Back to GetFilings.com
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, 1998
Commission file number 1-3433
THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 38-1285128
(State or other jurisdiction of (I.R.S. 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, Chicago 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 29, 1999, (based upon the closing price of $88.0625 per common
share as quoted on the New York Stock Exchange) is approximately $19,180
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 29, 1999 numbered 217,801,809 shares. Total common
stock outstanding at January 29, 1999 numbered 220,238,161.
Documents Incorporated by Reference
-----------------------------------
Part III: Proxy Statement for the Annual Meeting of Stockholders to be
held on May 13, 1999.
--- Page 1 ---
THE DOW CHEMICAL COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I
Page
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 11
Executive Officers of the Registrant 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 25
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 55
PART III
Item 10. Directors and Executive Officers of the Registrant 55
Item 11. Executive Compensation 55
Item 12. Security Ownership of Certain Beneficial Owners and Management 55
Item 13. Certain Relationships and Related Transactions 55
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 55
SIGNATURES 58
--- Page 2 ---
PART I
ITEM 1. BUSINESS
THE COMPANY
The Dow Chemical Company was incorporated in 1947 under Delaware law
and is the successor to a Michigan corporation, of the same name,
organized in 1897. The Company is engaged in the manufacture and sale
of chemicals, plastic materials, agricultural and 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 Dow Chemical Company is a global science and technology based
company that develops and manufactures a portfolio of chemicals,
plastics and agricultural products and services for customers in 168
countries around the world. With annual sales of more than $18
billion, Dow conducts its operations through 14 global businesses
employing 39,000 people. The company has 121 manufacturing sites in 32
countries and supplies more than 3,500 products grouped within the
operating segments listed on the following pages. The Corporate
Profile is an integral part of Note R to the Financial Statements.
PERFORMANCE PLASTICS
ADHESIVES, SEALANTS AND COATINGS business enables customers to
reduce overall systems costs, enhance product performance and
optimize manufacturing processing through custom solutions based
on Dow's line of adhesives, sealants and coatings. The Adhesives,
Sealants and Coatings business includes Polyurethane Systems
Houses, Essex Specialty Products, Inc. and Advanced Surface
Treatments.
- Applications: Acoustical systems, flexible and rigid foam,
footwear, glass bonding systems, modular construction components,
structural reinforcing composites
- Products: Betaseal glass bonding adhesive systems, Customized
adhesives and sealants, Polyurethane systems, Specialty coatings,
Surface treatments
ENGINEERING PLASTICS business offers one of the broadest ranges of
engineering plastics of any global plastics supplier. Dow's
Engineering Plastics portfolio is backed by technical expertise
and a commitment to delivering improved economics and performance.
- Applications: Automotive interiors, exteriors and powertrains;
building and construction; communications technology; computer
housings and accessories; electrical and electronic connectors;
footwear; medical devices; packaging; sports and recreation equipment
- Products: Calibre polycarbonate resins, Isoplast engineering
thermoplastic polyurethane resins, Magnum ABS resins, Pellethane
thermoplastic polyurethane elastomers, Prevail engineering
thermoplastic resins, Pulse engineering resins, Questra crystalline
polymers, Tyril SAN resins, Vydyne nylon
EPOXY PRODUCTS AND INTERMEDIATES business manufactures a variety
of basic epoxy products, as well as intermediates used by other
major epoxy producers. Dow is a leading global producer of basic
epoxy products, supported by high-quality raw materials, technical
service and production capabilities.
- Applications: Civil engineering, construction, electrical
laminates, food and beverage containers, heavy duty marine, industrial
protection, pharmaceuticals, water treatment
- Products: Acrylic monomers, Allylics, Composite resins,
Converted resins, D.E.H. epoxy catalyst resins, D.E.N. epoxy novolac
resins, D.E.R. epoxy resins (liquid and powder), Derakane epoxy vinyl
ester resins, Optim glycerine, Phenolics
FABRICATED PRODUCTS business manufactures and markets an extensive
line of plastic film and foam products. Fabricated Products sets
the competitive standard by creating high-performance solutions in
industries ranging from packaging and construction to
telecommunications, automotive and medical.
- Applications: Building insulation, medical packaging, protective
packaging, refrigerated shipping, telecommunication cables, water
drainage systems, window envelopes
- Products: Dow window film, Ethafoam polyethylene foam, Instill
vacuum insulation core, Integral adhesive film, Polystyrene film,
Styrofoam brand insulation, Zetabon coated metal cable armor
--- Page 3 ---
Business and Products - Corporate Profile, Performance Plastics (Continued)
POLYURETHANES business is a leading global producer of
polyurethane raw materials. Differentiated by its ability to
globally supply a high-quality, consistent and complete product
range, the Polyurethanes business emphasizes new business
developments while facilitating customer success with a global
market and technology network.
- Applications: Appliance insulation, automotive seating and
instrument panels, bedding mattresses, biocomposite binders and
services, carpeting, flooring, furniture padding, office furniture,
roofing
- Products: Curithane liquid catalysts, The Enhancer carpeting
backing, Isobind isocyanate binders, Isonate pure and modified MDI
products, Lifespan polyurethane carpet backing, Optimax composite
board technology, Papi polymeric MDI (PMDI), Specflex polyurethane
components, Spectrim reaction moldable products, Syntegra polyurethane
dispersions, Toluene diisocyanate, Voranate specialty isocyanates,
Voranol polyether polyols and copolymers
PERFORMANCE CHEMICALS
SPECIALTY CHEMICALS business provides products used as functional
ingredients or as processing aids in the manufacture of a diverse
range of products. It also includes contract manufacturing
services for other specialty chemical, pharmaceutical and
agricultural chemical producers.
- Applications: Building materials, food processing, household and
personal care products, pharmaceuticals, pulp and paper manufacturing,
water treatment
- Products: Dowanol glycol ethers, Dowex ion exchange resins,
Dowfax surfactants, Dowicil antimicrobials, Dowtherm synthetic organic
fluids, Drytech superabsorbent polymers, Ethocel ethylcellulose
resins, Ethyleneamines, FilmTec membranes, Gas/Spec specialty amines,
Hamposyl surfactants, Methocel cellulose ethers, Polyethylene glycols,
Polypropylene glycols, Synalox fluids, Versene chelating agents
EMULSION POLYMERS business includes both synthetic latex and
rubber. Dow is the largest, most globally diverse of the styrene
butadiene latex suppliers. Global reach, technology leadership and
customer knowledge support the development of new technologies and
the rapid commercialization of differentiated products.
- Applications: Coated paper and paperboard, plastics
modification, residential and commercial carpeting, specialty
applications, tires
- Products: Acrylate latex, Polybutadiene rubber, Polystyrene
latex, Styrene acrylate latex, Styrene butadiene emulsion rubber,
Styrene butadiene (S/B) latex
AGRICULTURAL PRODUCTS
DOW AGROSCIENCES is a global leader in the agriculture industry
which develops, manufactures and markets products for crop
production, weed, insect and plant disease management, and
industrial and commercial pest management. Through strategic
acquisitions, such as Mycogen Corporation, alliances and research
agreements, as well as investment in internal capabilities, Dow
AgroSciences is aggressively building a leading biotechnology
business in crop seeds, traits and value-added grains.
- Applications: Disease control, insect control, seeds, traits,
urban pest management, value-added grains, weed control
- Products: Clincher herbicide; Dursban insecticides; FirstRate
herbicide; Fortress fungicide; Lorsban insecticides; NatureGard
seeds; Starane herbicide; Sentricon termite colony elimination
system; Spider herbicide; Spinosad insect control products,
including Success Naturalyte insect control and Tracer Naturalyte
insect control
PLASTICS
POLYETHYLENE business supplies polyethylene-based solutions
through sustainable product differentiation. Dow is the world's
leading producer of polyethylene resins, one of the most versatile
plastic materials. Also included in the business are polyethylene
terephthalate (PET), purified terephthalic acid (PTA), and several
specialty resins.
- Applications: Agricultural films; bottles; tubes and drums;
consumer bags and packaging; fibers; food packaging and coating;
health and hygiene films and nonwovens; heavy-duty sacks; oil tanks
and road equipment; pipe; sheets and membranes; shrink films; stretch
films; toys and play equipment; wire and cable
- Products: Affinity polyolefin plastomers, Aspun fiber grade
resins, Attane ultra low density polyethylene copolymers, Dowlex
linear low density polyethylene resins, Elite enhanced polyethylene
resins, High density polyethylene resins (HDPE), Lighter C PET, Low
density polyethylene resins (LDPE), Primacor copolymers, PTA, Saran
PVDC resins and films
--- Page 4 ---
Business and Products - Corporate Profile, Plastics (Continued)
POLYSTYRENE business is the global leader in the production of
polystyrene resins, uniquely positioned with geographic breadth
and broad industry experience to meet a diverse range of customer
needs. By implementing breakthrough proprietary technology, Dow
continues to improve efficiencies and product performance.
- Applications: Appliances, building and construction, consumer
electronics, consumer goods, films, housewares, information
technology, packaging, toys
- Products: Aim advanced styrenic resins, EcoPLA renewable
biodegradable polymers, Styrenic alloys, Styron general purpose
polystyrene resins, Styron high impact polystyrene resins, Styron
ignition resistant polystyrene resins
POLYPROPYLENE (PP) is leveraging Dow's innovative manufacturing
technology, research and product development expertise to become a
major global PP supplier. Polypropylene is managed through the
Engineering Plastics business.
- Applications: Appliance housings, automotive parts and trim,
carpeting, disposable diaper liners, flexible and rigid packaging,
housewares, luggage, outdoor furniture, textiles, toys
- Products: Inspire polypropylene resins
INSITE TECHNOLOGY is a proprietary catalyst technology that
enables Dow and its customers to improve the performance of a
variety of plastics. Insite Technology is leveraged to develop new
products and strategic business opportunities through licensing. A
new Dow innovation, Index interpolymers, was developed from Insite
Technology. DuPont Dow Elastomers L.L.C., a 50:50 joint venture,
leverages Insite Technology into elastomeric products.
CHEMICALS
CHEMICALS business is a leading global producer of each of its
basic chemical products. These products are sold to many
industries worldwide and also serve as key raw materials in the
production of many of Dow's performance and plastics products.
