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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required]
FOR THE YEAR ENDED DECEMBER 31, 1994
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
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $2.50 per share Common Stock registered on the
New York, Midwest and Pacific
Stock Exchanges
Debentures: Debentures registered on the
6.85%, final maturity 2013 New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ].
The aggregate market value of voting stock held by nonaffiliates as of
January 31, 1995, (based upon the closing price of $62.375 per common
share as quoted on the New York Stock Exchange) is approximately
$17,085 million. For purposes of this computation, the shares of
voting stock held by Directors, Officers and the Employees' Retirement
Plan were deemed to be stock held by affiliates. Nonaffiliated common
stock outstanding at January 31, 1995 numbered 273,913,825 shares.
Documents Incorporated by Reference
-----------------------------------
Part III: Proxy Statement for the Annual Meeting of Stockholders to
be held May 11, 1995.
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(This Page Intentionally Left Blank)
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THE DOW CHEMICAL COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
TABLE OF CONTENTS
PART I
Page
Item 1. Business 4
Item 2. Properties 8
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 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 51
PART III
Item 10. Directors and Executive Officers of the Registrant 51
Item 11. Executive Compensation 51
Item 12. Security Ownership of Certain Beneficial Owners
and Management 51
Item 13. Certain Relationships and Related Transactions 51
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 51
Signatures 54
3
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, pharmaceuticals, agricultural and
consumer products and other specialized products. 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
Products and Services
Dow was organized in 1897 to extract chemicals from the native brine
deposits of central Michigan. From an initial concentration on
products derived from these chemicals, the Company has expanded its
activities into four industry segments. Aggregation of products is
generally made on the basis of process technology, end-use markets and
channels of distribution. Key products and services include:
Chemicals and Performance Products
Dow's wide range of products are used primarily as raw materials in
the manufacture of customer products, or they aid in the processing
of customer products and services. Industries served include
adhesives, aerosols, aerospace, automotive, chemical processing,
metalworking, oil and gas, pulp and paper, personal care,
pharmaceuticals, processed foods, utilities and water treatment.
Chemicals and Metals: Acetone, alkanolamines, caustic soda,
chlorinated solvents, chlorine, ethyleneamines, ethylene
dichloride, ethylene glycols, glycerine, hydrochloric acid,
hydrogen chloride, magnesium metal, methyl chloride, phenol,
propylene glycols, propylene oxide and vinyl chloride monomer.
Performance Products: Acetylsalicylic acid (aspirin), acrylamide
monomer, air separation and gas treating products and services,
antimicrobials, aqueous and semi-aqueous cleaners, brake fluids,
compressor lubricants, Dowanol glycol ethers, Dowex ion exchange
resins, Dowfax surfactants; Dowfrost, Dowtherm and Syltherm heat
transfer fluids; Drytech superabsorbents, FilmTec membranes, Invert
solvents, latex coatings and binders, magnesium hydroxide, Methocel
and Ethocel cellulosic products, Peladow, Liquidow and Dowflake
calcium chloride; plastic lined piping products, polyglycols,
specialty monomers (DVB, VBC) and Versene chelating agents.
Plastic Products
Dow ranks among the world leaders in the production of plastics,
offering the broadest range of thermoplastic and thermoset
materials of any manufacturer. Dow plastics and plastic fabricated
products are used in a wide variety of industries, such as
appliances, automotive, building and construction, electronics,
flooring, furniture, health care, housewares, packaging and
recreation.
Thermoplastics: Affinity polyolefin plastomers, Aim advanced
styrenic resins, Aspun fiber-grade resins, Attane ultra low density
polyethylene copolymers, Calibre polycarbonate resins, Dowlex
linear low density polyethylene, Engage polyolefin elastomers,
Insite technology polymers, Isoplast polyurethane engineering
thermoplastic resins, low and high density polyethylene, Magnum ABS
resins, Pellethane TPU elastoplastic polymers, Prevail
thermoplastic resins, Primacor adhesive copolymers, Pulse
engineering resins, Sabre engineering resins, Saran PVDC, Styron
polystyrene, Tyril SAN resins and Tyrin CPE elastomers and resins.
Thermosets: Cyclotene advanced electronics resins, D.E.H. curing
agents, D.E.N. epoxy novolacs, D.E.R. liquid and solid epoxy
resins, Derakane epoxy vinyl ester resins, Isonate pure and
modified MDI (methylene diphenyl diisocyanate), Papi polymeric MDI,
Specflex systems, Spectrim reaction moldable products, Tactix
performance polymers, The Enhancer carpet backing, Voranate T-80
TDI (toluene diisocyanate) and Voranol polyether polyols and
copolymer polyols.
Fabricated Products: DAF adhesive films, DWF window films, Ethafoam
plastic foams, Opticite label films, Saranex plastic films,
Styrofoam brand plastic foams, Trycite plastic films, Trymer rigid
foam billets and Zetabon plastic clad metals.
Hydrocarbons and Energy
Dow is the world leader in the production of olefins, styrene and
aromatics. This segment encompasses procurement of fuels and
petroleum-based raw materials as well as the production of olefins,
aromatics, styrene and cogenerated power and steam for use in the
Company's operations.
Hydrocarbons: Benzene, ethylene, propylene and styrene.
4
Hydrocarbons and Energy (Continued)
Energy: Power and steam production plus fuels procurement and
natural gas pipelines. Includes independent power producer Destec
Energy, Inc., a Dow subsidiary, which develops independent power
projects and sells electrical and thermal energy.
Consumer Specialties
This segment is comprised of three businesses primarily operated by
Dow affiliates: Agricultural Products, Pharmaceuticals and Consumer
Products. Agricultural Products (DowElanco) are used in crop
protection and production, and for industrial pest control. The
Pharmaceuticals business (Marion Merrell Dow) includes prescription
drugs and over-the-counter health care products. The Consumer
Products business (DowBrands) includes household and personal care
products.
Agricultural Products: Broadstrike, Garlon, Lontrel, Sonalan,
Starane, Tordon, Treflan and phenoxy herbicides; Dursban and
Lorsban insecticides; Beam, Rubigan and Trimidal fungicides;
N-Serve nitrogen stabilizer, Telone soil fumigant, Vikane gas
fumigant, Sentricon termite colony elimination system, and hybrid
seeds.
Pharmaceuticals: Prescription Products: Carafate antiulcer,
Cardizem antianginal, Cardizem SR antihypertensive, Cardizem CD
antianginal/antihypertensive, Cardizem Injectable for atrial
fibrillation or atrial flutter, Nicorette (outside the U.S.) and
Nicoderm smoking cessation aids, Sabril anticonvulsant, Seldane
antihistamine, Seldane-D antihistamine-decongestant combination and
Targocid antibiotic.
Pharmaceuticals: Over-the-Counter Products: (now marketed in the
U.S. by SmithKline Beecham Consumer Healthcare, a partnership
between Marion Merrell Dow and SmithKline Beecham) Cepastat sore
throat lozenges, Citrucel bulk-fiber laxative, Debrox ear care
product, Gaviscon antacid, Gly-Oxide oral antiseptic, Nicorette (in
the U.S.), Novahistine cough/cold/allergy products and OsCal
calcium supplements.
Consumer Products: Household Products: Dow bathroom cleaner with
Scrubbing Bubbles, Fantastik all purpose cleaner, Glass Plus multi-
surface cleaner, Handi-Wrap plastic film, Saran Wrap plastic film,
Smart Scrub soft scouring cleanser, Spray'N Wash tough laundry
stain remover, ultra Vivid color safe bleach, ultra Yes laundry
detergent and Ziploc plastic bags.
Consumer Products: Personal Care: Apple Pectin, Nucleic A,
PermaSoft, Salon Style, and Style hair care products.
Unallocated
This segment encompasses Dow's businesses that are not reported
elsewhere, including the consolidated insurance and finance
companies, and Ventures businesses such as Dow Environmental and
advanced electronics materials. This segment includes activities
and overhead cost variances not allocated to other segments.
Industry Segment and Geographic Area Results
See Note S to the Financial Statements for a discussion of sales,
operating income and identifiable assets by industry segment and
geographic area. A product segment sales analysis follows.
PRODUCT SEGMENT SALES ANALYSIS
In millions (Unaudited) 1994 1993 1992
- ----------------------------------------------------------------------
Sales of Principal Products and Services
- ----------------------------------------------------------------------
Chemicals and Performance Products
Chemicals and Metals $2,762 $2,625 $2,807
Performance Products 1,774 1,643 1,664
--------------------------------------------------------------------
Total Chemicals and Performance Products 4,536 4,268 4,471
- ----------------------------------------------------------------------
Plastic Products
Thermoplastics 3,887 3,203 3,332
Thermosets 2,679 2,414 2,485
Fabricated Products 910 842 898
--------------------------------------------------------------------
Total Plastic Products 7,476 6,459 6,715
- ----------------------------------------------------------------------
Hydrocarbons and Energy
Hydrocarbons and Energy 2,043 1,797 1,734
- ----------------------------------------------------------------------
Consumer Specialties
Agricultural Products 1,735 1,604 1,580
Pharmaceuticals 3,274 3,007 3,478
Consumer Products 845 846 919
--------------------------------------------------------------------
Total Consumer Specialties 5,854 5,457 5,977
- ----------------------------------------------------------------------
Unallocated
Miscellaneous 106 79 74
- ----------------------------------------------------------------------
Net Sales $20,015 $18,060 $18,971
- ----------------------------------------------------------------------
5
Raw Materials
The Company has, and expects to continue to have, adequate supplies of
raw materials during 1995 and subsequent years.
Chemicals and Performance Products
The most important raw materials for the Chemicals and Performance
Products segment are ammonia, benzene, butadiene, caustic soda,
cellulose, chlorine, ethylene, limestone, natural gas and natural
gas liquids, natural brines, naphtha, organic acid, propylene,
propylene oxide, salt and styrene. Ocean water from the Gulf of
Mexico is the principal raw material for magnesium. The Company
owns salt deposits in Louisiana, Michigan and Texas, U.S.; Alberta,
Canada; Brazil; and Germany. The Company also owns natural brine
deposits in Michigan and limestone deposits in Texas. These
deposits are expected to last in excess of 100 years. The Company
produces essentially all of its internal requirements of brine,
propylene oxide, caustic soda, chlorine and styrene; and most of
its internal requirements of butadiene and ethylene.
Plastic Products
Major raw materials for the Plastic Products segment are styrene,
ethylene, benzene, acrylonitrile, octene, aniline, propylene oxide,
bisphenol, epichlorohydrin, and vinylidene chloride. With the
exception of ethylene, acrylonitrile, octene and aniline, the
Company produces essentially all of the major raw materials that it
consumes.
Hydrocarbons and Energy
Major raw materials such as liquefied petroleum gases, crude oil,
naphtha, natural gas, benzene, propylene, fuel oil and coal are
purchased by the Company both on long-term contracts and as they
become available on the market.
The Company, and its subsidiary Destec Energy, Inc., own the
rights to substantial deposits of lignite in Texas and Louisiana.
About 89 percent of the output of a 1.6 billion pounds-per-year
ethylene plant and 40 percent of the output of a 1.8 billion
pounds-per-year ethylene plant, both owned by Novacor Chemicals
Ltd., at Joffre, Alberta, Canada, are under long-term supply
contracts to Dow Chemical Canada, Inc. This commitment is further
described in Note Q to the Financial Statements. The purchased
ethylene is used for feedstock at Dow Canada's manufacturing
complex at Fort Saskatchewan and at other Dow locations.
About 33 percent of the capacity of a 1.3 billion pounds-per-year
ethylene plant, owned by BASF in Antwerp, Belgium is under a long-
term contract to convert Dow's naphtha into ethylene and its
by-products. The ethylene and by-products will be used for feedstock
at Dow Benelux's manufacturing facility in Terneuzen, the
Netherlands.
Consumer Specialties
The Consumer Specialties segment raw materials are primarily
chlorine, 1,3 dichloropropene, dexylamine succinate, phenol,
polyethylene, and vinylidene chloride, which are manufactured by
the Company. Other raw materials such as pyridine, propionic acid,
organo-phosphate based derivatives, sugar, alcohol, quinine,
sulphate, lactulose, sucralfate, and codeine, are purchased under
contracts.
Method of Distribution
All products and services are marketed primarily through the Company's
sales force, although in some foreign markets more emphasis is placed
upon sale through distributors. No significant portion of the business
of any industry segment is dependent upon a single customer.
Competition
The Company experiences substantial competition in each of its industry
segments. During 1994, the Company was the second largest chemical
company in the United States in terms of sales and will likely be in
the top five in terms of sales worldwide in 1994. 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 U.S. and abroad. The Company competes worldwide on the basis of
price, quality and customer service.
Patents, Licenses and Trademarks
The Company consistently applies for and obtains United States and
foreign patents and the Company and its consolidated subsidiaries now
own approximately 4,900* active United States patents and
approximately 14,100* active foreign patents, which can be identified
to industry segments as follows: Chemicals and Performance Products,
1,400 U.S. and 2,600 foreign; Plastic Products, 1,300 U.S. and 3,400
foreign; Hydrocarbons and Energy, 100 U.S. and 200 foreign; Consumer
Specialties, 1,300* U.S. and 6,400* foreign; Ventures, 500 U.S. and
1,200 foreign, and Unallocated, 300 U.S. and 300 foreign. Dow is also
party to a substantial number of patent licenses and other technology
agreements. Dow's primary purpose in obtaining its patents is to
protect the results of its own research effort for use in its own
operations. The Company had patent and technology royalty income of
$25 million in 1994, $26 million in 1993 and $21 million in 1992,
6
Patents, Licenses and Trademarks (Continued)
and paid royalties to others of $40 million in 1994, $44 million in
1993, and $34 million in 1992. 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 valuable assets, it does not regard its
business as being materially dependent upon any single patent, license
or trademark.
*Includes approximately 700 Marion Merrell Dow, Inc. and 500 DowElanco
patents in the U.S., and approximately 4,000 Marion Merrell Dow, Inc.
and 2,200 DowElanco foreign patents.
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 $1,261
million in 1994 compared to $1,256 million in 1993 and $1,289 million
in 1992. The Company employs approximately 7,700 people in various
kinds of research and development activities.
Other Activities
Dow owns, through its Liana Limited subsidiary, 100 percent of the
stock of Dorinco Reinsurance Company, a Michigan stock property and
casualty company which engages in the insurance and reinsurance
business. In addition, the Company effectively owns 100 percent of the
stock of two Bermuda insurance companies.
Principal Partly Owned Companies
Principal companies in which Dow owns a 50 percent interest include
Dow Corning Corporation, a manufacturer of silicone and silicone
products; Dow-United Technologies Composite Products, Inc., a
manufacturer of composite products; and Gurit-Essex, A.G., a Swiss
company, which supplies European automobile manufacturers with
proprietary specialty products. In addition, Dow has a 45 percent
interest in Total Raffinaderij Nederland N.V., which provides
feedstocks for Dow's major petrochemical site at Terneuzen, the
Netherlands, and also services the Benelux and nearby markets.
Protection of the Environment
Matters pertaining to the environment are discussed in Legal
Proceedings, Management's Discussion and Analysis of Financial
Condition and Results of Operations and Notes A and Q to the Financial
Statements.
Financial Information About Foreign and Domestic Operations and Export Sales
In 1994, the Company derived 50 percent of its sales and had 46
percent of its plant 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, to carry
any greater risk than its operations in the United States. Information
on sales, operating income and identifiable assets by geographic area
for each of the last three years appears in Note S to the Financial
Statements.
Number of Products
Dow manufactures and supplies more than 2,500 product families and
services and no single one accounted for more than 5 percent of the
Company's consolidated sales in 1994. No significant portion of the
business of any industry segment is dependent upon a single customer.
Employees
The personnel count at December 31, 1994 was 53,730 versus 55,436 at
the end of 1993 and 61,353 at the end of 1992. The 12 percent
reduction in personnel from the end of 1992 to the end of 1994
reflected rationalization and work process improvements throughout the
Company.
7
ITEM 2. PROPERTIES
The Company operates 130 manufacturing sites in 30 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 92 percent of capacity during 1994. On a
global basis, Dow operates 14 major production plants, the locations
of which are as follows:
United States: Midland, Michigan; Freeport, Texas; Pittsburg,
California; Plaquemine, Louisiana;
Cincinnati, Ohio; Kansas City, Missouri.
Canada: Sarnia, Ontario; Fort Saskatchewan, Alberta.
Germany: Stade; Rheinmuenster.
France: Drusenheim
The Netherlands: Terneuzen.
Spain: Tarragona.
Brazil: Aratu.
Including the major production facilities, the Company has plants
and holdings in the following geographic areas:
United States: 50 manufacturing locations in 16 states and the
Commonwealth of Puerto Rico.
Canada: 9 manufacturing locations in 3 provinces.
Europe: 39 manufacturing locations in 14 countries.
Latin America: 19 manufacturing locations in 6 countries.
Pacific: 13 manufacturing locations in 7 countries.
All of the above Dow plants are owned in fee, subject to certain
easements of other persons which, in the opinion of Dow, do not
substantially interfere with the continued use of such properties or
materially affect their value.
A summary of plant properties, classified by type, is contained in
Note G to the Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Breast Implant Matters
The Company and Corning Incorporated ("Corning") are each 50 percent
shareholders in Dow Corning Corporation ("Dow Corning"). Dow Corning,
and in many cases the Company and Corning as well, have been sued in a
number of individual and class actions by plaintiffs seeking damages,
punitive damages and injunctive relief in connection with injuries
purportedly resulting from alleged defects in silicone breast
implants. In addition, certain shareholders of the Company have filed
separate consolidated class action complaints alleging that the
Company, Dow Corning or some of their respective Directors violated
duties imposed by the federal securities laws regarding disclosure of
alleged defects in silicone breast implants. The Company and one of
its former officers have also been sued in two separate class action
complaints alleging that the defendants violated duties imposed by the
federal securities laws regarding disclosure of information material
to a reasonable investor's assessment of the magnitude of the
Company's exposure to direct liability in silicone breast implant
litigation. In a separate action, a Corning shareholder has sued
certain Dow Corning Directors (including three current Company
Directors and two former Company Directors) alleging breaches of state
law duties relating to the manufacture and marketing of silicone
breast implants and seeking to recover unquantified money damages
derivatively on Corning's behalf.
Two separate derivative actions have been brought in the federal
court, Southern District of New York, by Company shareholders
purportedly on the Company's behalf. In Kas, et al. v. Butler, et al.,
two Company shareholders brought suit in 1992, naming as defendants
all persons who were serving the Company as Directors on December 31,
1990, certain Dow Corning Directors, Dow Corning, Corning and certain
Dow Corning officers, seeking derivatively on the Company's behalf
unquantified money damages. In Rubinstein, et al. v. Ludington,
et al., four Company shareholders brought suit in 1992, naming as
defendants Dow Corning's Directors (Messrs. Falla, Popoff and
Stavropoulos) who were also Company Directors and three former Company
Directors, also seeking derivatively on the Company's behalf
unquantified money damages. Plaintiffs in both cases subsequently made
demands that the Company's Board bring suit on behalf of the Company.
After the Board rejected those demands, the plaintiffs refiled their
complaints alleging that the demands were wrongfully rejected.
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, subject to the effects described below.
8
Breast Implant Matters (Continued)
In September 1993, Dow Corning announced the possibility of a global
settlement concerning the silicone breast implant matter. 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 the Settlement Agreement (defined below);
litigation and claims outside the Settlement Agreement; and provisions
for legal, administrative and research costs related to breast
implants. The charges for 1993 and 1994 included pretax amounts of
$1,240 million and $441 million, respectively, less expected insurance
recoveries of $600 million and $200 million, respectively. The 1993
amounts reported by Dow Corning were determined on a present value
basis. On an undiscounted basis, the estimated liability above for
1993 was $2,300 million less expected insurance recoveries of $1,200
million. As a result of the Dow Corning actions, the Company recorded
its 50 percent share of the charges, net of tax benefits available to
the Company. The impact on the Company's net income was a charge of
$192 million for 1993 and a charge of $70 million for 1994.
