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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

FOR THE QUARTERLY PERIOD ENDED June 30, 2004

Commission file number 1-3433

THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)		       38-1285128
(I.R.S. Employer
Identification No.)

2030 DOW CENTER, MIDLAND, MICHIGAN 48674
(Address of principal executive offices) (Zip Code)

989-636-1000
(Registrant's telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

Class
    
   Outstanding at June 30, 2004
Common Stock, par value $2.50 per share       939,431,901 shares


The Dow Chemical Company
Table of Contents

 
   PAGE
PART I—FINANCIAL INFORMATION    
 
Item 1. Financial Statements
 
3
   
Consolidated Statements of Income
 
3
   
Consolidated Balance Sheets
 
4
   
Consolidated Statements of Cash Flows
 
5
   
Consolidated Statements of Comprehensive Income
 
5
   
Notes to the Consolidated Financial Statements
 
6
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
24
   
Disclosure Regarding Forward-Looking Information
 
24
   
Results of Operations
 
24
   
Changes in Financial Condition
 
32
   
Other Matters
 
34
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
40
 
Item 4. Controls and Procedures
 
41

PART II—OTHER INFORMATION
 
 
 
Item 1. Legal Proceedings
 
42
 
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
 
42
 
Item 4. Submission of Matters to a Vote of Security Holders
 
43
 
Item 6. Exhibits and Reports on Form 8-K
 
44

SIGNATURE
 
46

EXHIBIT INDEX
 
47

2


PART I—FINANCIAL INFORMATION
Item 1.    Financial Statements


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income

 
   Three Months Ended
   Six Months Ended
  
In millions, except per share amounts (Unaudited)
   June 30,
2004
   June 30,
2003
   June 30,
2004
   June 30,
2003
  
Net Sales   $ 9,844   $ 8,242   $ 19,153   $ 16,323  
   
 
 
 
 
  Cost of sales     8,345     6,970     16,252     14,133  
  Research and development expenses     262     246     513     483  
  Selling, general and administrative expenses     347     354     710     709  
  Amortization of intangibles     16     15     45     30  
  Restructuring net gain     20     —     20     —  
  Equity in earnings of nonconsolidated affiliates     254     90     394     129  
  Sundry income (expense)—net     13     52     (15 )   46  
  Interest income     21     18     39     38  
  Interest expense and amortization of debt discount     182     207     368     422  
   
 
 
 
 
Income before Income Taxes and Minority Interests     1,000     610     1,703     759  
   
 
 
 
 
  Provision for income taxes     284     186     488     233  
  Minority interests' share in income     31     31     61     48  
   
 
 
 
 
Income before Cumulative Effect of Change in Accounting Principle     685     393     1,154     478  
   
 
 
 
 
  Cumulative effect of change in accounting principle     —     —     —     (9 )
   
 
 
 
 
Net Income Available for Common Stockholders   $ 685   $ 393   $ 1,154   $ 469  
   
 
 
 
 
Share Data                          
  Earnings before cumulative effect of change in accounting
        principle per common share—basic		   $ 0.73   $ 0.43   $ 1.23   $ 0.52  
  Earnings per common share—basic   $ 0.73   $ 0.43   $ 1.23   $ 0.51  
  Earnings before cumulative effect of change in accounting
        principle per common share—diluted		   $ 0.72   $ 0.43   $ 1.22   $ 0.52  
  Earnings per common share—diluted   $ 0.72   $ 0.43   $ 1.22   $ 0.51  
  Common stock dividends declared per share of common stock   $ 0.335   $ 0.335   $ 0.67   $ 0.67  
  Weighted-average common shares outstanding—basic     938.0     917.3     934.9     916.0  
  Weighted-average common shares outstanding—diluted     947.9     921.9     945.8     921.8  
   
 
 
 
 
Depreciation   $ 458   $ 426   $ 920   $ 859  
   
 
 
 
 
Capital Expenditures   $ 329   $ 272   $ 530   $ 495  
   
 
 
 
 

See Notes to the Consolidated Financial Statements.