- Applications: Automotive antifreeze; chemical processing;
coolant systems; dry cleaning; household cleaners; paints, coatings
and adhesives; personal care products; petroleum refining; pipe; pulp
and paper manufacturing; water treatment
- Products: Carbon tetrachloride, Caustic soda, Chlorine,
Chloroform, Dowper dry cleaning solvent, Ethylene dichloride (EDC),
Ethylene glycol (EG), Ethylene oxide (EO), Liquidow liquid calcium
chloride, Maxistab stabilizers for chlorinated solvents, Methyl
chloride, Methylene chloride, Peladow calcium chloride pellets,
Perchloroethylene, Propylene glycol, Propylene oxide (PO), Safe-tainer
closed loop delivery system, Trichloroethylene, Vinyl chloride monomer
(VCM)
HYDROCARBONS AND ENERGY
HYDROCARBONS AND ENERGY business encompasses the procurement of
fuels and crude oil-based raw materials, as well as the supply of
products and power for use in the Company's global operations. The
world leader in the production of olefins and styrene, the
Hydrocarbons and Energy business supplies integrated and purchased
feedstocks and energy.
- Applications: Polymer and chemical production
- Products: Butadiene, Ethylene, Power and steam, Propylene, Styrene
New Businesses includes technology licensing, advanced materials
for electronics, industrial biotechnology, venture capital and new
developments with a focus on identifying and pursuing emerging
commercial and technology opportunities. The results for New
Businesses are included in UNALLOCATED AND OTEHR.
Industry Segments and Geographic Area Results
See Note R to the Financial Statements for disclosure of
information by operating segment and geographic area.
Number of Products
Dow manufactures and supplies more than 3,500 products and services,
and no single one accounted for more than 5 percent of the Company's
consolidated sales in 1998. No significant portion of the business of
any operating segment is dependent upon a single customer.
Competition
The Company experiences substantial competition in each of its
industry segments. During 1998, 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.
--- Page 5 ---
Business and Products (Continued)
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, and condensate. These raw
materials are used in the production of both saleable products and
energy. The Company also purchases electric power, ethylene and
styrene to supplement internal production. Expenditures for
hydrocarbons and energy accounted for 24% of the Company's operating
costs and expenses for the year ended December 31, 1998. 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, organic acids, and toluene diamine.
These raw materials are purchased by the Company both on long-term
contracts and as they become available on a global basis.
The Company has, and expects to continue to have, adequate supplies
of raw materials during 1999 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 operating segment is dependent upon a single customer.
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 $807 million
in 1998 compared with $785 million in 1997 and $761 million in 1996.
The Company employs approximately 5,400 people in various research and
development activities.
Patents, Licenses and Trademarks
The Company consistently applies for and obtains United States and
foreign patents. At December 31, 1998 the Company owned approximately
2,660 active United States patents and approximately 7,300 active
foreign patents, which can be classified as follows: chemicals, 600
United States and 1,200 foreign; plastics, 1,100 United States and
2,700 foreign; agricultural products, 260 United States and 1,200
foreign; fabricated products, 200 United States and 800 foreign; and
new businesses, 500 United States and 1,400 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 $32 million in
1998, $47 million in 1997 and $26 million in 1996, and incurred
royalties to others of $3 million in 1998, $5 million in 1997 and $5
million in 1996. 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.
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; 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 P 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 countries. Dow
also owns 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, completed in 1997, 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.
--- Page 6 ---
Business and Products (Continued)
Financial Information About Foreign and Domestic Operations and Export
Sales
In 1998, the Company derived 60 percent of its sales and had 50
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 and long-lived assets by geographic area for each
of the last three years appears in Note R to the Financial Statements,
and discussions of the Company's risk management program for foreign
exchange and interest rate risk management appear in Management's
Discussion and Analysis of Financial Condition and Results of
Operations and Note J to the Financial Statements.
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 P to the
Financial Statements.
Employees
The personnel count at December 31, 1998 was 39,029 versus 42,861 at
the end of 1997, and 40,289 at the end of 1996.
Other Activities
Dow engages in the property and casualty insurance and reinsurance
business primarily through its Liana Limited subsidiaries.
ITEM 2. PROPERTIES
The Company operates 121 manufacturing sites in 32 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 86 percent of capacity during 1998. 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 sites, the Company has plants and
holdings in the following geographic areas:
United States: 36 manufacturing locations in 19 states.
Canada: 5 manufacturing locations in 3 provinces.
Europe: 41 manufacturing locations in 15 countries.
Latin America: 23 manufacturing locations in 6 countries.
Pacific: 16 manufacturing locations in 9 countries.
All of Dow's plants are owned or leased, 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.
--- Page 7 ---
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 in the federal district court for the Southern
District of New York alleging that the Company, Dow Corning or some of
their respective Directors violated duties imposed by the federal
securities laws regarding disclosure of alleged defects in silicone
breast implants. All individual defendants in this case have been
dismissed without prejudice. The Company and one of its former
officers were also sued in two separate class action complaints
(subsequently consolidated in the federal district court for the
Eastern District of Michigan under the caption ZSA v. Dow Chemical)
alleging that the defendants violated duties imposed by the federal
securities laws regarding disclosure of information material to a
reasonable investor's assessment of the magnitude of the Company's
exposure to direct liability in silicone breast implant litigation. On
February 1, 1999, the Court entered a Stipulated Order in ZSA v. Dow
Chemical dismissing the claims of the named plaintiffs with prejudice
and dismissing the claims of the class, which had never been
certified, without prejudice.
On May 15, 1995, Dow Corning announced that it had voluntarily filed
for protection under Chapter 11 of the United States Bankruptcy Code.
Under Chapter 11, all claims against Dow Corning (although not against
its co-defendants) are automatically stayed.
It is impossible to predict the outcome of each of the above
described legal actions. However, it is the opinion of the Company's
management that the possibility that these actions will have a
material adverse impact on the Company's consolidated financial
statements is remote, except as described below.
In January 1994, Dow Corning announced a pretax charge of $640
million ($415 million after tax) for the fourth quarter of 1993. In
January 1995, Dow Corning announced a pretax charge of $241 million
($152 million after tax) for the fourth quarter of 1994. These
charges included Dow Corning's best estimate of its potential
liability for breast implant litigation based on a global Breast
Implant Litigation Settlement Agreement (the "Settlement Agreement");
litigation and claims outside the Settlement Agreement; and provisions
for legal, administrative and research costs related to breast
implants. The charges for 1993 and 1994 included pretax amounts of
$1,240 million and $441 million, respectively, less expected insurance
recoveries of $600 million and $200 million, respectively. The 1993
amounts reported by Dow Corning were determined on a present value
basis. On an undiscounted basis, the estimated liability noted above
for 1993 was $2,300 million less expected insurance recoveries of
$1,200 million. As a result of the Dow Corning actions, the Company
recorded its 50 percent share of the charges, net of tax benefits
available to the Company. The impact on the Company's net income was a
charge of $192 million for 1993 and a charge of $70 million for 1994.
Dow Corning reported an after-tax net loss of $167 million for the
second quarter of 1995, of which the Company's share amounted to $83
million. Dow Corning's second quarter loss was a result of a $221
million after-tax charge taken to reflect a change in accounting
method from the present value basis noted above to an undiscounted
basis resulting from the uncertainties associated with its Chapter 11
filing. As a result of Dow Corning's 1995 second quarter loss and
Chapter 11 filing, the Company recognized a pretax charge against
income of $330 million for the second quarter of 1995, fully reserved
its investment in Dow Corning and is not recognizing its 50 percent
share of equity earnings while Dow Corning remains in Chapter 11.
On September 1, 1994, Judge Sam C. Pointer, Jr. of the United States
District Court for the Northern District of Alabama approved the
Settlement Agreement pursuant to which plaintiffs choosing to
participate in the Settlement Agreement released the Company from
liability. The Company was not a participant in the Settlement
Agreement nor was it required to contribute to the settlement. On
October 7, 1995, Judge Pointer issued an order which concluded that
the Settlement Agreement was not workable in its then-current form
because the funds committed to it by industry participants were
inadequate. The order provided that plaintiffs who had previously
agreed to participate in the Settlement Agreement could opt out after
November 30, 1995.
The Company's maximum exposure for breast implant product liability
claims asserted against Dow Corning is limited to its investment in
Dow Corning which, after the 1995 second quarter charge noted above,
is zero. As a result, any future charges by Dow Corning related to
such claims or as a result of the Chapter 11 proceeding would not have
an adverse impact on the Company's consolidated financial statements.
The Company is separately named as a defendant in over 14,000
breast implant product liability cases. In these situations,
plaintiffs have alleged that the Company should be liable for Dow
Corning's alleged torts based on the Company's 50 percent stock
ownership in Dow Corning and that the Company should be liable by
virtue of alleged "direct participation" by the Company or its agents
in Dow Corning's breast implant business. These latter, direct
participation claims include counts sounding in strict liability,
fraud, aiding and abetting, conspiracy, concert of action and
negligence.
Judge Pointer has been appointed by the Federal Judicial Panel on
Multidistrict Litigation to oversee all of the product liability cases
involving silicone breast implants filed in the U.S. federal courts.
Initially, in a ruling issued on December 1, 1993, Judge Pointer
granted the Company's motion for summary judgment, finding that there
was no basis on which a jury
--- Page 8 ---
Legal Proceedings (Continued)
could conclude that the Company was liable for any claimed defects in
the breast implants manufactured by Dow Corning. In an interlocutory
opinion issued on April 25, 1995, Judge Pointer affirmed his December
1993 ruling as to plaintiffs' corporate control claims but vacated
that ruling as to plaintiffs' direct participation claims.
In his opinion, Judge Pointer reaffirmed the view he had expressed
in his December 1993 ruling that the Company is a separate,
independent entity from Dow Corning and therefore has no legal
responsibility as a result of its ownership of Dow Corning stock for
Dow Corning's breast implant business. However, Judge Pointer stated
that, under the law of at least some states (although not necessarily
all states), actions allegedly taken by the Company independent of its
role as a stockholder in Dow Corning could give rise to liability
under a negligence theory. Judge Pointer declined to address
plaintiffs' other legal theories, including strict liability, fraud,
aiding and abetting, conspiracy and concert of action. It is
impossible to predict the outcome or to estimate the cost to the
Company of resolving any of the federal product liability cases. The
Company has filed claims with insurance carriers to recover in the
event it is held liable in the federal (or any other) breast implant
litigation.