On March 23, 1994, Dow Corning, along with other defendants and
representatives of breast implant litigation plaintiffs, signed a
Breast Implant Litigation Settlement Agreement (the "Settlement
Agreement"). The Settlement Agreement was approved by Dow Corning's
Board of Directors on March 28, 1994. Under the Settlement Agreement,
industry participants (the "Funding Participants") would contribute up
to approximately $4.2 billion over a period of more than thirty years
to establish several special purpose funds. The Company is not a
Funding Participant and is not required to contribute to the
settlement. The Settlement Agreement, if implemented, provides for a
claims-based structured resolution of claims arising out of silicone
breast implants and defines periods during which breast implant
plaintiffs may "opt out" of the class subject to the settlement by
electing not to settle their claims by way of the Settlement Agreement
and instead continuing their individual breast implant litigation
against manufacturers and other defendants, including the Company. In
certain circumstances, if any defendant who is a Funding Participant
considers the number of plaintiffs who have opted out and maintained
lawsuits against such defendant to be excessive, such defendant may
withdraw from participation in the Settlement Agreement. Pursuant to
the Settlement Agreement, any plaintiff who participates in the
settlement releases the Company from any breast implant related
liability.
On April 1, 1994, the U.S. District Court for the Northern District
of Alabama (the "Court") preliminarily approved the Settlement
Agreement. A Court-supervised fairness review process of the
Settlement Agreement was completed on August 22, 1994. The
Settlement Agreement received final approval by the Court on September 1,
1994. The Court's final approval of the Settlement Agreement has
been appealed to the U.S. Court of Appeals for the Eleventh Circuit.
Various preliminary estimates of the aggregate number of plaintiffs
who have indicated an intent to opt out of the settlement (the "Opt
Out Plaintiffs") have been made public. Dow Corning has reported that
since July 1, 1994, many initial Opt Out Plaintiffs with claims
against Dow Corning have rejoined the settlement. The Court is
continuing to collect information relating to the number of Opt Out
Plaintiffs. Dow Corning will continue to evaluate the nature and scope
of the current or potential future claims of these Opt Out Plaintiffs.
Opt Out Plaintiffs were able to rejoin the settlement until the March 1,
1995 date established by the Court.
The date by which Dow Corning was required to decide whether to
remain as a participant in or to exercise the first of its options to
withdraw from the Settlement Agreement was extended to September 9,
1994. On September 8, 1994, Dow Corning's Board of Directors approved
Dow Corning's continued participation in the Settlement Agreement.
Initial claims were required to be filed with the Court by September
16, 1994. After these claims and the supporting medical records have
been evaluated by the Court for validity, eligibility, accuracy, and
consistency, the Court will determine whether contributions to the
settlement are sufficient to pay validated claims. The date by which
this process will be completed is uncertain. If contributions are not
sufficient, claimants with validated claims may have the ability to
become Opt Out Plaintiffs during another specified period. In that
event, if any defendant who is a Funding Participant considers the
number of new Opt Out Plaintiffs to be excessive, such defendant may
decide to exercise a second option to withdraw from participation in
the Settlement Agreement. There can be no assurance that Dow Corning
will not withdraw from participation in the Settlement Agreement.
Dow Corning has reported that, as additional facts and circumstances
develop, the estimate of its potential liability may be revised, or
provisions may be necessary to reflect any additional costs of
resolving breast implant litigation and claims not covered by the
settlement. Any future charge by Dow Corning resulting from a revision
or provision, if required, could have a material adverse impact on the
Company's net income for the period in which it is recorded by Dow
Corning, but would not have a material adverse impact on the Company's
consolidated cash flows or financial position.
As to breast implant product liability claims that continue to be
asserted against Dow Corning (as opposed to the Company), any loss to
the Company would be limited to the diminution in the value of the
Company's investment in Dow Corning, which totaled $337 million as of
December 31, 1994, that would be caused by charges taken against
income by Dow Corning in connection with these claims. The Company
believes that Dow Corning is defending these claims vigorously.
9
Breast Implant Matters (Continued)
The Company is separately named as a defendant in a total of 12,395
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 fraud, aiding and
abetting, conspiracy and negligence.
On December 1, 1993, Federal District Court Judge Sam C. Pointer, Jr.,
dismissed the Company from more than 3,000 (4,945 as of February 28,
1995) federal product liability cases involving silicone breast
implants. The Opt Out Plaintiffs who have sued in federal courts are
bound by this decision unless it is later vacated. Judge Pointer had
been appointed by the Federal Judicial Panel on Multidistrict
Litigation to oversee all of the silicone breast implant cases filed
in the U.S. federal courts. In his ruling, Judge Pointer stated that
the Company is a separate, independent company and has no legal
responsibility for Dow Corning's breast implant business activities.
He further held that the Company is not liable for any actions
allegedly taken independent of its role as a shareholder of Dow
Corning. Judge Pointer stated that there was "no evidence" to indicate
the Company "had any special knowledge about the alleged risks and
hazards of silicone" or that the Company did anything improper. Judge
Pointer also held that he would reconsider his ruling if new facts
emerge or if the law changes in one or more states. Certain new facts
have emerged since Judge Pointer's ruling. Plaintiffs have asked the
Court to vacate its ruling based on those facts. The Company does not
believe these facts are material and has asked that the Court's
December 1, 1993 ruling be made final. In separate similar rulings,
the Company has been dismissed from 4,076 cases brought in the state
courts of California, Indiana, Michigan, New Jersey, New York and
Pennsylvania as to all claims against it. The California ruling has
been appealed. The Company remains a defendant in 3,374 product
liability cases brought in state courts and continues to be named as a
defendant as additional cases are filed in various courts.
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 status as a shareholder of Dow Corning, (ii)
the claim that the Company was liable in negligence for failing to
supervise Dow Corning, and (iii) the 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 2,331 cases pending in Harris County
litigation. In those cases, the Company has filed cross-claims against
Dow Corning on the ground that if the Company and Dow Corning are
found jointly and severally liable, Dow Corning should bear
appropriate responsibility for the injuries caused by its product. In
addition, the Company has filed claims with its insurance carriers to
recover in the event it is held liable in the Harris County (or any
other) breast implant litigation.
The first of the Harris County cases went to trial in November 1994,
and the jury returned a verdict on February 15, 1995. At the
conclusion of the presentation of the evidence, plaintiffs voluntarily
withdrew their fraud and Deceptive Trade Practices Act claims against
the Company. The jury reached a verdict dismissing the Company from
all liability with respect to one plaintiff. As to the second
plaintiff, the jury found for the Company in plaintiff's conspiracy,
concert of action and negligence counts. The jury also found the
Company jointly and severally liable with Dow Corning in the amount of
$5.23 million for having given Dow Corning "substantial encouragement
or assistance" in marketing breast implants that had not been first
adequately tested. The jury allocated the Company's responsibility for
plaintiff's damages at 20%. The Company has filed a motion with Judge
Schneider requesting a judgment notwithstanding the verdict and will
appeal any unfavorable ruling. It is impossible to predict the outcome
or to estimate the cost to the Company of resolving this action or any
of the other cases in Harris County.
In an order dated December 1, 1994, Judge Frank Andrews, presiding
in the consolidated breast implant cases in Dallas County, Texas,
indicated that he had granted the Company's motion for summary
judgment "on all causes of action other than conspiracy and strict
liability as a component parts supplier." As a result, the Company
remains a defendant as to such claims in 116 cases pending in Dallas
County. It is impossible to predict the outcome or to estimate the
cost to the Company of resolving these actions.
It is the opinion of the Company's management that the possibility
that plaintiffs will prevail on the theory that the Company should be
liable in the breast implant litigation because of its shareholder
relationship with Dow Corning is remote. It is further the opinion of
the Company's management that the possibility that a resolution of
plaintiffs' direct participation claims would materially impact the
Company's consolidated financial statements is remote.
The Company was informed by Dow Corning that it had received a
request dated July 9, 1993, from the Boston Regional office of the
Securities and Exchange Commission for certain documents and
information related to silicone breast implants. The request states
that the Boston Regional Office is conducting an informal investigation
which "concerns Dow Corning, its subsidiary Dow Corning Wright ('DCW'),
and parent corporations Dow Chemical Co. and Corning Inc."
10
Seldane
In July 1992, two class actions lawsuits were filed in the United
States District Court for the Western District of Missouri alleging
that Marion Merrell Dow Inc. ("MMD"), a subsidiary of the Company,
violated the federal securities laws as a result of alleged false
statements and omission regarding the drug Seldane. The suits, which
were brought by purchasers of MMD stock and sought unquantified
damages, also named the Company as a defendant, principally because of
its status as an alleged "controlling person" of MMD. In addition to
seeking recovery against MMD and the Company, the suits named as
defendants a variety of entities and individuals including certain
Directors of MMD (some of whom are also Directors of the Company) and
certain underwriters of a 1992 offering of MMD stock. Subsequently,
plaintiffs filed a consolidated amended class action complaint in the
same court consolidating the two previously filed complaints and
captioned In re Marion Merrell Dow Securities Litigation. The
consolidated amended class action complaint does not name the Company
as a defendant but reserves the right to name the Company in the
future should discovery disclose a basis for doing so. In December
1992, plaintiffs and the Company entered into an agreement
conditionally tolling the statute of limitations as to any action
against the Company.
In addition, in July 1992, a derivative suit captioned Harris J.
Sklar v. Ewing M. Kauffman, et al. was filed in the Court of Chancery
of the State of Delaware against MMD (as nominal defendant) and
certain past and present Directors of MMD, including Messrs. Falla,
Lyons, Popoff and Stavropoulos, who are also Directors of the Company.
The suit sought unquantified damages allegedly suffered by MMD as a
result of alleged breaches of fiduciary duty and waste of corporate
assets by its Directors in connection with the marketing of Seldane
and alleged disclosures and omissions regarding Seldane made to
consumers and to the investing public. On February 28, 1993, the Court
entered an order dismissing without prejudice the complaint as against
all defendants.
Management believes that the above actions are without merit.
Furthermore, it is the opinion of the Company's management that the
possibility that litigation of these claims would materially impact
the Company's consolidated financial statements is remote.
Environmental Matters
The Company has agreed to participate in the Toxic Substances Control
Act, Section 8(e) compliance audit program and expects to pay a civil
penalty of $1 million sometime during the first half of 1995.
On September 27, 1993, February 23, 1994, and October 31, 1994, the
U.S. Environmental Protection Agency filed actions against the Company
alleging violations of the boiler and industrial furnace regulations.
The Company agreed to pay a total of $151,729 in settlement of
$319,230 of proposed fines with respect to two Company sites. Proposed
civil fines for three additional Company sites total $1,286,764.
On May 31, 1994, the U.S. Environmental Protection Agency filed an
action against the Company alleging violations of the Clean Water Act
at the Company's Ludington, Michigan site. Proposed civil fines total
$125,000.
On July 1, 1994, the Louisiana Department of Environmental Quality
served a Penalty Notice on the Company alleging three spills which
violated the Louisiana Clean Water Act, seeking proposed civil fines
totaling $120,740, including administrative expenses.
DowElanco, a general partnership 60 percent owned by the Company,
received a letter dated November 30, 1994 from the U.S. Environmental
Protection Agency regarding incident reporting under Section 6(a)(2)
of the Federal Insecticide, Fungicide and Rodenticide Act. Settlement
negotiations have been initiated to resolve any possible fines which
may exceed $100,000.
On December 19, 1994, the Texas Natural Resource Conservation
Commission sent a proposed order to the Company seeking administrative
civil penalties of $519,350 for alleged violations of the Texas Clean
Air Act.
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 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information related to the Company's executive
officers as of March 13, 1995.
Enrique C. Falla, 55, Dow Executive Vice President and Chief Financial
Officer. Director Since 1985.
Employee of Dow since 1967. Commercial Vice President of Dow Latin
America 1979-80. President of Dow Latin America 1980-84. Dow Financial
Vice President 1984-91. Treasurer 1986-87. Chief Financial Officer
1987 to date. Executive Vice President 1991 to date. Director of Dow
Corning Corporation,* Marion Merrell Dow Inc.,* Kmart Corporation and
the University of Miami. Mr. Falla is a cousin of Mr. Sosa's wife.
11
EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
Frank P. Popoff, 59, Chairman of the Dow Board of Directors and Chief
Executive Officer. Director since 1982.
Employee of Dow since 1959. Executive Vice President of Dow Europe
S.A.* 1980-81. President of Dow Europe S.A.* 1981-85. Dow Executive
Vice President 1985-87. President and Chief Operating Officer 1987.
President 1987-93. Chief Executive Officer 1987 to date. Chairman of
the Board December 1992 to date. Director of Dow Corning Corporation,*
Marion Merrell Dow Inc.* and DowElanco.* Director of American Express
Company, U S WEST, Inc. and Chemical Financial Corporation. Serves on
the Policy Committee of The Business Roundtable, The Business Council
and The Conference Board. Member of the American Chemical Society, the
National LEAD Council and the Michigan Business Partnership.
Enrique J. Sosa, 54, Dow Senior Vice President and President of Dow
North America. Director since 1990.
Employee of Dow since 1964. Director of Marketing for the Plastics
Department 1980-82. General Manager of Dow Brazil 1982-84. President
of Dow Brazil 1984-85. Commercial Vice President for Specialty
Chemicals 1985-87. Group Vice President for Chemicals and Performance
Products 1987-90. Director of Corporate Product Department 1990-93.
President of Dow North America 1993 to date. Dow Vice President 1990-91.
Senior Vice President 1991 to date. Director of Destec Energy,
Inc.* and Dow Corning Corporation.* Director of the National
Association of Manufacturers and National Action Council for
Minorities in Engineering, Inc. Member, Board of Trustees, Northwood
University, and Executive Committee, Michigan First, Inc. Mr. Sosa's
wife is a cousin of Mr. Falla.
William S. Stavropoulos, 55, Dow President and Chief Operating
Officer. Director since 1990.
Employee of Dow since 1967. President of Dow Latin America 1984-85.
Commercial Vice President for Dow U.S.A., Basics and Hydrocarbons 1985-87.
Group Vice President for Plastics and Hydrocarbons 1987-90.
Chairman of Essex Specialty Products, Inc.* 1988-92. President of Dow
U.S.A. 1990-93. Dow Vice President 1990-91. Senior Vice President 1991-93.
Dow President and Chief Operating Officer 1993 to date. Director
of Dow Corning Corporation* and Marion Merrell Dow Inc.* Chairman of
the Board of the American Plastics Council. Board member of the
Chemical Manufacturers Association, Citizens Research Council, U.S.
Council for International Business and Midland Community Center.
Member of the Society of Chemical Industry, American Chemical Society,
University of Notre Dame Science Advisory Council and Joint Automotive
Suppliers Governmental Action Council. Director of Chemical Financial
Corporation and Chemical Bank and Trust Company.
Each of these executive officers was elected by the Board of Directors
to hold office until the next annual election of officers. As provided
by the Bylaws of the Company, the Board of Directors elects the
officers at its first meeting after each annual meeting of the
stockholders.
* A number of Company entities are referred to in the biographies and
are defined as follows. (Some of these entities have had various
names over the years and the names and relationships to the Company,
unless otherwise indicated, are stated as they existed as of March
13, 1995.) Dow Corning Corporation, a corporation 50 percent-owned
by Dow; DowElanco, a general partnership 60 percent-owned by Dow;
Destec Energy, Inc. and Marion Merrell Dow Inc., both majority-owned
subsidiaries of Dow; Dow Europe S.A. and Essex Specialty Products,
Inc., 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 9, 1995, the Company declared a cash
dividend of 65 cents per share, payable April 28, 1995, to
stockholders of record on March 31, 1995. This will be the 333rd
consecutive quarterly dividend since 1912. There were 96,697 common
stockholders of record as of March 13, 1995.
Quarterly market and dividend information can be found in Part II,
Item 8 (Supplementary Data) on page 50.
12
ITEM 6. SELECTED FINANCIAL DATA
The Dow Chemical Company and Subsidiaries
Five-Year Summary of Selected Financial Data
In millions, except as noted (Unaudited) 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------------
Summary of Operations
Net sales $20,015 $18,060 $18,971 $18,807 $19,773
Cost of sales 13,219 12,195 12,704 12,661 13,035
Insurance and finance company operations, pretax
(income) expense (40) (98) (15) (95) (65)
Research and development expenses 1,261 1,256 1,289 1,159 1,136
Promotion and advertising expenses 658 678 795 721 639
Selling and administrative expenses 2,403 2,230 2,328 2,181 2,084
Amortization of intangibles 169 179 147 129 126
Special charge - 180 433 370 -
------------------------------------------------------------------------------------------------------------------
Operating income 2,345 1,440 1,290 1,681 2,818
Investment and sundry income 113 518 168 488 278
Interest expense-net (406) (433) (586) (481) (533)
-------------------------------------------------------------------------------------------------------------------
Income before provision for taxes on income and
minority interests 2,052 1,525 872 1,688 2,563
Provision (credit) for taxes on income 779 606 274 510 978
Minority interests' share in income 335 275 322 236 201
------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 938 644 276 942 1,384
Cumulative effect of accounting change - - (765) - -
Preferred stock dividends 7 7 7 7 6
------------------------------------------------------------------------------------------------------------------
Net income (loss) available for common stockholders 931 637 (496) 935 1,378
------------------------------------------------------------------------------------------------------------------
Per share of common stock (dollars):
Income before cumulative effect of accounting change 3.37 2.33 0.99 3.46 5.10
Cash dividends declared 2.60 2.60 2.60 2.60 2.60
Cash dividends paid 2.60 2.60 2.60 2.60 2.60
Average common shares outstanding (thousands) 276,094 273,620 271,647 270,477 269,899
Convertible preferred shares outstanding (thousands) 1,549 1,567 1,586 1,592 1,602
- ---------------------------------------------------------------------------------------------------------------------
Year-end Financial Position
Total assets $26,545 $25,505 $25,360 $24,727 $23,953
Working capital 2,075 2,001 1,802 1,584 2,265
Plant properties-gross 23,210 21,608 21,444 20,663 19,149
Plant properties-net 8,726 8,580 8,801 8,775 8,249
Long-term obligations and redeemable preferred stock 5,325 5,918 6,201 6,083 5,209
Total debt 6,578 6,944 7,469 7,652 6,642
Net stockholders' equity 8,212 8,034 8,064 9,441 8,728
- ---------------------------------------------------------------------------------------------------------------------
Financial Ratios
Research and development expenses as percent of net sales 6.3% 7.0% 6.8% 6.2% 5.7%
Income before provision for taxes and minority interests
as percent of net sales 10.3% 8.4% 4.6% 9.0% 13.0%
Return on average stockholders' equity 11.4% 7.9% 3.1%(1) 10.3% 16.5%
Book value per share of common stock (dollars) $29.63 $29.36 $29.69 $34.90 $32.33
Debt as percent of total capitalization excluding
temporary equity 38.0% 39.9% 42.5% 42.3% 41.3%
- ----------------------------------------------------------------------------------------------------------------------
General
Capital expenditures $1,183 $1,397 $1,595 $1,908 $2,119
Depreciation 1,321 1,343 1,342 1,306 1,170
Wages and salaries paid 3,239 3,332 3,263 3,101 3,104
Cost of employee benefits 832 887 938 711 690
Number of employees at year-end (thousands) 53.7 55.4 61.4 62.2 62.1
Number of stockholders of record at year-end (thousands) 98.0 (2) 102.5 105.9 108.4 109.4
- ---------------------------------------------------------------------------------------------------------------------
(1) Before cumulative effect of accounting change.
(2) Stockholders of record as reported by the transfer agent. The Company
estimates that there are an additional 151,200 stockholders whose shares
are held in nominee names, or in dividend reinvestment accounts without
underlying registered shares.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Sales were $20.0, $18.1 and $19.0 billion for 1994, 1993 and 1992,
respectively. Operating income for the same periods was $2.3, $1.4 and
$1.3 billion, which included pretax special charges of $180 million in
1993 and $433 million in 1992 as discussed in Note B to the Financial
Statements. The 1993 charge was taken by Marion Merrell Dow Inc.,
Dow's pharmaceutical subsidiary (71 percent owned), to cover expenses
related to realignment of the company and other cost-management
efforts to position the business for long-term success. Dow took a
special charge in 1992 that reflected write-offs and write-downs,
plant shutdowns, divestitures and the consolidation of a variety of
business activities globally.
