt was $6.3 billion, $5.5 billion and $5.4 billion at
December 31, 1997, 1996 and 1995, respectively. Net debt, which
equals total debt less cash, cash equivalents, marketable
securities and interest-bearing deposits, was $5.7 billion, $3.2
billion and $2 billion at December 31, 1997, 1996 and 1995,
respectively. The debt to total capitalization ratio increased
temporarily to 43 percent at year-end 1997 from 35 percent at the
end of 1996 and 36 percent at the end of 1995. This ratio
decreased significantly in early 1998 with the cash receipt of
approximately $1.2 billion from the sale of the DowBrands
business on January 23, 1998.
During the last three years, the company has repurchased 63.7
million shares of its common stock. $1.7 billion worth of common
stock was repurchased in 1997, $1.2 billion in 1996 and $2.1
billion in 1995. Since the beginning of 1995, net shares
outstanding have been reduced by 19 percent (see Note L to the
Financial Statements).
At December 31, 1997, the company had unused and available
credit facilities with various U.S. and foreign banks totaling
$1.8 billion in support of its working capital requirements and
commercial paper borrowings. Additional unused credit facilities
totaling $1.4 billion were available for use by foreign
subsidiaries.
At December 31, 1997, 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 $385 million) registered
with Japan's Ministry of Finance.
Minority interest in subsidiary companies decreased during the
year from $2.1 billion in 1996 to $676 million at the end of
1997, attributable to the acquisition of the remaining 40 percent
share in DowElanco, the divestiture of Destec Energy, Inc. and
the redemption of minority interests in DowBrands L.P. as
discussed in Notes C and K to the Financial Statements.
Year 2000
Dow has established a plan to address what many call the Year
2000 challenge; specifically, the fact that many computing and
control systems will not accurately interpret dates after
December 31, 1999. Since early 1997, a Year 2000 project team has
been dedicated to making Dow's systems and businesses ready for
the next millennium. The project team's responsibilities include
assessing the potential impact of the Year 2000 issue on the
company's systems and operations, developing action plans to
address the needs and issues identified, ascertaining the
resources required and establishing a time-phased work plan,
which will include systems tests to determine Year 2000
compliance. Year 2000 and the required system modifications are
not expected to materially affect the company's business
operations or consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Dow's business operations give rise to market risk exposure due
to changes in foreign exchange rates, interest rates, commodity
prices and other market factors such as equity prices. To manage
such risks effectively, the company enters into hedging
transactions, pursuant to established guidelines and policies,
that enable it to mitigate the adverse effects of financial
market risk. A secondary objective is to add value by creating
additional exposure within established limits and policies. The
potential impact of creating such additional exposures is not
material to the company's results.
The global nature of Dow's business requires active
participation in the foreign exchange markets. As a result of
investments, production facilities and other operations on a
global scale, the company has assets, liabilities and cash flows
in currencies other than the U.S. dollar. The primary objective
of the company's foreign exchange risk management is to optimize
the U.S. dollar value of net assets and cash flows, keeping the
adverse impact of currency movements to a minimum. To achieve
this objective, the company hedges on a net exposure basis using
foreign currency forward contracts and over-the-counter option
contracts. Main exposures are related to assets and liabilities
denominated in the currencies of Europe, Asia Pacific and Canada;
bonds denominated in foreign currencies - mainly the Deutsche
mark, Swiss franc and Japanese yen; and economic exposure derived
from the risk that currency fluctuations could affect the dollar
value of future cash flows. The majority of the foreign exchange
exposure is related to the Japanese yen, Deutsche mark, Dutch
guilder and other European currencies.
The main objective of interest rate risk management is to
reduce the total funding cost to the company and to alter the
interest rate exposure to the desired risk profile. Dow uses
interest rate swaps, "swaptions" and exchange traded instruments
to accomplish this objective. The company's primary exposure is
to the U.S. dollar yield curve.
Inherent in Dow's business is exposure to price changes for
several commodities. Some exposures can be hedged effectively
through liquid tradable financial instruments. Chemical
feedstocks and natural gas constitute the main commodity
exposures. Over-the-counter and exchange traded instruments are
used to hedge these risks when feasible. The risk of these
hedging instruments is not material.
--- Page 20 ---
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK (Continued)
As a result of acquisition and divestiture activity, the
company has a portfolio of equity securities. The major part of
this exposure is related to restricted stock warrants. This
exposure is managed in a manner consistent with the company's
market risk policies and procedures.
Dow uses value at risk (VAR) stress testing and scenario
analysis for risk measurement and control purposes. VAR estimates
the potential gain or loss in fair market values, given a certain
move in prices over a certain period of time, using specified
confidence levels. On an ongoing basis, the company estimates the
maximum gain or loss that could arise in one day, given a two
standard deviation move in the respective price levels. These
amounts are relatively insignificant in comparison to the size of
the equity and earnings of the company. The VAR methodology used
by Dow is based primarily on the variance/covariance statistical
model. As an example, the VAR for one day, using a 95 percent
confidence level at December 31, 1997, for foreign exchange,
interest rate and equity exposures, net of hedges was: foreign
exchange - $12 million; interest rate - $23 million; and equity -
$3 million.
