UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended MARCH 31, 2008

 

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)

 

989-636-1000

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes    x No

 

Class

 

Outstanding at March 31, 2008

Common Stock, par value $2.50 per share

 

930,421,523 shares

 

 



 

The Dow Chemical Company

 

QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended March 31, 2008

 

TABLE OF CONTENTS

 

 

 

PAGE

PART I - FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

Financial Statements.

 

3

 

 

 

 

 

Consolidated Statements of Income

 

3

 

 

 

 

 

Consolidated Balance Sheets

 

4

 

 

 

 

 

Consolidated Statements of Cash Flows

 

5

 

 

 

 

 

Consolidated Statements of Comprehensive Income

 

6

 

 

 

 

 

Notes to the Consolidated Financial Statements

 

7

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

24

 

 

 

 

 

Disclosure Regarding Forward-Looking Information

 

24

 

 

 

 

 

Results of Operations

 

24

 

 

 

 

 

Changes in Financial Condition

 

30

 

 

 

 

 

Other Matters

 

31

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

35

 

 

 

 

Item 4.

Controls and Procedures.

 

36

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

Item 1.

Legal Proceedings.

 

37

 

 

 

 

Item 1A.

Risk Factors.

 

37

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

37

 

 

 

 

Item 6.

Exhibits.

 

37

 

 

 

SIGNATURE

 

39

 

 

 

EXHIBIT INDEX

 

40

 

2



 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

 

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Income

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

In millions, except per share amounts (Unaudited)

 

2008

 

2007

 

Net Sales

 

$

14,824

 

$

12,432

 

Cost of sales

 

12,908

 

10,605

 

Research and development expenses

 

331

 

302

 

Selling, general and administrative expenses

 

498

 

418

 

Amortization of intangibles

 

22

 

11

 

Equity in earnings of nonconsolidated affiliates

 

274

 

274

 

Sundry income - net

 

46

 

69

 

Interest income

 

24

 

40

 

Interest expense and amortization of debt discount

 

145

 

146

 

Income before Income Taxes and Minority Interests

 

1,264

 

1,333

 

Provision for income taxes

 

299

 

335

 

Minority interests’ share in income

 

24

 

25

 

Net Income Available for Common Stockholders

 

$

941

 

$

973

 

Share Data

 

 

 

 

 

Earnings per common share - basic

 

$

1.00

 

$

1.01

 

Earnings per common share - diluted

 

$

0.99

 

$

1.00

 

Common stock dividends declared per share of common stock

 

$

0.42

 

$

0.375

 

Weighted-average common shares outstanding - basic

 

942.1

 

963.2

 

Weighted-average common shares outstanding - diluted

 

951.6

 

975.9

 

Depreciation

 

$

495

 

$

466

 

Capital Expenditures

 

$

359

 

$

330

 

 

See Notes to the Consolidated Financial Statements.

 

3



 

The Dow Chemical Company and Subsidiaries

Consolidated Balance Sheets

 

 

 

March 31,

 

Dec. 31,

 

In millions (Unaudited)

 

2008

 

2007

 

Assets

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

1,673

 

$

1,736

 

Marketable securities and interest-bearing deposits

 

1

 

1

 

Accounts and notes receivable:

 

 

 

 

 

Trade (net of allowance for doubtful receivables - 2008: $126; 2007: $118)

 

6,621

 

5,944

 

Other

 

3,919

 

3,740

 

Inventories

 

7,688

 

6,885

 

Deferred income tax assets - current

 

234

 

348

 

Total current assets

 

20,136

 

18,654

 

Investments

 

 

 

 

 

Investment in nonconsolidated affiliates

 

3,067

 

3,089

 

Other investments

 

2,399

 

2,489

 

Noncurrent receivables

 

404

 

385

 

Total investments

 

5,870

 

5,963

 

Property

 

 

 

 

 

Property

 

49,044

 

47,708

 

Less accumulated depreciation

 

34,499

 

33,320

 

Net property

 

14,545

 

14,388

 

Other Assets

 

 

 

 

 

Goodwill

 

3,608

 

3,572

 

Other intangible assets (net of accumulated amortization - 2008: $757; 2007: $721)

 

785

 

781

 

Deferred income tax assets - noncurrent

 

2,286

 

2,126

 

Asbestos-related insurance receivables - noncurrent

 

695

 

696

 

Deferred charges and other assets

 

2,732

 

2,621

 

Total other assets

 

10,106

 

9,796

 

Total Assets

 

$

50,657

 

$

48,801

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Notes payable

 

$

2,114

 

$

1,548

 

Long-term debt due within one year

 

827

 

586

 

Accounts payable:

 

 

 

 

 

Trade

 

4,834

 

4,555

 

Other

 

2,129

 

1,981

 

Income taxes payable

 

683

 

728

 

Deferred income tax liabilities - current

 

131

 

117

 

Dividends payable

 

394

 

418

 

Accrued and other current liabilities

 

2,292

 

2,512

 

Total current liabilities

 

13,404

 

12,445

 

Long-Term Debt

 

7,392

 

7,581

 

Other Noncurrent Liabilities

 

 

 

 

 

Deferred income tax liabilities - noncurrent

 

907

 

854

 

Pension and other postretirement benefits - noncurrent

 

3,102

 

3,014

 

Asbestos-related liabilities - noncurrent

 

959

 

1,001

 

Other noncurrent obligations

 

3,284

 

3,103

 

Total other noncurrent liabilities

 

8,252

 

7,972

 

Minority Interest in Subsidiaries

 

430

 

414

 

Preferred Securities of Subsidiaries

 

1,000

 

1,000

 

Stockholders’ Equity

 

 

 

 

 

Common stock

 

2,453

 

2,453

 

Additional paid-in capital

 

947

 

902

 

Retained earnings

 

18,542

 

18,004

 

Accumulated other comprehensive income (loss)

 

415

 

(170

)

Treasury stock at cost

 

(2,178

)

(1,800

)

Net stockholders’ equity

 

20,179

 

19,389

 

Total Liabilities and Stockholders’ Equity

 

$

50,657

 

$

48,801

 

 

See Notes to the Consolidated Financial Statements.

 

4



 

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Cash Flows

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

In millions (Unaudited)

 

2008

 

2007

 

Operating Activities

 

 

 

 

 

Net Income Available for Common Stockholders

 

$

941

 

$

973

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

574

 

508

 

Provision (credit) for deferred income tax

 

64

 

(43

)

Earnings of nonconsolidated affiliates less than (in excess of) dividends received

 

45

 

(44

)

Minority interests’ share in income

 

24

 

25

 

Pension contributions

 

(43

)

(52

)

Net gain on sale of consolidated companies

 

(18

)

 

Net gain on sales of investments

 

(18

)

(26

)

Net gain on sales of property and businesses

 

(25

)

(30

)

Other net loss (gain)

 

1

 

(34

)

Excess tax benefits from share-based payment arrangements

 

 

(9

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts and notes receivable

 

(689

)

(662

)

Inventories

 

(786

)

(48

)

Accounts payable

 

326

 

(273

)

Other assets and liabilities

 

51

 

251

 

Cash provided by operating activities

 

447

 

536

 

Investing Activities

 

 

 

 

 

Capital expenditures

 

(359

)

(330

)

Proceeds from sales of property, businesses and consolidated companies

 

88

 

35

 

Purchase of previously leased assets

 

(10

)

(1

)

Investments in consolidated companies

 

(31

)

 

Investments in nonconsolidated affiliates

 

(27

)

(1

)

Distributions from nonconsolidated affiliates

 

2

 

3

 

Proceeds from sale of ownership interests in nonconsolidated affiliates

 

 

30

 

Purchases of investments

 

(285

)

(367

)

Proceeds from sales and maturities of investments

 

332

 

341

 

Cash used in investing activities

 

(290

)

(290

)

Financing Activities

 

 

 

 

 

Changes in short-term notes payable

 

559

 

42

 

Payments on long-term debt

 

(57

)

(1

)

Proceeds from issuance of long-term debt

 

5

 

 

Purchases of treasury stock

 

(411

)

(420

)

Proceeds from sales of common stock

 

21

 

132

 

Excess tax benefits from share-based payment arrangements

 

 

9

 

Distributions to minority interests

 

(22

)

(22

)

Dividends paid to stockholders

 

(395

)

(359

)

Cash used in financing activities

 

(300

)

(619

)

Effect of Exchange Rate Changes on Cash

 

80

 

(7

)

Summary

 

 

 

 

 

Decrease in cash and cash equivalents

 

(63

)

(380

)

Cash and cash equivalents at beginning of year

 

1,736

 

2,757

 

Cash and cash equivalents at end of period

 

$

1,673

 

$

2,377

 

 

See Notes to the Consolidated Financial Statements.

 

5



 

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Comprehensive Income

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

In millions (Unaudited)

 

2008

 

2007

 

Net Income Available for Common Stockholders

 

$

941

 

$

973

 

Other Comprehensive Income (Loss), Net of Tax

 

 

 

 

 

Net unrealized losses on investments

 

(29

)

(7

)

Translation adjustments

 

573

 

74

 

Adjustments to pension and other postretirement benefit plans

 

14

 

38

 

Net gains on cash flow hedging derivative instruments

 

27

 

42

 

Total other comprehensive income

 

585

 

147

 

Comprehensive Income

 

$

1,526

 

$

1,120

 

 

See Notes to the Consolidated Financial Statements.

 

6



 

 

The Dow Chemical Company and Subsidiaries

 

 

PART I – FINANCIAL INFORMATION, Item 1. Financial Statements.

 

(Unaudited)

Notes to the Consolidated Financial Statements

 

 

NOTE A – CONSOLIDATED FINANCIAL STATEMENTS

 

The unaudited interim consolidated financial statements of The Dow Chemical Company and its subsidiaries (“Dow” or the “Company”) were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect all adjustments (including normal recurring accruals) which, in the opinion of management, are considered necessary for the fair presentation of the results for the periods presented. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

 

NOTE B – RECENT ACCOUNTING PRONOUNCEMENTS

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. The Statement applies under other accounting pronouncements that require or permit fair value measurements and was effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2, which delayed the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statement on a recurring basis, to fiscal years beginning after November 15, 2008. On January 1, 2008, the Company adopted the portion of SFAS No. 157 that was not delayed, and since the Company’s existing fair value measurements are consistent with the guidance of the Statement, the partial adoption of the Statement did not have a material impact on the Company’s consolidated financial statements. The Company uses a December 31 measurement date for its pension and other postretirement plans; therefore, the Company is still evaluating the impact of adopting the Statement for its plan assets. The adoption of the deferred portion of the Statement on January 1, 2009 is not expected to have a material impact on the Company’s consolidated financial statements. See Note F for expanded disclosures about fair value measurements.