Volume gains, price recovery and improved productivity contributed to
higher operating income in 1994 compared to 1993 and 1992. Volume improved
8 percent in 1994 versus the previous year, and prices increased 2 percent
after having declined since 1990. Through work process improvements, cost
of sales adjusted for volume was down more than 2 percent despite an increase
of almost 1 percent in the hydrocarbons and energy purchase price index.
CHEMICALS AND PERFORMANCE PRODUCTS
Chemicals and Performance Products had a 6 percent gain in sales in
1994 compared to the previous year, reporting $4.5 billion in sales
versus $4.3 billion. In 1992, sales were $4.5 billion.
Operating income continued to increase, rising to $592 million in
1994 from $350 million in 1993 and $269 million in 1992. The segment's
operating income was affected by a special charge of $115 million in
1992.
Chemicals and Metals
Sales for Chemicals and Metals were up 5 percent in 1994 compared to
the previous year and down 2 percent versus 1992. Sales were $2.8,
$2.6 and $2.8 billion for 1994, 1993 and 1992, respectively.
The sales gain in 1994 resulted from 4 percent increases in both
prices and volume compared to the previous year. Besides price
recovery, lower costs and expenses resulted in improved margins.
Price increases and higher volume for vinyl chloride monomer made
the greatest contribution to the sales gain in this business and
helped offset lower prices for caustic soda. An upturn in construction
activity led to the stronger demand. Ethylene glycol was also a
significant contributor to the improved results, with higher prices
and volume.
Propylene oxide demand improved in 1994, resulting in very tight
supply. Because demand is expected to continue growing, Dow is
authorizing incremental expansions of propylene oxide capacity in the
U.S., Germany and Brazil. Dow has identified more than 500 million
pounds of incremental capacity that can be added beginning in late
1995 or early 1996 with little added capital. Capacity was also
increased for Dow with the start-up of its Zhejiang Pacific Chemical
Company joint venture propylene oxide plant in Ningbo, People's
Republic of China.
Following a dramatic volume decline for magnesium, Dow adjusted its
capacity in 1994 by permanently closing a production facility in
Freeport, Texas. The facility had previously been idled when product
exported from Russia and China saturated world markets. As supply and
demand balances have become more favorable, price recovery is
underway.
Prices for chlorinated organics remained steady while volume
continued to decline. The phaseout is underway for methyl chloroform
and other applications of chlorinated organics which are of
environmental concern. This phaseout will not have a material impact
on Chemicals and Performance Products.
Performance Products
In 1994, Performance Products had record sales of $1.8 billion, up 8
percent from the previous year. Sales were $1.6 and $1.7 billion in
1993 and 1992, respectively. Volume grew 8 percent in 1994 compared to
1993 while prices remained flat. In 1993, prices declined 6 percent
compared to 1992, resulting in the sales decline that year.
Improving economic conditions created greater demand for latex
coated paper around the world, resulting in higher sales and profits
for emulsion polymers. Demand and prices also improved for carpet and
specialty applications. Dow responded to the increased demand for
styrene butadiene latex by achieving an incremental increase in
capacity from its existing facilities globally.
Dow achieved higher sales for Methocel methyl cellulose as demand
and prices strengthened. In anticipation of greater demand, Dow plans
to add capacity in 1995 through debottlenecking.
Sales declined for separation systems in 1994 due to the loss of
patent protection for FilmTec membranes. The resulting increase in
competition had little impact on volume, but prices were down
significantly versus 1993. The loss of patent protection did not
materially impact the results of Chemicals and Performance Products.
Competitive pressures also resulted in a sales decline for ion
exchange resins, but prices appear to have stabilized and volume is
improving.
Drytech superabsorbents experienced price attrition in 1994 in the
face of new competition. However, volume remained strong. Sales of
oxygenated solvents, chelants, antimicrobials, polyglycols, heat
transfer fluids and other specialty chemicals continued to grow with
gains in prices and volume.
14
Outlook for Chemicals and Performance Products
Prices of caustic soda began to recover in the second half of 1994.
This recovery is expected to accelerate in 1995 as contract renewals
bring higher prices. The improvement for caustic, coupled with strong
demand and higher prices for most products in Chemicals and Metals,
should result in further growth in sales and operating income in 1995.
Performance Products is likely to better the record sales it
attained in 1994, as volume and prices are expected to rise. Leading
the return to more attractive margins will be the emulsion polymers
business, where price recovery is expected to continue as global
economic conditions improve.
PLASTIC PRODUCTS
Plastics reported record sales in 1994 of $7.5 billion, an increase of
16 percent versus the previous year. Sales were $6.5 billion in 1993
and $6.7 billion in 1992. The higher sales resulted from volume and
price gains of 11 percent and 3 percent, respectively.
Operating income continued to improve in 1994 on the strength of
price recovery and cost and expense reductions. Operating income in
1994 was $1.1 billion, up from $380 million in 1993 and $94 million in
1992. Operating income in 1992 included a special charge of $184
million.
Thermoplastics
Sales increased 21 percent to $3.9 billion in 1994 compared to $3.2
billion in 1993. Sales were $3.3 billion in 1992.
Polyolefins and elastomers had significantly improved sales and margins
due to the strong global pricing environment, higher volume in all geographic
areas and continued cost reductions. As overall economic conditions
improved, Dow's volume increased 11 percent, in line with industry
growth rates. In meeting this strong demand, the business set
production records for polyethylene and chlorinated polyethylene.
Start-up of a new plant for Dowlex polyethylene at Fort Saskatchewan,
Alberta, was completed in a safe manner, within budget and ahead of
schedule in September 1994.
The global commercialization of Insite technology has accelerated as
more than 25 commercial applications of Affinity plastomers and Engage
elastomers have been developed. A second production unit was converted
in late 1994 to satisfy growing demand for Insite technology polymers.
In January 1995, Dow and DuPont signed a letter of intent to form an
enterprise that would include a broad portfolio of general purpose and
specialty elastomer products. Combined global elastomer sales for the
two companies currently are about $1 billion. The new enterprise has
the potential to grow at more than twice the industry rate, leading to
total revenues of $2 billion within five years.
Specialty polyolefins posted record profitability in 1994, resulting
primarily from strong volume growth and lower costs.
Price was the single largest contributor to sales and profit
improvement for Styron polystyrene, with significant increases in all
geographic areas. Coupled with double-digit reductions in cost, the
sales gain brought a dramatic improvement in margins. Dow responded to
high levels of demand by increasing the capacity of existing plants in
the U.S. and Canada.
In November 1994, Styron Asia Ltd., a Dow joint venture with Asahi
Chemical Industry Co., was formed. Based in Hong Kong, Styron Asia
Ltd. will engage in the marketing, sales and service for polystyrene
to the consumer and business electronics industries outside of Japan.
Engineering thermoplastics had significantly improved performance in
1994 due to cost reductions and volume gains. While prices were down 3
percent, volume increased, resulting in higher sales. Volume improved
in the Pacific area as the result of general industrial growth and in
North America due to increased demand from the automotive and
construction industries. Magnum ABS, Calibre polycarbonate and Pulse
polycarbonate blends had the strongest improvement.
Start-up of the Sumitomo-Dow Ltd. joint venture polycarbonate
compounding operation was completed in September 1994, with the
polymerization step scheduled to start up in February 1995. Demand for
polycarbonate accelerated worldwide in 1994 and was exceptionally
strong in the Pacific.
Dow, in cooperation with Idemitsu Petrochemical Ltd., has moved into
the development phase of new, semi-crystalline engineering resins.
Thermosets
Thermosets had record sales of $2.7 billion in 1994, up from $2.4
billion the previous year and $2.5 billion in 1992. The sales increase
in 1994 versus 1993 resulted from a 9 percent gain in volume, which
offset a 1 percent decline in prices.
Polyurethanes enjoyed record sales in 1994 based on strong demand.
The global polyurethanes industry had exceptional growth rates in
1994, including a 12 percent increase in the U.S. Much of Dow's growth
came from the Pacific, where the company has expanded its
polyurethanes manufacturing presence in recent years.
15
Thermosets (Continued)
In 1994, Dow started up its joint venture polyol facility in Ningbo,
People's Republic of China, and completed a 300 million pound capacity
expansion for polyols at its facility in Freeport, Texas. In February
1995, Dow announced plans to construct a new world-scale toluene
diisocyanate (TDI) plant in Freeport. Dow's capacity expansions for
TDI, polyols and propylene oxide (discussed under Chemicals and
Metals) will provide the feedstocks needed to continue meeting the
growing demand for polyurethanes globally.
Productivity improvements are helping the polyurethanes business
retain its low-cost-to-serve position, which is of primary importance
for this industry. In 1994, costs were reduced and production records
set.
For epoxy products, supply tightened globally, supporting an upward
trend in prices. Volume improved in 1994 and cost reductions
contributed to better margins than in 1993. Operating rates also
improved and were at high levels.
In 1994, Dow started up a 120 million pound per year incremental
expansion of epichlorohydrin, one of the basic products in the epoxy
products chain. The expansion came in response to growing global
demand that has outpaced supply. Bisphenol, another raw material for
epoxy products, moved from a balanced to a tight supply situation in
1994.
Fabricated Products
Fabricated Products had record sales of $910 million in 1994, up from
$842 million in 1993 and $898 million in 1992. The business also
achieved record profits in 1994 as a result of strong volume growth,
price increases and cost reductions.
Volume for Styrofoam brand products improved as economic conditions
provided an increase in construction activity. In line with the
company's plans to expand geographically, Dow will start up a new
plant in Turkey for Styrofoam brand products in late 1995.
Films and engineered laminates had higher sales due to the
improvement in overall economic conditions and penetration of new
applications. Price increases initiated across all of films during the
last four months of 1994 will have their full effect in 1995 and
demand is expected to remain strong.
Outlook for Plastic Products
Thermoplastics will benefit from strong demand and tight supply for
ethylene- and styrene-based products. Dow's capacity expansions are
well timed to capture this growth.
The epoxy and polyurethanes businesses should continue to grow,
although at a lesser rate than during the past few years. Dow believes
that its Thermosets business will grow faster than the overall
economy.
The Fabricated Products business is expected to benefit from growing
demand in the construction, electronics and telecommunications
sectors, which are driven by expansion outside the U.S.
HYDROCARBONS AND ENERGY
Hydrocarbons and Energy had sales of $2.0 billion, up 14 percent from
$1.8 billion in 1993 and 18 percent compared to $1.7 billion in 1992.
Operating income increased 72 percent to $74 million in 1994 from
$43 million in 1993. Hydrocarbons and Energy had an operating loss of
$183 million in 1992, which included the unfavorable impact of a
special charge of $113 million. Although operating income was not
affected, Dow's 1994 earnings included a gain on its investment in
Magma Power Company, primarily as a result of the merger agreement
between Magma and California Energy Company, Inc. In 1993, earnings
included gains from the sale of portions of the company's equity
interests in Magma and Crestar Energy Inc. (see Note C to the
Financial Statements).
Ethylene production for Dow continued at high operating rates that
were above the industry average. Ethylene market values rose
substantially worldwide, driven by strong demand. This growth is
expected to continue and capacity was expanded through the start-up of
crackers in Fort Saskatchewan, Alberta, in the second half of 1994 and
Freeport, Texas, in early 1995. Demand strengthened for styrene in the
second half of 1994, leading to tight supply conditions and
significant price increases.
Feedstock costs for Hydrocarbons and Energy were up 1 percent in
1994 compared to the previous year.
Destec Energy, Inc.
Independent power producer Destec Energy, Inc., a publicly traded Dow
subsidiary (76 percent owned), reported revenues for 1994 of $727
million, up from $674 million in 1993 and $508 million in 1992. The
percentage of Destec's revenues sourced from Dow was 19 percent in 1994
and 1993, and 23 percent in 1992.
Destec's results were favorably affected by an increase in equity
earnings from the company's power facility partnerships, financing of
the 123 megawatt Michigan Power CoGen project in Ludington, Michigan,
and settlements concerning the development of two other projects. In
1994, Destec added 936 megawatts of new capacity and improved the
operations and ownership structures at several existing facilities.
The company presently has seven projects in construction or advanced
development, representing additional equivalent capacity of more than
1,200 megawatts.
16
Outlook for Hydrocarbons and Energy
Ethylene and styrene will begin the year in a favorable supply and
demand situation for Dow, but new ethylene capacity being added around
the world could lead to a weaker market in the second half of 1995.
Styrene demand is expected to remain strong throughout the year.
Destec implemented a major corporate restructuring in 1994 aimed at
realigning its development strategy, streamlining its organizational
profile and reducing costs. In 1995, Destec plans to focus on its
restructured business strategies.
Two of Destec's Texas power marketing contracts expired during 1994
and the remaining contract expires in April 1995. As these contracts
expire, Destec is selling its excess capacity at prevailing tariff
prices and attempting to negotiate new contracts, but these
expirations could substantially reduce Destec's revenues and gross
margin in 1995 and beyond. In 1994, these contracts and operations
from the related facilities accounted for 30 percent of Destec's total
revenues and 78 percent of its gross margin.
CONSUMER SPECIALTIES
Consumer Specialties had sales of $5.9 billion in 1994, up 7 percent
compared to 1993, but down 2 percent versus 1992. Operating income in
1994 was $762 million, a 1 percent decrease from $772 million in 1993
when excluding a Marion Merrell Dow Inc. special charge of $180
million that year. Including the impact of the charge, operating
income in 1993 was $592 million.
Operating income was $1.1 billion in 1992, which included the impact
of an $11 million special charge. The declines in operating income,
when excluding the charges, primarily reflect the shift to lower
margin generic products for Pharmaceuticals.
Agricultural Products
Dow had a record $1.7 billion in sales of Agricultural Products
through DowElanco, which is a global joint venture between Dow and Eli
Lilly and Company, with Dow holding a 60 percent share. Sales for
Agricultural Products were $1.6 billion in both 1993 and 1992.
U.S. sales remained strong in specialty products, with notable
increases in termite control, vegetation management and technical
products. Lorsban 15G, the leading U.S. corn soil insecticide, yielded
steady performance. Sales of other previously registered crop
protection products were augmented by Broadstrike weed control systems
in their first year of introduction.
On a global basis, European sales stabilized despite government-
sponsored farm acreage reduction programs and lack of financing for
sales to the former Soviet Union. In Latin America and the Pacific,
sales increased significantly, due to strong performance across
product lines and added revenue from the introduction of flumetsulam,
the active ingredient of Broadstrike.
DowElanco also formed joint ventures with IPiCi to serve the global
dinitroanaline market and with Nocil for the manufacture and sale of
chlorpyrifos in India. Additionally, European operations were
streamlined with new formulation and packaging operations.
In 1995, DowElanco is commercializing the newly registered Sentricon
system featuring Recruit termite bait. In 1997, pending EPA approvals,
DowElanco plans to launch a new line of Naturalyte insecticides based
on fermentation technology, initially targeted at the cotton and
vegetable markets.
Pharmaceuticals
Sales for Pharmaceuticals were $3.3 billion in 1994, up from $3.0
billion in 1993 but down from $3.5 billion in 1992. This business
includes Marion Merrell Dow Inc., a Dow subsidiary (71 percent owned),
and Dow's wholly owned pharmaceutical subsidiaries in Latin America.
Marion Merrell Dow Inc. reported higher sales in 1994. Sales were
$3.1 billion in 1994, an increase of 9 percent from 1993 sales of $2.8
billion. The growth in sales resulted primarily from acquisitions in
the U.S. and Japan, along with strong North American sales of Cardizem
CD once-a-day treatment for hypertension and angina.
Sales of the Cardizem (diltiazem HCl) family of cardiovascular
medications were $933 million in 1994, an increase of 2 percent over
1993. Sales were aided by the strength of Cardizem CD, which posted
record sales of $708 million in 1994, up 30 percent.
The Seldane (terfenadine) family of anti-allergy products recorded
1994 sales of $698 million, down 7 percent. Sales in North America and
Europe were lower due to competitive pressures, while the Pacific
region continued to show solid growth. Included in global sales for
the brand in 1994 were $563 million for Seldane tablets, down 7
percent, and $135 million for Seldane-D (terfenadine and
pseudoephedrine HCl), down 5 percent.
Carafate (sucralfate), a unique anti-ulcer medication, faced
continued pressure in 1994, with sales of $147 million, down 17
percent.
17
Consumer Products
Dow's Consumer Products affiliate, DowBrands, had sales of $845, $846
and $919 million in 1994, 1993 and 1992, respectively.
In North America Household Products, a gain in sales for food
protection products was offset by declines in the hard surface cleaner
and laundry product businesses caused by aggressive competitive
activity. Ziploc brand bags had a significant market share gain in
1994. Contributing to this gain were the recent new product
introductions of Ziploc vegetable bags and Ziploc snack bags.
The new manufacturing and distribution center in Urbana, Ohio, began
shipping product in the fourth quarter. Brands such as Dow bathroom
cleaner, Fantastik all purpose cleaner, Glass Plus multi-surface
cleaner and Spray'N Wash tough laundry stain remover were reintroduced
to the marketplace with new ergonomically designed bottles, more
effective formulations and improved trigger sprayers that are intended
to build consumer preference for the products.
DowBrands also introduced Smart Scrub soft scouring cleaner with 100
percent water-soluble baking soda, which eliminates lengthy rinsing
and gritty residue. Smart Scrub achieved a strong market share during
its introduction, and will be followed by Smart Scrub with bleach in
the first half of 1995.
Outlook for Consumer Specialties
DowElanco expects accelerating momentum from new product sales
combined with steady earnings from older products to continue in the
coming year.
While two of Marion Merrell Dow's key products, Seldane and Seldane-D,
face vigorous competition from other brands, the products have yet
to experience generic competition in the U.S. Following the April 1994
expiration of one U.S. patent relating to Seldane, Marion Merrell Dow
is defending the company's intellectual property rights related to
certain other patents but cannot predict when, or if, U.S. generic
competition might begin. In addition, the Cardizem brand faces
increasing competition from generic and brand name products.
DowBrands is likely to have improved profitability in 1995 as a
result of the pending sale of its Personal Care business. This will
allow the company to focus resources on the global expansion of its
Home Food Management products, introduce new products and restore
growth in cleaning and laundry products.
UNALLOCATED
The operating results of the consolidated insurance and finance
subsidiaries, and Ventures businesses such as Dow Environmental and
advanced electronics materials, are grouped in this segment together
with activities and overhead cost variances not allocated to other
business segments. This segment had an operating loss of $214 million
in 1994 versus income of $75 million in 1993 and a loss of $6 million
in 1992. The primary components of the 1994 operating loss were
severance costs of $124 million, research and other expenses related
to new developmental activities in the Ventures businesses of $91
million, and asset write-offs and provisions for environmental
remediation not assigned to Dow's other industry segments of $38
million. These costs were partially offset by pretax income from the
insurance and finance company operations of $40 million. This
segment's 1993 operating income was comprised primarily of pretax
income from the insurance and finance company operations of $98
million and favorable variances resulting from resource use reduction
of $60 million which were partially offset by expenses related to new
developmental activities in the Ventures businesses of $70 million.
In 1992, casualty losses from Hurricane Andrew, a fire in Terneuzen,
the Netherlands, and a decrease in investment income, all contributed
to the lower operating results of the insurance and finance companies.