After Judge Pointer's initial ruling in December 1993, summary
judgment was granted to the Company in approximately 4,000 breast
implant cases pending in state courts in California, Indiana,
Michigan, New Jersey and New York, and over 100 actions in
Pennsylvania were dismissed. Of these rulings, the California ruling
was final and was appealed. On September 25, 1996, the California
Court of Appeal for the 4th District affirmed the trial court's order
granting summary judgment to the Company. On July 9, 1998, the
California Supreme Court affirmed the decision of the Court of Appeal,
and the California summary judgment order in favor of the Company is
now final. The Michigan ruling was made final on March 20, 1997. This
decision has been appealed by plaintiffs. The New Jersey ruling has
been reconsidered and all claims were again dismissed, except the
negligence claim. Plaintiffs in New York filed a motion to reconsider
based on Judge Pointer's April 25, 1995 ruling. On September 22, 1995,
Judge Lobis, presiding over the consolidated New York breast implant
litigation, dismissed all counts of all cases filed against the
Company in New York on the ground that no reasonable jury could find
against the Company. On May 28, 1996, the New York Supreme Court
Appellate Division affirmed the lower court's dismissal of all claims
against the Company. New York's highest court subsequently denied
plaintiffs' petition for review, and the order dismissing all claims
against the Company is now final. Other rulings that are not final
decisions are also subject to reconsideration. On October 20, 1996, in
a Louisiana state court breast implant case styled Spitzfaden v. Dow
Corning, et al., the court entered an order maintaining certification
of a class of Louisiana plaintiffs consisting of recipients of Dow
Corning breast implants who, as of January 15, 1997, (i) are residents
of Louisiana, (ii) are former residents of Louisiana who are
represented by Louisiana counsel, or (iii) received their implants in
Louisiana and are represented by Louisiana counsel, together with the
spouses and children of such plaintiffs, and representatives of the
estates of class members who are deceased. On August 18, 1997, at the
conclusion of the first of four phases of this case, the jury found in
part that the Company had been negligent in the testing and/or
research of silicone, had misrepresented and concealed unspecified
hazards associated with using silicone in the human body and had
conspired with Dow Corning to misrepresent or conceal such hazards.
The Company has appealed the jury's verdict. On December 1, 1997, the
trial court decertified the class. Further action in the Spitzfaden
case will commence, if at all, only after the resolution of pending
appeals. The Company remains a defendant in other breast implant
product liability cases originally brought in state courts and
continues to be named as a defendant as cases are filed in various
courts which are then transferred to the United States District Court,
Eastern District of Michigan. It is impossible to predict the outcome
or to estimate the cost to the Company of resolving any of the product
liability cases described above.
The Company was also a defendant in ten federal silicone jaw
implant cases involving implants manufactured by Dow Corning. Federal
District Court Judge Paul A. Magnuson has been appointed by the
Federal Judicial Panel on Multidistrict Litigation to oversee all of
the product liability cases involving silicone jaw implants filed in
the U.S. federal courts. On March 31, 1995, Judge Magnuson granted the
Company's motion for summary judgment, concluding, based on virtually
the same arguments that were presented to Judge Pointer, that no
reasonable jury could find in favor of plaintiffs on any of their
claims against the Company. On June 13, 1995, Judge Magnuson denied
plaintiffs' motion to reconsider his ruling based on Judge Pointer's
April 25, 1995 decision, and granted the Company's request to enter a
final judgment in its favor. The United States Court of Appeals for
the Eighth Circuit affirmed the summary judgment in favor of the
Company on May 16, 1997. That judgment is now final.
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
--- Page 9 ---
Legal Proceedings (Continued)
appropriate responsibility for the injuries judged to be caused by its
product. In certain jurisdictions, the Company has also filed cross-
claims and/or third party claims against Corning. It is impossible to
predict the outcome or to estimate the cost to the Company of
resolving any of the Harris County product liability cases.
In an order dated December 1, 1994, Judge Frank Andrews, presiding
in the consolidated breast implant cases in Dallas County, Texas,
granted the Company's motion for summary judgment "in all respects
except as to theories of conspiracy and strict liability as a
component supplier." As a result, the Company remains a defendant as
to such claims in the Dallas County product liability cases. It is
impossible to predict the outcome or to estimate the cost to the
Company of resolving any of these actions.
In addition to the jury findings in the first phase of the Louisiana
state case noted above, three breast implant product liability cases
brought against the Company have now been tried to judgment. In
February 1995, a Harris County jury exonerated the Company in one case
and found the Company jointly and severally liable with Dow Corning
for $5.23 million on a single count in a second case. After the
verdict, however, the Court overturned the jury's verdict and entered
judgment for the Company. On October 30, 1995 a state court jury in
Reno, Nevada found the Company liable for $4.15 million in
compensatory damages and $10 million in punitive damages. On December
31, 1998, the Nevada Supreme Court reversed and vacated the $10
million punitive damages award and affirmed the $4.15 million
compensatory damages award. The Company filed a motion asking the
Court to reconsider that portion of its opinion affirming the
compensatory damages award. On February 12, 1999, that motion was
denied. The Company intends to file a petition for a writ of
certiorari with the United States Supreme Court regarding this case.
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, 1997 order transferred the Louisiana state
court breast implant case, Spitzfaden v. Dow Corning, et al., to the
United States District Court, Eastern District of Michigan. The
plaintiffs in that case filed an emergency motion to transfer, or
abstain and remand, the case back to the Louisiana state court. On May
21, 1997, Judge Hood "abstain(ed) from the claims involved in Phases I
and II" of that case resulting in its return to the Louisiana state
court and the resumption of the trial. The Company sought review of
Judge Hood's May 21 decision by the United States Court of Appeals for
the Sixth Circuit. On June 25, 1998, the Sixth Circuit rejected the
Company's argument that Judge Hood's May 21, 1997 order returning
Phases I and II of the Spitzfaden proceeding to Louisiana was an abuse
of her discretion.
On July 7, 1998, Dow Corning, the Company and Corning, on the one
hand, and the Tort Claimants' Committee in Dow Corning's bankruptcy on
the other, agreed on a binding Term Sheet to resolve all tort claims
involving Dow Corning's silicone medical products, including the
claims against Corning and the Company. The agreement set forth in the
Term Sheet was memorialized in a Joint Plan Of Reorganization (the
"Joint Plan") filed by Dow Corning and the Tort Claimants' Committee
on November 9, 1998. On February 4, 1999, the court approved the
disclosure statement describing the Joint Plan. Before the Joint Plan
can become effective, however, it will be subject to a vote by the
claimants, a confirmation hearing and all relevant provisions of the
Bankruptcy Code. Accordingly, there can be no assurances at this time
that the Joint Plan will become effective.
It is the opinion of the Company's management that the possibility
is remote that plaintiffs will prevail on the theory that the Company
should be liable in the breast implant litigation because of its
stockholder relationship with Dow Corning. The Company's management
believes that there is no merit to plaintiffs' claims that the Company
is liable for alleged defects in Dow Corning's silicone products
because of the Company's alleged direct participation in the
development of those products, and the Company intends to contest
those claims vigorously. Management believes that the possibility is
remote that a resolution of plaintiffs' direct participation claims,
including the vigorous defense against those claims, will have a
material adverse impact on the Company's financial position or cash
flows. Nevertheless, in light of Judge Pointer's April 25, 1995
ruling, it is possible that a resolution of plaintiffs' direct
participation claims, including the vigorous defense against those
claims, could have a material adverse impact on the Company's net
income for a particular period, although it is impossible at this time
to estimate the range or amount of any such impact.
--- Page 10 ---
Legal Proceedings (Continued)
Environmental Matters
On March 19, 1998, the United States Environmental Protection Agency
(the "EPA") filed a complaint against the Company alleging violations
of the Comprehensive Environmental Response, Compensation and
Liability Act and the Emergency Planning and Community Right-to-Know
Act. The complaint sought civil fines totaling $110,000. On September
14, 1998, the EPA withdrew the complaint with prejudice.
On March 25, 1998, Dow AgroSciences LLC, a wholly owned subsidiary
of the Company, made a written inquiry to the EPA with regard to
alleged violations of the Federal Insecticide, Fungicide and
Rodenticide Act for which the EPA has verbally indicated that it is
seeking a civil penalty in the amount of $792,000.
On November 13, 1998, the Michigan Department of Environmental
Quality ("MDEQ") commenced an investigation of alleged unpermitted
release and improper storage of material containing dioxin and furans
at Radian International LLC's ("Radian") waste treatment facility which
is located within the Company's Michigan Operations manufacturing site.
This waste treatment facility processes dried tertiary pond solids for
transport to the Company's incinerator under an agreement with the State
of Michigan. The Company has been included in the MDEQ investigation even
though the waste treatment facility in question is owned and operated
by Radian. At this juncture, a fine in excess of $100,000
against both companies is possible, although the Company may
ultimately have indemnification rights against Radian.
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 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information related to the Company's executive
officers as of March 15, 1999.
ARNOLD A. ALLEMANG, 56. DOW VICE PRESIDENT, OPERATIONS. DIRECTOR
SINCE 1996. Employee of Dow since 1965. Director of Technology
Centers, Dow U.S.A. 1989-92. Manufacturing General Manager, Dow
Benelux N.V.* 1992-93. Regional Vice President, Manufacturing and
Administration, Dow Benelux N.V.* 1993. Vice President, Manufacturing
Operations, Dow Europe S.A.* 1993-95. Dow Vice President and Director
of Manufacturing and Engineering 1996-97. Dow Vice President,
Operations 1997 to date. Director of Liana Limited.* Representative
on the Members Committees of DuPont Dow Elastomers L.L.C.* President
of Dow Environmental Inc.* Member of the American Chemical Society
and the Advisory Board, Center for Chemical Process Safety, American
Institute of Chemical Engineers.
ANTHONY J. CARBONE, 58. DOW EXECUTIVE VICE PRESIDENT. DIRECTOR SINCE
1995. Employee of Dow since 1962. Dow Latin America Marketing
Director for Plastics 1974-76. Dow Business Manager for Styrofoam
1976-80, Director of Marketing for Functional Products and Systems
1980-83. Dow U.S.A. General Manager of the Coatings and Resins
Department 1983-86, General Manager of Separation Systems 1986-87,
Vice President Dow Plastics 1987-91. Dow North America Group Vice
President for Plastics 1991-93. Group Vice President, Global Plastics
1993-95. Group Vice President - Global Plastics, Hydrocarbons and
Energy 1995-96. Executive Vice President, 1996 to date. Board member
of the Society of Plastics Industries and the American Plastics
Council. Member of the American Chemical Society.
RICHARD M. GROSS, 51. DOW VICE PRESIDENT AND DIRECTOR OF RESEARCH AND
DEVELOPMENT. Employee of Dow since 1974. Research and Development
Director, North American Chemicals and Metals/Hydrocarbons 1992-95.
Director of Core Technologies Research and Development 1995-98.