3


The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets

In millions (Unaudited)
   June 30,
2004
   Dec. 31,
2003
  
Assets              
Current Assets              
  Cash and cash equivalents   $ 2,294   $ 2,392  
  Marketable securities and interest-bearing deposits     43     42  
  Accounts and notes receivable:              
    Trade (net of allowance for doubtful receivables—2004: $120; 2003: $118)     4,472     3,574  
    Other     2,110     2,246  
  Inventories     4,360     4,050  
  Deferred income tax assets—current     299     698  
   
 
 
  Total current assets     13,578     13,002  
   
 
 
Investments              
  Investment in nonconsolidated affiliates     2,242     1,878  
  Other investments     2,006     1,971  
  Noncurrent receivables     213     230  
   
 
 
  Total investments     4,461     4,079  
   
 
 
Property              
  Property     40,271     40,812  
  Less accumulated depreciation     26,723     26,595  
   
 
 
  Net property     13,548     14,217  
   
 
 
Other Assets              
  Goodwill     3,150     3,226  
  Other intangible assets (net of accumulated amortization—2004: $443; 2003: $406)     562     579  
  Deferred income tax assets—noncurrent     4,287     4,113  
  Asbestos-related insurance receivables—noncurrent     1,086     1,176  
  Deferred charges and other assets     1,512     1,499  
   
 
 
  Total other assets     10,597     10,593  
   
 
 
Total Assets   $ 42,184   $ 41,891  
   
 
 
Liabilities and Stockholders' Equity              
Current Liabilities              
  Notes payable   $ 240   $ 258  
  Long-term debt due within one year     104     1,088  
  Accounts payable:              
    Trade     3,068     2,843  
    Other     2,328     2,041  
  Income taxes payable     236     212  
  Deferred income tax liabilities—current     245     241  
  Dividends payable     336     331  
  Accrued and other current liabilities     2,343     2,520  
   
 
 
  Total current liabilities     8,900     9,534  
   
 
 
Long-Term Debt     12,241     11,763  
   
 
 
Other Noncurrent Liabilities              
  Deferred income tax liabilities—noncurrent     1,125     1,124  
  Pension and other postretirement benefits—noncurrent     3,620     3,572  
  Asbestos-related liabilities—noncurrent     1,696     1,791  
  Other noncurrent obligations     3,299     3,556  
   
 
 
  Total other noncurrent liabilities     9,740     10,043  
   
 
 
Minority Interest in Subsidiaries     405     376  
   
 
 
Preferred Securities of Subsidiaries     1,000     1,000  
   
 
 
Stockholders' Equity              
  Common stock     2,453     2,453  
  Additional paid-in capital     83     8  
  Unearned ESOP shares     (27 )   (30 )
  Retained earnings     10,519     9,994  
  Accumulated other comprehensive loss     (1,726 )   (1,491 )
  Treasury stock at cost     (1,404 )   (1,759 )
   
 
 
  Net stockholders' equity     9,898     9,175  
   
 
 
Total Liabilities and Stockholders' Equity   $ 42,184   $ 41,891  
   
 
 

See Notes to the Consolidated Financial Statements.

4


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows

 
    
   Six Months Ended
  
In millions (Unaudited)
   June 30,
2004
   June 30,
2003
  
Operating Activities   Income before cumulative effect of change in accounting principle   $ 1,154   $ 478  
    Adjustments to reconcile net income to net cash provided by
    operating activities:		              
        Depreciation and amortization     1,016     935  
        Provision for deferred income tax     219     54  
        Earnings/losses of nonconsolidated affiliates in excess of
        dividends received		     (236 )   (45 )
        Minority interests' share in income     61     48  
        Net loss on sales on consolidated companies     —     3  
        Net gain on sales of investments     (13 )   (16 )
        Net gain on sales of property and businesses     (11 )   (24 )
        Other net (gain) loss     62     (24 )
        Net (gain) loss on sale of nonconsolidated affiliates     (17 )   1  
        Net gain on asset divestitures related to formation of
        nonconsolidated affiliates		     (563 )   —  
        Restructuring charges     496     —  
        Tax benefit—nonqualified stock option exercises     41     13  
    Changes in assets and liabilities that provided (used) cash:              
        Accounts and notes receivable     (893 )   (361 )
        Inventories     (336 )   (78 )
        Accounts payable     584     (41 )
        Noncurrent receivables     17     271  
        Other assets and liabilities     (862 )   448  
       
 
 
    Cash provided by operating activities     719     1,662  
       
 
 
Investing Activities   Capital expenditures     (530 )   (495 )
    Proceeds from sales of property and businesses     27     83  
    Acquisition of business     (149 )   —  
    Investments in consolidated companies     —     (69 )
    Investments in nonconsolidated affiliates     (56 )   (48 )
    Distribution from nonconsolidated affiliate     3     —  
    Proceeds from sale of nonconsolidated affiliates     33     8  
    Proceeds from asset divestitures related to formation of
    nonconsolidated affiliates		     845     —  
    Purchases of investments     (898 )   (936 )
    Proceeds from sales and maturities of investments     806     886  
       
 
 
    Cash provided by (used in) investing activities     81     (571 )
       