COMPANY SUMMARY
Net sales for 1994 of $20.0 billion were up 11 percent from $18.1
billion in 1993 and 6 percent from $19.0 billion in 1992. This result
reflected improved economic conditions globally which led to higher
selling prices and stronger volumes as illustrated in the Sales Price
and Volume table on the following page. All geographic areas and all
industry segments had higher sales versus 1993 with Rest of World
sales up 21 percent. Plastic Products led Dow's industry segments with
sales increasing 16 percent compared to a year ago. Volume was up 8
percent versus 1993 and up across all geographic areas. Volume was up
6 percent in the United States, 7 percent in Europe and 18 percent in
Rest of World. Selling prices were up 2 percent globally with Europe
and Rest of World recording increases of 3 percent and the United
States an increase of 1 percent versus 1993. Sales in the United
States accounted for 50 percent of the total sales in 1994, 51 percent
in 1993 and 50 percent in 1992. Sales details by industry segment and
geographic area are provided in Note S to the Financial Statements and
in the Product Segment Sales Analysis on page 5.
18
Sales Price and Volume
1994 1993 1992
Percentage changes ------------------ ------------------ ------------------
from prior year(1) Price Volume Total Price Volume Total Price Volume Total
- --------------------------------------------------------------------------------
Geographic Areas:
United States 1% 6% 7% - (3)% (3)% (1)% 6% 5%
Europe 3 7 10 (13)% (1) (14) (6) 1 (5)
Rest of World 3 18 21 (1) 4 3 (3) 3 -
- --------------------------------------------------------------------------------
Total 2% 8% 11% (4)% (1)% (5)% (3)% 4% 1%
- --------------------------------------------------------------------------------
Industry Segments:
Chemicals and Performance
Products 1% 5% 6% (4)% (1)% (5)% (3)% 2% (1)%
Plastic Products 4 12 16 (6) 2 (4) (6) 4 (2)
Hydrocarbons and Energy 6 8 14 (5) 9 4 (7) (3) (10)
Consumer Specialties (1) 8 7 - (9) (9) 3 6 9
- --------------------------------------------------------------------------------
Total 2% 8% 11% (4)% (1)% (5)% (3)% 4% 1%
- --------------------------------------------------------------------------------
(1)Not intended to add.
Operating Income
Operating income was $2.3 billion in 1994, up 63 percent from $1.4
billion in 1993 and 82 percent from $1.3 billion in 1992. As discussed
in Note B to the Financial Statements, 1993 and 1992 included special
charges against income of $180 million and $433 million, respectively.
Gross margin improved $931 million versus 1993, primarily as a result
of higher selling prices and increased sales volumes. Research and
development, promotion and advertising, and selling and administrative
expenses increased by a total of $158 million or 4 percent compared to
1993, primarily as a result of increased selling expenses and new
product launch costs in the Consumer Specialties segment, and variable
compensation expenses linked to improved company earnings.
Management's continued focus on resource use reduction resulted in
structural costs being reduced $174 million or 4 percent versus 1993
levels.
The ratio of operating income to sales was 12 percent in 1994,
versus 8 percent in 1993 and 7 percent in 1992. Price and volume
increases in the Chemicals and Performance Products, Plastic Products,
and Hydrocarbons and Energy segments coupled with the favorable impact
of reduced structural costs led to the improved 1994 results.
Operating income for Plastic Products nearly tripled to $1.1 billion
compared to 1993, on the strength of both price and volume increases.
Prices for the company began to show noticeable improvement in the
latter half of 1994, contributing to the improved operating results.
Higher prices are expected in 1995 versus 1994 with caustic prices
improving significantly as contracts are renewed. Sales volumes are
expected to be higher in 1995 as well. The United States contributed
55 percent of the total operating income in 1994 compared to 72
percent in 1993 and 90 percent in 1992. The United States portion of
the total declined as a result of operating income improvements in
Europe and Rest of World. Operating income in Europe was $273 million
in 1994 versus a $1 million loss in 1993 and a $90 million loss in
1992. Operating income from Dow's other geographic areas continued to
show improvement, increasing to $779 million in 1994 from $405 million
in 1993 and $221 million in 1992.
Operating Costs and Expenses
Cost Components as a Percent of Total: 1994 1993 1992
- -------------------------------------------------------------------
Hydrocarbons and energy 22% 21% 21%
Wages, salaries and employee benefits 23 25 24
Maintenance 6 6 7
Depreciation 7 8 7
Supplies, services and other raw materials 42 40 41
- -------------------------------------------------------------------
Total 100% 100% 100%
- -------------------------------------------------------------------
Dow's global plant operating rate for its chemicals and plastics
businesses was 92 percent of capacity in 1994 compared to 85 percent
in 1993 and 84 percent in 1992. The higher operating rate is
attributed to sales volume growth which increased 8 percent over 1993.
Overall manufacturing costs for chemicals and plastics, after
adjusting for volume and special charges, were down 4 percent from
1993. This reduction was primarily the result of a continued focus on
cost and resource use reduction in manufacturing, including lower
maintenance spending. Depreciation expense was $1.3 billion in 1994,
1993 and 1992.
Research and Development expenses were $1.3 billion, flat with 1993
and down 2 percent from 1992.
19
Operating Income (Continued)
Promotion and Advertising expenses are of a discretionary nature and
are most directly related to sales in Consumer Specialties. In 1994,
Promotion and Advertising expenses were $658 million, down 3 percent
from $678 million in 1993 and 17 percent from $795 million in 1992.
These 1994 expenses were reduced primarily in Pharmaceuticals as a
result of a product mix more heavily weighted by generics.
Selling and Administrative expenses for 1994 were $2.4 billion, up 8
percent from $2.2 billion in 1993 and 3 percent from $2.3 billion in
1992. The increase in 1994 was primarily the result of variable
compensation accruals based on improved company earnings and increased
spending in Pharmaceuticals due to the inclusion of the full-year
results of The Rugby Group, Inc. and Kodama Ltd. Rugby and Kodama, two
Marion Merrell Dow Inc. pharmaceutical acquisitions, were consolidated
for the first time in the fourth quarter of 1993 and first quarter of
1994, respectively. Selling and Administrative expenses represented 12
percent of sales in each of 1994, 1993 and 1992.
The personnel count at December 31, 1994 was 53,730 versus 55,436 at
the end of 1993 and 61,353 at the end of 1992. The 12 percent
reduction in personnel from the end of 1992 to the end of 1994
reflected rationalization and work process improvements throughout the
company. Excluding the acquisitions of Kodama in 1994 and Rugby in
1993, the personnel counts would have been 52,314 and 54,626 at the
end of 1994 and 1993, respectively, a 15 percent reduction from year-
end 1992 to year-end 1994.
Net Income
Net income available for common stockholders in 1994 of $931 million
or $3.37 per share increased 46 percent compared to net income of $637
million or $2.33 per share in 1993. The increase is primarily
attributable to stronger operating results in the company's chemicals
and plastics businesses. A net loss of $496 million or $1.83 per share
was recorded in 1992. Effective January 1, 1992, Dow adopted Statement
of Financial Accounting Standards (SFAS) No. 106 (Employers'
Accounting for Postretirement Benefits Other Than Pensions) and SFAS
No. 109 (Accounting for Income Taxes). The transition impact of the
adoption of these two required accounting standards was a net
cumulative charge against 1992 income of $765 million. Income before
cumulative effect of accounting change was $276 million in 1992 or 99
cents per share.
Dow's share of the earnings of 20%-50% owned companies amounted to
$63 million in 1994 compared to a net loss of $111 million in 1993 and
net earnings of $71 million in 1992. Dow Corning Corporation, in which
the company is a 50 percent shareholder, reported net losses of $7
million in 1994, $287 million in 1993 and $72 million in 1992. Dow
Corning's 1994 and 1993 losses reflected after tax charges against
income related to breast implant litigation of $152 million and $415
million, respectively. The negative impact of the charges on Dow's net
income was $70 million or 25 cents per share in 1994 and $192 million
or 70 cents per share in 1993. See Note Q to the Financial Statements
for further discussion of breast implant litigation. Dow Corning's
1992 net loss was largely due to the net cumulative effect charge of
$100 million for implementation of SFAS Nos. 106 and 109 and to pretax
special charges of $109 million related to restructuring costs,
litigation and other costs for its discontinued breast implant
business.
In 1993, Dow's share of the earnings of 20%-50% owned companies was
further reduced as a result of the sale of the company's 50 percent
ownership in the Dowell Schlumberger group of companies in January
1993 (see Note C to the Financial Statements). In 1992, Dow's share of
Dowell Schlumberger's net income was $36 million.
Net interest expense, which is comprised of interest income,
capitalized interest, interest expense and amortization of debt
discount, was $406 million in 1994, down 6 percent from $433 million
in 1993 and down 31 percent from $586 million in 1992. The decrease in
1994 was primarily due to lower average borrowings and lower interest
rates versus 1993 and 1992. Foreign currency transaction gains for Dow
and its consolidated subsidiaries amounted to $7 million in 1994
versus losses of $10 million in 1993 and gains of $11 million in 1992.
For a discussion of the company's risk management program for both
foreign currency and interest rate risk, see Note J to the Financial
Statements.
Dow recorded a net loss on investments of $60 million in 1994. The
net loss was primarily due to a $132 million pretax charge in the
fourth quarter of 1994 related to the pending sale of the Personal
Care business of DowBrands. Partially offsetting this charge was a
pretax gain of $90 million recorded by the company on its common
shares of Magma Power Company, primarily as a result of the merger
agreement between Magma and California Energy Company, Inc. In 1993,
Dow recorded a net gain on investments of $592 million, primarily due
to the sale of its interest in Dowell Schlumberger and portions of its
interests in Magma and Crestar Energy Inc. (see Note C to the
Financial Statements).
The provision for taxes on income was $779 million in 1994 versus
$606 million in 1993 and $274 million in 1992. Dow's overall effective
tax rate for 1994 was 38.0 percent versus 39.7 percent for 1993 and
31.4 percent for 1992. The underlying factors affecting Dow's overall
effective tax rates are discussed in Note D to the Financial
Statements. U.S. and other tax law and rate changes during the year
did not have a material impact on Dow.
Minority interests' share of net income in 1994 was $335 million
compared to $275 million in 1993 and $322 million in 1992. The current
year increase reflected the improved profitability of Agricultural
Products and Pharmaceuticals as well as the full-year impact of
certain limited partnerships (see Note K to the Financial Statements).
Profitability for Pharmaceuticals declined in 1993 as a result of the
special charge recorded by Marion Merrell Dow Inc. (see Note B to the
Financial Statements).
20
Net Income (Continued)
The following table summarizes the impact of special items on
earnings per common share.
1994 1993 1992
- ---------------------------------------------------------------------------
Special charges against operating income - $(.30) $(1.02)
Impact of Dow Corning Corporation
breast implant charges (.25) (.70) -
Net gain (loss) on investments (.29) 1.31 -
Accounting change: Transition to SFAS No. 106 - - (3.66)
Transition to SFAS No. 109 - - .84
Other earnings 3.91 2.02 2.01
- ---------------------------------------------------------------------------
Net earnings (loss) per common share $3.37 $2.33 $(1.83)
- ---------------------------------------------------------------------------
Dividends
The Board of Directors has announced a quarterly dividend of 65 cents
per share, payable April 28, 1995, to stockholders of record March 31,
1995. This will be the 333rd consecutive quarterly dividend since
1912. Dow has maintained or increased the dividend throughout that time.
Environment
Dow's operations around the world 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.
It has been Dow's policy to adhere to a waste management hierarchy
that minimizes the impact of wastes on the environment. First, Dow
works to eliminate or minimize the generation of waste at the source
through research, process design, plant operations and maintenance.
Second, Dow finds ways to reuse and recycle materials. Finally,
unusable or nonrecyclable 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 and determined infeasible. Dow has specific requirements for
wastes that are transferred to non-Dow facilities. Wastes that are
recycled, treated or recovered for energy off-site represent less than
1 percent of the total amount of wastes reported as part of the
Pollution Prevention Act. Dow's policy of treating its wastes on-site
has resulted in only 12 percent of its total environmental liability
being directed at remediation under federal or state "Superfund"
statutes. As Dow develops advanced technology to improve its
environmental performance, it disseminates that technology to
operations around the world to be incorporated into new and existing
plants. Environmental audits are used by management to continually
measure and report Dow's progress against environmental expectations.
The costs of site remediation are accrued as a part of the shutdown
of a facility or, in the case of a landfill, over its useful life. The
nature of such remediation includes the cleanup of soil contamination
and the closure of landfills and waste treatment ponds. These
practices have minimized the company's exposure to environmental
liabilities. 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. Inherent
uncertainties exist in such evaluations primarily due to unknown
conditions, changing governmental regulations and legal standards
regarding liability, and evolving technologies for handling site
remediation and restoration. These liabilities are adjusted
periodically as remediation efforts progress or as additional
technical or legal information becomes available.
Dow has been identified as a potentially responsible party (PRP)
under federal or state "Superfund" statutes at approximately 90 sites.
Dow readily cooperates in remediation at sites where its liability is
clear, thereby minimizing legal and administrative costs. However, at
several of these Superfund sites, Dow has had no known involvement and
is contesting all liability; at many others, Dow disputes major
liability, believing its responsibility to be de minimis. Because
current law imposes joint and several liability upon each party at a
Superfund site, Dow has evaluated its potential liability in light of
the number of other companies which have also been named PRPs at each
site, the estimated apportionment of costs among all PRPs and the
financial ability and commitment of each to pay its expected share.
Management has estimated that the company's probable liability for
the remediation of Superfund sites at December 31, 1994 was $29
million, which has been accrued. In addition, receivables of $15
million for probable third-party recoveries have been recorded related
to these sites. Other recoveries are possible since Dow has numerous
insurance policies secured from many carriers at various times that
may provide coverage at different levels for environmental
liabilities. The company is currently involved in litigation to
determine the scope and extent of such coverage. Dow has not recorded
any receivables for these possible recoveries.
21
Environment (Continued)
In addition to the Superfund related liability referenced above, Dow
had an accrued liability of $205 million at December 31, 1994
representing the total probable costs that the company could incur
related to the remediation of current or former Dow-owned sites. The
company had not recorded as a receivable any third-party recovery
related to these sites.
In total, Dow's accrued liability for probable environmental
remediation and restoration costs was $234 million at December 31,
1994, as compared to $226 million at the end of 1993. This is
management's best estimate of these liabilities, although possible
costs for environmental remediation and restoration could range up to
50 percent higher.
The amounts charged to income on a pretax basis related to
environmental remediation totaled $64 million in 1994, $69 million in
1993 and $47 million in 1992. Capital expenditures for environmental
protection were $106 million in 1994, $157 million in 1993 and $200
million in 1992. Capital expenditures for environmental protection in
future years are currently projected at $100 million in 1995 and $100
million in 1996.
It is the opinion of the company's management that the possibility
is remote that costs in excess of those accrued or disclosed will have
a material adverse impact on the company's consolidated financial
statements.
Capital Expenditures
Capital spending for the year was $1.2 billion, down 15 percent from
$1.4 billion in 1993 and 26 percent from $1.6 billion in 1992. The
decrease primarily reflected the completion of a number of major
projects during 1994 and management's continued effort to reduce
capital resource requirements. Approximately 43 percent of the
company's capital expenditures was directed toward additional capacity
for new and existing products, while about 12 percent was committed to
projects related to environmental protection, safety and loss
prevention, and industrial hygiene. The remaining capital was utilized
to maintain the company's existing asset base including projects
related to cost reduction, energy conservation and facilities support.
Major projects underway during 1994 included a light hydrocarbons
plant at Freeport, Texas, a linear low density polyethylene plant at
Fort Saskatchewan, Alberta and a DowBrands household cleaners plant in
Urbana, Ohio. Start-up on each of these plants has been completed and
they are now operational. Because the company designs and builds most
of its capital projects in-house, it does not have major capital
commitments, other than for the purchase of materials from
fabricators.
Liquidity and Capital Resources
Operating activities provided $2.6 billion in cash in 1994, as
compared to $2.1 billion in 1993 and $2.0 billion in 1992 (see the
Consolidated Statements of Cash Flows). The items affecting operating
activities are discussed in the sales, operating income and net income
analysis. Cash used in investing activities was $1.2 billion in 1994
versus $622 million in 1993 and $1.3 billion in 1992. The 1993
reduction was largely the result of the sale of the company's interest
in Dowell Schlumberger which generated cash proceeds of $675 million
(see Note C to the Financial Statements) and outside investors'
participation in limited partnerships which generated cash proceeds of
$380 million (see Note K to the Financial Statements). These proceeds
were used for general corporate purposes and redemption of debt.
During 1994, Marion Merrell Dow Inc. (MMDI) increased its ownership in
Kodama Ltd. to 99.8 percent, requiring net cash outlays of $101
million (see Note C to the Financial Statements). Net cash of $271
million in 1993 and $14 million in 1994 was used by MMDI to acquire
The Rugby Group, Inc., the generic drug business of Rugby-Darby Group
Companies, Inc. (see Note C to the Financial Statements). In 1992, the
company received cash proceeds of $855 million from outside investors'
participation in DowBrands L.P. (see Note K to the Financial
Statements).
Total working capital at year-end was $2.1 billion versus $2.0
billion at the end of 1993. Cash, cash equivalents, marketable
securities and interest-bearing deposits increased by $297 million.
Inventories and trade receivables together increased $958 million in
1994 as a result of increased sales activity after consecutive
declines in 1993 and 1992 of $238 million and $316 million,
respectively. Days-sales-in-inventory was 80 days, 82 days and 91 days
at the end of 1994, 1993 and 1992, respectively. Days-sales-
outstanding-in-receivables was 52 days at the end of 1994, 1993 and
1992.
Short-term borrowings at December 31, 1994 were $741 million, a
decrease of $136 million from year-end 1993. Long-term debt due within
one year increased $369 million to $534 million at the end of 1994
compared to $165 million at the end of 1993. Long-term debt due in
1995 will be funded by operating cash flows. Accounts payable
increased by $318 million to $2.6 billion and income taxes payable
increased $419 million during the year.
Long-term debt was $5.3 billion, a decrease of $599 million from
year-end 1993. During the year, $108 million of new long-term debt was
incurred while $526 million of long-term debt was retired and $534
million was transferred to long-term debt due within one year.
Total debt was $6.6, $6.9 and $7.5 billion at December 31, 1994,
1993 and 1992, respectively. Net debt, which equals total debt less
cash, cash equivalents, marketable securities and interest-bearing
deposits, was $5.4, $6.1 and $6.9 billion at December 31, 1994, 1993
and 1992, respectively. The debt to total capitalization ratio
decreased to 38.0 percent at year-end 1994 from 39.9 percent at the
end of 1993.
22
Liquidity and Capital Resources (Continued)
The company has unused and available credit facilities with various
U.S. and foreign banks totaling $2.0 billion in support of its working
capital requirements and commercial paper borrowings. Additional
unused credit facilities totaling $2.3 billion are available for use
by foreign subsidiaries. Refer to Note I to the Financial Statements
for further discussion on credit facilities.
In February 1993, Dow effected a shelf registration for debt
securities of 50.0 billion Japanese yen with Japan's Ministry of
Finance. A total of 20.0 billion yen of this has been used. At
December 31, 1994, there was a total of $1.4 billion in available SEC
registered debt securities between Dow and Dow Capital B.V., a wholly
owned subsidiary.
Minority interest in subsidiary companies increased during the year
from $2.4 to $2.5 billion at the end of 1994, largely as a result of
outside investors' increased ownership in MMDI.
Eli Lilly and Company (Lilly) is a 40 percent partner with the
company in DowElanco, a global agricultural products joint venture.
Lilly holds a put option requiring the company to purchase Lilly's
interest in DowElanco at fair market value. Lilly notified the company
in September 1994 that it did not plan to exercise the put option at
that time. No subsequent notification has been received.
During the third quarter of 1994, Dow Deutschland Inc., a subsidiary
of the company, signed a letter of intent with the Treuhandanstalt in
which Dow Deutschland Inc. agreed to study and evaluate the
restructuring potential of several state-owned chemical assets in
eastern Germany with the intention of acquiring a majority position.
Facilities involved in the evaluation include a steam cracker at
Saechsische Olefinwerke GmbH in Boehlen, electrochemical units and
derivative operations at Buna GmbH in Schkopau, and polyolefin and
intermediate chemical operations at Leuna-Werke GmbH in Merseburg and
at Buna GmbH. The Treuhandanstalt is the German government agency
charged with privatizing state-owned assets in the former East
Germany.