Director of Continental Operations 1995-97. Vice President of Dow
North America and Director of Michigan Operations 1997-98. Vice
President and Director of Research and Development 1998 to date.
Recipient of 1996 Genesis Award for Excellence in People Development.
Member of the American Chemical Society, the American Institute of
Chemical Engineers, and National Chemical Sciences Roundtable. Past
member of the Governing Board and Executive Committee, the Council for
Chemical Research. Member and past chair, External Advisory Board,
Chemical Engineering Department, Georgia Institute of Technology.
G. MICHAEL LYNCH, 55. DOW VICE PRESIDENT AND CONTROLLER. Employee of
Dow since 1997. Controller for Plastics and Trim Division, Ford Motor
Company 1991-93. Assistant Corporate Controller, International
Automotive Group and Financial Services, Ford Motor Company 1993-94.
Controller, Automotive Components Division, Ford Motor Company 1994-
97. Vice President and Controller, The Dow Chemical Company, 1997 to
date. Director of Dow Credit Corporation;* Dow Holdings, Inc.;* Dow
Financial Holding, Inc.;* and Diamond Capital Management, Inc.*
--- Page 11 ---
Executive Officers of the Registrant (Continued)
GEOFFERY E. MERSZEI, 47. DOW VICE PRESIDENT AND TREASURER. Employee
of Dow since 1978. Director of Finance, Dow Chemical (Hong Kong)
Limited* 1989-92. Director of Finance, Dow Europe S.A.* 1992-96.
Vice President and Treasurer, The Dow Chemical Company 1996 to date.
Member of the Conference Board's Council of Financial Executives.
Chairman of the Committee on Corporate Finance for the Financial
Executive Institute. Member of the Citibank Advisory Board.
MICHAEL D. PARKER, 52. DOW EXECUTIVE VICE PRESIDENT AND PRESIDENT OF
DOW NORTH AMERICA. DIRECTOR SINCE 1995. Employee of Dow since 1968.
Dow Europe S.A.* Product Marketing Manager for Epoxy Resins 1977-79.
Director of Marketing for Inorganic Chemicals 1979-82. Director of
Marketing for Organic Chemicals 1982-83. Commercial Director for the
Functional Products Department 1983-84. Dow U.S.A. General Manager of
the Specialty Chemicals Department 1984-87. Dow Chemical Pacific
Limited* Commercial Vice President 1987-88, President 1988-93. Dow
Group Vice President 1993-96. Group Vice President - Chemicals and
Hydrocarbons 1993-95. Vice President for Chemicals and Metals 1995 to
date. President Dow North America 1995 to date. Executive Vice
President 1996 to date. Director, Destec Energy, Inc. 1995-97.
Director of the National Association of Manufacturers, the National
Legal Center for the Public Interest and the Chlorine Chemistry
Council.
FRANK P. POPOFF, 63. CHAIRMAN OF THE DOW BOARD OF DIRECTORS.
DIRECTOR SINCE 1982. Employee of Dow since 1959. Dow Europe S.A.*
Executive Vice President 1980-81, President 1981-85. Dow Executive
Vice President 1985-87, President 1987-93, President and Chief
Operating Officer 1987, Chief Executive Officer 1987-95, Chairman of
the Board 1992 to date. Director of American Express Company; U S
WEST, Inc.; Chemical Financial Corporation; United Technologies
Corporation; the Indiana University Foundation; and the Michigan
Molecular Institute. Past Chairman of the Chemical Manufacturers
Association. Member of The Business Council, The Conference Board,
and the American Chemical Society.
J. PEDRO REINHARD, 53. DOW EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER. DIRECTOR SINCE 1995. Employee of Dow since 1970.
Dow Brazil Area Finance Director 1978-81. Dow Europe S.A.* Finance
Director 1981-85. Dow Assistant Treasurer 1984-85. Dow Europe S.A.*
Vice President 1985-88. Managing Director, Dow Italy 1985-88. Dow
Treasurer 1988-96, Vice President 1990-95, Financial Vice President
1995-96, Chief Financial Officer 1995 to date, Executive Vice
President 1996 to date. Chairman of the Board of Liana Limited.*
Representative on the Members Committee, Dow AgroSciences LLC.*
Member of the Financial Accounting Standards Advisory Council, the
Financial Executives Institute and The Conference Board's Council of
Financial Executives.
JOHN SCRIVEN, 56. DOW VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY.
Employee of Dow since 1975. General Counsel, Dow Europe S.A.* 1983-
93. Vice President, Dow Europe S.A.* 1986-93. Associate General
Counsel 1993-94. Vice President and General Counsel, 1994 to date.
Secretary 1996 to date. Chairman, Global Ethics & Compliance
Committee 1998 to date. Solicitor, Supreme Court of the United
Kingdom, Member, State Bar of Michigan. Visiting Professor at
McGeorge School of Law, University of the Pacific, Sacramento,
California. Guest Lecturer to the Swiss Banking Institute, Zurich,
Switzerland. Member, North America Board of Advisors of the Swiss
American Chamber of Commerce. Member, Board of Directors of the
American Arbitration Association.
WILLIAM S. STAVROPOULOS, 59. DOW PRESIDENT AND CHIEF EXECUTIVE
OFFICER. DIRECTOR SINCE 1990. Employee of Dow since 1967. President
of Dow Latin America 1984-85. Dow U.S.A. Commercial Vice President
for Basics and Hydrocarbons 1985-87. Group Vice President for
Plastics and Hydrocarbons 1987-90. President of Dow U.S.A. 1990-93.
Dow Vice President 1990-91, Senior Vice President 1991-93, Chief
Operating Officer 1993-95, President 1993 to date, Chief Executive
Officer 1995 to date. Director of Dow Corning Corporation,* NCR
Corporation, BellSouth Corporation, Chemical Financial Corporation,
and Chemical Bank and Trust Company. Representative on the Members
Committee, Dow AgroSciences LLC.* Member of the American Chemical
Society, The Business Council, The Business Roundtable, and the
Society of Chemical Industry. Serves on the Joint Automotive
Suppliers Governmental Action Council and the University of Notre Dame
Advisory Council for the College of Science. Board member of the
American Plastics Council, Chemical Manufacturers Association,
University of Washington Foundation, American Enterprise Institute for
Public Policy Research, Midland Community Center, and U.S. Council for
International Business.
--- Page 12 ---
Executive Officers of the Registrant (Continued)
LAWRENCE J. WASHINGTON, JR., 53. DOW VICE PRESIDENT, ENVIRONMENT,
HEALTH & SAFETY, HUMAN RESOURCES AND PUBLIC AFFAIRS. Employee of Dow
since 1969. General Manager, Western Division 1987-90. Vice
President, Dow North America, and General Manager of the Michigan
Division 1990-94. Vice President, Human Resources 1994 to date. Vice
President, Environment, Health & Safety and Public Affairs 1997 to
date. Director of Chemical Bank and Trust Company and Liana Limited.*
Member of the National Advisory Board for Michigan Technological
University and the Advisory Council, College of Engineering and
Science, University of Detroit Mercy.
* A number of Company entities are referenced to in the biographies
and are defined as follows. (Some of these entities have had various
names over the years. The names and relationships to the Company,
unless otherwise indicated, are stated in this footnote as they
existed as of the Annual Meeting record date.) Dow Corning
Corporation and DuPont Dow Elastomers L.L.C. - companies ultimately 50
percent-owned by Dow. Dow AgroSciences LLC, Dow Benelux N.V., Dow
Chemical (Hong Kong) Limited, Dow Chemical Pacific Limited, Dow Credit
Corporation, Dow Environmental Inc., Dow Europe S.A., Dow Holdings,
Inc., Dow Financial Holding, Inc., Diamond Capital Management, Inc.,
and Liana Limited - all ultimately wholly owned subsidiaries of Dow.
Ownership by Dow described above may be either direct or indirect.
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 11, 1999, the Company declared a cash
dividend of 87 cents per share, payable April 30, 1999, to
stockholders of record on March 31, 1999. This will be the 349th
consecutive quarterly dividend since 1912. There were 91,660 common
stockholders of record as of March 15, 1999. The Company estimates
that there were an additional 105,000 stockholders whose shares were
held in nominee names at December 31, 1998.
Quarterly market and dividend information can be found in Part II,
Item 8 (Financial Statements & Supplementary Data) on page 54.
--- Page 13 ---
ITEM 6. SELECTED FINANCIAL DATA
The Dow Chemical Company and Subsidiaries
Five-year Summary of Selected Financial Data
In millions, except as noted (Unaudited) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
Summary of Operations (1)
Net sales $18,441 $20,018 $20,053 $20,200 $16,742
Cost of sales 13,799 14,679 14,108 13,337 12,131
Insurance and finance company operations,
pretax income (112) (113) (78) (61) (40)
Research and development expenses 807 785 761 808 783
Promotion and advertising expenses 125 371 370 416 411
Selling and administrative expenses 1,541 1,509 1,766 1,771 1,594
Amortization of intangibles 88 61 39 38 43
Purchased in-process research and development 349 - - - -
Special charges 458 - - - -
-------------------------------------------------------------------------------------------------------------
Operating income 1,386 2,726 3,087 3,891 1,820
Other income (expense) 980 511 405 (222) 77
-------------------------------------------------------------------------------------------------------------
Earnings before interest, income taxes
and minority interests 2,366 3,237 3,492 3,669 1,897
Interest expense - net 354 289 204 140 271
-------------------------------------------------------------------------------------------------------------
Income before income taxes and minority
interests 2,012 2,948 3,288 3,529 1,626
Provision for income taxes 685 1,041 1,187 1,442 654
Minority interests' share in income 17 99 194 196 200
Preferred stock dividends 6 6 7 7 7
-------------------------------------------------------------------------------------------------------------
Income from continuing operations 1,304 1,802 1,900 1,884 765
Discontinued operations net of income taxes - - - 187 166
-------------------------------------------------------------------------------------------------------------
Net income available for common stockholders $ 1,304 $ 1,802 $ 1,900 $ 2,071 $ 931
-------------------------------------------------------------------------------------------------------------
Per share of common stock (dollars):
Income from continuing operations -
basic $5.83 $7.81 $7.71 $7.03 $2.77
Net income available for common
stockholders - basic $5.83 $7.81 $7.71 $7.72 $3.37
Income from continuing operations -
diluted $5.76 $7.70 $7.60 $6.93 $2.75
Net income available for common
stockholders - diluted $5.76 $7.70 $7.60 $7.61 $3.34
Cash dividends declared $3.48 $3.36 $3.00 $2.90 $2.60
Cash dividends paid $3.48 $3.24 $3.00 $2.80 $2.60
Weighted-average common shares outstanding 223.5 230.6 246.3 268.2 276.1
Convertible preferred shares outstanding 1.4 1.4 1.5 1.5 1.5
- --------------------------------------------------------------------------------------------------------------
Year-end Financial Position
Total assets $23,830 $24,040 $24,673 $23,582 $26,545
Working capital (2) 1,198 1,629 4,276 5,451 2,339
Property - gross 24,435 23,345 23,737 23,218 23,210
Property - net 8,447 8,052 8,484 8,113 8,726
Long-term obligations and redeemable
preferred stock 4,094 4,245 4,230 4,733 5,325
Total debt 5,877 6,258 5,468 5,403 6,578
Net stockholders' equity 7,429 7,626 7,954 7,361 8,212
- --------------------------------------------------------------------------------------------------------------
Financial Ratios
Research and development expenses as
percent of net sales (1) 4.4% 3.9% 3.8% 4.0% 4.7%
Income before income taxes and minority
interests as percent of net sales (1) 10.9% 14.7% 16.4% 17.5% 9.7%
Return on stockholders' equity 17.5% 23.5% 23.8% 26.9% 11.3%
Book value per share of common
stock (dollars) $33.91 $34.04 $33.13 $30.69 $29.71
Debt as a percent of total capitalization 42.3% 42.8% 35.2% 36.3% 38.0%
- --------------------------------------------------------------------------------------------------------------
General
Capital expenditures $1,546 $1,198 $1,344 $1,417 $1,183
Depreciation (1) 1,188 1,208 1,259 1,369 1,224
Salaries and wages paid 2,816 2,882 2,944 2,734 3,239
Cost of employee benefits 637 666 700 696 832
Number of employees at year-end (thousands) 39.0 44.1 40.3 39.5 53.7
Number of stockholders of record at
year-end (thousands) (3) 93.0 97.2 104.6 111.1 114.5
- --------------------------------------------------------------------------------------------------------------
(1) Restated for the sale of the pharmaceutical businesses in 1995.