 

SAB No. 74 Disclosures for Accounting Standards Issued But Not Yet Adopted

 

In December 2007, the FASB revised SFAS No. 141, “Business Combinations,” to establish revised principles and requirements for how entities will recognize and measure assets and liabilities acquired in a business combination. The Statement is effective for business combinations completed on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company will apply the guidance of the Statement to business combinations completed on or after January 1, 2009.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.” The Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The Statement is effective on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the impact of adopting the Statement on January 1, 2009.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133.” The Statement requires enhanced disclosures about an entity’s derivative and hedging activities. The Statement is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is evaluating the additional disclosures required by the Statement beginning January 1, 2009.

 

NOTE C – RESTRUCTURING

 

2007 Restructuring

 

On December 3, 2007, the Company’s Board of Directors approved a restructuring plan that includes the shutdown of a number of assets and organizational changes within targeted support functions to improve the efficiency and cost effectiveness of the Company’s global operations. As a result of these shutdowns and organizational changes, which are scheduled to be completed by the end of 2009, the Company recorded pretax restructuring charges totaling $590 million in the fourth quarter of 2007. The charges consisted of asset write-downs and write-offs of $422 million, costs associated with exit or disposal activities of $82 million and severance costs of $86 million. The impact of the charges was shown as “Restructuring charges” in the 2007 consolidated statements of income.

 

7



 

The severance component of the 2007 restructuring charges of $86 million was for the separation of approximately 978 employees under the terms of Dow’s ongoing benefit arrangements, primarily over two years. At March 31, 2008, severance of approximately $8 million had been paid to 104 employees and a liability of $80 million remained for approximately 874 employees.

 

The following table summarizes 2008 activities related to the Company’s 2007 restructuring reserve:

 

2008 Activities Related to 2007 Restructuring

 

 

In millions

 

Costs associated
with Exit or
Disposal
Activities

 

Severance
Costs

 

Total

 

Reserve balance at December 31, 2007

 

$

79

 

$

85

 

$

164

 

Cash payments

 

(2

)

(7

)

(9

)

Foreign currency impact

 

3

 

2

 

5

 

Reserve balance at March 31, 2008

 

$

80

 

$

80

 

$

160

 

 

2006 Restructuring

 

On August 29, 2006, the Company’s Board of Directors approved a plan to shut down a number of assets around the world as the Company continues its drive to improve the competitiveness of its global operations. As a consequence of these shutdowns, which are scheduled to be completed by the first quarter of 2009, and other optimization activities, the Company recorded pretax restructuring charges totaling $591 million in 2006. The charges consisted of asset write-downs and write-offs of $346 million, costs associated with exit or disposal activities of $172 million and severance costs of $73 million. The impact of the charges was shown as “Restructuring charges” in the 2006 consolidated statements of income.

 

The severance component of the 2006 restructuring charges of $73 million was for the separation of approximately 810 employees under the terms of Dow’s ongoing benefit arrangements, primarily over two years. As of March 31, 2008, severance of $37 million had been paid to 468 employees, and a liability of $31 million remained for approximately 303 employees.

 

The following table summarizes 2008 activities related to the Company’s 2006 restructuring reserve:

 

2008 Activities Related to 2006 Restructuring

 

In millions

 

Costs associated
with Exit or
Disposal
Activities

 

Severance
Costs

 

Total

 

Reserve balance at December 31, 2007

 

$

135

 

$

39

 

$

174

 

Adjustment to reserve

 

(5

)

 

(5

)

Cash payments

 

(1

)

(9

)

(10

)

Foreign currency impact

 

1

 

1

 

2

 

Reserve balance at March 31, 2008

 

$

130

 

$

31

 

$

161

 

 

8



 

NOTE D – INVENTORIES

 

The following table provides a breakdown of inventories:

 

Inventories
In millions

 

March 31,
2008

 

Dec. 31,
2007

 

Finished goods

 

$

4,720

 

$

4,085

 

Work in process

 

1,483

 

1,595

 

Raw materials

 

804

 

566

 

Supplies

 

681

 

639

 

Total inventories

 

$

7,688

 

$

6,885

 

 

The reserves reducing inventories from the first-in, first-out (“FIFO”) basis to the last-in, first-out (“LIFO”) basis amounted to $1,761 million at March 31, 2008 and $1,511 million at December 31, 2007.

 

NOTE E – GOODWILL AND OTHER INTANGIBLE ASSETS

 

The following table shows the carrying amount of goodwill by operating segment:

 

Goodwill

In millions

 

Performance
Plastics

 

Performance
Chemicals

 

Agricultural
Sciences

 

Basic
Plastics

 

Hydrocarbons
and Energy

 

Total

 

Balance at December 31, 2007

 

$

1,034

 

$

995

 

$

1,380

 

$

100

 

$

63

 

$

3,572

 

Goodwill related to 2008 acquisitions of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional 51% interest in Pacific Plastics Thailand Limited

 

7

 

 

 

 

 

7

 

Texas Triumph Seed Co., Inc.

 

 

 

10

 

 

 

10

 

Adjustments to goodwill related to 2007 acquisitions of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Wolff Walsrode

 

 

7

 

 

 

 

7

 

Hyperlast Limited

 

1

 

 

 

 

 

1

 

GNS Technologies, LLC

 

2

 

 

 

 

 

2

 

Poly-Carb Inc.

 

(2

)

 

 

 

 

(2

)

UPPC AG

 

11

 

 

 

 

 

11

 

Balance at March 31, 2008

 

$

1,053

 

$

1,002

 

$

1,390

 

$

100

 

$

63

 

$

3,608

 

 

The following table provides information regarding the Company’s other intangible assets:

 

Other Intangible Assets

 

At March 31, 2008

 

At December 31, 2007

 

 

 

Gross

 

 

 

 

 

Gross

 

 

 

 

 

 

 

Carrying

 

Accumulated

 

 

 

Carrying

 

Accumulated

 

 

 

In millions

 

Amount

 

Amortization

 

Net

 

Amount

 

Amortization

 

Net

 

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses and intellectual property

 

$

309

 

$

(172

)

$

137

 

$

302

 

$

(165

)

$

137

 

Patents

 

146

 

(108

)

38

 

145

 

(104

)

41

 

Software

 

599

 

(331

)

268

 

575

 

(318

)

257

 

Trademarks

 

176

 

(54

)

122

 

173

 

(51

)

122

 

Other

 

312

 

(92

)

220

 

307

 

(83

)

224

 

Total

 

$

1,542

 

$

(757

)

$

785

 

$

1,502

 

$

(721

)

$

781

 

 

9



 

The following table provides information regarding amortization expense:

 

Amortization Expense

 

Three Months Ended

 

In millions

 

March 31,
2008

 

March 31,
2007

 

Other intangible assets, excluding software

 

$

22

 

$

11

 

Software, included in “Cost of sales”

 

$

11

 

$

10

 

 

Total estimated amortization expense for 2008 and the five succeeding fiscal years is as follows:

 

Estimated Amortization Expense
In millions

 

2008

 

$

132

 

2009

 

$

121

 

2010

 

$

117

 

2011

 

$

106

 

2012

 

$

99

 

2013

 

$

67

 

 

NOTE F – FAIR VALUE MEASUREMENTS

 

The following table summarizes the bases used to measure certain assets and liabilities at fair value on a recurring basis in the consolidated balance sheets:

 

Basis of Fair Value Measurements

 

 

 

Quoted Prices

 

Significant

 

 

In millions

 

At
March 31,
2008

 

in Active
Markets for
Identical Items
(Level 1)

 

Other
Observable
Inputs
(Level 2)

 

Assets at fair value:

 

 

 

 

 

 

 

Equity securities (1)

 

$

493

 

$

457

 

$

36

 

Debt securities (1)

 

1,492

 

 

1,492

 

Derivatives relating to:

 

 

 

 

 

 

 

Foreign currency

 

149

 

 

149

 

Interest rates

 

1

 

 

1

 

Commodities

 

86

 

 

86

 

Total assets at fair value

 

$

2,221

 

$

457

 

$

1,764

 

Liabilities at fair value:

 

 

 

 

 

 

 

Derivatives relating to:

 

 

 

 

 

 

 

Foreign currency

 

$

(78

)

 

$

(78

)

Interest rates

 

(3

)

 

(3

)

Commodities

 

(22

)

 

(22

)

Total liabilities at fair value

 

$

(103

)

 

$

(103

)

 


(1)   The Company’s investments in equity and debt securities are classified as available-for-sale, and are included in “Other investments” in the consolidated balance sheets.

 

For assets that are measured using quoted prices in active markets, the total fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using significant other observable inputs are primarily valued by reference to quoted prices of similar assets or liabilities in active markets, adjusted for any terms specific to that asset or liability. For all other assets and liabilities for which observable inputs are used, fair value is derived through the use of fair value models, such as a discounted cash flow model or other standard pricing models.

 

10



 

NOTE G – COMMITMENTS AND CONTINGENT LIABILITIES

 

Litigation

 

Breast Implant Matters

 

On May 15, 1995, Dow Corning Corporation (“Dow Corning”), in which the Company is a 50 percent shareholder, voluntarily filed for protection under Chapter 11 of the Bankruptcy Code to resolve litigation related to Dow Corning’s breast implant and other silicone medical products. On June 1, 2004, Dow Corning’s Joint Plan of Reorganization (the “Joint Plan”) became effective and Dow Corning emerged from bankruptcy. The Joint Plan contains release and injunction provisions resolving all tort claims brought against various entities, including the Company, involving Dow Corning’s breast implant and other silicone medical products.

 

To the extent not previously resolved in state court actions, cases involving Dow Corning’s breast implant and other silicone medical products filed against the Company were transferred to the U.S. District Court for the Eastern District of Michigan (the “District Court”) for resolution in the context of the Joint Plan. On October 6, 2005, all such cases then pending in the District Court against the Company were dismissed. Should cases involving Dow Corning’s breast implant and other silicone medical products be filed against the Company in the future, they will be accorded similar treatment. It is the opinion of the Company’s management that the possibility is remote that a resolution of all future cases will have a material adverse impact on the Company’s consolidated financial statements.

 

As part of the Joint Plan, Dow and Corning Incorporated have agreed to provide a credit facility to Dow Corning in an aggregate amount of $300 million. The Company’s share of the credit facility is $150 million and is subject to the terms and conditions stated in the Joint Plan. At March 31, 2008, no draws had been taken against the credit facility.

 

DBCP Matters

 

Numerous lawsuits have been brought against the Company and other chemical companies, both inside and outside of the United States, alleging that the manufacture, distribution or use of pesticides containing dibromochloropropane (“DBCP”) has caused personal injury and property damage, including contamination of groundwater. 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.

 

Environmental Matters

 

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. At March 31, 2008, the Company had accrued obligations of $320 million for environmental remediation and restoration costs, including $27 million for the remediation of Superfund sites. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Company has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to twice that amount. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies for handling site remediation and restoration. At December 31, 2007, the Company had accrued obligations of $322 million for environmental remediation and restoration costs, including $28 million for the remediation of Superfund sites.