In August 1994, Dow announced that it had retained an investment
banking firm for advice regarding possible strategic transactions
involving Marion Merrell Dow Inc. At the same time, Marion Merrell Dow
announced that it had also retained an investment banking firm for
advice regarding its own strategic alternatives.
Subsequent Event
On February 28, 1995, The Hoechst Group, Marion Merrell Dow and The
Dow Chemical Company announced that they are engaged in discussions
concerning the possible negotiated acquisition of all of the
outstanding shares of Marion Merrell Dow by the Hoechst Group at a
price of $25.75 per share in cash. Dow presently owns approximately
197 million shares, or approximately 71 percent, of Marion Merrell
Dow's outstanding common stock.
Dow and the Hoechst Group are also discussing the possible
acquisition of Dow's Latin American pharmaceuticals business for
approximately $200 million.
The companies stated that while discussions are ongoing, the boards
of directors and supervisory boards of the respective companies have
not yet met to consider the possible transactions, no agreements have
been reached and there can be no assurance that any agreements will be
reached or that any transactions will be consummated.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Responsibility for Financial Statements and Independent Auditors' Report
- ---------------------------------------------------------------------------
Management Statement of Responsibility
The management of The Dow Chemical Company and its subsidiaries
prepared the accompanying consolidated financial statements, and has
responsibility for their integrity, objectivity and freedom from
material misstatement or error. These statements were prepared in
accordance with generally accepted accounting principles. The
financial statements include amounts that are based on management's
best estimates and judgments. Management also prepared the other
information in this annual report and is responsible for its accuracy
and consistency with the financial statements. The Board of Directors,
through its Audit Committee, assumes an oversight role with respect to
the preparation of the financial statements.
Management recognizes its responsibility for fostering a strong ethical
climate so that the Company's affairs are conducted according to the highest
standards of personal and corporate conduct. Management has established and
maintains a system of internal control that provides reasonable
assurance as to the integrity and reliability of the financial
statements, the protection of assets from unauthorized use or
disposition, and the prevention and detection of fraudulent financial
reporting.
The system of internal control provides for appropriate division of
responsibility and is documented by written policies and procedures
that are communicated to employees with significant roles in the
financial reporting process and updated as necessary. Management
continually monitors the system of internal control for compliance.
The Company maintains a strong internal auditing program that
independently assesses the effectiveness of the internal controls and
recommends possible improvements.
Deloitte & Touche LLP, independent auditors, with direct access to
the Board of Directors through its Audit Committee, has audited the
consolidated financial statements prepared by the Company, and their
report follows.
Management has considered recommendations from the internal auditors
and Deloitte & Touche LLP concerning the system of internal control
and has taken actions that are cost-effective in the circumstances to
respond appropriately to these recommendations. Management further
believes the controls are adequate to accomplish the objectives
discussed herein.
- ---------------------------------------------------------------------------
Independent Auditors' Report
To the Stockholders and Board of Directors of The Dow Chemical Company:
We have audited the accompanying consolidated balance sheets of The
Dow Chemical Company and its subsidiaries as of December 31, 1994 and
1993, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1994. Our audits also included the financial statement
schedule listed at Item 14(a)2. These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of The Dow
Chemical Company and its subsidiaries at December 31, 1994 and 1993,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1994 in conformity
with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents
fairly, in all material respects the information set forth therein.
As discussed in Note B to the financial statements, effective January 1,
1992, the Company changed its methods of accounting for other
postretirement benefits and income taxes.
Deloitte & Touche LLP
- ---------------------
DELOITTE & TOUCHE LLP
Midland, Michigan
February 8, 1995
24
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
In millions, except for share amounts 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
Net Sales $20,015 $18,060 $18,971
- ------------------------------------------------------------------------------------------------------------------
Operating Costs and Expenses Cost of sales 13,219 12,195 12,704
Insurance and finance company
operations, pretax income (40) (98) (15)
Research and development expenses 1,261 1,256 1,289
Promotion and advertising expenses 658 678 795
Selling and administrative expenses 2,403 2,230 2,328
Amortization of intangibles 169 179 147
Special charge (Note B) - 180 433
-------------------------------------------------------------------------------
Total operating costs and expenses 17,670 16,620 17,681
- ------------------------------------------------------------------------------------------------------------------
Operating Income 2,345 1,440 1,290
- ------------------------------------------------------------------------------------------------------------------
Other Income (Expense) Equity in earnings (losses) of
20%-50% owned companies (Note Q) 63 (111) 71
Interest income 131 167 109
Capitalized interest 66 66 78
Interest expense and amortization of debt discount (603) (666) (773)
Net gain (loss) on foreign currency transactions 7 (10) 11
Net gain (loss) on investments (Note C) (60) 592 -
Sundry income-net 103 47 86
-------------------------------------------------------------------------------
Total other income (expense) (293) 85 (418)
- ------------------------------------------------------------------------------------------------------------------
Income before Provision for Taxes on Income and Minority Interests 2,052 1,525 872
- ------------------------------------------------------------------------------------------------------------------
Provision for Taxes on Income 779 606 274
- ------------------------------------------------------------------------------------------------------------------
Minority Interests' Share in Income (Note K) 335 275 322
- ------------------------------------------------------------------------------------------------------------------
Income before Cumulative Effect of Accounting Change 938 644 276
- ------------------------------------------------------------------------------------------------------------------
Cumulative Effect of Accounting Change, Net of Taxes on Income (Note B) - - (765)
- ------------------------------------------------------------------------------------------------------------------
Net Income (Loss) 938 644 (489)
- ------------------------------------------------------------------------------------------------------------------
Preferred Stock Dividends 7 7 7
- ------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Available for Common Stockholders $931 $637 ($496)
- ------------------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding 276.1 273.6 271.6
- ------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Before cumulative effect of accounting change $3.37 $2.33 $0.99
per Common Share: Cumulative effect of accounting change (Note B) - - (2.82)
-------------------------------------------------------------------------------
Net earnings (loss) per common share $3.37 $2.33 ($1.83)
- ------------------------------------------------------------------------------------------------------------------
Common Stock Dividends Declared per Share $2.60 $2.60 $2.60
- ------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
25
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
December 31
In millions 1994 1993
- ------------------------------------------------------------------------------------------------------------------
Assets
- ------------------------------------------------------------------------------------------------------------------
Current Assets Cash and cash equivalents $569 $407
Marketable securities and interest-bearing deposits 565 430
Accounts and notes receivable:
Trade (less allowance for doubtful receivables-
1994, $104; 1993, $93) 3,359 2,587
Other 1,099 1,245
Inventories:
Finished and work in process 2,079 1,984
Materials and supplies 633 542
Deferred income taxes receivable-current 389 457
-------------------------------------------------------------------------------
Total current assets 8,693 7,652
- ------------------------------------------------------------------------------------------------------------------
Investments Capital stock at cost plus equity in accumulated
earnings of 20%-50% owned companies 931 1,019
Other investments 1,529 1,726
Noncurrent receivables 330 369
-------------------------------------------------------------------------------
Total investments 2,790 3,114
- ------------------------------------------------------------------------------------------------------------------
Plant Properties Plant properties 23,210 21,608
Less accumulated depreciation 14,484 13,028
-------------------------------------------------------------------------------
Net plant properties 8,726 8,580
- ------------------------------------------------------------------------------------------------------------------
Other Assets Goodwill (net of accumulated amortization-
1994, $676; 1993, $563) 4,365 4,434
Deferred income taxes receivable-noncurrent 1,132 933
Deferred charges and other assets 839 792
-------------------------------------------------------------------------------
Total other assets 6,336 6,159
- ------------------------------------------------------------------------------------------------------------------
Total Assets $26,545 $25,505
- ------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
26
The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets
December 31
In millions, except for share amounts 1994 1993
- ------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------
Current Liabilities Notes payable $741 $877
Long-term debt due within one year 534 165
Accounts payable:
Trade 1,928 1,479
Other 634 765
Income taxes payable 664 245
Deferred income taxes payable-current 56 199
Dividends payable 202 200
Accrued and other current liabilities 1,859 1,721
-------------------------------------------------------------------------------
Total current liabilities 6,618 5,651
- ------------------------------------------------------------------------------------------------------------------
Long-Term Debt 5,303 5,902
- ------------------------------------------------------------------------------------------------------------------
Deferred Taxes and Deferred income taxes payable-noncurrent 644 372
Other Liabilities Pension and other postretirement benefits-noncurrent 1,987 1,918
Other noncurrent obligations 1,253 1,173
-------------------------------------------------------------------------------
Total deferred taxes and other liabilities 3,884 3,463
- ------------------------------------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies 2,506 2,439
- ------------------------------------------------------------------------------------------------------------------
Temporary Equity Preferred stock (authorized 250,000,000 shares of $1.00 par
value each; issued Series A-1994: 1,549,014; 1993: 1,566,677)
at redemption value 133 135
Less guaranteed ESOP obligation 111 119
-------------------------------------------------------------------------------
Total temporary equity 22 16
- ------------------------------------------------------------------------------------------------------------------
Stockholders' Equity Common stock (authorized 500,000,000 shares of $2.50 par
value each; issued 1994: 327,125,854; 1993: 327,125,854) 818 818
Additional paid-in capital 326 366
Retained earnings 8,857 8,645
Unrealized gains (losses) on investments (21) 105
Cumulative translation adjustments (330) (304)
Treasury stock, at cost (shares 1994: 50,002,967;
1993: 52,640,015) (1,438) (1,596)
-------------------------------------------------------------------------------
Net stockholders' equity 8,212 8,034
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $26,545 $25,505
- ------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
27
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
In millions 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
Common Stock Balance at beginning and end of year $818 $818 $818
- ------------------------------------------------------------------------------------------------------------------
Additional Paid-in Capital Balance at beginning of year 366 350 346
Tax benefit of contingent value rights - 34 45
Issuance of treasury stock at less than cost (40) (18) (41)
-------------------------------------------------------------------------------
Balance at end of year 326 366 350
- ------------------------------------------------------------------------------------------------------------------
Retained Earnings Balance at beginning of year 8,645 8,720 9,920
Net income (loss) 938 644 (489)
Unfunded pension obligations - - 3
Preferred stock dividends declared (7) (7) (7)
Common stock dividends declared (719) (712) (707)
-------------------------------------------------------------------------------
Balance at end of year 8,857 8,645 8,720
- ------------------------------------------------------------------------------------------------------------------
Unrealized Gains (Losses) Balance at beginning of year 105 (2) (2)
on Investments Unrealized gains (losses) (126) 107 -
-------------------------------------------------------------------------------
Balance at end of year (21) 105 (2)
- ------------------------------------------------------------------------------------------------------------------
Cumulative Translation Balance at beginning of year (304) (107) 194
Adjustments Translation adjustments (26) (197) (301)
-------------------------------------------------------------------------------
Balance at end of year (330) (304) (107)
- ------------------------------------------------------------------------------------------------------------------
Treasury Stock Balance at beginning of year (1,596) (1,715) (1,835)
Purchases (38) (17) (10)
Issuance to employees and employee plans 196 136 130
-------------------------------------------------------------------------------
Balance at end of year (1,438) (1,596) (1,715)
- ------------------------------------------------------------------------------------------------------------------
Net Stockholders' Equity $8,212 $8,034 $8,064
- ------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
28
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
In millions 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
Operating Activities Income before cumulative effect of $938 $644 $276
accounting change
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,525 1,552 1,487
Provision (credit) for deferred income tax 34 24 (295)
Undistributed (earnings) losses of 20%-50%
owned companies (48) 147 (27)
Minority interests' share in income 335 275 322
Net (gain) loss on investments (Note C) 60 (592) -
Net gain on sales of plant properties (73) (58) (22)
Net (gain) loss on foreign currency transaction (7) 10 (11)
Special charge (Note B) - 180 433
Other 6 13 10
Changes in assets and liabilities that
provided (used) cash:
Accounts receivable (513) (8) (17)
Inventories (171) 207 195
Accounts payable 238 139 (275)
Other assets and liabilities (1) 311 (440) (45)
-------------------------------------------------------------------------------
Cash provided by operating activities 2,635 2,093 2,031
- ------------------------------------------------------------------------------------------------------------------
Investing Activities Purchases of plant properties (1,183) (1,414) (1,608)
Investments in unconsolidated affiliates (43) (103) (90)
Purchases of consolidated companies
(net of cash acquired) (Note C) (88) (307) (397)
Proceeds from sales of plant properties 111 100 62
Proceeds from outside investors
in limited partnerships (Note K) - 380 855
Purchases of investments (1,171) (237) (127)
Proceeds from sales of investments (Note C) 1,179 959 -
-------------------------------------------------------------------------------
Cash used in investing activities (1,195) (622) (1,305)
- ------------------------------------------------------------------------------------------------------------------
Financing Activities Changes in short-term notes payable (62) 121 (248)
Proceeds from issuance of long-term debt 108 969 1,231
Payments on long-term debt (391) (1,675) (791)
Purchases of treasury stock (38) (17) (10)
Proceeds from sales of common stock 110 82 82
Distributions to minority interests (281) (198) (143)
Dividends paid to stockholders (723) (719) (710)
-------------------------------------------------------------------------------
Cash used in financing activities (1,277) (1,437) (589)
- ------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash (1) (2) 2
- ------------------------------------------------------------------------------------------------------------------
Summary Increase in cash and cash equivalents 162 32 139
Cash and cash equivalents at beginning of year 407 375 236
-------------------------------------------------------------------------------
Cash and cash equivalents at end of year $569 $407 $375
- ------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
(1) Excludes cumulative effect of accounting change.
29
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
Table of Contents
Page
A Summary of Significant Accounting Policies 30
B Special Charge and Accounting Change 32
C Acquisitions and Divestitures 33
D Taxes on Income 33
E Inventories 35
F Related Company Transactions 35
G Plant Properties 35
H Leased Properties 35
I Notes Payable, Long-Term Debt and
Available Credit Facilities 36
J Financial Instruments 38
K Limited Partnerships 40
L Stockholders' Equity 41
M Stock Option Plans 41
N Redeemable Preferred Stock 42
O Pension Plans 42
P Other Postretirement Benefits 43
Q Commitments and Contingent Liabilities 45
R Supplementary Information 47
S Industry Segments and Geographic Areas 48
A Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements of The Dow Chemical
Company and its subsidiaries (the Company) include the assets,
liabilities, revenues and expenses of all majority-owned subsidiaries.
Intercompany transactions and balances are eliminated in
consolidation. Investments in companies 20%-50% owned (related
companies) are accounted for on the equity basis.
Reclassifications
Certain reclassifications of prior years' amounts have been made to
conform to the presentation adopted for 1994.
Foreign Currency Translation
The local currency has primarily been used as the functional currency
throughout the world. Translation gains and losses of those operations
that use local currency as the functional currency, and the effects of
exchange rate changes on transactions designated as hedges of net
foreign investments, are included as a separate component of
stockholders' equity. Where the U.S. dollar is used as the functional
currency, foreign currency gains and losses are reflected in income
currently.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and readily marketable
securities with original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market. The method of
determining cost is used consistently from year to year at each
subsidiary and varies among the last-in, first-out (LIFO) method; the
first-in, first-out (FIFO) method; and the average cost method.
Plant Properties, Investments and Other Assets
Land, buildings and equipment, including property under capital
lease agreements, are carried at cost less accumulated
depreciation. Depreciation is based on the estimated service
lives of depreciable assets and is generally provided using the
30
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
A Summary of Significant Accounting Policies (Continued)
Plant Properties, Investments and Other Assets (Continued)
declining balance method. Fully depreciated assets are retained in
property and depreciation accounts until they are removed from
service. In the case of disposals, assets and related depreciation are
removed from the accounts and the net amount, less proceeds from
disposal, is charged or credited to income.
The excess of the cost of investments in subsidiaries over the
carrying value of assets acquired is shown as goodwill, which is
amortized on a straight-line basis over its estimated useful life with
a maximum of 40 years.
The Company evaluates long-lived assets for impairment based on the
recoverability of the asset's carrying amount. When it is probable
that undiscounted future cash flows will not be sufficient to recover
the asset's carrying amount, the asset is written down to its fair
value.
Gain Recognition on Sale of Subsidiaries' Stock
Company policy is to record gains from the sale or other issuance of
previously unissued stock by its subsidiaries.
Financial Instruments
Interest differentials on swaps and forward rate agreements designated
as hedges of exposures to interest rate risk are recorded as
adjustments to interest expense over the contract period. Premiums for
early termination of derivatives designated as hedges are amortized as
adjustments to interest expense over the original contract period.
Interest derivatives not designated as hedges are marked-to-market at
the end of each accounting period.
The Company calculates the fair value of financial instruments using
quoted market prices whenever available. When quoted market prices are
not available, the Company uses standard pricing models for various
types of financial instruments (such as forwards, options, swaps,
etc.) which take into account the present value of estimated future
cash flows.
Investments in debt and equity securities are classified as either
Trading, Available-for-Sale or Held-to-Maturity. Investments classified
as Trading are reported at fair value with unrealized gains and losses
included in income. Investments classified as Available-for-Sale are
reported at fair value with unrealized gains and losses recorded in a
separate component of stockholders' equity. Investments classified as
Held-to-Maturity are recorded at amortized cost.
The cost of investments sold is determined by specific identification.
Environment
Accruals for environmental matters are recorded when it is probable
that a liability has been incurred and the amount of the liability can
be reasonably estimated, based on current law and existing
technologies. These accruals are adjusted periodically as assessment
and remediation efforts progress or as additional technical or legal
information becomes available. Accruals for environmental liabilities
are generally included in the balance sheet as "Other noncurrent
obligations" at undiscounted amounts and exclude claims for recoveries
from insurance or other third parties. Accruals for insurance or other
third party recoveries for environmental liabilities are recorded when
it is probable that a claim will be realized. Accruals for recoveries
are included in the balance sheet as "Noncurrent receivables."
Environmental costs are capitalized if the costs extend the life of
the property, increase its capacity, and/or mitigate or prevent
contamination from future operations. Costs related to environmental
contamination treatment and cleanup are charged to expense.
Taxes on Income
The Company accounts for taxes on income using the asset and liability
method wherein deferred tax assets and liabilities are recognized for
the future tax consequences of temporary differences between the
carrying amounts and tax bases of assets and liabilities using enacted
rates.
Provision is made for taxes on undistributed earnings of foreign
subsidiaries and related companies to the extent that such earnings
are not deemed to be permanently invested.
Certain countries provide tax incentives which are granted to
encourage new investment. Generally, such grants are credited to
income as earned.
Earnings per Common Share
The calculation of earnings per share is based on the weighted average
number of common shares outstanding during the applicable period.
31
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
B Special Charge and Accounting Change
The second quarter of 1993 included a special pretax charge of $180 by
Marion Merrell Dow Inc. (MMDI). The special charge reflected the
impact of a number of steps intended to reduce costs and position MMDI
for the future, including work force reduction and U.S. business
reorganization. The special charge has had total cash expenditures of
$107 ($65 in 1994, $42 in 1993), all of which have been funded from
operations. Asset write-downs have been $4. At December 31, 1994, the
special charge liability was $69. Work force reduction efforts are
expected to result in estimated payroll and benefit cost savings in
1995 of $127. The actions intended by the restructuring are expected
to be substantially complete by December 1995. The Company owns 71
percent of MMDI.
During the fourth quarter of 1992, opportunities were identified to
streamline the Company and a special pretax charge of $433 was taken.
This charge reflected asset write-offs and write-downs, plant
shutdowns, divestitures and the consolidation of a variety of business
activities globally. Included were costs related to work force
reductions associated with these activities. The actions contemplated
by the special charge were substantially complete at December 31,
1993, with no significant adjustments required to the estimates.
Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 112 (Employers' Accounting
for Postemployment Benefits). The impact on net income for the year
was not material.