(2) Prior years' amounts reclassified to conform to the presentation adopted for 1998.
(3) 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, 1998.
--- Page 14 ---
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements made by or on behalf of the
company. This section covers the current performance and outlook of
the company and each of its operating segments. The forward-looking
statements contained in this section and in other parts of this
document involve risks and uncertainties that may affect the company's
operations, markets, products, services, prices and other factors as
more fully discussed elsewhere and in filings with the U.S. Securities
and Exchange Commission. These risks and uncertainties include, but
are not limited to, economic, competitive, legal, governmental, and
technological factors, as well as issues related to Year 2000 and the
Euro conversion. Accordingly, there is no assurance that the company's
expectations will be realized.
RESULTS OF OPERATIONS
Dow's sales for 1998 were $18.4 billion, down 8 percent from $20.0
billion in 1997 and $20.1 billion in 1996. Lower selling prices
reduced sales for the year by 10 percent, or $2.0 billion, while
volume improved 2 percent from 1997 (see Sales Price and Volume table
on page 19). Compared with 1997, sales prices were lower in all
operating segments and all geographic areas as the chemical industry
approached trough-level pricing. Volume growth was strong for
Performance Chemicals and Agricultural Products as strategic
acquisitions offered new products and broader global presence.
Sales in the United States accounted for 40 percent of total sales
in 1998, down from 44 percent in 1997 and 1996, primarily due to the
sale of the DowBrands consumer products business in early 1998. Sales
and other information by operating segment and geographic area are
provided in Note R to the Financial Statements.
Dow continued to further restructure its portfolio toward
performance businesses in 1998. Changes included the acquisition of
Isopol for the production and commercialization of toluene
diisocyanate (TDI) in Latin America, the acquisition of the remaining
shares of Mycogen Corporation (Mycogen), the integration of Sentrachem
Limited (Sentrachem), and the divestitures of DowBrands, Radian
International LLC (Radian) and Dow-United Technologies Composite
Products, Inc. (Dow-UT). Details for these events are included in Note
C to the Financial Statements.
1998 was a challenging year, and Dow expects 1999 to be the same,
partly because the economy will continue to be affected by the
financial crisis in Asia Pacific. Weakening economic conditions are
anticipated to restrict volume growth. Prices are expected to
stabilize in the latter part of the year at trough levels. Dow
continues, however, to follow its strategy to achieve productivity
improvements, develop value-growth opportunities and further refine
its business portfolio, in order to achieve its objective of positive
results across the business cycle.
PERFORMANCE PLASTICS
Sales for Performance Plastics were $5.1 billion in 1998, compared
with $5.2 billion in 1997 and $5.3 billion in 1996. An overall volume
gain of 3 percent in 1998 partially offset a price decline of 5
percent versus the previous year. In 1997, the segment showed a 7
percent volume gain and an 8 percent price decline versus 1996.
Earnings before Interest, Income Taxes and Minority Interests (EBIT)
increased 5 percent to $1.1 billion in 1998 from $1.0 billion in 1997,
down from record EBIT of $1.2 billion in 1996. Lower raw material
costs and productivity improvements resulted in improved profitability
in 1998 compared with the prior year.
Sales for Adhesives, Sealants and Coatings were up 13 percent from
last year, primarily due to strong volume growth. In 1998, new Systems
House polyurethanes formulation capacity was added to meet growing
demand in Europe and Latin America, and a new operation was started up
in China.
Engineering Plastics sales were up 2 percent compared with the
prior year with volume up 5 percent and prices down 3 percent. Double
digit volume growth in polycarbonate was offset by weak results in
thermoplastic polyurethane (TPU) due to a slowdown in sales to the
athletic footwear and automotive industries. Reductions in conversion
costs and operating expenses combined with lower raw material costs
resulted in improved profitability.
Epoxy Products and Intermediates sales declined 7 percent from last
year. Prices were down 6 percent and volume was off 1 percent from
peak levels in 1997. Turmoil in the Asia Pacific economies
significantly reduced exports to the region and forced epoxy producers
in Asia Pacific to seek overseas markets for their products. These
factors contributed to price pressure globally.
In 1998, Fabricated Products posted a 2 percent volume increase,
partially offsetting a 6 percent price decline resulting from
competitive pressures in key markets. Lower raw material costs
combined with productivity improvements allowed the business to
maintain profits despite lower revenue. The business gained volume in
the North American commercial and roofing sectors and recorded 6
percent volume growth for building materials in Europe. Engineered
laminates and films experienced solid gains in both volume and
profitability.
Polyurethanes sales were down 5 percent in 1998 versus the prior
year. Prices were down 6 percent, with declines in most geographic
regions. The Asia Pacific crisis heavily impacted volume as demand was
down 19 percent in the region compared with 1997. This volume decline
was offset by volume increases in Latin America driven mainly by the
Isopol acquisition. To meet overall increasing global demand, Dow
started up a new copolymer polyol (CPP) plant in Terneuzen, the
Netherlands. Additional CPP capacity will start up in Freeport, Texas,
in 1999.
--- Page 15 ---
PERFORMANCE PLASTICS (Continued)
Outlook for 1999
The Performance Plastics segment expects continued solid performance
in 1999. Price pressure is expected to moderate and improved volume
growth is anticipated.
In 1999, Engineering Plastics expects higher sales volumes offset
by declining sales prices. The January 1999 start-up of Dow's second
polycarbonate train at Stade, Germany, is expected to ease supply
shortages and allow volume growth to continue at double digit rates in
Europe and Asia. However, the supply/demand imbalance for TPU will
likely continue into 1999. Dow will market nylon 6,6 for injection
molded applications on a worldwide basis starting in 1999 as part of a
marketing alliance with Solutia Inc.
The Epoxy Products and Intermediates business anticipates modest
volume growth and continued pressure on prices in 1999. Potential
consolidations in both the epoxy and global coatings businesses create
uncertainty regarding the future competitive balance in the global
epoxy business.
Sales volume for Fabricated Products is expected to grow as a
result of continued construction growth, geographic expansion and new
products. The overall business environment will likely remain very
competitive into 1999. Demand for Fabricated Products is expected to
continue to be influenced by general economic activity, including
housing starts, demand for durable goods and more stringent energy
insulation standards worldwide.
Polyurethanes expects solid volume growth overall despite the
continuation of depressed economic conditions in Asia Pacific.
Additional industry capacity is expected to continue to negatively
influence prices in 1999; however, reduced conversion costs and
operating expenses are expected to help offset the anticipated price
declines.
PERFORMANCE CHEMICALS
Sales of Performance Chemicals were $2.6 billion in 1998, compared
with $2.5 billion in 1997 and $2.4 billion in 1996. The segment
experienced a strong volume gain of 11 percent, along with a price
decline of 4 percent compared with 1997. In 1997, sales reflected an
11 percent volume gain with a 7 percent price decline versus 1996.
1998 EBIT was $427 million versus $399 million in 1997. EBIT
increased as higher volume and lower feedstock costs more than offset
the effect of price declines and additional costs associated with the
integration of Hampshire Chemical Corp., acquired through the
Sentrachem acquisition. In 1996, EBIT was $408 million.
In 1998, Emulsion Polymers posted a 4 percent increase in volume
compared with the previous year, largely offsetting a 5 percent price
decline. Overall profitability was maintained in 1998 as price
declines were offset by lower raw material costs. Demand for styrene
butadiene (S/B) latex for coated paper remained strong in most
geographies.
Specialty Chemicals volume grew 14 percent in 1998, primarily due
to the addition of Hampshire Chemical and strong demand for Methocel
cellulose ethers, polyglycols, superabsorbents and antimicrobials.
Prices declined 3 percent in 1998 primarily due to competitive
pressures in liquid separations, superabsorbents, polyglycols and
oxygenated solvents.
Outlook for 1999
Performance Chemicals' good performance is expected to continue in
1999, with solid volume growth anticipated by both of the segment's
businesses.
During 1998, the Emulsion Polymers business agreed to purchase
Shell's synthetic rubber business. The transaction, involving the
acquisition of two European plants, is expected to close in early
1999. This business will be combined with the existing synthetic
rubber volume supplied by Buna Sow Leuna Olefinverbund (BSL). Due to
this acquisition and higher S/B latex volume in North America and Asia
Pacific, the business expects significant volume growth in 1999.
Specialty Chemicals is anticipating another good year in 1999
despite a challenging economic environment. Volume growth will be
facilitated by capacity increases in polyglycols and superabsorbents,
and prior acquisitions such as a range of water soluble polymers
acquired from Courtaulds Chemicals.