 

Midland Site Environmental Matters

 

On June 12, 2003, the Michigan Department of Environmental Quality (“MDEQ”) issued a Hazardous Waste Operating License (the “License”) to the Company’s Midland, Michigan manufacturing site (the “Midland site”), which included provisions requiring the Company to conduct an investigation to determine the nature and extent of off-site contamination in Midland area soils; Tittabawassee and Saginaw River sediment and floodplain soils; and Saginaw Bay. The License required the Company, by August 11, 2003, to propose a detailed Scope of Work for the off-site investigation for the City of Midland and the Tittabawassee River and floodplain for review and approval by the MDEQ. Revised Scopes of Work were approved by the MDEQ on October 18, 2005. The Company was required to submit a Scope of Work for the investigation of the Saginaw River and Saginaw Bay by August 11, 2007. The Company submitted the Scope of Work for the Saginaw River and Saginaw Bay on July 13, 2007. The Company received a Notice of Deficiency dated August 29, 2007, from the MDEQ with respect to the Scope of Work for the Saginaw River and Saginaw Bay. The Company submitted a revised Scope of Work for the Saginaw River and Saginaw Bay to the MDEQ on October 15, 2007. On February 1, 2008, the Company received an approval with modification for the Saginaw River and Saginaw Bay Scope of Work. The Company appealed the MDEQ’s approval with modification action in Midland Circuit Court on February 21, 2008 and then by filing a Contest Case Petition with the Michigan Office of Administrative Hearings and Rules on March 28, 2008.

 

Discussions between the Company and the MDEQ that occurred in 2004 and early 2005 regarding how to proceed with off-site corrective action under the License resulted in the execution of the Framework for an Agreement Between the State of Michigan and The Dow Chemical Company (the “Framework”) on January 20, 2005. The Framework committed the

 

11



 

Company to propose a remedial investigation work plan by the end of 2005, conduct certain studies, and take certain immediate interim remedial actions in the City of Midland and along the Tittabawassee River.

 

Remedial Investigation Work Plans

 

The Company submitted Remedial Investigation Work Plans for the City of Midland and for the Tittabawassee River on December 29, 2005. By letters dated March 2, 2006 and April 13, 2006, the MDEQ provided two Notices of Deficiency (“Notices”) to the Company regarding the Remedial Investigation Work Plans. The Company responded, as required, to some of the items in the Notices on May 1, 2006, and as required responded to the balance of the items and submitted revised Remedial Investigation Work Plans on December 1, 2006. In response to subsequent discussions with the MDEQ, the Company submitted further revised Remedial Investigation Work Plans on September 17, 2007, for the Tittabawassee River and on October 15, 2007, for the City of Midland.

 

Studies Conducted

 

On July 12, 2006, the MDEQ approved the sampling for the first six miles of the Tittabawassee River. On December 1, 2006, the MDEQ approved the Sampling and Analysis Plan in Support of Bioavailability Study for Midland (the “Plan”). The results of the Plan were provided to the MDEQ on March 22, 2007. On May 3, 2007, the MDEQ approved the GeoMorph® Pilot Site Characterization Report for the first six miles and approved this approach for the balance of the Tittabawassee River with some qualifications. On July 12, 2007, the MDEQ approved, with qualifications, the sampling for the next 11 miles of the Tittabawassee River. On March 3, 2008 the Company submitted to the MDEQ the Tittabawassee River Site Characterization Report that incorporated the data obtained from the 2006 and 2007 field investigations.

 

Interim Remedial Actions

 

The Company has been working with the MDEQ to implement Interim Response Activities and Pilot Corrective Action Plans in specific areas in and along the Tittabawassee River, where elevated levels of dioxins and furans were found during the investigation of the first six miles of the river.

 

Removal Actions

 

On June 27, 2007, the U.S. Environmental Protection Agency (“EPA”) sent a letter to the Company demanding that the Company enter into consent orders under Section 106 of the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) for three areas identified during investigation of the first six miles of the Tittabawassee River as areas for interim remedial actions under MDEQ oversight. The EPA sought a commitment that the Company immediately engage in remedial actions to remove soils and sediments. Three removal orders were negotiated and were signed on July 12, 2007, and the soil and sediment removal work required by these orders has been completed. On November 15, 2007, the Company and the EPA entered into a CERCLA removal order requiring the Company to remove sediment in the Saginaw River where elevated concentrations were identified during investigative work conducted on the Saginaw River. The sediment removal work was completed in December 2007.

 

The Framework also contemplates that the Company, the State of Michigan and other federal and tribal governmental entities will negotiate the terms of an agreement or agreements to resolve potential governmental claims against the Company related to historical off-site contamination associated with the Midland site. The Company and the governmental parties began to meet in the fall of 2005 and entered into a Confidentiality Agreement in December 2005. The Company continues to conduct negotiations with the governmental parties under the Federal Alternative Dispute Resolution Act.

 

On September 12, 2007, the EPA issued a press release reporting that they were withdrawing from the alternative dispute resolution process. On September 28, 2007, the Company entered into a Funding and Participation Agreement with the natural resource damage trustees that addressed the Company’s payment of past costs incurred by the trustees, payment of the costs of a trustee coordinator and a process to review additional cooperative studies that the Company might agree to fund or conduct with the natural resource damage trustees.

 

On October 10, 2007, the EPA presented a Special Notice letter to the Company offering to enter into negotiations for an administrative order on consent for the Company to conduct or fund a remedial investigation, a feasibility study, interim remedial actions and a remedial design for the Tittabawassee River, Saginaw River, and Saginaw Bay. The Company agreed to enter into negotiations and submitted its Good Faith Offer to the EPA on December 10, 2007. On January 4, 2008, the EPA terminated negotiations under the Special Notice Letter.

 

On March 18, 2008, the Company and the natural resource damage trustees entered into a Memorandum of Understanding to provide a mechanism for the Company to fund cooperative studies related to the assessment of natural

 

12



 

resource damages. On April 7, 2008 the natural resource damage trustees released for public review and comment their “Natural Resource Damage Assessment Plan for the Tittabawassee River System Assessment Area.”

 

At the end of 2007, the Company had an accrual for off-site corrective action of $5 million (included in the total accrued obligation of $322 million at December 31, 2007) based on the range of activities that the Company proposed and discussed implementing with the MDEQ and which is set forth in the Framework. At March 31, 2008, the accrual for off-site corrective action was $3 million (included in the total accrued obligation of $320 million at March 31, 2008).

 

Environmental Matters Summary

 

It is the opinion of the Company’s management that the possibility is remote that costs in excess of those disclosed will have a material adverse impact on the Company’s consolidated financial statements.

 

Asbestos-Related Matters of Union Carbide Corporation

 

Union Carbide Corporation (“Union Carbide”), a wholly owned subsidiary of the Company, is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to Union Carbide’s products.

 

Influenced by the bankruptcy filings of numerous defendants in asbestos-related litigation and the prospects of various forms of state and national legislative reform, the rate at which plaintiffs filed asbestos-related suits against various companies, including Union Carbide and Amchem, increased in 2001, 2002 and the first half of 2003. Since then, the rate of filing has significantly abated. Union Carbide expects more asbestos-related suits to be filed against Union Carbide and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.

 

Based on a study completed by Analysis, Research & Planning Corporation (“ARPC”) in January 2003, Union Carbide increased its December 31, 2002 asbestos-related liability for pending and future claims for the 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. Since then, Union Carbide has compared current asbestos claim and resolution activity to the results of the most recent ARPC study at each balance sheet date to determine whether the accrual continues to be appropriate. In addition, Union Carbide has requested ARPC to review Union Carbide’s historical asbestos claim and resolution activity each November since 2004 to determine the appropriateness of updating the most recent ARPC study.

 

In November 2006, Union Carbide requested ARPC to review Union Carbide’s historical asbestos claim and resolution activity and determine the appropriateness of updating its most recent study from January 2005. In response to that request, ARPC reviewed and analyzed data through October 31, 2006 and concluded that the experience from 2004 through 2006 was sufficient for the purpose of forecasting future filings and values of asbestos claims filed against Union Carbide and Amchem, and could be used in place of previous assumptions to update its January 2005 study. The resulting study, completed by ARPC in December 2006, stated that the undiscounted cost of resolving pending and future asbestos-related claims against Union Carbide and Amchem, excluding future defense and processing costs, through 2021 was estimated to be between approximately $1.2 billion and $1.5 billion. As in its January 2003 and January 2005 studies, ARPC provided estimates for a longer period of time in its December 2006 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.

 

Based on ARPC’s December 2006 study and Union Carbide’s own review of the asbestos claim and resolution activity, Union Carbide decreased its asbestos-related liability for pending and future claims to $1.2 billion at December 31, 2006 which covered the 15-year period ending in 2021 excluding future defense and processing costs. The reduction was $177 million and was shown as “Asbestos-related credit” in the consolidated statements of income for 2006.

 

In November 2007, Union Carbide requested ARPC to review Union Carbide’s 2007 asbestos claim and resolution activity and determine the appropriateness of updating its December 2006 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2007. In December 2007, ARPC stated that an update of its study would not provide a more likely estimate of future events than the estimate reflected in its study of the previous year and, therefore, the estimate in that study remained applicable. Based on Union Carbide’s own review of the asbestos claim and resolution activity and ARPC’s response, Union Carbide determined that no change to the accrual was required. At December 31, 2007, Union Carbide’s asbestos-related liability for pending and future claims was $1.1 billion. At December 31, 2007, approximately 31 percent of the recorded liability related to pending claims and approximately 69 percent related to future claims.

 

Based on Union Carbide’s review of 2008 activity, Union Carbide determined that no adjustment to the accrual was required at March 31, 2008. Union Carbide’s asbestos-related liability for pending and future claims was $1.1 billion at March 31, 2008. Approximately 30 percent of the recorded liability related to pending claims and approximately 70 percent related to future claims.

 

13



 

At December 31, 2002, Union Carbide increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion, substantially exhausting its asbestos product liability coverage. The insurance receivable related to the asbestos liability was determined by Union Carbide after a thorough review of applicable insurance policies and the 1985 Wellington Agreement, to which Union Carbide and many of its liability insurers are signatory parties, as well as other insurance settlements, with due consideration given to applicable deductibles, retentions and policy limits, and taking into account the solvency and historical payment experience of various insurance carriers. The Wellington Agreement and other agreements with insurers are designed to facilitate an orderly resolution and collection of Union Carbide’s insurance policies and to resolve issues that the insurance carriers may raise.