Effective January 1, 1992, the Company adopted SFAS No. 106
(Employers' Accounting for Postretirement Benefits Other Than
Pensions) and SFAS No. 109 (Accounting for Income Taxes). SFAS No. 106
requires employers to recognize the cost of certain health care and
life insurance benefits provided to retirees and their dependents as a
liability during the employees' active years of service. In making the
transition to adopt this required accounting standard, a charge of
$994 or $3.66 per share was made against 1992 net income. SFAS No. 109
requires an asset and liability approach for financial accounting and
reporting for income taxes. The favorable cumulative effect of its
implementation was $229 or 84 cents per share in 1992. The net impact
of adopting SFAS Nos. 106 and 109 was a cumulative charge of $765
against 1992 net income.
32
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
C Acquisitions and Divestitures
In 1994, the Company recognized a pretax gain of $90 on its common
shares in Magma Power Company (Magma), primarily as a result of the
merger agreement between Magma and California Energy Company, Inc.
In the fourth quarter of 1994, the Company recorded a pretax charge
of $132 related to the pending sale of the Personal Care business of
DowBrands.
During the third quarter of 1994, Dow Deutschland Inc., a subsidiary
of the Company, signed a letter of intent to study and evaluate the
restructuring potential of several state-owned chemical assets in
eastern Germany with the intention of acquiring a majority position.
During January and February of 1994, Marion Merrell Dow Inc. (MMDI)
increased its ownership of Kodama Ltd. (Kodama), a Japanese
pharmaceutical corporation, to 91 percent. By December 31, 1994, MMDI
had further increased its ownership of Kodama to 99.8 percent. The net
cash cost for 1994 was $101.
In November 1993, Dow Chemical Canada Inc. (DCCI) sold shares of
Crestar Energy Inc. (Crestar). The net proceeds to the Company were
$172 and generated a pretax gain of $101. As a result of the sale,
DCCI's common share holding in Crestar was reduced from 50 percent to
17.5 percent.
In October 1993, MMDI acquired The Rugby Group, Inc., the U.S.'s
largest generic drug company, from the privately held Rugby-Darby
Group Companies, Inc. for $285.
In June 1993, the Company sold 3.6 million shares of common stock in
Magma for which it received gross proceeds of $116. The sale generated
a pretax gain of $62 in 1993. In October 1993, the Company sold its
option to purchase 2 million shares of Magma common stock to Magma and
received consideration of 857,143 shares of Magma's common stock.
In January 1993, the Company sold its 50 percent ownership in the
Dowell Schlumberger group of companies to Schlumberger Limited. The
selling price was $675 in cash and a warrant to purchase 7.5 million
shares of Schlumberger stock with an exercise price of $59.95 per
share. The warrant is fully vested and nontransferable, and expires in
the year 2000. The sale generated a pretax gain of $450.
The Company acquired an additional 2.1 million shares of MMDI common
stock during 1993 and 1.4 million shares during 1992 at costs of $36
and $43, respectively. The increased interests were accounted for as
purchases with increases to goodwill of $21 and $29, respectively.
D Taxes on Income
Operating loss carryforwards at December 31, 1994 amounted to $870 of
which $108 is subject to expiration in 1995, $176 in 1996, $87 in
1997, $39 in 1998 and $5 in 1999. The remaining balances expire in
years beyond 1999 or have an indefinite carryforward period.
Tax credit carryforwards at December 31, 1994 amounted to $100 of
which $3 is subject to expiration in 1995, $3 in 1996, $4 in 1997, $1
in 1998 and $2 in 1999. The remaining balances expire in years beyond
1999 or have an indefinite carryforward period.
Undistributed earnings of subsidiaries and related companies which
are deemed to be permanently invested amounted to $2,053, $1,782 and
$1,989 at December 31, 1994, 1993 and 1992, respectively. It is not
practicable to calculate the unrecognized deferred tax liability on
those earnings.
The movement in the valuation allowance during 1994 was a net
reduction of $37 due primarily to business improvement and an
extension in the loss carryforward period in Spain.
Domestic and Foreign Components of Income before
Taxes on Income and Minority Interests
1994 1993 1992
- -------------------------------------------------------
Domestic $1,161 $1,099 $632
Foreign 891 426 240
- -------------------------------------------------------
Total $2,052 $1,525 $872
- -------------------------------------------------------
33
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
D Taxes on Income (Continued)
Reconciliation to U.S. Statutory Rate
- --------------------------------------------------------------------------
1994 1993 1992
- --------------------------------------------------------------------------
Taxes at U.S. statutory rate $718 $534 $296
Amortization of nondeductible intangibles 83 45 43
Taxes on foreign operations at rates different
from U.S. statutory rate (including FSC) (4) 29 37
Other-net (18) (2) (102)
- --------------------------------------------------------------------------
Total tax provision $779 $606 $274
- --------------------------------------------------------------------------
Effective tax rate 38.0% 39.7% 31.4%
- ---------------------------------------------------------------------------
Provision (Credit) for Taxes on Income
1994 1993 1992
---------------------- ---------------------- ----------------------
Current Deferred Total Current Deferred Total Current Deferred Total
- -------------------------------------------------------------------------------
Federal $457 $13 $470 $404 $(8) $396 $381 $(158) $223
State and
local 23 2 25 63 - 63 39 - 39
Foreign 265 19 284 115 32 147 149 (137) 12
- -------------------------------------------------------------------------------
Total $745 $34 $779 $582 $24 $606 $569 $(295) $274
- -------------------------------------------------------------------------------
Deferred Tax Balances at December 31
1994 1993
-------------------------- --------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
- --------------------------------------------------------------------------------
Property $83 $(799) $94 $(732)
Inventory 104 (102) 103 (95)
Accounts receivable 58 (55) 47 (29)
Pension and other
compensation accruals 107 (49) 127 (47)
Tax loss and credit
carryforwards 330 - 355 -
Long-term debt 131 (19) 66 (16)
Alternative minimum tax 80 - 102 -
Accrual for postretirement
benefit obligations 624 (9) 625 -
Investments 30 (93) 76 (96)
Amortization of intangibles 28 (1) 15 (37)
Other accruals and reserves 379 (9) 305 (10)
Other - net 201 (175) 141 (115)
- --------------------------------------------------------------------------------
Subtotal $2,155 $(1,311) $2,056 $(1,177)
Less: Valuation allowance 23 - 60 -
- --------------------------------------------------------------------------------
Total $2,132 $(1,311) $1,996 $(1,177)
- --------------------------------------------------------------------------------
34
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
E Inventories
A reduction of certain inventories resulted in the liquidation of some
quantities of LIFO inventory, which increased pretax income by $16 in
1994 and decreased pretax income by $18 in 1993 and $6 in 1992.
The amount of reserve required to reduce inventories from the first-
in, first-out basis to the last-in, first-out basis at December 31,
1994 and 1993, was $119 and $106, respectively. The inventories that
were valued on a LIFO basis represented 35 and 41 percent of the total
inventories at December 31, 1994 and 1993, respectively.
F Related Company Transactions
The Company's investments in related companies accounted for by the
equity method at December 31, 1994 and 1993 were $931 and $1,019,
respectively, which approximated the Company's equity in the net
assets of these companies.
Dividends received from related companies were $15 in 1994, $36 in
1993 and $45 in 1992. All other transactions with related companies,
and balances due to or from related companies, were not material in amount.
G Plant Properties
Plant Properties at December 31
1994 1993
- -----------------------------------------------------------------------
Land $414 $359
Land and waterway improvements 660 607
Buildings 2,337 2,177
Transportation and construction equipment 211 199
Machinery and equipment 15,332 14,191
Utility and supply lines 1,315 1,244
Office furniture and equipment 836 757
Wells and mineral reserves 355 240
Other 184 229
Construction in progress 1,566 1,605
- -----------------------------------------------------------------------
Total $23,210 $21,608
- -----------------------------------------------------------------------
Depreciation expense was $1,321 in 1994, $1,343 in 1993 and $1,342 in
1992. Maintenance and repair costs were $974 in 1994, $1,004 in 1993
and $1,152 in 1992.
H Leased Properties
The Company routinely leases premises for use as sales and
administrative offices, warehouses and tanks for product storage,
motor vehicles, railcars, computers, office machines and equipment
under operating leases. In addition, the Company leases a vinyl
chloride plant and a Canadian subsidiary leases an ethylene plant. The
Company has the option to purchase these plants and certain other
leased equipment and buildings at the termination of the leases.
Rental expenses under operating leases were $459, $482 and $554 for
1994, 1993 and 1992, respectively. The minimum future lease
commitments for all operating leases are included below.
Minimum Operating Lease Commitments
- ------------------------------------------------
1995 $297
1996 272
1997 250
1998 402
1999 360
2000 and thereafter 1,358
- ------------------------------------------------
Total minimum lease commitments $2,939
- ------------------------------------------------
35
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
I Notes Payable, Long-Term Debt and Available Credit Facilities
Notes payable at December 31, 1994 and 1993 consisted of obligations
due banks with a variety of interest rates and maturities. The notes
payable outstanding at December 31, 1994 and 1993 were $741 and $877,
respectively, on which the year-end weighted average interest rates
were 4.80 percent and 4.20 percent, respectively, excluding the
effects of short-term borrowings in highly inflationary countries.
Included in notes payable at December 31, 1994 and 1993 was commercial
paper of $191 and $225, respectively.
The average interest rate on long-term debt was 6.64 percent in 1994
compared to 7.43 percent in 1993. Annual installments on long-term
debt for the next five years are as follows: 1995, $534; 1996, $387;
1997, $649; 1998, $330; 1999, $230. During 1994, $526 of long-term
debt was retired. Included in this amount was $135 of 5.75%
subordinated exchangeable notes due in 2001 that were exchanged for
shares of Magma Power Company.
The Company had unused and available credit facilities at December 31,
1994, with various U.S. and foreign banks totaling $2,043, which
required the payment of commitment fees. Additional unused credit
facilities totaling $2,276 at December 31, 1994 were available for use
by foreign subsidiaries. These facilities are available in support of
commercial paper borrowings and working capital requirements.
Promissory Notes and Debentures at December 31
1994 1993
- -----------------------------------------
4.63%, final maturity 1995 $150 $150
8.25%, final maturity 1996 150 150
5.75%, final maturity 1997 200 200
5.75%, final maturity 2001 15 150
7.38%, final maturity 2002 150 150
9.35%, final maturity 2002 200 200
7.13%, final maturity 2003 150 150
8.63%, final maturity 2006 200 200
8.55%, final maturity 2009 150 150
9.00%, final maturity 2010 150 150
9.20%, final maturity 2010 200 200
6.85%, final maturity 2013 150 150
7.13%, final maturity 2015 24 150
9.00%, final maturity 2021 300 300
8.85%, final maturity 2021 200 200
8.70%, final maturity 2022 138 150
7.38%, final maturity 2023 150 150
- -----------------------------------------
Subtotal $2,677 $2,950
- -----------------------------------------
Guaranteed ESOP Obligations at December 31
1994 1993
- ------------------------------------------------------------
9.42%, final maturity 2004, Dow ESOP $111 $119
9.11%, final maturity 2005, MMDI ESOP 90 95
- ------------------------------------------------------------
Subtotal $201 $214
- ------------------------------------------------------------
36
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
I Notes Payable, Long-Term Debt and Available Credit Facilities (Continued)
Foreign Bonds at December 31
1994 1993
- -------------------------------------------------------------------
6.75%, final maturity 1995, German mark $194 $173
5.63%, final maturity 1996, German mark 194 173
10.87%, final maturity 1997, British pound sterling 374 354
4.00%, final maturity 1998, Japanese yen 201 179
4.75%, final maturity 1999, Swiss franc 152 135
4.63%, final maturity 2000, Swiss franc 114 101
6.38%, final maturity 2001, Japanese yen 251 224
- -------------------------------------------------------------------
Subtotal $1,480 $1,339
- -------------------------------------------------------------------
Other Facilities - Various Rates and Maturities at December 31
1994 1993
- ------------------------------------------------------------
Foreign currency loans $255 $339
U.S. dollar loans 4 50
Medium-term notes, final maturity 2022 585 607
Pollution control/industrial revenue bonds,
final maturity 2024 707 684
Unexpended construction funds (20) (50)
Capital lease obligations 32 40
- ------------------------------------------------------------
Subtotal $1,563 $1,670
- ------------------------------------------------------------
Long-Term Debt at December 31
1994 1993
- ------------------------------------------------------------
Promissory notes and debentures $2,677 $2,950
Guaranteed ESOP obligations 201 214
Foreign bonds 1,480 1,339
Other facilities 1,563 1,670
Less unamortized debt discount (84) (106)
Less long-term debt due within one year (534) (165)
- ------------------------------------------------------------
Long-term debt $5,303 $5,902
- ------------------------------------------------------------
37
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
J Financial Instruments
Fair Value of Financial Instruments at December 31
1994 1993
- ------------------------------------------------------------------------------------------------------
Cost Gain Loss Fair Value Cost Gain Loss Fair Value
- ------------------------------------------------------------------------------------------------------
Nonderivatives:
Interest-bearing deposits $92 - - $92 $105 - - $105
Marketable equity and debt securities:
Trading 414 $20 - 434 433 $7 - 440
Available-for-Sale:
Debt securities 824 3 $(22) 805 732 38 $(3) 767
Equity securities 454 64 (45) 473 489 205 (22) 672
Held-to-Maturity 408 1 (1) 408 177 3 (3) 177
Other 337 - (7) 330 357 - (4) 353
- ------------------------------------------------------------------------------------------------------
Total investments $2,529 $88 $(75) $2,542 $2,293 $253 $(32) $2,514
-----------------------------------------------------------------------------------------------------
Long-term debt $(5,303) $33 - $(5,270) $(5,902) - $(391) $(6,293)
- ------------------------------------------------------------------------------------------------------
Derivatives relating to:
Foreign currency - $52 $(70) $(18) - $9 - $9
Interest - 37 (45) (8) - 176 $(130) 46
Cross-currency swaps - 15 (93) (78) - - - -
- ------------------------------------------------------------------------------------------------------
The cost approximates the fair value for all other financial instruments.
Investments
Total investments at December 31, 1994 and 1993 included cash
equivalents of $455 and $362, marketable securities and interest-
bearing deposits of $565 and $430, and other investments of $1,529 and
$1,726, respectively.
The proceeds from sales of Available-for-Sale securities were $981
for 1994. These sales resulted in gross realized gains of $55 and
losses of $26.
Maturities for most debt securities ranged from one to ten years for
the Available-for-Sale classification and one to five years for the
Held-to-Maturity classification at December 31, 1994.
Foreign Currency Risk Management
The Company's global operations require active participation in the
foreign exchange markets. The Company enters into foreign exchange
forward contracts and options to hedge various currency exposures or
create desired exposures. Exposures primarily relate to (a) assets and
liabilities denominated in foreign currency in Europe, Asia and
Canada; (b) bonds denominated in foreign currency; and (c) economic
exposure derived from the risk that currency fluctuations could affect
the dollar value of future cash flows at the operating margin level.
The primary business objective of the activity is to optimize the U.S.
dollar value of the Company's assets, liabilities and future cash
flows with respect to exchange rate fluctuations. Hedging is done on a
net exposure basis. Namely, assets and liabilities denominated in the
same currency are netted and only the balance is hedged.
At December 31, 1994 and 1993, the Company had forward contracts
outstanding with various expiration dates (primarily in January of the
next year) to buy, sell or exchange foreign currencies with a U.S.
dollar equivalent of $6,573 and $3,664, respectively. The unrealized
gains or losses on these contracts, based on the foreign exchange
rates at December 31, 1994 and 1993, were a loss of $18 and a gain of
$9, respectively, and were included in income in "Net gain (loss) on
foreign currency transactions."
38
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
J Financial Instruments (Continued)
Interest Rate Risk Management
The Company enters into various interest rate contracts with the
objective of lowering funding costs, diversifying sources of funding
or altering interest rate exposure. In these contracts, the Company
agrees with other parties to exchange, at specified intervals, the
difference between fixed and floating interest amounts calculated on
an agreed upon notional principal amount.
The notional principal on all types of interest derivative contracts
at December 31, 1994 and 1993 totaled $4,264 and $9,302, with a
weighted average remaining life of 3.3 and 3.8 years, respectively.
The $37 in gains and $45 in losses in 1994 related to interest
derivatives were not recognized in income as they represented hedges
of debt-related exposures. The $15 in gains and $93 in losses in 1994
related to cross-currency swaps were primarily recognized in income in
"Net gain (loss) on foreign currency transactions" and offset the
gains and losses from the assets and liabilities being hedged. In
1993, there were $176 in gains and $130 in losses related to cross-
currency swaps and interest derivatives. Of these amounts, $142 in
gains and $103 in losses had not been recognized in income as they
represented hedges of debt-related exposures.
Interest Derivatives at December 31, 1994
Weighted Average Rate
Notional ---------------------
Amount Maturities Receive Pay
- ----------------------------------------------------------------------
Cross-currency swaps $1,427 1995-1999 - -
Receive Fixed Hedge 1,630 1995-2005 6.1% 5.5%
Receive Floating Hedge 1,024 1996-2005 5.5% 6.8%
Other 183 1995-1998 - -
- ----------------------------------------------------------------------
The Company's risk management program for both foreign currency and
interest rate risk is based on fundamental, mathematical and technical
models that take into account the implicit cost of hedging. Risks
created by derivative instruments and the mark-to-market valuations of
positions are strictly monitored at all times. The Company uses
portfolio sensitivities and stress tests to monitor risk. Because the
counterparties to these contracts are major international financial
institutions, credit risk arising from these contracts is not
significant and the Company does not anticipate any such losses. The
net cash requirements arising from risk management activities are not
expected to be material. The Company's overall financial strategies
and impacts from using derivatives in its risk management program are
reviewed periodically with the Finance Committee of the Company's
Board of Directors and revised as market conditions dictate.
The Company's global orientation in diverse businesses with a large
number of diverse customers and suppliers minimizes concentrations of
credit risk. No concentration of credit risk existed at December 31, 1994.
39
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
K Limited Partnerships
In April 1993, three wholly owned subsidiaries of the Company
contributed assets with an aggregate fair value of $977 to Chemtech
Royalty Associates L.P. (Chemtech), a newly formed Delaware limited
partnership. In August and October 1993, outside investors acquired
limited partner interests in Chemtech totaling 20 percent in exchange
for $200.
In April 1993, two wholly owned subsidiaries of Marion Merrell Dow
Inc. (MMDI) contributed assets with an aggregate fair value of
approximately $1 billion to Carderm Capital L.P. (Carderm), a newly
formed Delaware limited partnership. Outside investors made
contributions of $180 in October 1993 in exchange for limited partner
interests in Carderm totaling 15 percent.
In December 1991, three wholly owned subsidiaries of the Company
contributed assets with an aggregate market value of $2 billion to
DowBrands L.P., a newly formed Delaware limited partnership. Outside
investors made cash contributions of $45 in December 1991 and $855 in
June 1992 in exchange for an aggregate 31 percent limited partner
interest in DowBrands L.P.
The three partnerships (Chemtech, Carderm and DowBrands L.P.) are
separate and distinct legal entities from the Company and its
affiliates and have separate assets, liabilities, businesses and
operations. Each partnership has as a general partner a wholly owned
subsidiary of either the Company or MMDI which directs the business
activities of the partnership and has fiduciary responsibilities to
the partnership and its other partners.
The outside investors in each partnership will receive a cumulative
annual priority return on their investments in the partnership and
participate in residual earnings. The annual priority return is $14,
$11 and $67 for Chemtech, Carderm and DowBrands L.P., respectively.
The partnerships will not terminate unless a termination or
liquidation event occurs. One such event, which is within the control
of outside investors, occurs in the year 2000 for Chemtech and Carderm
and 1996 for DowBrands L.P. In addition, the partnership agreements
provide for various windup provisions wherein subsidiaries of the
Company or MMDI may purchase at any time the limited partnership
interests of the outside investors. Upon windup, liquidation or
termination, the partners' capital accounts will be redeemed at
current fair values.
For financial reporting purposes, the assets (other than
intercompany loans, which are eliminated), liabilities, results of
operations and cash flows of the partnerships and subsidiaries are
included in the Company's consolidated financial statements and
outside investors' limited partnership interests are reflected as
minority interests.