AGRICULTURAL PRODUCTS
Agricultural Products sales rose 10 percent to $2.4 billion in 1998,
compared with $2.1 billion in 1997 and $1.9 billion in 1996. While
sales volume grew 13 percent, prices, including the unfavorable impact
of currency, fell 3 percent compared with 1997. The substantial volume
growth in 1998 resulted from the introduction of new products in all
markets, strength in the existing product portfolio, exceptional
demand in Latin America and the addition of Sanachem, through the
Sentrachem acquisition in December 1997. In 1997, sales volume grew 17
percent while prices declined 7 percent versus 1996.
EBIT, excluding unusual items, was $154 million in 1998 versus $233
million in 1997. The results of the agricultural business were lower
in 1998 as significant expenditures were made to build biotechnology
capabilities. Unusual items recorded in 1998 totaled $363 million and
included charges for purchased in-process research and development
(see Note B to the Financial Statements) related mainly to the
acquisitions of Sanachem, the remaining 40 percent share of DowElanco
(since renamed Dow AgroSciences LLC) owned by Eli Lilly and Company,
and the remaining shares in Mycogen, and environmental remediation
costs. Unusual items recorded in 1997 totaled $20 million and included
property write-downs and insurance restructuring related to the
purchase of the remaining 40 percent share of DowElanco. In 1996, EBIT
was $304 million.
--- Page 16 ---
AGRICULTURAL PRODUCTS (Continued)
New products performed well in 1998, both in terms of efficacy and
market acceptance. Sales for spinosad insect control products were
triple that of 1997. The Sentricon Termite Colony Elimination System
continued to gain wide acceptance in urban pest applications and
experienced excellent growth in sales. The launch of FirstRate
herbicide was highly successful, resulting in significant new business
and sold-out capacity.
The business' plant genetics and biotechnology platform is focused
on three segments: seeds, traits and value-added grains. During the
year, the biotech strategy was significantly advanced through
strategic acquisitions, joint ventures, research agreements, alliances
and the buildup of internal capabilities. The outstanding shares of
Mycogen were purchased, providing significant benefits in advancing
our intellectual property, germplasm and research capabilities.
Through Mycogen, four seed companies in Brazil and one in Argentina
were acquired, and a joint venture was formed with J. G. Boswell
Company to develop and market cotton seeds globally. A research
agreement with Biosource Technologies, Inc. was entered into for the
development of a genomics program to identify and patent novel genes
for industrial and agricultural biotechnology at a pace significantly
faster than previous genomics programs. Research collaborations,
through Mycogen and Dow AgroSciences, with Rhone-Poulenc Agro were
announced to conduct research to develop genetically modified plants
and seed products containing multiple traits. A new company, Advanced
AgriTraits LLC, was formed to serve as a clearinghouse for companies
seeking to bolster their biotechnology offerings.
Outlook for 1999
Dow AgroSciences expects substantial growth in 1999 due to geographic
expansion of new products such as spinosad products, along with
additional new product launches and resumed growth in Asia Pacific.
Significant investment spending will continue for plant genetics and
biotechnology, including potential value-added alliances, acquisitions
and joint ventures to continue building a competitive capability.
PLASTICS
Plastics reported sales of $3.8 billion in 1998, down 9 percent from
1997. A volume increase of 7 percent was offset by a price decline of
16 percent. In 1997, Plastics reported sales up 6 percent from 1996
with a volume increase of 7 percent offset by a modest price decline
of 1 percent.
EBIT for Plastics decreased 32 percent to $607 million in 1998,
primarily due to a decline in selling prices which was only partially
offset by lower hydrocarbon feedstock costs. EBIT for 1997 was $892
million, up from $827 million in 1996, as stronger volumes more than
offset lower prices.
Polyethylene resins experienced an 8 percent increase in volume
globally with North America, Europe and Latin America more than
compensating for a drop in Asia Pacific. Overall, 1998 sales for
polyethylene resins declined 11 percent as the increase in volume was
more than offset by continued price pressure globally. Sales of Elite
enhanced polyethylene resins launched in 1997 more than doubled
globally in 1998. During the year, Dow started up a new polyethylene
plant in Fort Saskatchewan, Alberta, Canada, that is capable of
producing both traditional solution process polyethylene resins and
resins made via Insite Technology. Through the Sentrachem acquisition,
Dow acquired a 50 percent ownership in a high density slurry process
polyethylene facility in South Africa. During 1998, output from a new
BSL polyethylene plant in Germany became available and construction
was begun on a solution process polyethylene plant in Bahia Blanca,
Argentina.
BSL completed construction of a new polyethylene terephthalate
(PET) plant in 1998. Under a marketing and sales agreement, the output
of this plant became available to Dow. Lighter C enhanced PET for
bottles was introduced with the approval of major soft drink and
mineral water bottlers. Interest in licenses for purified terephthalic
acid (PTA) technology continued to be strong.
Polystyrene sales were down 9 percent from 1997 as volume growth
partially offset continued downward pricing pressure. Although the
crisis in Asia Pacific had a negative impact, lower demand in several
of the Asian countries was offset by an increased demand in China.
Cargill Dow Polymers LLC, a 50:50 limited liability company formed
in 1997 with Cargill, Inc., moved forward toward commercializing
polylactic acid (PLA), a new polymer platform with multiple
applications based on renewable agricultural resources such as corn,
wheat or sugar beets.
In the Polypropylene business, demand grew more than 7 percent over
1997 despite a substantial slowdown in Asia Pacific. Pricing came
under pressure during 1998 due to excess capacity with the addition of
industry capacity in Asia Pacific and North America. Dow's sales and
volume in 1998 more than doubled over 1997 as successful market
penetration in Europe and North America continued. Through the
Sentrachem acquisition, Dow acquired 50 percent ownership in a
polypropylene facility in South Africa. Polypropylene output from a
new BSL facility became available in 1998.
In 1998, DuPont Dow Elastomers L.L.C. (DDE), a 50:50 joint venture,
continued the commercial launch of its next generation EPDM product
line, Nordel IP hydrocarbon rubber, with significant progress in
market penetration due to the product's improved processibility versus
competitive materials. To lower fixed costs, DDE restructured its
operations in the fourth quarter resulting in lower profits for 1998.
--- Page 17 ---
PLASTICS (Continued)
Outlook for 1999
It is expected that the Plastics segment will continue to experience
strong volume growth and downward pricing pressure.
Dow is planning to start up new plastics facilities in 1999
including a new polyethylene plant as part of the Dow-Siam Cement
joint venture in Map Ta Phut, Thailand. Styron polystyrene from a new
plant at BSL will become available in 1999. The addition of the new
PET facility at BSL will help Dow strengthen its PET position in
Central and Eastern Europe.
CHEMICALS
Chemicals sales were $2.4 billion in 1998, compared with $2.9 billion
in 1997 and $3.0 billion in 1996. Prices declined 17 percent due to
the economic crisis in Asia Pacific and heightened competitive
pressures. Volume fell 1 percent during the year. In 1997, prices
declined 2 percent while volume declined 2 percent versus 1996.
EBIT, excluding unusual items of $168 million, was $361 million in
1998 compared with $695 million in 1997, primarily due to lower
pricing in vinyl chloride monomer (VCM), ethylene dichloride (EDC) and
ethylene glycol (EG). In addition, magnesium plant storm-related
problems (and eventual shutdown) contributed to the decline in EBIT.
1998 unusual items recorded in this segment included write-offs
related to the shutdown of the magnesium business and environmental
remediation costs. EBIT of $695 million in 1997 was down from $755
million in 1996, due to lower prices and volume, and operating
problems in North American facilities.
1998 results for propylene oxide (PO) and derivatives were solid,
despite an increasingly competitive global environment. Price and
volume for PO and propylene glycol (PG) have remained strong compared
with 1997. In contrast, 1998 was a very challenging year for ethylene
oxide (EO) and EG in terms of price and volume, primarily due to
economic conditions in Asia Pacific.
Results for chlorinated organics in 1998 were improved versus 1997,
as reductions in raw material costs more than offset the reductions in
selling prices for finished products.
Market pricing for polyvinyl chloride (PVC) in North America
declined to more than 10 percent below the bottom of the 1991-1992
cycle despite demand growth of 5 percent versus 1997. This, combined
with steep pricing declines in key raw materials, moved the North
American VCM price to its lowest point in more than 20 years. Export
VCM shipments from North America were reduced to minimal levels during
the first half of 1998 due to the economic situation in Asia Pacific,
but improved during the second half.
Demand for caustic soda remained stable during the first half of
1998 while chlor-alkali production slowed, resulting in firm caustic
soda values. During the second half of the year, however, caustic soda
demand decreased and pricing started to decline.
In 1998, Dow added new chlorine capacity at its site in Stade,
Germany, and is continuing with previously announced plans for
expansions of membrane chlorine capacity in Freeport, Texas, in 1999
and 2000. The additional capacity is planned to meet the company's
increased internal chlorine demand supporting derivative businesses.
In late 1998, the company shut down its sole magnesium metal plant
in Freeport, Texas, and exited the magnesium business. A special
charge of $113 million was recorded relative to this shutdown in the
fourth quarter.
Outlook for 1999
Business conditions for EO/EG are expected to remain difficult through
1999. During 1998, demand was adversely impacted by the crisis in Asia
Pacific, particularly in fibers; as a consequence, EG prices fell
during 1998 and are anticipated to remain low during 1999. EG sales
volume, however, is expected to increase compared with 1998.
Demand for PO/PG remains fairly solid and 1999 volume is expected
to increase compared with 1998.
Excess supply for most chlorinated organics, partially caused by
the economic crisis in Asia Pacific, is expected to continue through
1999. Demand for carbon tetrachloride is expected to continue to
decline as a result of the impact of
the Montreal Protocol.
Continued unfavorable supply/demand balances and low chlorine and
ethylene prices are expected to keep VCM prices depressed throughout
1999. Lower demand for EDC and VCM in Asia Pacific is expected to
persist until the region's economic recovery begins in 2000 or beyond.
It is expected that volume and pricing for caustic soda and
chlorine will remain weak through 1999.
HYDROCARBONS AND ENERGY
Hydrocarbons and Energy sales were $1.5 billion in 1998, compared with
$2.2 billion in 1997 and $2.4 billion in 1996. The segment experienced
a volume decline of 12 percent, mainly due to the sale of Destec
Energy, Inc. (Destec) in the second quarter of 1997. Prices declined
20 percent versus the previous year, in line with reductions in the
prices of crude oil and related hydrocarbon feedstocks. 1997 versus
1996 showed a volume decline of 13 percent and a price increase of 2
percent.