 
 
Financing Activities   Changes in short-term notes payable     (100 )   (8 )
    Payments on long-term debt     (1,075 )   (594 )
    Proceeds from issuance of long-term debt     618     833  
    Purchases of treasury stock     (7 )   (4 )
    Proceeds from sales of common stock     325     96  
    Distributions to minority interests     (32 )   (38 )
    Dividends paid to stockholders     (623 )   (612 )
       
 
 
    Cash used in financing activities     (894 )   (327 )
       
 
 
Effect of Exchange Rate Changes on Cash     (4 )   28  
       
 
 
Summary   Increase (Decrease) in cash and cash equivalents     (98 )   792  
    Cash and cash equivalents at beginning of year     2,392     1,484  
       
 
 
    Cash and cash equivalents at end of period   $ 2,294   $ 2,276  
       
 
 

See Notes to the Consolidated Financial Statements.


The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income

 
   Three Months Ended
   Six Months Ended
  
In millions (Unaudited)
   June 30,
2004
   June 30,
2003
   June 30,
2004
   June 30,
2003
  
Net Income Available for Common Stockholders   $ 685   $ 393   $ 1,154   $ 469  
   
 
 
 
 
Other Comprehensive Income (Loss), Net of Tax                          
  Net unrealized gains (losses) on investments     (34 )   39     (24 )   32  
  Translation adjustments     (81 )   80     (223 )   185  
  Minimum pension liability adjustments     (17 )   —     (16 )   (3 )
  Net gains on cash flow hedging derivative instruments     35     18     28     2  
   
 
 
 
 
  Total other comprehensive income (loss)     (97 )   137     (235 )   216  
   
 
 
 
 
Comprehensive Income   $ 588   $ 530   $ 919   $ 685  
   
 
 
 
 

See Notes to the Consolidated Financial Statements.

5


The Dow Chemical Company and Subsidiaries
Notes to the Consolidated Financial Statements

(Unaudited)

NOTE A—CONSOLIDATED FINANCIAL STATEMENTS

        The unaudited interim consolidated financial statements of The Dow Chemical Company and its subsidiaries ("Dow" or the "Company") were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and reflect all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are considered necessary for a fair presentation of the results for the periods covered. Certain reclassifications of prior year amounts have been made to conform to current year presentation. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.

NOTE B—ACCOUNTING CHANGES

        In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations," which requires an entity to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the related long-lived asset. The liability is adjusted to its present value each period and the asset is depreciated over its useful life. A gain or loss may be incurred upon settlement of the liability. SFAS No. 143 was effective for fiscal years beginning after June 15, 2002. Adoption of SFAS No. 143 on January 1, 2003 resulted in the recognition of an asset retirement obligation of $45 million and a charge of $9 million (net of tax of $5 million), which was included in "Cumulative effect of changes in accounting principles."

        In accordance with SFAS No. 143, the Company has recognized asset retirement obligations related to demolition and remediation activities at manufacturing sites in the United States, Germany, France and The Netherlands. In addition, the Company has recognized obligations related to capping activities at landfill sites in the United States, Canada, Italy and Brazil. The aggregate carrying amount of asset retirement obligations recognized by the Company was $47 million at June 30, 2004 and $46 million at December 31, 2003. These obligations are included in the consolidated balance sheets as "Other noncurrent obligations."

        In the first quarter of 2003, Dow adopted the fair value provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," for new grants of equity instruments (which include stock options, deferred stock grants, and subscriptions to purchase shares under the Company's Employees' Stock Purchase Plan) to employees. As required by SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure," the following table provides pro forma results as if the fair value based method had been applied to all outstanding and unvested awards in each period presented:

 
   Three Months Ended
   Six Months Ended
  
In millions
   June 30,
2004
   June 30,
2003
   June 30,
2004
   June 30,
2003
  
Net income, as reported   $ 685   $ 393   $ 1,154   $ 469  
Add: Stock-based compensation expense included in
    reported net income, net of tax		     29     8     52     11  
Deduct: Total stock-based compensation expense
    determined using fair value based method for
    all awards, net of tax		     (34 )   (19 )   (61 )   (38 )
   
 
 
 
 
Pro forma net income   $ 680   $ 382   $ 1,145   $ 442  
   
 
 
 
 
Earnings per share (in dollars):                          
  Basic—as reported   $ 0.73   $ 0.43   $ 1.23   $ 0.51  
  Basic—pro forma     0.72     0.42     1.22     0.48  
  Diluted—as reported     0.72     0.43     1.22     0.51  
  Diluted—pro forma     0.72     0.41     1.21     0.48