Supplemental contractual disclosures required by the partnership
agreements are contained within Note R of the December 31, 1993 Form
10-K of The Dow Chemical Company.
40
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
L Stockholders' Equity
The authorized capital stock consists of 250 million preferred shares
with a par value of $1.00 per share, and 500 million shares of common
stock with a par value of $2.50 per share. The only preferred shares
issued are the convertible preferred shares discussed in Note N. The
number of common shares issued has remained at 327,125,854 for the
last three years.
There are no significant restrictions limiting the Company's ability
to pay dividends.
Undistributed earnings of 20%-50% owned companies included in
retained earnings were $269 and $290 at December 31, 1994 and 1993,
respectively.
In computing earnings per common share, no adjustment was made for
common shares issuable under award, option and stock purchase plans,
or conversion of preferred shares issued, because there would be no
material dilutive effect.
The Board of Directors has authorized, subject to certain business
and market conditions, the purchase of up to 18,000,000 shares of the
Company's common stock. At December 31, 1994, the number of shares
purchased under this authorization was approximately 3,700,000.
The number of treasury shares purchased was 591,000 in 1994, 300,000
in 1993 and 169,000 in 1992. The number of treasury shares issued to
employees was 2,836,000 in 1994, 1,946,000 in 1993 and 2,051,000 in
1992. The number of treasury shares contributed to the pension plan
for funding future retiree health care benefits through a 401(h)
account was 391,000 in 1994 and 251,000 in 1993.
Reserved Treasury Stock at December 31
In thousands of shares 1994 1993 1992
- ----------------------------------------------------------------
Stock option plans 16,517 15,807 14,171
Employees' stock purchase plan 894 1,040 1,120
- ----------------------------------------------------------------
Total shares reserved 17,411 16,847 15,291
- ----------------------------------------------------------------
M Stock Option Plans
The Company has various stock option plans. Options under all plans
are granted at the market price of the shares on the date of the grants.
Option Plans
In thousands of shares 1994 1993 1992
- -----------------------------------------------------------------------------
Outstanding at January 1 14,059 11,657 9,986
Granted 2,634 3,431 2,688
Exercised (1,862) (567) (801)
Expired (96) (462) (216)
- -----------------------------------------------------------------------------
Outstanding at December 31 14,735 14,059 11,657
Price Range $23.54-$74.63 $18.46-$60.88 $18.46-$60.88
- -----------------------------------------------------------------------------
Exercisable at December 31 12,189 10,776 8,869
Available for future grant 559 407 1,177
- -----------------------------------------------------------------------------
Stock options were exercised at prices ranging from $18.46 to $65.06
in 1994, $18.46 to $59.75 in 1993 and $18.46 to $60.88 in 1992.
The Company made offerings of common stock to its employees,
excluding directors, in 1994, 1993 and 1992 at $54.50, $45.00 and
$48.00 per share, respectively, payable generally through payroll
deductions. Unfilled subscriptions, cancelable at the option of the
employee, were 894,000, 1,040,000 and 1,120,000 shares at December 31,
1994, 1993 and 1992, respectively. Partial payments received on these
subscriptions aggregating $32, $28 and $33 at December 31, 1994, 1993
and 1992, respectively, were included in current liabilities.
41
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
N Redeemable Preferred Stock
The Company has an employee stock ownership plan (the ESOP), which is
an integral part of the Salaried Employees Savings Plan.
The ESOP borrowed funds at a 9.42 percent interest rate with a final
maturity in 2004, and used the proceeds to purchase convertible
preferred stock from the Company. The preferred stock is convertible
into approximately 1.5 million shares of the Company's common stock at
$86.125 per common share. The dividend yield on the preferred stock is
7.75 percent of the $86.125 redemption value.
In the event the Company consummates certain merger or consolidation
transactions involving the Company's common stock, the preferred stock
must be redeemed by the Company for cash at a redemption price equal
to 105 percent of the $86.125 per share redemption value, plus accrued
and unpaid dividends.
The convertible preferred stock issued to the ESOP is reported as
temporary equity in the Company's balance sheet. Since the Company has
guaranteed the ESOP's borrowings, the principal amount of the ESOP
loan has been reported as long-term debt and a reduction of temporary
equity in the Company's balance sheet.
O Pension Plans
The Company has defined benefit pension plans which cover employees in
the U.S. and a number of foreign countries. The Company's funding
policy is to contribute annually, at a rate that is intended to
approximate a level percentage of compensation for the covered
employees, to those plans where pension laws and economics either
require or encourage funding.
The U.S. funded plan is the largest plan. Its benefits are based on
length of service and the employee's three-highest consecutive years
of compensation. The weighted average discount rate and rate of
increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligations were 7.75
and 5.5 percent, respectively, for 1994 and 7.25 and 5.5 percent,
respectively, for 1993. The assumed long-term rate of return on assets
was 9 percent for 1994 and 1993.
All other pension plans used assumptions in determining the
actuarial present value of the projected benefit obligations that are
consistent with (but not identical to) those of the U.S. plan.
Defined contribution plans cover employees in some subsidiaries in
the U.S. and in other countries, including Australia, France, Spain,
and the United Kingdom. In addition, employees in the U.S. are
eligible to participate in defined contribution plans (Employee
Savings Plans) by contributing a portion of their compensation. The
Company matches compensation deferrals, depending on Company profit
levels. Contributions charged to income for defined contribution plans
were $71 in 1994, $76 in 1993 and $83 in 1992.
The net periodic pension cost for all significant defined benefit
plans was as follows:
Net Periodic Pension Cost
1994 1993 1992
- --------------------------------------------------------------------------
Service cost-benefits earned during the period $170 $152 $122
Interest cost on projected benefit obligation 347 333 306
Actual (return) on assets (93) (494) (341)
Amortization and deferred amounts (266) 153 47
Employee contributions to the plans (8) (8) (9)
- ---------------------------------------------------------------------------
Net periodic pension cost $150 $136 $125
- ---------------------------------------------------------------------------
42
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
O Pension Plans (Continued)
The funded status of significant defined benefit plans for the Company
was as follows:
Defined Benefit Plans at December 31
Fully Funded Partially Funded
------------- ----------------
1994 1993 1994 1993
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested $(3,287) $(3,173) $(467) $(361)
Nonvested (292) (324) (40) (50)
- --------------------------------------------------------------------------------
Accumulated benefit obligation (3,579) (3,497) (507) (411)
Effect of projected compensation increases (826) (838) (125) (164)
- --------------------------------------------------------------------------------
Projected benefit obligation for services
rendered to date (4,405) (4,335) (632) (575)
Plan assets at market value, primarily
publicly traded stocks and bonds 4,439 4,534 221 208
- --------------------------------------------------------------------------------
Plan assets in excess of (less than)
projected benefit obligation 34 199 (411) (367)
Unrecognized transition obligation 28 29 45 35
Unrecognized net (gains) losses 57 (84) (1) 51
Unrecognized prior service cost 9 (4) 39 48
Additional minimum liability - - (49) (8)
- --------------------------------------------------------------------------------
Accrued pension asset (liability) $128 $140 $(377) $(241)
- --------------------------------------------------------------------------------
P Other Postretirement Benefits
The Company provides certain health care and life insurance benefits
to retired employees. The Company funds most of the cost of these
health care and life insurance benefits as incurred.
The U.S. plan covering the parent company is the largest plan. The
plan provides health care benefits, including hospital, physicians'
services, drug and major medical expense coverage, and life insurance
benefits. The plan provides benefits supplemental to Medicare after
retirees are eligible for these benefits, except for employees hired
after December 31, 1992. The cost of these benefits is shared by the
Company and the retiree, with the Company portion increasing as the
retiree has increased years of credited service. The Company has the
ability to change these benefits at any time.
Effective October 1993, the Company amended its health care benefits
plan in the U.S. to cap the cost absorbed by the Company at
approximately twice the 1993 cost per person for employees who retire
after December 31, 1993. Effective April 1994, the Company extended
this amendment to cover all other retired employees. The effect of the
October 1993 amendment was to reduce the net periodic postretirement
cost by $21 for 1993 and the accumulated postretirement benefit
obligation by $327 at December 31, 1993. The effect of the April 1994
amendment was to reduce the net periodic postretirement cost by $71
for 1994 and the accumulated postretirement benefit obligation by $101
at December 31, 1994.
For 1994, a discount rate of 7.75 percent and weighted average medical
cost trend rates starting at 9.47 percent and declining to 5.53 percent in
2004 were assumed. For 1993, the discount rate assumption was 7.25 percent
and the medical cost trend rate assumption was 10.65 percent declining to
5.03 percent in 2004. The assumed long-term rate of return on assets was
9 percent for 1994 and 1993. Increasing the assumed medical cost trend rate
by 1 percentage point in each year would increase the accumulated
postretirement benefit obligation at December 31, 1994 by $33 and the net
periodic postretirement benefit cost for the year by $3.
All other postretirement health care and other benefit plans used
assumptions in determining the actuarial present value of accumulated
postretirement benefit obligations that are consistent with (but not
identical to) those of the U.S. parent company plan.
43
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
P Other Postretirement Benefits (Continued)
The net periodic benefit cost of all significant plans was as follows:
Net Periodic Postretirement Cost
1994 1993 1992
- ----------------------------------------------------------------------------
Service cost - benefits earned during the period $26 $35 $38
Interest cost on accumulated postretirement
benefit obligation 89 122 127
Amortization and deferred amounts (43) (9) -
- ----------------------------------------------------------------------------
Net periodic postretirement cost $72 $148 $165
- ----------------------------------------------------------------------------
The postretirement benefit obligations of all significant plans were
as follows:
Partially Funded Postretirement Plans at December 31
1994 1993
- -----------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $(676) $(792)
Fully eligible active plan participants (290) (279)
Other active plan participants (210) (234)
- -----------------------------------------------------------------------
Total accumulated postretirement benefit obligation (1,176) (1,305)
Plan assets at market value, primarily publicly traded
stocks and bonds 52 20
- -----------------------------------------------------------------------
Unfunded accumulated postretirement
benefit obligation (1,124) (1,285)
Unrecognized gain from experience favorable
to assumptions (166) (81)
Negative prior service costs (373) (319)
- -----------------------------------------------------------------------
Accrued postretirement benefit liability $(1,663) $(1,685)
- -----------------------------------------------------------------------
44
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
Q Commitments and Contingent Liabilities
In January 1994, Dow Corning Corporation (Dow Corning), in which Dow
is a 50 percent shareholder, announced a pretax charge of $640 ($415
after tax) for the fourth quarter of 1993. In January 1995, Dow
Corning announced a pretax charge of $241 ($152 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 the settlement approved by Judge Sam C. Pointer, Jr. of the
U.S. District Court for the Northern District of Alabama (the Court);
litigation and claims outside of this breast implant settlement; and
provisions for legal, administrative and research costs related to
breast implants. The charges for 1993 and 1994 included pretax amounts
of $1,240 and $441, respectively, less expected insurance recoveries
of $600 and $200, respectively. The 1993 amounts reported by Dow
Corning were determined on a present value basis. On an undiscounted
basis, the estimated liability above for 1993 was $2,300 less expected
insurance recoveries of $1,200.
As a result of the Dow Corning actions, the Company recorded its 50
percent share of the charges, net of tax benefits available to Dow.
The impact on the Company's net income was a charge of $192 for 1993
and a charge of $70 for 1994.
In March 1994, Dow Corning signed a Breast Implant Litigation Settlement
Agreement (the Settlement Agreement) which was preliminarily approved by the
Court in April 1994. The Settlement Agreement received final approval by the
Court on September 1, 1994. The Company is not a signatory to the Settlement
Agreement and is not required to contribute to the settlement. In
certain circumstances, if any defendant who is a signatory to the
Settlement Agreement considers the number of plaintiffs who have opted
out and maintained lawsuits against such defendant to be excessive,
such defendant may withdraw from participation in the Settlement
Agreement.
Various preliminary estimates of the aggregate number of plaintiffs
who have indicated an intent to opt out of the settlement (the Opt Out
Plaintiffs) have been made public. Dow Corning has reported that,
since July 1, 1994, many former Opt Out Plaintiffs have rejoined the
settlement. The Court is continuing to collect information relating to
the number of Opt Out Plaintiffs. Dow Corning has stated that, as
information is received from the Court, Dow Corning will continue to
evaluate the nature and scope of the current or potential future
claims of these Opt Out Plaintiffs. Opt Out Plaintiffs may continue to
rejoin the settlement until the March 1, 1995 date established by the
Court.
The date by which Dow Corning was required to decide whether to
remain as a participant in or to exercise the first of itsoptions to
withdraw from the Settlement Agreement was extended to September 9,
1994. On September 8, 1994, Dow Corning's Board of Directors approved
Dow Corning's continued participation in the Settlement Agreement.
Initial claims were required to be filed with the Court by September
16, 1994. After these claims and the supporting medical records have
been evaluated by the Court for validity, eligibility, accuracy, and
consistency, the Court will determine whether contributions to the
settlement are sufficient to pay validated claims. The date by which
this process will be completed is uncertain. If contributions are not
sufficient, claimants with validated claims may have the ability to
become Opt Out Plaintiffs during another specified period. In that
event, if any defendant who is a signatory to the Settlement Agreement
considers the number of new Opt Out Plaintiffs to be excessive, such
defendant may decide to exercise a second option to withdraw from
participation in the Settlement Agreement. There can be no assurance
that Dow Corning will not withdraw from participation in the
Settlement Agreement.
Dow Corning has reported that, as additional facts and circumstances
develop, the estimate of its potential liability may be revised, or
provisions may be necessary to reflect any additional costs of
resolving breast implant litigation and claims not covered by the
settlement. Any future charge by Dow Corning resulting from a revision
or provision, if required, could have a material adverse impact on the
Company's net income for the period in which it is recorded by Dow
Corning, but would not have a material adverse impact on the Company's
consolidated cash flows or financial position. The Company's maximum
exposure for breast implant product liability claims against Dow
Corning is limited to its investment in Dow Corning which, at December
31, 1994, was $337.
The Company is separately named as a defendant in many of the breast
implant claims and lawsuits. It is the opinion of the Company's
management that the possibility is remote that the litigation of these
claims will have a material adverse impact on the Company's
consolidated financial statements.
45
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
Q Commitments and Contingent Liabilities (Continued)
Numerous lawsuits have been brought against the Company and other
chemical companies alleging that the manufacture, distribution or use
of pesticides containing dibromochloropropane (DBCP) has caused, among
other things, property damage, including contamination of groundwater.
To date, there have been no verdicts or judgments against the Company
in connection with these allegations. It is the opinion of the
Company's management that the possibility is remote that the
resolution of such lawsuits will have a material adverse impact on the
Company's consolidated financial statements.
The Company has accrued $234 at December 31, 1994, for probable
environmental remediation and restoration liabilities, including $29
for the remediation of Superfund sites. This is management's best
estimate of these liabilities, although possible costs for
environmental remediation and restoration could range up to 50 percent
higher. It is the opinion of the Company's management that the
possibility is remote that costs in excess of those accrued or
disclosed will have a material adverse impact on the Company's
consolidated financial statements.
In addition to the breast implant, DBCP and environmental
remediation matters, the Company and its subsidiaries are parties to a
number of other claims and lawsuits arising out of the normal course
of business with respect to commercial matters, including product
liabilities, governmental regulation and other actions. Certain of
these actions purport to be class actions and seek damages in very
large amounts. All such claims are being contested.
Except for the possible effect on the Company's net income for
charges which may be taken by Dow Corning for breast implant
litigation, it is the opinion of the Company's management that the
possibility is remote that the aggregate of all claims and lawsuits
will have a material adverse impact on the Company's consolidated
financial statements.
On behalf of Destec Energy, Inc. (Destec), a 76 percent owned
subsidiary, the Company has guaranteed the lease payments of a Destec
subsidiary which leases the Lyondell cogeneration facility near
Houston, Texas. Minimum lease payments total $145 for the
noncancelable portion of the lease which runs through March 31, 1995.
The guarantee is cancelable upon proper notice on any anniversary date
of the guarantee.
Destec entered into an agreement with the U.S. Department of Energy,
PSI Energy Inc. (PSI), and a third party owner to design, construct,
and operate a 262 megawatt syngas facility which will repower an
existing PSI turbine. Destec will provide coal gasification services
under a 25-year contract. Associated with the above agreement, Destec
assumed a construction performance obligation of $161 with project
completion scheduled for third quarter 1995, at which time Destec will
lease the plant. The lease commitments are included in Note H.
Destec contracted to design, engineer, build and operate a
cogeneration facility in central Florida for a partnership in which
Destec owns approximately 50 percent. Commercial operations commenced
in January 1995 as planned. Destec has guaranteed $33 to fund its
equity contribution.
Destec contracted to design, engineer and build a 424 megawatt
cogeneration facility in Freeport, Texas and is a 50 percent partner
in Oyster Creek Limited which owns the facility. The Company has
agreed to purchase steam and power from the facility and estimates
that its minimum annual obligation to outside parties is $20,
increasing 3 percent annually through 2014.
Eli Lilly and Company (Lilly) is a 40 percent partner with the
Company in DowElanco, a global agricultural products joint venture.
Lilly holds a put option requiring the Company to purchase Lilly's
interest in DowElanco at fair market value. Lilly notified the Company
in September 1994 that it did not plan to exercise the put option at
that time. No subsequent notification has been received.
A Canadian subsidiary has entered into two 20-year agreements to
purchase 89 percent of the output of an ethylene plant (Plant No. 1)
and 40 percent of the output of a second ethylene plant (Plant No. 2).
The purchase price of the output is determined on a cost-of-service
basis which, in addition to covering all operating expenses and debt
service costs, provides the owner of the plants with a specified
return on capital. Total purchases under the agreements were $252,
$237 and $236 in 1994, 1993 and 1992, respectively. The contracts
related to Plants No. 1 and No. 2 expire in 1998 and 2004,
respectively.
DCS Capital Corporation (the Corporation) is 100 percent owned by
DCS Capital Partnership. The Corporation was organized to assist DCS
Capital Partnership in raising funds to finance construction of an
ethylene plant. DCS Capital Partnership is owned by Shell Canada,
Union Carbide and Dow through its 100 percent owned subsidiary,
Dofinco, Inc. As part of the ownership agreement, Dofinco indirectly
guarantees approximately 52 percent of the debt of the Corporation.
Dofinco's indirect guarantee amounted to $68 at December 31, 1994.
At December 31, 1994, the Company had various outstanding
commitments for take or pay and throughput agreements, including the
Canadian subsidiary's take or pay ethylene contract, for terms
extending from one to 20 years. In general, such commitments were at
prices not in excess of current market prices. The table below shows
the fixed and determinable portion of the take or pay and throughput
obligations:
46
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
Q Commitments and Contingent Liabilities (Continued)
Fixed and Determinable Portion of Obligations
- ---------------------------------------------
1995 $200
1996 168
1997 155
1998 142
1999 73
2000 through expiration of contracts 197
- ---------------------------------------------
Total $935
- ---------------------------------------------
In addition to the take or pay and throughput obligations, the
Company had other outstanding commitments at December 31, 1994,
including ship charters, purchase commitments for materials and
property, and other purchases used in the normal course of business.
Total purchase obligations under the agreements were $244. In general,
such commitments were at prices not in excess of current market
prices.
R Supplementary Information
Accrued and Other Current Liabilities at December 31
1994 1993
- ------------------------------------------
Accrued vacations $200 $196
Employees' retirement plans 163 135
Interest payable 124 126
Accrued payroll 316 154
Accrued miscellaneous taxes 146 142
Insurance companies' reserves 168 155
Sundry 742 813
- ------------------------------------------
Total $1,859 $1,721
- ------------------------------------------
Sundry Income - Net
1994 1993 1992
- --------------------------------------------------
Royalty income $25 $26 $21
Gain (loss) on securities (34) (55) 24
Gain on sale of assets 73 57 22
Dividend income 36 93 14
Other-net 3 (74) 5
- --------------------------------------------------
Total $103 $47 $86
- --------------------------------------------------
Other Supplementary Information
1994 1993 1992
- ----------------------------------------------------------
Cash payments for interest $576 $611 $690
Cash payments for taxes on income 257 454 439
Provision for doubtful receivables 11 18 9
- ----------------------------------------------------------
47
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
S Industry Segments and Geographic Areas
The Company conducts its worldwide operations through separate
geographic area organizations which represent major markets or
combinations of related markets.