 

In September 2003, Union Carbide filed a comprehensive insurance coverage case, now proceeding in the Supreme Court of the State of New York, County of New York, seeking to confirm its rights to insurance for various asbestos claims and to facilitate an orderly and timely collection of insurance proceeds. This lawsuit was filed against insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place with Union Carbide regarding their asbestos-related insurance coverage, in order to facilitate an orderly resolution and collection of such insurance policies and to resolve issues that the insurance carriers may raise. Although the lawsuit is continuing, through the end of the first quarter of 2008, Union Carbide had reached settlements with several of the carriers involved in this litigation.

 

Union Carbide’s receivable for insurance recoveries related to its asbestos liability was $465 million at March 31, 2008 and $467 million at December 31, 2007. At March 31, 2008 and December 31, 2007, all of the receivable for insurance recoveries was related to insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place regarding their asbestos-related insurance coverage.

 

In addition to the receivable for insurance recoveries related to its asbestos liability, Union Carbide had receivables for defense and resolution costs submitted to insurance carriers for reimbursement as follows:

 

Receivables for Costs Submitted to Insurance Carriers

In millions

 

March 31,
2008

 

Dec. 31,
2007

 

Receivables for defense costs

 

$22

 

$18

 

Receivables for resolution costs

 

248

 

253

 

Total

 

$270

 

$271

 

 

Union Carbide expenses defense costs as incurred. The pretax impact for defense and resolution costs, net of insurance, was $14 million in the first quarter of 2008 and $17 million in the first quarter of 2007, and was reflected in “Cost of sales.”

 

After a review of its insurance policies, with due consideration given to applicable deductibles, retentions and policy limits, after taking into account the solvency and historical payment experience of various insurance carriers; existing insurance settlements; and the advice of outside counsel with respect to the applicable insurance coverage law relating to the terms and conditions of its insurance policies, Union Carbide continues to believe that its recorded receivable for insurance recoveries from all insurance carriers is probable of collection.

 

The amounts recorded by Union Carbide for the asbestos-related liability and related insurance receivable described above were based upon current, known facts. However, future events, such as the number of new claims to be filed and/or received each year, the average cost of disposing of each such claim, coverage issues among insurers, and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries for Union Carbide to be higher or lower than those projected or those recorded.

 

Because of the uncertainties described above, Union Carbide’s management cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing Union Carbide and Amchem. Union Carbide’s management believes that it is reasonably possible that the cost of disposing of Union Carbide’s asbestos-related claims, including future defense costs, could have a material adverse impact on Union Carbide’s results of operations and cash flows for a particular period and on the consolidated financial position of Union Carbide.

 

It is the opinion of Dow’s management that it is reasonably possible that the cost of Union Carbide disposing of its asbestos-related claims, including future defense costs, could have a material adverse impact on the Company’s results of operations and cash flows for a particular period and on the consolidated financial position of the Company.

 

Synthetic Rubber Industry Matters

 

In 2003, the U.S., Canadian and European competition authorities initiated separate investigations into alleged anticompetitive behavior by certain participants in the synthetic rubber industry. Certain subsidiaries of the Company (but as

 

14



 

to the investigation in Europe only) have responded to requests for documents and are otherwise cooperating in the investigations.

 

On June 10, 2005, the Company received a Statement of Objections from the European Commission (the “EC”) stating that it believed that the Company and certain subsidiaries of the Company (the “Dow Entities”), together with other participants in the synthetic rubber industry, engaged in conduct in violation of European competition laws with respect to the butadiene rubber and emulsion styrene butadiene rubber businesses. In connection therewith, on November 29, 2006, the EC issued its decision alleging infringement of Article 81 of the Treaty of Rome and imposed a fine of Euro 64.575 million (approximately $85 million) on the Dow Entities. Several other companies were also named and fined. Subsequently, the Company has been named in various related U.S. civil actions. In the fourth quarter of 2006, the Company recognized a loss contingency of $85 million related to the fine. The Company has appealed the EC’s decision.

 

Additionally, on March 10, 2007, the Company received a Statement of Objections from the EC stating that it believed that DuPont Dow Elastomers L.L.C. (“DDE”), a former 50:50 joint venture with E.I. du Pont de Nemours and Company (“DuPont”), together with other participants in the synthetic rubber industry, engaged in conduct in violation of European competition laws with respect to the polychloroprene business. This Statement of Objections specifically names the Company, in its capacity as a former joint venture owner of DDE. On December 5, 2007, the EC announced its decision to impose a fine on the Company, among others, in the amount of Euro 48.675 million (approximately $72 million). The Company previously transferred its joint venture ownership interest in DDE to DuPont in 2005, and DDE then changed its name to DuPont Performance Elastomers L.L.C. (“DPE”). In February 2008, DuPont, DPE and the Company each filed an appeal of the December 5, 2007 decision of the EC. Based on the Company’s allocation agreement with DuPont, the Company’s share of this fine, regardless the outcome of the appeals, will not have a material adverse impact on the Company’s consolidated financial statements.

 

Other Litigation Matters

 

In addition to breast implant, DBCP, environmental and synthetic rubber industry matters, the Company is party to a number of other claims and lawsuits arising out of the normal course of business with respect to commercial matters, including product liability, 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. Dow has an active risk management program consisting of numerous insurance policies secured from many carriers at various times. These policies provide coverage that will be utilized to minimize the impact, if any, of the contingencies described above.

 

Summary

 

Except for the possible effect of Union Carbide’s asbestos-related liability described above, 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.

 

Purchase Commitments

 

The Company has numerous agreements for the purchase of ethylene-related products globally. The purchase prices are determined primarily on a cost-plus basis. Total purchases under these agreements were $1,624 million in 2007, $1,356 million in 2006 and $1,175 million in 2005. The Company’s take-or-pay commitments associated with these agreements at December 31, 2007 are included in the table below.

 

The Company also has various commitments for take-or-pay and throughput agreements. Such commitments are at prices not in excess of current market prices. The terms of all but one of these agreements extend from one to 25 years. One agreement has terms extending to 80 years. The determinable future commitment for this agreement is included for 10 years in the following table which presents the fixed and determinable portion of obligations under the Company’s purchase commitments at December 31, 2007:

 

Fixed and Determinable Portion of Take-or-Pay and 
Throughput Obligations at December 31, 2007

In millions

 

 

 

2008

 

$

2,136

 

2009

 

1,845

 

2010

 

1,578

 

2011

 

1,117

 

2012

 

941

 

2013 and beyond

 

5,212

 

Total

 

$

12,829

 

 

15



 

In addition, in January 2008, the Company entered into a new 11-year contract for the purchase of ethylene-related products beginning in 2010. At March 31, 2008, the fixed and determinable portion of the take-or-pay commitment associated with this new contract is $57 million in 2010, $114 million in 2011, $114 million in 2012 and $912 million in 2013 and beyond.

 

In addition to the take-or-pay obligations at December 31, 2007, the Company had outstanding commitments which ranged from one to six years for steam, electrical power, materials, property and other items used in the normal course of business of approximately $234 million. Such commitments were at prices not in excess of current market prices.

 

Guarantees

 

The Company provides a variety of guarantees as described more fully in the following sections.

 

Guarantees

 

Guarantees arise during the ordinary course of business from relationships with customers and nonconsolidated affiliates when the Company undertakes an obligation to guarantee the performance of others (via delivery of cash or other assets) if specified triggering events occur. With guarantees, such as commercial or financial contracts, non-performance by the guaranteed party triggers the obligation of the Company to make payments to the beneficiary of the guarantee. The majority of the Company’s guarantees relate to debt of nonconsolidated affiliates, which have expiration dates ranging from less than one year to eight years, and trade financing transactions in Latin America and Asia Pacific, which typically expire within one year of their inception.

 

Residual Value Guarantees

 

The Company provides guarantees related to leased assets specifying the residual value that will be available to the lessor at lease termination through sale of the assets to the lessee or third parties.

 

The following tables provide a summary of the final expiration, maximum future payments and recorded liability reflected in the consolidated balance sheets for each type of guarantee:

 

Guarantees at March 31, 2008

 

Final

 

Maximum Future

 

Recorded

 

In millions

 

Expiration

 

Payments

 

Liability

 

Guarantees

 

2014

 

$

353

 

$

22

 

Residual value guarantees

 

2015

 

1,040

 

5

 

Total guarantees

 

 

 

$

1,393

 

$

27

 

 

Guarantees at December 31, 2007

 

Final

 

Maximum Future

 

Recorded

 

In millions

 

Expiration

 

Payments

 

Liability

 

Guarantees

 

2014

 

$

354

 

$

22

 

Residual value guarantees

 

2015

 

1,035

 

5

 

Total guarantees

 

 

 

$

1,389

 

$

27

 

 

Asset Retirement Obligations

 

The Company has recognized asset retirement obligations for the following activities:  demolition and remediation activities at manufacturing sites in the United States, Canada and Europe; capping activities at landfill sites in the United States, Canada, Italy and Brazil; and asbestos encapsulation as a result of planned demolition and remediation activities at manufacturing and administrative sites in the United States, Canada and Europe.

 

The aggregate carrying amount of asset retirement obligations recognized by the Company was $116 million at March 31, 2008 and December 31, 2007. The discount rate used to calculate the Company’s asset retirement obligation was 5.08 percent. These obligations are included in the consolidated balance sheets as “Other noncurrent obligations.”

 

The Company has not recognized conditional asset retirement obligations for which a fair value cannot be reasonably estimated in its consolidated financial statements. It is the opinion of the Company’s management that the possibility is remote that such conditional asset retirement obligations, when estimable, will have a material adverse impact on the Company’s consolidated financial statements based on current costs.

 

16



 

NOTE H – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

 

Net Periodic Benefit Cost for All Significant Plans

 

Three Months Ended

 

In millions

 

March 31,
2008

 

March 31,
2007

 

Defined Benefit Pension Plans:

 

 

 

 

 

Service cost

 

$

67

 

$

71

 

Interest cost

 

241

 

217

 

Expected return on plan assets

 

(310

)

(291

)

Amortization of prior service cost

 

8

 

6

 

Amortization of net loss

 

11

 

49

 

Termination benefits/curtailment costs

 

 

1

 

Net periodic benefit cost

 

$

17

 

$

53

 

 

 

 

 

 

 

Other Postretirement Benefits:

 

 

 

 

 

Service cost

 

$

4

 

$

5

 

Interest cost

 

30

 

28

 

Expected return on plan assets

 

(7

)

(9

)

Amortization of prior service credit

 

(1

)

(1

)

Amortization of net loss

 

 

1

 

Net periodic benefit cost

 

$

26

 

$

24

 

 

NOTE I – STOCK-BASED COMPENSATION

 

The Company grants stock-based compensation to employees under the Employees’ Stock Purchase Plans (“ESPP”) and the 1988 Award and Option Plan (the “1988 Plan”) and to non-employee directors under the 2003 Non-Employee Directors’ Stock Incentive Plan.