Hydrocarbons and Energy, which transfers materials to Dow's
derivative businesses at cost, reported EBIT of $(5) million for 1998,
compared with $220 million and $163 million in 1997 and 1996,
respectively. 1997 EBIT included the operating results of Destec and a
gain of $189 million from the sale of Destec in June 1997.
--- Page 18 ---
HYDROCARBONS AND ENERGY (Continued)
The total cost of acquiring feedstock materials and energy for 1998
was reduced by $1.1 billion compared with 1997. In December 1997, the
combination of high inventory of crude oil and refinery products in
the industry and a reduction in demand in Asia Pacific caused a sharp
decline in crude oil prices which continued throughout 1998. Toward
the end of 1998, prices had declined to a 12-year low. In addition,
the average price for natural gas on the U.S. gulf coast declined
16 percent from 1997.
In 1998, Dow sold a power plant in Pittsburg, California, and
closed an ethylbenzene/styrene manufacturing plant in Sarnia, Ontario,
Canada. Also during 1998, Dow successfully brought on-line the
expansion of a light hydrocarbon plant at Fort Saskatchewan, Alberta,
Canada, and construction was begun on a new ethylene plant in Bahia
Blanca, Argentina.
Outlook for 1999
Crude oil and feedstock prices are expected to remain low in 1999, but
with high price volatility. Liberalization effects in Europe should
result in lower energy costs there. Cracker margins are expected to
remain under pressure similar to the second half of 1998. Ethylene,
styrene and propylene are expected to be in an oversupply situation in
1999.
UNALLOCATED AND OTHER
Sales were $731 million, $962 million and $1.1 billion in 1998, 1997
and 1996, respectively. Sales in 1998 decreased 24 percent from 1997,
primarily due to the divestitures of DowBrands and Radian. A gain on
the sale of DowBrands of $816 million, partially offset by asset write-
downs and other special charge items (primarily severance costs)
totaling $357 million, accounted for the majority of the increase in
EBIT to $264 million in 1998 (see Notes B and C to the Financial
Statements). EBIT was $(222) million in 1997 and $(189) million in
1996. Research and developmental costs in New Businesses, employee
severance costs, overhead cost variances not allocated to other
segments, results of insurance and finance company operations, and
several diversified businesses acquired in Dow's acquisition of
Sentrachem in December 1997, are included in these results.
New Businesses made significant changes in its portfolio, selling
Radian, Dow-UT and the Tungsten Carbide business. These businesses
were viewed as non-strategic to Dow. Significant resources are being
committed to the development of an integrated biotechnology business
platform. The focus of this effort is to build a sustainable
industrial business in specialty products using biotechnology
production tools and building on the use of renewable feedstocks.
COMPANY SUMMARY
Earnings before Interest, Income Taxes and Minority Interests (EBIT)
- --------------------------------------------------------------------
EBIT was $2.4 billion in 1998, down 27 percent from $3.2 billion in
1997 and 32 percent from $3.5 billion in 1996. Earnings for 1998 were
significantly reduced by several unusual items: purchased in-process
research and development costs of $349 million and special charges of
$458 million, as discussed in Note B to the Financial Statements, and
environmental remediation costs of $120 million. Gross margin
decreased $697 million versus 1997, as significant declines in selling
prices were only partially offset by lower feedstock and energy costs
and productivity improvements. 1997 gross margin decreased $606
million from 1996, primarily due to lower selling prices and
unfavorable currency exchange rates.
Sales Price and Volume
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Percent change from prior year Price Volume Total Price Volume Total Price Volume Total
- ---------------------------------------------------------------------------------------------------------------
Operating Segments:
Performance Plastics (5)% 3% (2)% (8)% 7% (1)% (3)% 4% 1%
Performance Chemicals (4) 11 7 (7) 11 4 (6) 6 -
Agricultural Products (3) 13 10 (7) 17 10 (3) 2 (1)
Plastics (16) 7 (9) (1) 7 6 (18) 15 (3)
Chemicals (17) (1) (18) (2) (2) (4) (10) 4 (6)
Hydrocarbons and Energy (20) (12) (32) 2 (13) (11) (6) 9 3
Unallocated and Other - (24) (24) - (10) (10) 5 5 10
All Segments (10)% 2% (8)% (4)% 4% - (8)% 7% (1)%
- ---------------------------------------------------------------------------------------------------------------
Geographic Areas:
United States (7)% (8)% (15)% (1)% 1% - (6)% 3% (3)%
Europe (12) 16 4 (8) 5 (3)% (11) 10 (1)
Rest of World (13) 4 (9) (4) 8 4 (8) 11 3
All Areas (10)% 2% (8)% (4)% 4% - (8)% 7% (1)%
- ---------------------------------------------------------------------------------------------------------------
Sales price includes the impact of currency.
--- Page 19 ---
Earnings before Interest, Income Taxes and Minority Interests (EBIT)
(Continued)
Dow's global plant operating rate was 86 percent of capacity, down
from 89 percent in 1997 and 1996. Depreciation expense was $1.2
billion in 1998 and 1997, and $1.3 billion in 1996.
Operating expenses, which include research and development, and
selling, general and administrative expenses, were $2.5 billion in
1998, a decrease of $192 million from $2.7 billion in 1997 and $424
million from $2.9 billion in 1996. The lower expenses in 1998 were the
result of Dow's ongoing productivity improvements and changes in the
company's business portfolio.
Research and development expenses were $807 million for 1998, up 3
percent from $785 million in 1997 and 6 percent from $761 million in
1996. The increased expenses reflected the company's investment in
biotechnology research.
Selling, general and administrative expenses of $1.7 billion for
1998 were down $214 million versus 1997 and $470 million from $2.1
billion in 1996. Selling, general and administrative expenses
represented 9 percent of sales in 1998 and 1997, down from 11 percent
in 1996. Included in these expenses were promotion and advertising
expenses of $125 million for 1998, which were down significantly from
$371 million in 1997 and $370 million in 1996, primarily due to the
sale of DowBrands.
Operating Costs and Expenses
Cost components as a percent of total 1998 1997 1996
- ----------------------------------------------------------------------
Hydrocarbons and energy 24% 29% 28%
Salaries, wages and employee benefits 20 21 21
Maintenance 4 4 4
Depreciation 7 7 7
Supplies, services and other raw materials 45 39 40
- ----------------------------------------------------------------------
Total 100% 100% 100%
- ----------------------------------------------------------------------
Dow's share of the earnings of nonconsolidated affiliates amounted
to $64 million in 1998 compared with $75 million in 1997 and $66
million in 1996. 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 P to the Financial Statements for
further discussion of Dow Corning's breast implant litigation.
Sundry income includes a variety of income and expense items
including royalty income, the gain or loss on foreign currency
exchange, dividends from investments, and gains and losses on sales of
investments and assets. Sundry income increased to $916 million in
1998 versus $436 million in 1997 and $339 million in 1996. Sundry
income for 1998 included a pretax gain of $816 million on the sale of
DowBrands. During the previous two years, Dow sold or restructured its
interest in a number of businesses, including Destec in 1997, which
resulted in a pretax gain of $189 million, and Boride Products,
Crestar Energy and Cynara in 1996. In addition, the company realized a
pretax gain of $120 million in 1996 from the sale of a portion of its
ownership in Oasis Pipeline.
Personnel count was 39,029 at December 31, 1998, 44,078 at the end
of 1997 and 40,289 at the end of 1996. The significant reduction in
employees during 1998 was due to the DowBrands and Radian divestitures
and severance plans adopted in the first quarter of the year (see
Notes B and C to the Financial Statements). The increase in 1997 over
1996 resulted from the addition of approximately 5,200 employees from
the Sentrachem acquisition.
Net Income
Net income available for common stockholders in 1998 was $1.3 billion
or $5.76 per share (diluted), compared with $1.8 billion or $7.70 per
share in 1997 and $1.9 billion or $7.60 per share in 1996.
The following table summarizes the impact of unusual items on
diluted earnings per common share:
1998 1997 1996
- ---------------------------------------------------------------------
Impact of sale of DowBrands and other
unusual charges $(.31) - -
Impact of sale of Destec Energy, Inc.
and other one-time events - $ .23 -
Other earnings 6.07 7.47 $7.60
- ---------------------------------------------------------------------
Earnings per common share - diluted $5.76 $7.70 $7.60
- ---------------------------------------------------------------------
Interest income in 1998 was $139 million, down 24 percent from $182
million in 1997 and 52 percent from $290 million in 1996. Higher
interest income in 1996 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 and 1998 resulted from
the company's use of cash for acquisitions. Acquisitions and
divestitures are discussed in Note C to the Financial Statements.
Interest expense (net of capitalized interest) and amortization of
debt discount were $493 million in 1998 compared with $471 million in
1997 and $494 million in 1996.
--- Page 20 ---
Net Income (Continued)
The provision for income taxes was $685 million in 1998 versus $1
billion in 1997 and $1.2 billion in 1996. Dow's overall effective tax
rate for 1998 was 34 percent versus 35.3 percent for 1997 and 36.1
percent for 1996. The underlying factors affecting Dow's overall
effective tax rates are summarized 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 1998 was $17 million
compared with $99 million in 1997 and $194 million in 1996. The
decrease in minority interest versus prior years resulted from the
acquisition of the remaining 40 percent share in DowElanco, the
divestiture of Destec and the redemption of partners' capital accounts
in DowBrands L.P. (see Notes C and K to the Financial Statements).
Liquidity and Capital Resources
Operating activities provided $2.9 billion in cash in 1998, compared
with $3.7 billion in 1997 and $3.4 billion in 1996 (see the
Consolidated Statements of Cash Flows). The items affecting operating
activities are discussed in the EBIT and Net Income sections.
Investing activities used $1.1 billion in cash in 1998, $3.3 billion
in 1997 and $2.2 billion in 1996. The divestitures of DowBrands and
Radian provided additional net cash proceeds of $1.3 billion in 1998.
Cash was used to repurchase shares of the company's common stock, to
reduce total debt by $381 million, to purchase the remaining shares of
Mycogen and an ownership interest in Isopol, and for other normal
activities. In 1997, the sale of Destec generated additional net cash
proceeds of $907 million. The increased use of cash during 1997
resulted from the acquisition of the remaining 40 percent share in
DowElanco, 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).