--- Page 21 ---
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,
1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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, 1997 and
1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997 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 11, 1998
--- Page 22 ---
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
In millions, except for per share amounts 1997 1996 1995
- ----------------------------------------------------------------------------------
Net Sales $20,018 $20,053 $20,200
Operating Costs and Expense
Cost of sales 14,679 14,108 13,337
Insurance and finance company operations,
pretax income (113) (78) (61)
Research and development expenses 785 761 808
Promotion and advertising expenses 371 370 416
Selling and administrative expenses 1,509 1,766 1,771
Amortization of intangibles 61 39 38
-------------------------------------------------------------------------------
Total operating costs and expenses 17,292 16,966 16,309
- ----------------------------------------------------------------------------------
Operating Income 2,726 3,087 3,891
- ----------------------------------------------------------------------------------
Other Income (Expense)
Equity in earnings of nonconsolidated affiliates 75 66 70
Interest expense and amortization of debt discount (471) (494) (434)
Interest income and foreign exchange - net 194 286 289
Net loss on investments 0 0 (330)
Sundry income - net 424 343 43
-------------------------------------------------------------------------------
Total other income (expense) 222 201 (362)
- ----------------------------------------------------------------------------------
Income before Provision for Taxes on Income and
Minority Interests 2,948 3,288 3,529
- ----------------------------------------------------------------------------------
Provision for Taxes on Income 1,041 1,187 1,442
- ----------------------------------------------------------------------------------
Minority Interests' Share in Income 99 194 196
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Preferred Stock Dividends 6 7 7
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Income from Continuing Operations 1,802 1,900 1,884
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Discontinued Operations
Income from pharmaceutical businesses, net of taxes
on income 0 0 18
Gain on sale of pharmaceutical businesses, net of
taxes on income 0 0 169
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Net Income Available for Common Stockholders $1,802 $1,900 $2,071
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Weighted-average Common Shares Outstanding 230.6 246.3 268.2
- ----------------------------------------------------------------------------------
Per Share Data
Earnings per common share from continuing
operations $7.81 $7.71 $7.03
Earnings per common share 7.81 7.71 7.72
Earnings per common share from continuing
operations - assuming dilution 7.70 7.60 6.93
Earnings per common share - assuming dilution 7.70 7.60 7.61
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Common stock dividends declared per share $3.36 $3.00 $2.90
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See Notes to Financial Statements.
--- Page 23 ---
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
December 31
In millions 1997 1996
- ----------------------------------------------------------------------------------
Assets
- ----------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $235 $1,903
Marketable securities and interest-bearing deposits 302 399
Accounts and notes receivable:
Trade (less allowance for doubtful receivables -
1997, $73; 1996, $71) 3,257 2,985
Other 1,701 1,411
Inventories:
Finished and work in process 2,309 2,267
Materials and supplies 612 548
Deferred income tax assets - current 224 317
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Total current assets 8,640 9,830
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Investments
Capital stock at cost plus equity in accumulated
earnings of nonconsolidated affiliates 1,206 1,387
Other investments 2,529 2,060
Noncurrent receivables 400 437
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Total investments 4,135 3,884
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Property
Property 23,345 23,737
Less accumulated depreciation 15,293 15,253
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Net property 8,052 8,484
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Other Assets
Goodwill (net of accumulated amortization -
1997, $211; 1996, $177) 1,762 899
Deferred income tax assets - noncurrent 452 669
Deferred charges and other assets 999 907
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Total other assets 3,213 2,475
- ----------------------------------------------------------------------------------
Total Assets $24,040 $24,673
- ----------------------------------------------------------------------------------
See Notes to Financial Statements.
--- Page 24 ---
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
December 31
In millions, except for share amounts 1997 1996
- ----------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ----------------------------------------------------------------------------------
Current Liabilities
Notes payable $1,656 $665
Long-term debt due within one year 406 607
Accounts payable:
Trade 1,731 1,596
Other 960 724
Income taxes payable 521 567
Deferred income tax liabilities - current 100 64
Dividends payable 200 184
Accrued and other current liabilities 1,766 1,597
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Total current liabilities 7,340 6,004
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Long-Term Debt 4,196 4,196
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Other Noncurrent Liabilities
Deferred income tax liabilities - noncurrent 649 1,005
Pension and other postretirement benefits - noncurrent 1,840 1,896
Other noncurrent obligations 1,664 1,493
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Total other noncurrent liabilities 4,153 4,394
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Minority Interest in Subsidiary Companies 676 2,091
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Temporary Equity
Temporary equity - other 9 0
Preferred stock (authorized 250,000,000 shares of $1.00
par value each; issued Series A - 1997: 1,438,084;
1996: 1,482,309) at redemption value 124 128
Guaranteed ESOP obligation (84) (94)
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Total temporary equity 49 34
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Stockholders' Equity
Common stock (authorized 500,000,000 shares of $2.50 par
value each; issued 1997 and 1996: 327,125,854 818 818
Additional paid-in capital 532 307
Retained earnings 12,357 11,323
Unrealized gains on investments 316 192