 

During the first quarter of 2008, employees subscribed to the right to purchase 4.6 million shares with a weighted-average exercise price of $35.57 per share and a weighted-average fair value of $4.33 per share under the ESPP.

 

During the first quarter of 2008, the Company granted the following stock-based compensation awards to employees under the 1988 Plan:

 

·                  9.2 million stock options with a weighted-average exercise price of $38.62 per share and a weighted-average fair value of $8.88 per share.

·                  1.9 million shares of deferred stock with a weighted-average fair value of $38.59 per share.

·                  1.1 million shares of performance deferred stock with a weighted-average fair value of $38.62 per share.

 

During the first quarter of 2008, the Company granted the following stock-based compensation awards to non-employee directors under the 2003 Non-Employee Directors’ Stock Incentive Plan:

 

·                  28,200 shares of restricted stock with a weighted-average fair value of $37.71 per share.

 

Total unrecognized compensation cost at March 31, 2008, including unrecognized cost related to the first quarter of 2008 activity, is provided in the following table:

 

Total Unrecognized Compensation Cost at March 31, 2008

In millions

 

Unrecognized
Compensation
Cost

 

Weighted-average
Recognition
Period

 

ESPP purchase rights

 

$

16

 

4.5 months

 

Unvested stock options

 

$

101

 

0.81 year

 

Deferred stock awards

 

$

156

 

1.19 years

 

Performance deferred stock awards

 

$

74

 

0.78 year

 

 

17



 

NOTE J – EARNINGS PER SHARE CALCULATIONS

 

Earnings Per Share Calculations

 

Three Months Ended
March 31, 2008

 

Three Months Ended
March 31, 2007

 

In millions, except per share amounts

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Net income available for common stockholders

 

$

941

 

$

941

 

$

973

 

$

973

 

Weighted-average common shares outstanding

 

942.1

 

942.1

 

963.2

 

963.2

 

Add dilutive effect of stock options and awards

 

 

9.5

 

 

12.7

 

Weighted-average common shares for EPS calculations

 

942.1

 

951.6

 

963.2

 

975.9

 

Earnings per common share

 

$

1.00

 

$

0.99

 

$

1.01

 

$

1.00

 

Stock options and deferred stock awards excluded from EPS calculations (1)

 

 

 

34.0

 

 

 

22.2

 

 


(1)   Outstanding options to purchase shares of common stock and deferred stock awards that were not included in the calculation of diluted earnings per share because the effect of including them would have been anti-dilutive.

 

NOTE K – OPERATING SEGMENTS AND GEOGRAPHIC AREAS

 

Corporate Profile

 

Dow is a diversified chemical company that combines the power of science and technology with the “Human Element” to constantly improve what is essential to human progress. The Company delivers a broad range of products and services to customers in approximately 160 countries, connecting chemistry and innovation with the principles of sustainability to help provide everything from fresh water, food and pharmaceuticals to paints, packaging and personal care products. In 2007, Dow had annual sales of $53.5 billion and employed approximately 45,900 people worldwide. The Company has 150 manufacturing sites in 35 countries and produces approximately 3,100 products. The following descriptions of the Company’s operating segments include a representative listing of products for each business.

 

PERFORMANCE PLASTICS

 

Applications: automotive interiors, exteriors, under-the-hood and body engineered systems · building and construction, thermal and acoustic insulation, roofing · communications technology, telecommunication cables, electrical and electronic connectors · footwear · home and office furnishings:  kitchen appliances, power tools, floor care products, mattresses, carpeting, flooring, furniture padding, office furniture · information technology equipment and consumer electronics · packaging, food and beverage containers, protective packaging · sports and recreation equipment · wire and cable insulation and jacketing materials for power utility and telecommunications

 

Dow Automotive serves the global automotive market and is a leading supplier of plastics, adhesives, sealants and other plastics-enhanced products for interior, exterior, under-the-hood, vehicle body structure and acoustical management technology solutions. With offices and application development centers around the world, Dow Automotive provides materials science expertise and comprehensive technical capabilities to its customers worldwide.

 

·                  Products: AFFINITY™ polyolefin plastomers; AMPLIFY™ functional polymers; BETABRACE™ reinforcing composites; BETADAMP™ acoustical damping systems; BETAFOAM™ NVH and structural foams; BETAGUARD™ sealants; BETAMATE™ structural adhesives; BETASEAL™ glass bonding systems; CALIBRE™ polycarbonate resins; DOW™ polyethylene resins; DOW™ polypropylene resins and automotive components made with DOW™ polypropylene; IMPAXX™ energy management foam; INSPIRE™ performance polymers; INTEGRAL™ adhesive film; ISONATE™ pure and modified methylene diphenyl diisocyanate (MDI) products; ISOPLAST™ engineering thermoplastic polyurethane resins; MAGNUM™ ABS resins; PAPI™ polymeric MDI; PELLETHANE™ thermoplastic polyurethane elastomers; Premium brake fluids and lubricants; PULSE™ engineering resins; SPECFLEX™ semi-flexible polyurethane foam systems; SPECTRIM™ reaction moldable polymers; STRANDFOAM™ polypropylene foam; VERSIFY™ plastomers and elastomers; VORANATE™ specialty isocyanates; VORANOL™ polyether polyols

 

Dow Building Solutions manufactures and markets an extensive line of insulation, weather barrier, and oriented composite building solutions and adhesives. The business is the recognized leader in extruded polystyrene (XPS) insulation, known industry-wide by its distinctive Blue color and the Dow STYROFOAM™ brand for more than 50 years.

 

18



 

·                  Products: EQUIFOAM™ comfort products; FROTH-PAK™ polyurethane spray foam; GREAT STUFF™ polyurethane foam sealant; IMMOTUS™ acoustic panels; INSTA-STIK™ roof insulation adhesive; QUASH™ sound management foam; SARAN™ vapor retarder film and tape; STYROFOAM™ brand insulation products (including XPS and polyisocyanurate rigid foam sheathing products); SYMMATRIX™ oriented composites; SYNERGY™ soft touch foam; TILE BOND™ roof tile adhesive; TRYMER™ polyisocyanurate foam pipe insulation; WEATHERMATE™ weather barrier solutions (housewraps, sill pans, flashings and tapes)

 

Dow Epoxy is a leading global producer of epoxy resins, intermediates and specialty resins for a wide range of industries and applications such as coatings, electrical laminates, civil engineering, adhesives and composites. With plants strategically located across four continents, the business is focused on providing customers around the world with differentiated solution-based epoxy products and innovative technologies and services.

 

·                  Products: D.E.H.™ epoxy curing agents or hardeners; D.E.N.™ epoxy novolac resins; D.E.R.™ epoxy resins (liquids, solids and solutions); Epoxy intermediates (Acetone, Allyl chloride, Bisphenol A, Epichlorohydrin, OPTIM™ synthetic glycerine and Phenol); Specialty acrylic monomers (Glycidyl methacrylate, Hydroxyethyl acrylate and Hydroxypropyl acrylate); UCAR™ solution vinyl resins

 

The Polyurethanes and Polyurethane Systems business is a leading global producer of polyurethane raw materials and polyurethane systems. Differentiated by its ability to globally supply a high-quality, consistent and complete product range, this business emphasizes both existing and new business developments while facilitating customer success with a global market and technology network.

 

·                  Products: ENFORCER™ Technology and ENHANCER™ Technology for polyurethane carpet and turf backing; ISONATE™ MDI; PAPI™ polymeric MDI; Propylene glycol; Propylene oxide; SPECFLEX™ copolymer polyols; SYNTEGRA™ waterborne polyurethane dispersions; VORACOR™, VORALAST™, VORALUX™ and VORASTAR™ polyurethane systems; VORANATE™ isocyanate; VORANOL™ and VORANOL™ VORACTIV™ polyether and copolymer polyols

 

Specialty Plastics and Elastomers is a business portfolio of specialty products including a broad range of engineering plastics and compounds, performance elastomers and plastomers, specialty copolymers, synthetic rubber, polyvinylidene chloride resins and films (PVDC), and specialty film substrates. The business serves such industries as automotive, civil construction, wire and cable, building and construction, consumer electronics and appliances, food and specialty packaging, and footwear.

 

·                  Products: AFFINITY™ polyolefin plastomers (POPs); AMPLIFY™ functional polymers; CALIBRE™ polycarbonate resins; DOW XLA™ elastic fiber; EMERGE™ advanced resins; ENGAGE™ polyolefin elastomers; FLEXOMER™ very low density polyethylene (VLDPE) resins; INTEGRAL™ adhesive films; ISOPLAST™ engineering thermoplastic polyurethane resins; MAGNUM™ ABS resins; NORDEL™ hydrocarbon rubber; PELLETHANE™ thermoplastic polyurethane elastomers; PRIMACOR™ copolymers; PROCITE™ window envelope films; PULSE™ engineering resins; REDI-LINK™ polyethylene-based wire & cable insulation compounds; SARAN™ PVDC resin and SARAN™ PVDC film ; SARANEX™ barrier films; SI-LINK™ polyethylene-based low voltage insulation compounds; TRENCHCOAT™ protective films; TYRIL™ SAN resins; TYRIN™ chlorinated polyethylene; UNIGARD™ HP high-performance flame-retardant compounds; UNIGARD™ RE reduced emissions flame-retardant compounds; UNIPURGE™ purging compound; VERSIFY™ plastomers and elastomers

 

The Technology Licensing and Catalyst business includes licensing and supply of related catalysts, process control software and services for the UNIPOL™ polypropylene process, the METEOR™ process for ethylene oxide (EO) and ethylene glycol (EG), the LP OXO™ process for oxo alcohols, the QBIS™ bisphenol A process, and Dow’s proprietary technology for production of purified terephthalic acid (PTA). Licensing of the UNIPOL™ polyethylene process and sale of related catalysts, including metallocene catalysts, are handled through Univation Technologies, LLC, a 50:50 joint venture of Union Carbide.

 

·                  Products: LP OXO™ process technology and NORMAX™ catalysts; METEOR™ EO/EG process technology and catalysts; PTA process technology; QBIS™ bisphenol A process technology and DOWEX™ QCAT™ catalyst; UNIPOL™ PP process technology and SHAC™ catalyst systems

 

19



 

PERFORMANCE CHEMICALS

 

Applications: agricultural and pharmaceutical products and processing · building materials · chemical processing and intermediates · electronics · food processing and ingredients · gas treating solvents · household products · metal degreasing and dry cleaning · oil and gas treatment · paints, coatings, inks, adhesives, lubricants · personal care products · pulp and paper manufacturing, coated paper and paperboard · textiles and carpet · water purification

 

Designed Polymers is a business portfolio of products and systems characterized by unique chemistry, specialty functionalities, and people with deep expertise in regulated industries. Within Designed Polymers, Dow Water Solutions offers world-class brands and enabling component technologies designed to advance the science of desalination, water purification, trace contaminant removal and water recycling. Also in Designed Polymers, businesses such as Dow Wolff Cellulosics, Dow Biocides and ANGUS Chemical Company (a wholly owned subsidiary of Dow), develop and market a range of products that enhance or enable key physical and sensory properties of end-use products in applications such as food, pharmaceuticals, oil and gas, paints and coatings, personal care, and building and construction.