Total working capital at year-end was $1.2 billion versus $1.6
billion at the end of 1997. Cash, cash equivalents, marketable
securities and interest-bearing deposits decreased $147 million in
1998. Inventories and trade receivables decreased $581 million. Days-
sales-in-inventory for 1998 were 88 days, up versus 84 days in 1997
and 87 days in 1996. Days-sales-outstanding-in-receivables were 48
days, 47 days and 45 days for 1998, 1997 and 1996, respectively.
Goodwill at December 31, 1998, was $1.6 billion, a decrease of $121
million from year-end 1997, primarily due to the completion of the
allocations of the purchase prices of certain acquisitions, partially
offset by new acquisitions in 1998.
Short-term borrowings at December 31, 1998, were $1.5 billion, a
decrease of $130 million from year-end 1997. Long-term debt due within
one year decreased $106 million to $300 million at the end of 1998
compared with $406 million at the end of 1997. Long-term debt due in
1999 will be funded by operating cash flows. Accounts payable remained
relatively flat at $2.7 billion.
Long-term debt at year-end was $4.1 billion, down slightly from
1997. During the year, $218 million of new long-term debt was incurred
and $549 million of long-term debt was retired. Long-term debt due
within one year was $300 million at December 31, 1998.
Total debt was $5.9 billion, $6.3 billion and $5.5 billion at
December 31, 1998, 1997 and 1996, respectively. Net debt, which equals
total debt less cash, cash equivalents, marketable securities and
interest-bearing deposits, was $5.5 billion, $5.7 billion and $3.2
billion at December 31, 1998, 1997 and 1996, respectively. The debt to
total capitalization ratio of 42 percent at the end of 1998 was down
from 43 percent at year-end 1997, but up from 35 percent at year-end
1996.
During the last three years, the company has repurchased 42.6
million shares of its common stock. $742 million worth of common stock
was repurchased in 1998, $1.7 billion in 1997 and $1.2 billion in
1996. Since the beginning of 1995, net shares outstanding have been
reduced by 20 percent (see Note L to the Financial Statements).
At December 31, 1998, the company had unused and available credit
facilities with various U.S. and foreign banks totaling $2 billion in
support of its working capital requirements and commercial paper
borrowings. Additional unused credit facilities totaling $661 million
were available for use by foreign subsidiaries.
At December 31, 1998, 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 $437 million) registered with Japan's Ministry of
Finance.
Minority interest in subsidiary companies decreased during the year
from $676 million in 1997 to $532 million at the end of 1998.
Capital Expenditures
Capital spending for the year was $1.5 billion, up 29 percent from
$1.2 billion in 1997 and 15 percent from $1.3 billion in 1996. In
1998, approximately 54 percent of the company's capital expenditures
was directed toward additional capacity for new and existing products,
while about 7 percent was committed to projects related to
environmental protection, safety, loss prevention and industrial
hygiene. These compare with 44 percent and 9 percent, respectively, in
1997. The remaining capital was utilized to maintain the company's
existing asset base, including projects related to productivity
improvements, energy conservation and facilities support.
--- Page 21 ---
Capital Expenditures (Continued)
Major projects underway during 1998 included an expansion of the
polyethylene facilities in Fort Saskatchewan, Alberta, Canada; an
ethylene expansion in Terneuzen, the Netherlands; a polycarbonate
expansion in Stade, Germany; and epichlorohydrin and chlorine/caustic
soda expansions in Freeport, Texas. Because the company designs and
builds most of its capital projects in-house, it had no material
capital commitments, other than for the purchase of materials from
fabricators.
Dividends
The Board of Directors has announced a quarterly dividend of 87 cents
per share, payable April 30, 1999, to stockholders of record on March
31, 1999. This will be the 349th consecutive quarterly dividend since
1912. Dow has maintained or increased the dividend throughout that
time. The company declared dividends of $3.48 per share in 1998, $3.36
per share in 1997 and $3.00 per share in 1996.
OTHER MATTERS
Environment
In 1996, Dow announced a number of voluntary global Environment,
Health and Safety (EH&S) Goals for Year 2005, continuing the company's
long-term commitment to Responsible Care. Dow's EH&S goals for 2005
are ambitious performance targets to measure progress toward
sustainability, including targets to reduce chemical emissions, waste
and waste water by 50 percent. Equally aggressive are the goals to
reduce leaks, spills, fires, explosions, work-related injuries and
transportation incidents by 90 percent. Dow is on track or ahead of
schedule in most of these areas. More information on Dow's EH&S
policies, systems and performance can be found in the 1998 EH&S
Progress Report on the Internet at www.dow.com.
In addition to our voluntary commitments, 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 systems, performance
objectives, and design requirements needed to minimize the long-term
cost of environmental protection and 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.
At sites in Europe, Canada and the United States, the company also
receives third-party verification of Dow's compliance with Responsible
Care and with outside specifications such as ISO-14001.
It is 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 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 properly reflect 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. Dedicated Dow joint
ventures provide strategic management to identify cost-effective
solutions for certain remediation liabilities at the company'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 is named as a potentially responsible party (PRP) under federal
or state Superfund statutes at approximately 20 sites. Dow readily
cooperates in remediation where its liability is clear, thereby
minimizing legal and administrative costs. This approach, coupled with
Dow's long-standing preference for on-site waste treatment, has
resulted in a substantial decrease in the number of Superfund sites in
which Dow is involved.
--- Page 22 ---
Environment (Continued)
Because current law imposes joint and several liability upon each
party at a Superfund site, Dow has evaluated its potential liability
in light of the number of other companies which have also been named
PRPs at each site, the estimated apportionment of costs among all
PRPs, and the financial ability and commitment of each to pay its
expected share. Management estimated that the company's remaining
liability for the remediation of Superfund sites at December 31, 1998,
was $9 million.
Receivables of $14 million for probable third-party recoveries from
other PRPs have been recorded related to Superfund sites. In addition,
Dow reached settlement with several insurance carriers in 1998 for
recovery of past Superfund expenditures. The company is currently
involved in litigation with numerous other insurance carriers seeking
additional recoveries.
In addition to Superfund-related liability, Dow had an accrued
liability of $355 million at December 31, 1998, 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 $364 million at December 31,
1998, compared with $283 million at the end of 1997. 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 Dow 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 $149 million in 1998, $90 million in
1997 and $60 million in 1996. Capital expenditures for environmental
protection were $72 million in 1998, $77 million in 1997 and $80
million in 1996.
Year 2000 Readiness Disclosure
State of Readiness
The company's Year 2000 (Y2K) project, which began in early 1997, is a
global effort covering information systems, process control and
embedded systems for all of the company's businesses. The project is
designed to address, through use of reasonable commercial efforts, the
risk that certain internal or external systems may inaccurately
interpret dates after December 31, 1999. The project is led by a
senior director of Information Systems who reports to the Chief
Information Officer and an executive steering team, and is managed by
a global team consisting of technical, functional and business
leaders. Since early 1997, the Audit Committee of the company's Board
of Directors has received quarterly reports on the team's plan and
progress. Many of the company's strategic business systems have
already been upgraded and tested and, except as noted below, project
completion is anticipated in the first half of 1999.
The first two phases of the Y2K project have been completed. Phase
I, the Business Study, established an awareness of the problem and
developed the overall strategy. During Phase II, the Project Study,
the company inventoried and assessed applications, infrastructure and
embedded systems for Y2K problems; selected the remediation tools; and
prioritized the remediation projects. The plans resulting from these
studies continue to be updated as new information becomes available.
Phase III, Remediation, includes the efforts to upgrade, test for
Y2K readiness and implement needed changes and new systems. This phase
is in progress and almost all elements, as noted below, are expected
to be complete by mid-year 1999. Phase IV, Business Contingency
Planning, is also in progress and, as discussed below, any necessary
plans will be implemented as needed.
The Information Systems infrastructure team is responsible for Y2K
remediation of hardware, systems software and the telecommunications
network. The remediation phase was more than 65 percent complete at
the end of 1998 and is expected to be complete by mid-1999.
The Information Systems applications software organization is
responsible for the remediation of applications and, at the end of
1998, the remediation phase was more than 60 percent complete.
Remediation of all business-critical applications is expected to be
completed by mid-1999. The company's implementation of enterprise-wide
financial and operational systems and standardized desktop computing
during the last several years has facilitated this effort. Two
critical replacement projects are in progress and are on target to be
completed by mid-1999. A contingency plan has been established for one
of these projects, and a plan is being developed for the other, should
either of these projects miss the scheduled completion dates.
The company has common process control systems in more than 80
percent of its plants globally, and during the project study, the
company determined that 10 percent of the common systems needed to be
upgraded with Y2K ready software. Approximately 20 percent of the
company's process control systems are commercial systems, and these
have been assessed, and those requiring upgrades are being remediated
during scheduled plant shutdowns. It is anticipated that the
remediation phase for most critical process control systems will be
completed by mid-year 1999. However, remediation of some process
control systems may extend into the third quarter of 1999 due to plant
shutdown schedules.
--- Page 23 ---
Year 2000 Readiness Disclosure (Continued)
The company's embedded systems, such as laboratory equipment, air
conditioners and elevators, have been assessed and are being
remediated as necessary. The remediation phase tasks were more than 75
percent complete at the end of 1998 and are expected to be completed
by mid-1999.
The Y2K assessment of two recently acquired companies, for which
Y2K programs had not been initiated prior to the date of acquisition,
is now complete, and the company expects that all critical Y2K
preparations will be completed before 2000.
The company's assessment of critical material suppliers is ongoing,
and risk management actions and contingency plans are being developed,
as necessary. Approximately 75 percent of critical material suppliers
had responded to requests for information at year-end 1998, and work
is ongoing with a number of critical suppliers, primarily in Asia
Pacific, Latin America and Eastern Europe, who have indicated that
they may not be Y2K compliant before the year 2000. Contingency plans
relative to suppliers, including such actions as building inventories
and switching suppliers, are anticipated to be finalized for critical
material suppliers during the first quarter of 1999, and will be
executed in 1999, if necessary.
The company's assessment of customer readiness is in progress, with
completion anticipated by mid-1999.
Costs
Project costs are expected to be approximately $70 million, over three
years, and are not considered material to the company's consolidated
financial statements. Total project costs incurred to date at year-end
1998 were approximately $34 million. The Y2K effort is being supported
by a reallocation of existing resources. Capital equipment replacement
costs are expected to be an additional $5 million.
Risks
Failure to adequately address critical Y2K issues by the company, its
suppliers and/or its customers could result in interruptions of normal
business work operations. Such interruptions could materially and
adversely affect the company's results of operations, liquidity and
financial condition; however, the company's program to address these
is on schedule to meet a completion date ahead of the year 2000. The