Aggregation of products is generally made on the basis of process
technology, end-use markets and channels of distribution.
Chemicals and Performance Products contains a wide range of products
that are used primarily as raw materials in the manufacture of
customer products, or which aid in the processing of customer products
and services.
Plastic Products consists of a broad range of thermoplastics,
thermosets and plastic fabricated products used in a wide variety of
applications in markets which include packaging, automotive,
electronics, and construction among many others.
Hydrocarbons and Energy encompasses procurement of fuels and petroleum-
based raw materials as well as the production of olefins, aromatics,
styrene and cogenerated power and steam for use in the Company's
manufacturing operations. Income from the construction of power plants
by Destec Energy, Inc. is also recorded in this segment.
Consumer Specialties includes agricultural chemicals,
pharmaceuticals, and food care, home care, and personal care products.
The Unallocated segment encompasses the Company's businesses that
are not reported elsewhere, including the consolidated insurance and
finance companies, and Ventures businesses such as Dow Environmental
and advanced electronics materials. This segment also includes
activities and overhead cost variances not allocated to other
segments.
Transfers between areas and industry segments are generally valued
at cost except for movements between Consumer Specialties and the
other industry segments. These movements are generally valued at
market-based prices.
48
The Dow Chemical Company and Subsidiaries
- ---------------------------------------------------------------------------
Notes to Financial Statements
- ---------------------------------------------------------------------------
In millions, except for share amounts
- ---------------------------------------------------------------------------
S Industry Segments and Geographic Areas (Continued)
Industry Segment Results
Chemicals Corporate
& Performance Plastic Hydrocarbons Consumer and
Products Products & Energy Specialties Unallocated Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
1994
Sales to unaffiliated customers $4,536 $7,476 $2,043 $5,854 $106 $20,015
Intersegment transfers 797 88 2,345 1 8 $(3,239) -
Operating income (loss) (1) 592 1,131 74 762 (214) 2,345
Identifiable assets 4,051 5,782 3,455 7,582 1,015 4,660 26,545
Depreciation 402 456 259 204 - 1,321
Capital expenditures 281 219 408 275 - 1,183
- ---------------------------------------------------------------------------------------------------------------------------------
1993
Sales to unaffiliated customers $4,268 $6,459 $1,797 $5,457 $79 $18,060
Intersegment transfers 746 108 2,237 - 6 $(3,097) -
Special charge - - - 180 - 180
Operating income (1) 350 380 43 592 75 1,440
Identifiable assets 4,267 5,053 3,210 7,282 1,127 4,566 25,505
Depreciation 400 447 298 178 20 1,343
Capital expenditures 342 297 436 322 - 1,397
- ---------------------------------------------------------------------------------------------------------------------------------
1992
Sales to unaffiliated customers $4,471 $6,715 $1,734 $5,977 $74 $18,971
Intersegment transfers 683 108 2,316 - 4 $(3,111) -
Special charge 115 184 113 11 10 433
Operating income (loss) (1) 269 94 (183) 1,116 (6) 1,290
Identifiable assets 4,280 5,380 3,040 7,258 947 4,455 25,360
Depreciation 439 424 279 183 17 1,342
Capital expenditures 479 409 415 292 - 1,595
- ---------------------------------------------------------------------------------------------------------------------------------
Geographic Area Results
Rest of
United States Europe World Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
1994
Sales to unaffiliated customers $9,942 $5,320 $4,753 $20,015
Transfers between areas 1,575 466 341 $(2,382) -
Operating income (1) 1,293 273 779 2,345
Identifiable assets 14,800 6,402 5,343 26,545
Gross plant properties 12,554 7,103 3,553 23,210
Capital expenditures 758 266 159 1,183
- ---------------------------------------------------------------------------------------------------------------------------------
1993
Sales to unaffiliated customers $9,285 $4,836 $3,939 $18,060
Transfers between areas 1,047 325 311 $(1,683) -
Special charge 110 44 26 180
Operating income (loss) (1) 1,036 (1) 405 1,440
Identifiable assets 14,903 5,818 4,784 25,505
Gross plant properties 12,004 6,235 3,369 21,608
Capital expenditures 893 301 203 1,397
- ---------------------------------------------------------------------------------------------------------------------------------
1992
Sales to unaffiliated customers $9,538 $5,595 $3,838 $18,971
Transfers between areas 1,219 432 396 $(2,047) -
Special charge 167 152 114 433
Operating income (loss) (1) 1,159 (90) 221 1,290
Identifiable assets 14,551 6,464 4,345 25,360
Gross plant properties 11,581 6,568 3,295 21,444
Capital expenditures 912 464 219 1,595
- ---------------------------------------------------------------------------------------------------------------------------------
(1) The reconciliation between "Operating Income" and "Income before
Provision for Taxes on Income and Minority Interests" consists of
"Other Income (Expense)" items and can be found in the Consolidated
Statements of Income on Page 25.
49
Quarterly Statistics
In millions, except for share amounts (Unaudited)
- -------------------------------------------------------------------------------
1994 1st 2nd 3rd 4th Year
- -------------------------------------------------------------------------------
Net sales $4,541 $4,934 $5,046 $5,494 $20,015
Operating income 527 602 579 637 2,345
Income before taxes on income
and minority interests (Notes C and Q) 414 570 575 493 2,052
Net income available
for common stockholders 171 250 288 222 931
Earnings per common share 0.62 0.91 1.04 0.80 3.37
Cash dividends paid per common share 0.65 0.65 0.65 0.65 2.60
Market price range of common stock:
High 66.50 70.13 79.25 78.13 79.25
Low 56.50 58.75 64.88 60.75 56.50
- -------------------------------------------------------------------------------
1993 1st 2nd 3rd 4th Year
- -------------------------------------------------------------------------------
Net sales $4,363 $4,822 $4,370 $4,505 $18,060
Special charge (Note B) - 180 - - 180
Operating income 388 388 346 318 1,440
Income before taxes on income
and minority interests (Notes C and Q) 751 364 300 110 1,525
Net income (loss) available
for common stockholders 400 148 137 (48) 637
Earnings (loss) per common share 1.47 0.54 0.50 (0.18) 2.33
Cash dividends paid per common share 0.65 0.65 0.65 0.65 2.60
Market price range of common stock:
High 59.38 58.63 62.00 60.63 62.00
Low 49.63 49.00 55.25 53.50 49.00
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no reported disagreement on any matter of accounting
principles or procedures or financial statement disclosure in 1994
with the Independent Auditors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to Directors and executive officers of the
Company is contained in a definitive Proxy Statement for the Annual
Meeting of Stockholders of The Dow Chemical Company to be held May 11,
1995, and is incorporated herein by reference. See also the
information concerning executive officers of the registrant set forth
in Part I under the caption "Executive Officers of the Registrant" in
reliance on General Instruction G to Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is contained in a
definitive Proxy Statement for the Annual Meeting of Stockholders of
The Dow Chemical Company to be held May 11, 1995, and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to beneficial ownership of the common stock
as of January 31, 1995, by each Director and all Directors and
officers of the Company as a group is contained in definitive Proxy
Statement for the Annual Meeting of Stockholders of The Dow Chemical
Company to be held May 11, 1995, and is incorporated herein by
reference.
As of December 31, 1994, no person or entity was known to the
Company to beneficially own 5 percent or more of the outstanding
common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no such reportable relationships or related transactions in 1994.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. The Company's 1994 consolidated Financial Statements and
Independent Auditors' Report are included in Item 8 of Part II.
2. Financial Statement Schedules.
The following Financial Statement Schedule should be read in
conjunction with the Financial Statements included in Item 8 of
this Annual Report on Form 10-K .
Page
Schedule II - Valuation and Qualifying Accounts 52
Schedules other than the one listed above are omitted because
of the absence of the conditions under which they are required
or because the information called for is included in the
Financial Statements or Notes thereto.
51
SCHEDULE II
THE DOW CHEMICAL COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31
(In millions)
- -------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Balance Deductions Balance
at Beginning Additions to from at End
Description of Year Reserves Reserves of Year
- -------------------------------------------------------------------------------------------------------------------------------
1994
RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY:
For doubtful receivables $93 $33 $22 (b) $104
Other investments and noncurrent receivables 177 43 (a) 52 168
Accumulated goodwill amortization 563 139 26 676
- -------------------------------------------------------------------------------------------------------------------------------
1993
RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY:
For doubtful receivables $95 $34 $36 (b) $93
Other investments and noncurrent receivables 147 43 (a) 13 177
Accumulated goodwill amortization 429 136 2 563
- -------------------------------------------------------------------------------------------------------------------------------
1992
RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY:
For doubtful receivables $95 $33 $33 (b) $95
Other investments and noncurrent receivables 59 116 (a) 28 147
Accumulated goodwill amortization 317 123 11 429
- -------------------------------------------------------------------------------------------------------------------------------
(a) Additions to reserve represent: 1994 1993 1992
------------------------------
Charges to profit and loss $43 $36 $96
Miscellaneous other 0 7 20
------------------------------
$43 $43 $116
-----------------------------
(b) Deductions represent:
Notes and accounts receivable written off $12 $11 $12
Credits to profit and loss 6 22 17
Miscellaneous other 4 3 4
------------------------------
$22 $36 $33
------------------------------
52
3. Exhibits---See the Exhibit Index on pages 55 and 56 of this
Annual Report on Form 10-K for exhibits filed with this
Annual Report on Form 10-K (see below) and for exhibits
incorporated by reference.
The Company will provide a copy of any exhibit upon receipt of
a written request for the particular exhibit or exhibits
desired and upon receipt of payment of an amount equal to a
charge of twenty-five cents for each exhibit page, with a
minimum charge of two dollars per request. All requests
should be addressed to the Vice President and Controller of
the Company at the address of the Company's principal
executive offices.
The following exhibits listed on the Exhibit Index are filed
with this Annual Report on Form 10-K:
3(ii) A copy of the Bylaws of The Dow Chemical Company as
amended effective as of July 14, 1994.
10(f) A copy of The Dow Chemical Company Voluntary Deferred
Compensation Plan for Outside Directors, as amended
effective as of July 1, 1994.
10(o) A copy of The Dow Chemical Company 1994 Non-Employee
Directors' Stock Plan.
11 Computation of Earnings per Common Share.
21 Subsidiaries of The Dow Chemical Company.
23 Independent Auditors' Consent.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
A Current Report on Form 8-K dated January 20, 1995 was filed with
the Securities and Exchange Commission. Attached to it was the
Company's press release describing the impact on the Company's
1994 earnings resulting from a special charge taken by Dow Corning
Corporation for breast implant litigation and related matters.
A Current Report on Form 8-K dated January 25, 1995 was filed with
the Securities and Exchange Commission. Attached to it were two
(2) press releases (i) describing the impact on the Company of the
pending sale of the Personal Care business of DowBrands; and (ii)
constituting the Company's earnings release for the fourth quarter
and full year of 1994.
The following trademarks of The Dow Chemical Company appear in this
report: Affinity, Aim, Aspun, Attane, Calibre, Cyclotene, D.E.H.,
D.E.N., D.E.R., Derakane, Dowanol, Dowex, Dowfax, Dowflake, Dowfrost,
Dowlex, Dowtherm, Drytech, Engage, Ethafoam, Ethocel, Insite, Invert,
Isonate, Isoplast, Liquidow, Magnum, Methocel, Opticite, Papi,
Peladow, Pellethane, Prevail, Primacor, Pulse, Sabre, Saran,
Saran Wrap, Saranex, Specflex, Spectrim, Styrofoam, Styron, Tactix,
The Enhancer, Trycite, Trymer, Tyril, Tyrin, Versene, Voranate, Voranol
and Zetabon.
The following trademarks of DowBrands or an international affiliate
appear in this report: Apple Pectin, Fantastik, Glass Plus, Handi-Wrap,
Nucleic A, PermaSoft, Scrubbing Bubbles, Smart Scrub, Spray 'N Wash,
Style, Vivid, Yes and Ziploc.
The following trademark of Dow Corning Corporation appears in this
report: Syltherm.
The following trademarks of DowElanco or its affiliates appear in this
report: Beam, Broadstrike, Dursban, Garlon, Lontrel, Lorsban,
Naturalyte, N-Serve, Recruit, Rubigan, Sentricon, Sonalan, Starane,
Telone, Tordon, Treflan, Trimidal and Vikane.
The following trademark of FilmTec Corporation appears in this report:
FilmTec.
The following trademarks of Marion Merrell Dow Inc. or its affiliates
appear in this report: Carafate, Cardizem, Cardizem CD, Cardizem
Injectable, Cardizem SR, Cepastat, Citrucel, Debrox, Gaviscon,
Gly-Oxide, Nicoderm, Nicorette, Novahistine, OsCal, Sabril, Seldane,
Seldane-D and Targocid.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual
report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 13th day of March, 1995.
THE DOW CHEMICAL COMPANY
By: R. L. Kesseler
-----------------------------
R. L. Kesseler
Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed on the 13th day of
March, 1995 by the following persons in the capacities indicated:
F. P. Popoff J. L. Downey
- ------------------------------ ------------------------------
F. P. Popoff, Director, J. L. Downey, Director and
Chairman of the Board and Senior Consultant
Chief Executive Officer
E. C. Falla B. H. Franklin
- ------------------------------ ------------------------------
E. C. Falla, Director, B. H. Franklin, Director
Executive Vice President and
Chief Financial Officer
R. L. Kesseler F. W. Lyons, Jr.
- ------------------------------ ------------------------------
R. L. Kesseler, Vice President F. W. Lyons, Jr., Director
and Controller
J. K. Barton W. J. Neely
- ------------------------------ ------------------------------
J. K. Barton, Director W. J. Neely, Director
A. J. Butler H. T. Shapiro
- ------------------------------ ------------------------------
A. J. Butler, Director and H. T. Shapiro, Director
Senior Consultant
D. T. Buzzelli E. J. Sosa
- ------------------------------ ------------------------------
D. T. Buzzelli, Director and E. J. Sosa, Director and
Vice President Senior Vice President
F. P. Corson W. S. Stavropoulos
- ------------------------------ ------------------------------
F. P. Corson, Director and W. S. Stavropoulos, Director,
Vice President President and Chief Operating Officer
W. D. Davis P. G. Stern
- ------------------------------ ------------------------------
W. D. Davis, Director P. G. Stern, Director
M. L. Dow
- ------------------------------
M. L. Dow, Director
54
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3(i) Restated Certificate of Incorporation of The Dow Chemical
Company, incorporated by reference to Exhibit 3(a) to The Dow
Chemical Company Annual Report on Form 10-K for the year ended
December 31, 1992.
3(ii) A copy of the Bylaws of The Dow Chemical Company, as amended
effective as of July 14, 1994.
10(a) The Dow Chemical Company Executive Supplemental Retirement
Plan, incorporated by reference to Exhibit 10(a) to The
Dow Chemical Company Annual Report on Form 10-K for the year ended
December 31, 1992.
10(b) The Dow Chemical Company 1969 Award Plan (included as part
of and incorporated by reference to the Prospectus contained
in The Dow Chemical Company's Registration Statement on Form S-7,
File No. 2-32525, filed April 7, 1969), as amended on August 6, 1974
(incorporated by reference to Exhibit 41 to The Dow Chemical Company
Annual Report on Form 10-K for the year ended December 31, 1974), as
amended on August 9, 1979 (incorporated by reference to Exhibit 4 to
The Dow Chemical Company Annual Report on Form 10-K for the year ended
December 31, 1979), as amended on October 30, 1987 (incorporated by
reference to Exhibit 10(j) to The Dow Chemical Company Annual
Report on Form 10-K for the year ended December 31, 1987).
10(c) The Dow Chemical Company 1972 Option Plan, as amended through
December 31, 1982 (included as a part of and incorporated by
reference to the Prospectus contained in Post-Effective Amendment
No. 13 to The Dow Chemical Company's Registration Statement on
Form S-8, File No. 2-44789, filed June 23, 1983).
10(d) The Dow Chemical Company 1976 Option Plan, as amended through
December 31, 1982 (included as a part of and incorporated by
reference to the Prospectus contained in Post-Effective Amendment
No. 8 to The Dow Chemical Company's Registration Statement on
Form S-8, File No. 2-55837, filed June 23, 1983).
10(e) The Dow Chemical Company 1979 Award and Option Plan, as amended
through May, 1983 (included as part of and incorporated by reference
to the Prospectus contained in Post-Effective Amendment No. 4 to
The Dow Chemical Company's Registration Statement on Form S-8,
File No. 2-64560, filed June 23, 1983), as amended April 12, 1984
(incorporated by reference to Exhibit 10(ff) to The Dow Chemical
Company Annual Report on Form 10-K for the year ended December 31,
1984), as amended April 18, 1985 (incorporated by reference to
Exhibit 10(fff) to The Dow Chemical Company Annual Report on
Form 10-K for the year ended December 31, 1985), as amended
October 30, 1987 (incorporated by reference to Exhibit 10(j) to
The Dow Chemical Company Annual Report on Form 10-K for the year
ended December 31, 1987).
10(f) A copy of The Dow Chemical Company Voluntary Deferred Compensation
Plan for Outside Directors, as amended effective as of July 1, 1994.
10(g) The Dow Chemical Company Executive Post Retirement Life Insurance
Program, incorporated by reference to Exhibit 10(g) to The Dow
Chemical Company Annual Report on Form 10-K for the year ended
December 31, 1992.
10(h) The Dow Chemical Company Outside Directors' Pension Plan,
incorporated by reference to Exhibit 10(h) to The Dow Chemical
Company Annual Report on Form 10-K for the year ended December 31,
1992.
10(i) A written description of the Management Achievement Recognition
System adopted on April 8, 1987 (incorporated by reference to
Exhibit 10(k) to The Dow Chemical Company Annual Report on
Form 10-K for the year ended December 31, 1987).
55
EXHIBIT INDEX (Continued)
EXHIBIT NO. DESCRIPTION
10(j) The Dow Chemical Company Dividend Unit Plan, incorporated by
reference to Exhibit 10(j) to The Dow Chemical Company
Annual Report on Form 10-K for the year ended December 31, 1992.
10(k) The Dow Chemical Company 1988 Award and Option Plan (included as
part of and incorporated by reference to the Prospectus contained
in The Dow Chemical Company's Registration Statement on Form S-8,
File No. 33-21748, filed May 16, 1988), as amended during 1991
(incorporated by reference to Exhibit 10(k) to The Dow Chemical
Company Annual Report on Form 10-K for the year ended December 31,
1991).
10(l) The Dow Chemical Company Executive Award Plan, incorporated
by reference to Exhibit 10(l) to The Dow Chemical Company
Annual Report on Form 10-K for the year ended December 31, 1992.
10(m) The Dow Chemical Company Executive Split Dollar Life Insurance
Plan Agreement, incorporated by reference to Exhibit 10(m) to
The Dow Chemical Company Annual Report on Form 10-K for the year
ended December 31, 1992.
10(n) The Dow Chemical Company 1994 Executive Performance Plan,
incorporated by reference to the definitive Proxy Statement for
the Annual Meeting of Stockholders of The Dow Chemical Company held
on May 12, 1994.
10(o) A copy of The Dow Chemical Company 1994 Non-Employee Directors'
Stock Plan.
10(p) A written description of the one-time grant of shares of the
common stock of The Dow Chemical Company to nonemployee Directors,
incorporated by reference to the definitive Proxy Statement for the
Annual Meeting of Stockholders of The Dow Chemical Company to be held
May 11, 1995.
11 Computation of Earnings Per Common Share.
21 Subsidiaries of The Dow Chemical Company.
23 Independent Auditors' Consent.
27 Financial Data Schedule.
56