 

·                  Products and Services: Acrolein derivatives; Basic nitroparaffins and nitroparaffin-based specialty chemicals; CANGUARD™ BIT preservatives; CELLOSIZE™ hydroxyethyl cellulose; Chiral compounds and biocatalysts; CYCLOTENE™ advanced electronics resins; DOW™ latex powders; DOWEX™ ion exchange resins; DOWICIDE™ antimicrobial bactericides and fungicides; ETHOCEL™ ethylcellulose resins; FILMTEC™ membranes; FORTEFIBER™ soluble dietary fiber; Hydrocarbon resins; Industrial biocides; METHOCEL™ cellulose ethers; OMEXELL™ ultrafiltration; OMEXELL™ electrodeionization; Pfenex Expression Technology™; POLYOX™ water-soluble resins; Quaternaries; SILK™ semiconductor dielectric resins; WALOCEL™ cellulose polymers

 

The Dow Latex business is a major global supplier of latexes, for a wide range of industries and applications. It provides the broadest line of styrene-butadiene (S/B) products supporting customers in paper and paperboard (for magazines, catalogues and food packaging) applications, and the carpet and floor covering industry. UCAR Emulsion Systems (UES) manufactures and sells acrylic, vinyl-acrylic, vinyl acetate ethylene (VAE), and S/B and styrene-acrylic latexes and NEOCAR™ branched vinyl ester latexes for use in the architectural and industrial coatings, adhesives, construction products such as caulks and sealants, textile, and traffic paint. It also offers the broadest product range in the dispersion area and produces and markets UCAR™ POLYPHOBE™ rheology modifiers.

 

·                  Products: Acrylic latex; EVOCAR™ specialty latex; FOUNDATIONS™ latex; NEOCAR™ branched vinyl ester latexes; Styrene-acrylate latex; Styrene-butadiene latex; Styrene-butadiene vinyl acetate ethylene (VAE); UCAR™ all-acrylic, styrene-acrylic and vinyl-acrylic latexes; UCAR™ POLYPHOBE™ rheology modifiers; UCARHIDE™ opacifier

 

The Specialty Chemicals business provides products and services used as functional ingredients or processing aids in the manufacture of a diverse range of products. Applications include agricultural and pharmaceutical products and processing, building and construction, chemical processing and intermediates, electronics, food processing and ingredients, gas treating solvents, fuels and lubricants, oil and gas, household and institutional cleaners, coatings and paints, pulp and paper manufacturing, metal degreasing and dry cleaning, and transportation. Dow Haltermann Custom Processing provides contract and custom manufacturing services to other specialty chemical, agricultural chemical and biodiesel producers.

 

·                  Products: Acrylic acid/Acrylic esters; AMBITROL™ and NORKOOL™ industrial coolants; Butyl CARBITOL™ and Butyl CELLOSOLVE™ ethylene oxide; CARBOWAX™ and CARBOWAX™ SENTRY™ polyethylene glycols and methoxypolyethylene glycols; Diphenyloxide; DOW™ polypropylene glycols; DOWCAL™, DOWFROST™, DOWTHERM™, SYLTHERM and UCARTHERM™ heat transfer fluids; DOWFAX™, TERGITOL™ and TRITON™ surfactants; Ethanolamines; Ethyleneamines; Isopropanolamines; MAXIBOOST™ cleaning boosters; MAXICHECK™ solvent analysis test kits; MAXISTAB™ stabilizers; Propylene oxide-based glycol ethers; SAFE-TAINER™ closed-loop delivery system; SYNALOX™ lubricants; UCAR™ deicing fluids; UCARKLEAN™ amine management; UCARSOL™ formulated solvents; UCON™ fluids; VERSENE™ chelating agents; Fine and specialty chemicals from the Dow Haltermann Custom Processing business; Test and reference fuels, printing ink distillates, pure hydrocarbons and esters, and derivatives from Haltermann Products, a wholly owned subsidiary of Dow

 

20



 

The Performance Chemicals segment also includes the results of Dow Corning Corporation, and a portion of the results of the OPTIMAL Group of Companies and the SCG-Dow Group, all joint ventures of the Company.

 

AGRICULTURAL SCIENCES

 

Applications: control of weeds, insects and plant diseases for agriculture and pest management · agricultural seeds and traits (genes)

 

Dow AgroSciences is a global leader in providing pest management, agricultural and crop biotechnology products and solutions. The business develops, manufactures and markets products for crop production; weed, insect and plant disease management; and industrial and commercial pest management. Dow AgroSciences is building a leading plant genetics and biotechnology business in agricultural seeds, traits, healthy oils, and animal health.

 

·                  Products: CLINCHER™ herbicide; DELEGATE™ insecticide; DITHANE™ fungicide; FORTRESS™ fungicide; GARLON™ herbicide; GLYPHOMAX™ herbicide; GRANITE™ herbicide; HERCULEX™ I, HERCULEX™RW and HERCULEX™ XTRA insect protection; KEYSTONE™ herbicides; LAREDO™ fungicide; LONTREL™ herbicide; LORSBAN™ insecticides; MILESTONE™ herbicide; MUSTANG™ herbicide; MYCOGEN™ seeds; NEXERA™ canola and sunflower seeds; PHYTOGEN™ brand cottonseeds; PROFUME™ gas fumigant; SENTRICON™ termite colony elimination system; SIMPLICITY™ herbicide; STARANE™ herbicide; TELONE™ soil fumigant; TORDON™ herbicide; TRACER™ NATURALYTE™ insect control; VIKANE™ structural fumigant; WIDESTRIKE™ insect protection

 

BASIC PLASTICS

 

Applications: adhesives · appliances and appliance housings · agricultural films · automotive parts and trim · beverage bottles · bins, crates, pails and pallets · building and construction · coatings · consumer and durable goods · consumer electronics · disposable diaper liners · fibers and nonwovens · films, bags and packaging for food and consumer products · hoses and tubing · household and industrial bottles · housewares · hygiene and medical films · industrial and consumer films and foams · information technology · oil tanks and road equipment · plastic pipe · textiles · toys, playground equipment and recreational products · wire and cable compounds

 

The Polyethylene business is the world’s leading supplier of polyethylene-based solutions through sustainable product differentiation. Through the use of multiple catalyst and process technologies, the business offers customers one of the industry’s broadest ranges of polyethylene resins via a strong global network of local experts focused on partnering for long-term success.

 

·                  Products: ASPUN™ fiber grade resins; ATTANE™ ultra low density polyethylene (ULDPE) resins; CONTINUUM™ bimodal polyethylene resins; DOW™ high density polyethylene (HDPE) resins; DOW™ low density polyethylene (LDPE) resins; DOWLEX™ polyethylene resins; ELITE™ enhanced polyethylene (EPE) resins; TUFLIN™ linear low density polyethylene (LLDPE) resins; UNIVAL™ HDPE resins

 

The Polypropylene business, a major global polypropylene supplier, provides a broad range of products and solutions tailored to customer needs by leveraging Dow’s leading manufacturing and application technology, research and product development expertise, extensive market knowledge and strong customer relationships.

 

·                  Products: DOW™ homopolymer polypropylene resins; DOW™ impact copolymer polypropylene resins; DOW™ random copolymer polypropylene resins; INSPIRE™ performance polymers

 

The Polystyrene business, the global leader in the production of polystyrene resins, is uniquely positioned with geographic breadth and participation in a diversified portfolio of applications. Through market and technical leadership and low cost capability, the business continues to improve product performance and meet customer needs.

 

·                  Products: STYRON A-TECH™ and C-TECH™ advanced technology polystyrene resins and a full line of STYRON™ general purpose polystyrene resins; STYRON™ high-impact polystyrene resins

 

The Basic Plastics segment also includes the results of Equipolymers and a portion of the results of EQUATE Petrochemical Company K.S.C. and the SCG-Dow Group, all joint ventures of the Company.

 

21



 

BASIC CHEMICALS

 

Applications: agricultural products · alumina · automotive antifreeze and coolant systems · carpet and textiles · chemical processing · dry cleaning · dust control · household cleaners and plastic products · inks · metal cleaning · packaging, food and beverage containers, protective packaging · paints, coatings and adhesives · personal care products · petroleum refining · pharmaceuticals · plastic pipe · pulp and paper manufacturing · snow and ice control · soaps and detergents · water treatment

 

The Core Chemicals business is a leading global producer of each of its basic chemical products, which are sold to many industries worldwide, and also serve as key raw materials in the production of a variety of Dow’s performance and plastics products.

 

·                  Products: Acids; Alcohols; Aldehydes; Caustic soda; Chlorine; Chloroform; COMBOTHERM™ blended deicer; DOWFLAKE™ calcium chloride; DOWPER™ dry cleaning solvent; Esters; Ethylene dichloride (EDC); LIQUIDOW™ liquid calcium chloride; MAXICHECK™ procedure for testing the strength of reagents; MAXISTAB™ stabilizers for chlorinated solvents; Methyl chloride; Methylene chloride; Monochloroacetic acid (MCAA); Oxo products; PELADOW™ calcium chloride pellets; Perchloroethylene; Trichloroethylene; Vinyl acetate monomer (VAM); Vinyl chloride monomer (VCM); Vinylidene chloride (VDC)

 

The Ethylene Oxide/Ethylene Glycol business is a key supplier of ethylene glycol to MEGlobal, a 50:50 joint venture and a world leader in the manufacture and marketing of merchant monoethylene glycol and diethylene glycol. Dow also supplies ethylene oxide to internal derivatives businesses. Ethylene glycol is used in polyester fiber, polyethylene terephthalate (PET) for food and beverage container applications, polyester film and antifreeze.

 

·                  Products: Ethylene glycol (EG); Ethylene oxide (EO)

 

The Basic Chemicals segment also includes the results of MEGlobal and a portion of the results of EQUATE Petrochemical Company K.S.C. and the OPTIMAL Group of Companies, all joint ventures of the Company.

 

HYDROCARBONS AND ENERGY

 

Applications: polymer and chemical production · power

 

The Hydrocarbons and Energy business encompasses the procurement of fuels, natural gas liquids and crude oil-based raw materials, as well as the supply of monomers, power and steam principally for use in Dow’s global operations. The business regularly sells its byproducts; the business also buys and sells products in order to balance regional production capabilities and derivative requirements. The business also sells products to certain Dow joint ventures. Dow is the world leader in the production of olefins and aromatics.

 

·                  Products: Benzene; Butadiene; Butylene; Cumene; Ethylene; Propylene; Styrene; Power, steam and other utilities

 

The Hydrocarbons and Energy segment also includes the results of Compañía Mega S.A. and a portion of the results of the SCG-Dow Group, both joint ventures of the Company.

 

Unallocated and Other includes the results of New Ventures (which includes new business incubation platforms focused on identifying and pursuing new commercial opportunities); Venture Capital; the Company’s insurance operations and environmental operations; and certain overhead and other cost recovery variances not allocated to the operating segments.

 

Transfers of products between operating segments are generally valued at cost. However, transfers of products to Agricultural Sciences from other segments are generally valued at market-based prices; the revenues generated by these transfers in the first quarters of 2008 and 2007 were immaterial and eliminated in consolidation.

 

22



 

Operating Segments

 

Three Months Ended

 

In millions

 

March 31,
2008

 

March 31,
2007

 

Sales by operating segment

 

 

 

 

 

Performance Plastics

 

$

3,963

 

$

3,529

 

Performance Chemicals

 

2,323

 

2,002

 

Agricultural Sciences

 

1,314

 

1,036

 

Basic Plastics

 

3,492

 

2,894

 

Basic Chemicals

 

1,559

 

1,271

 

Hydrocarbons and Energy

 

2,165

 

1,612

 

Unallocated and Other

 

8

 

88

 

Total

 

$

14,824

 

$

12,432

 

EBIT (1) by operating segment

 

 

 

 

 

Performance Plastics

 

$

329

 

$

441

 

Performance Chemicals

 

271

 

312

 

Agricultural Sciences

 

331

 

282

 

Basic Plastics

 

427

 

527

 

Basic Chemicals

 

159

 

134

 

Hydrocarbons and Energy

 

 

 

Unallocated and Other

 

(132

)

(257

)

Total

 

$

1,385

 

$

1,439

 

Equity in earnings (losses) of nonconsolidated affiliates by operating segment (included in EBIT)

 

 

 

 

 

Performance Plastics

 

$

18

 

$

26

 

Performance Chemicals

 

95

 

105

 

Agricultural Sciences

 

1

 

 

Basic Plastics

 

42

 

54

 

Basic Chemicals

 

97

 

75

 

Hydrocarbons and Energy

 

22

 

15

 

Unallocated and Other

 

(1

)

(1

)

Total

 

$

274

 

$

274

 

 


(1)         The Company uses EBIT (which Dow defines as earnings before interest, income taxes and minority interests) as its measure of profit/loss for segment reporting purposes. EBIT by operating segment includes all operating items relating to the businesses; items that principally apply to the Company as a whole are assigned to Unallocated and Other. A reconciliation of EBIT to “Net Income Available for Common Stockholders” is provided below:

 

 

 

Three Months Ended

 

In millions

 

March 31,
2008

 

March 31,
2007

 

EBIT

 

$

1,385

 

$

1,439

 

+ Interest income

 

24

 

40

 

- Interest expense and amortization of debt discount

 

145

 

146

 

- Provision for income taxes

 

299

 

335

 

- Minority interests’ share in income

 

24

 

25

 

Net Income Available for Common Stockholders

 

$

941

 

$

973

 

 

Geographic Areas

 

Three Months Ended

 

In millions

 

March 31,
2008

 

March 31,
2007

 

Sales by geographic area

 

 

 

 

 

United States

 

$

4,658

 

$

4,109

 

Europe (1)

 

5,858

 

4,801

 

Rest of World (1)

 

4,308

 

3,522

 

Total

 

$

14,824

 

$

12,432

 

 


(1)         Sales to customers in the Middle East and Africa, previously reported with Europe, are now aligned with Rest of World; 2007 sales have been adjusted to reflect this realignment.

 

23



 

The Dow Chemical Company and Subsidiaries

PART I – FINANCIAL INFORMATION, Item 2.  Management’s Discussion and

Analysis of Financial Condition and Results of Operations.

 

DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION

 

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of The Dow Chemical Company and its subsidiaries (“Dow” or the “Company”). This section covers the current performance and outlook of the Company and each of its operating segments. The forward-looking statements contained in this section and in other parts of this document involve risks and uncertainties that may affect the Company’s operations, markets, products, services, prices and other factors as more fully discussed elsewhere and in filings with the U.S. Securities and Exchange Commission (“SEC”). These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental and technological factors. Accordingly, there is no assurance that the Company’s expectations will be realized. The Company assumes no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws.

 

OVERVIEW

 

·                  The Company reported sales in the first quarter of 2008 of $14.8 billion, up 19 percent from $12.4 billion in the first quarter of 2007, setting another new quarterly sales record.

 

·                  The results for the first quarter of 2008 demonstrated, once again, the value of the Company’s balanced portfolio, as weakness in the United States was more than offset by growth in the rest of the world, and as improvement in the results of some of the Company’s operating segments mitigated declines in others.

 

·                  Purchased feedstock and energy costs, which account for almost half of Dow’s total costs, increased 42 percent or $2.2 billion compared with the first quarter of 2007, the largest year-over-year increase in quarterly costs in the Company’s history, and almost equal to the increase of all of last year.

 

·                  Operating expenses rose during the first quarter of 2008, as Dow continued the disciplined implementation of its growth strategy.

 

·                  Equity earnings were $274 million in the first quarter of 2008, the fifth consecutive quarter in which equity earnings have exceeded $250 million.

 

·                  Capital spending was on target; debt as a percent of total capitalization held steady from year-end 2007; and the Company continued to purchase shares under its share repurchase program.

 

Selected Financial Data

 

Three Months Ended

 

In millions, except per share amounts

 

March 31,
2008

 

March 31,
2007

 

Net sales

 

$

14,824

 

$

12,432

 

 

 

 

 

 

 

Cost of sales

 

$

12,908

 

$

10,605

 

Percent of net sales

 

87.1

%

85.3

%

 

 

 

 

 

 

Research and development, and selling, general and administrative expenses

 

$

829

 

$

720

 

Percent of net sales

 

5.6

%

5.8

%

 

 

 

 

 

 

Effective tax rate

 

23.7

%

25.1

%

 

 

 

 

 

 

Net income available for common stockholders

 

$

941

 

$

973

 

 

 

 

 

 

 

Earnings per common share – basic

 

$

1.00

 

$

1.01

 

Earnings per common share – diluted

 

$

0.99

 

$

1.00

 

 

 

 

 

 

 

Operating rate percentage

 

86

%

87

%

 

RESULTS OF OPERATIONS

 

Net sales for the first quarter of 2008 were $14.8 billion, up 19 percent from $12.4 billion in the first quarter of last year. Compared with the same quarter of 2007, prices rose 17 percent, driven by continuing increases in feedstock and energy costs, and volume increased 2 percent. Prices were also impacted by currency which accounted for almost 30 percent of the increase. Prices increased in all operating segments, led by a 33 percent increase in Hydrocarbons and Energy, a 26 percent increase in Basic Chemicals and a 24 percent increase in Basic Plastics. Prices were also up in the Performance segments with an 11 percent increase in Agricultural Sciences and a 9 percent increase in Performance Plastics and Performance Chemicals. From a geographic standpoint, double-digit increases were reported in all geographic areas.

 

24



 

Prices were up 21 percent in Europe (where currency accounted for approximately one half of the increase), 16 percent in North America, 10 percent in Asia Pacific, 18 percent in Latin America and 11 percent in the India, Middle East and Africa (“IMEA”) region. Compared with the first quarter of last year, the change in volume by operating segment was mixed, with a 6 percent increase in the combined Performance segments offset by declines in Basic Plastics and Basic Chemicals. Volume was particularly strong in Agricultural Sciences (up 16 percent) and Performance Chemicals (up 7 percent). By geographic area, volume growth in Asia Pacific, Latin America, Europe and IMEA offset a decline in the United States which was down due to continued weakness in the residential construction and automotive industries. For additional details regarding the change in net sales, see the Sales Volume and Price table at the end of the section entitled “Segment Results.”

 

Gross margin was $1,916 million for the first quarter of 2008, up from $1,827 million in the first quarter of last year. Gross margin improved as higher selling prices and improved volume offset significantly higher hydrocarbon and energy (“H&E”) costs (up approximately $2.2 billion or 42 percent), the unfavorable impact of currency on cost and increased freight costs.

 

The Company’s global plant operating rate (for its chemicals and plastics businesses) was 86 percent in the first quarter of 2008, down slightly from 87 percent in the first quarter of 2007. The Company’s operating rate for the first quarter of 2008 reflected the impact of planned maintenance turnarounds, primarily in the Hydrocarbons & Energy segment.

 

Personnel count was 45,530 at March 31, 2008, down from 45,856 at December 31, 2007 and up from 42,755 at March 31, 2007. Headcount decreased from year-end 2007 due to the divestiture of two small companies. Compared with the first quarter of 2007, headcount increased principally due to the addition of research and development employees in India and China in support of the Company’s growth initiatives; the addition of approximately 110 employees with the second quarter of 2007 acquisition of Hyperlast Limited; and the addition of approximately 1,700 employees with the second quarter of 2007 acquisition of Wolff Walsrode AG and certain related affiliates and assets (“Wolff Walsrode”).

 

Operating expenses (research and development, and selling, general and administrative expenses) totaled $829 million in the first quarter of 2008, up $109 million from $720 million in the first quarter of last year. Compared with last year, research and development (“R&D”) expenses increased $29 million, and selling, general and administrative (“SG&A”) expenses increased $80 million. Approximately 75 percent of the increase in operating expenses was related to planned spending for growth initiatives in the Performance businesses and operating expenses for new acquisitions.

 

Amortization of intangibles was $22 million in the first quarter of 2008, up from $11 million in the first quarter of last year, with the increase due to 2007 acquisitions. See Note E to the Consolidated Financial Statements for additional information on intangible assets.

 

Dow’s share of the earnings of nonconsolidated affiliates was $274 million in the first quarter of 2008, equal to the first quarter of last year. Compared with the same quarter of last year, earnings improved at EQUATE Petrochemical Company K.S.C. (“EQUATE”) and MEGlobal. Results from Equipolymers B.V. (“Equipolymers”), Dow Corning Corporation (“Dow Corning”) and Siam Polyethylene Company Limited (“Siam Polyethylene”) were lower compared to the first quarter of last year.

 

On December 13, 2007, the Company and Petrochemical Industries Company (“PIC”) of Kuwait, a wholly owned subsidiary of Kuwait Petroleum Corporation, announced plans to form a 50:50 joint venture that will be a market-leading, global petrochemicals company. The joint venture, to be headquartered in the United States, will manufacture and market polyethylene, ethyleneamines, ethanolamines, polypropylene, and polycarbonate. To form the new joint venture, Dow will sell a 50 percent interest in the business assets included in the transaction to PIC. In turn, PIC and Dow will each contribute their assets into the joint venture. The resulting joint venture is expected to have revenues of more than $11 billion and employ more than 5,000 people worldwide. The transaction is subject to the completion of definitive agreements, customary conditions and regulatory approvals, and is anticipated to close in late 2008.

 

Sundry income – net includes a variety of income and expense items such as the gain or loss on foreign currency exchange, dividends from investments, and gains and losses on sales of investments and assets. Sundry income – net for the first quarter of 2008 was $46 million, compared with $69 million in the same quarter of 2007, and reflected the decrease in foreign exchange gains. In both periods, Sundry income – net included gains on the sale of miscellaneous assets, none of which were material.

 

Net interest expense (interest expense less capitalized interest and interest income) was $121 million in the first quarter of 2008, compared with $106 million in the first quarter of last year. Compared with last year, interest income was down $16 million principally due to lower levels of cash and cash equivalents, while interest expense was essentially flat.

 

25


 


 

The effective tax rate for the first quarter of 2008 was 23.7 percent, versus 25.1 percent for the first quarter of 2007. The Company’s effective tax rate fluctuates based on, among other factors, where income is earned and the level of income relative to tax credits available.

 

Net income available for common stockholders was $941 million or $0.99 per share for the first quarter of 2008, compared with $973 million or $1.00 per share for the first quarter of 2007.

 

SEGMENT RESULTS

 

The Company uses EBIT (which Dow defines as earnings before interest, income taxes and minority interests) as its measure of profit/loss for segment reporting purposes. EBIT by operating segment includes all operating items relating to the businesses; items that principally apply to the Company as a whole are assigned to Unallocated. See Note K to the Consolidated Financial Statements for a reconciliation of EBIT to “Net Income Available for Common Stockholders.”

 

PERFORMANCE PLASTICS

 

Performance Plastics sales were $3,963 million for the first quarter of 2008, up 12 percent from $3,529 million in the first quarter of 2007. Prices increased 9 percent, aided by a 5 percent favorable currency impact, while volume improved 3 percent. The improvement in price was widespread across the segment as businesses took action to mitigate the impact of increasing raw material costs. Volume improved as a result of recent acquisitions and a new marketing agreement with Nippon Unicar Company Limited (“NUC”) (a nonconsolidated affiliate), which became effective in the first quarter of 2008. EBIT for the segment totaled $329 million in the first quarter of 2008, down from $441 million in the same period last year. EBIT declined as the benefit of higher prices and improved volume was more than offset by the impact of higher raw material costs, higher operating expenses related to new product development and marketing, the unfavorable impact of currency on costs and higher freight costs.

 

Dow Automotive sales for the first quarter of 2008 were up 12 percent from one year ago. Prices improved 13 percent while volume declined 1 percent. Solid gains in pricing were achieved across all geographic areas as the business worked to mitigate the impact of higher raw material costs. The slight decline in volume was caused by continued weakness in the North American automotive industry, which was largely offset by volume gains in Europe and Latin America as the business benefited from growth with key customers in these geographic areas. EBIT for the business declined slightly versus the first quarter of last year due to higher raw material costs and increased spending associated with product development and the start up of new manufacturing assets.

 

Dow Building Solutions sales in the first quarter of 2008 improved 2 percent versus the same quarter last year as prices increased 4 percent and volume declined 2 percent. The improvement in price was primarily the result of favorable currency in Europe. A weak U.S. residential construction industry coupled with the closure of two polyisocyanurate foam plants in the United States in the fourth quarter of 2007 drove the decline in volume. EBIT declined due to rising raw material costs and the unfavorable impact of currency on costs.

 

Dow Epoxy sales for the first quarter of 2008 were down 2 percent from the first quarter of 2007 as volume declined 7 percent, more than offsetting a 5 percent increase in prices. The decline in volume was focused in the United States where the business was impacted by a planned maintenance turnaround, the exit of the peroxymeric chemicals business in 2007, as well as the decision by the business to reduce sales of epoxy intermediates in the face of declining industry margins due to additional industry capacity. Despite lower volumes in the United States, demand remained strong for electrical laminate and coatings applications. The improvement in prices was largely due to a favorable currency impact in Europe. Additional industry capacity limited the Company’s ability to raise prices. The business posted lower EBIT in the first quarter of 2008 due to lower sales volume, margin compression caused by rising raw material costs and limited ability to raise prices, and higher operating expenses.

 

Polyurethanes and Polyurethane Systems sales for the quarter were up 11 percent from the first quarter of 2007. Prices increased 11 percent while volume remained flat. The improvement in price was geographically balanced and in response to rising raw material costs and tight industry supply/demand conditions for toluene diisocyanate. Sales volume declined in Polyurethanes due to increased internal consumption of methylene diphenyl diisocyanate in Polyurethane Systems and softness in the North American furniture and bedding industries. The sales volume decline in Polyurethanes was offset by improved sales volume for Polyurethane Systems due to the impact of recent acquisitions. EBIT was down from the first quarter of 2007 as higher raw material costs and operating expenses were not fully offset by improved prices.

 

Specialty Plastics and Elastomers sales continued to grow, up 19 percent versus the first quarter of 2007 with a 12 percent increase in prices and a 7 percent improvement in volume. The improvement in price was broad-based with significant increases noted across all geographic areas. Volume increased due to a new marketing agreement with NUC, which became effective in the first quarter of 2008. Demand in the United States was negatively impacted by weakness in

 

26



 

the U.S. construction, utility and automotive industries. EBIT for the business declined significantly from a year ago due to margin compression as the rapid escalation of raw material and energy costs exceeded the impact of price increases.

 

Technology Licensing and Catalyst sales for the first quarter of 2008 increased 37 percent driven by higher catalyst sales. The increase in revenue also resulted in higher EBIT for the business.

 

PERFORMANCE CHEMICALS

 

Performance Chemicals sales were $2,323 million for the first quarter of 2008, up 16 percent from $2,002 million in the first quarter of 2007. Compared with first quarter of 2007, prices rose 9 percent, including a 4 percent favorable currency impact, while volume increased 7 percent. The rise in prices was broad-based, with increases reported in all geographic areas and across all major product groups. The increase in volume was principally due to the second quarter of 2007 acquisition of Wolff Walsrode. EBIT for the first quarter of 2008 was $271 million, down from $312 million in the first quarter of 2007, due to increases in raw material costs, integration costs associated with the acquisition of Wolff Walsrode, the unfavorable impact of currency on costs and lower equity earnings from Dow Corning.

 

Designed Polymers sales for the first quarter of 2008 were up 35 percent from the same quarter last year driven by a 30 percent increase in volume and a 5 percent increase in price. The improvement in volume was principally due to the acquisition of Wolff Walsrode in the second quarter of 2007. Higher volume in biocides, driven by higher demand in oil and gas applications, was negated by lower sales volumes in CELLOSIZE™ hydroxyethyl cellulose and methyl cellulosics, principally in the United States, due to continued weakness in housing construction. Compared with the first quarter of last year, EBIT increased slightly as higher sales volume and prices offset increases in raw material costs and higher operating expenses, including those related to the acquisition of Wolff Walsrode.

 

Dow Latex sales for the first quarter of 2008 were up 6 percent from the first quarter of 2007, as prices increased 5 percent, due to the favorable impact of currency, and volume increased 1 percent. Volume was up in all geographic areas, except the United States where demand for carpet and coated paper was lower due to continued softness in the housing industry. EBIT for the first quarter of 2008 declined significantly compared with the same period last year due to higher raw material costs and the unfavorable impact of currency on costs.

 

Specialty Chemicals sales for the first quarter of 2008 were up 12 percent compared with the same quarter last year as prices rose 14 percent and volume declined 2 percent. Prices were higher in all geographic areas and across most product groups driven by significant increases in raw material costs. EBIT was up from last year as the increase in selling prices and higher equity earnings from the OPTIMAL Group of Companies (“OPTIMAL”) more than offset higher raw material costs.

 

AGRICULTURAL SCIENCES

 

Agricultural Sciences sales were $1,314 million in the first quarter of 2008, up 27 percent from $1,036 million in the first quarter of 2007, posting a new quarterly sales record for the business. Volume improved 16 percent while prices rose 11 percent (including the favorable impact of currency of 7 percent) compared with the first quarter of 2007. All geographic areas recorded double-digit sales growth compared with last year, as a result of Dow AgroSciences’ strong product portfolio and robust global agricultural economics. Increased demand for cereal herbicides and early season purchases resulted in volume growth in Europe. The United States benefited from new product launches, while a continued buoyant agricultural industry in Latin America also drove volume growth.

 

EBIT for the first quarter of 2008 was $331 million, also a new quarterly record for the segment, up from $282 million in the first quarter of 2007. This increase was driven by price increases and strong sales volume growth, partially offset by an increase in operating expenses related to new product launches and the unfavorable impact of currency on costs.

 

BASIC PLASTICS

 

Basic Plastics sales were $3,492 million for the first quarter of 2008, up 21 percent from $2,894 million in the first quarter of last year. Compared with the first quarter of 2007, prices increased 24 percent. Double-digit price increases were reported in all geographic areas, reflecting significantly higher feedstock and energy costs. Volume was down 3 percent compared with the first quarter of 2007 principally due to declines in the United States and Europe, partially offset by volume improvements in Asia Pacific and India, Middle East and Africa. Volume decreased due in part to the December 2007 closure of the polypropylene manufacturing facility at St. Charles Operations in Hahnville, Louisiana, the sale of polyethylene assets in Cubatão, Brazil in the second quarter of 2007, as well as ongoing concerns about the U.S. economy and financial markets. European volume was lower, reflecting customer concerns about the economic outlook. Volume improved in Asia Pacific due to favorable market conditions and increased exports from North America to this geographic area. EBIT was $427 million for the first quarter of 2008, down from $527 million in the first quarter of 2007. EBIT declined as price increases were more than offset by higher feedstock and energy costs, higher operating costs, and lower equity earnings from Siam Polyethylene and Equipolymers.

 

27



 

Polyethylene sales were up significantly from the first quarter of 2007 as prices increased 28 percent and volume decreased 1 percent. Double-digit price increases were reported in all geographic areas as the business worked to offset the impact of significantly higher feedstock and energy costs. Volume was lower in the United States as softer industry fundamentals and customer inventory corrections took hold; volume was also impacted by an unplanned maintenance outage at the Company’s facility in Prentiss, Alberta, Canada. Volume was lower in Europe due to softening industry demand. Volume improved in Asia Pacific due to favorable market conditions and increased exports from North America to this geographic area. EBIT for the first quarter of 2008 declined versus the same period of 2007 as higher feedstock and energy costs, higher freight and lower equity earnings, primarily from Siam Polyethylene, more than offset the increase in prices.

 

Polypropylene sales were up 4 percent from the first quarter of 2007 as prices increased 22 percent and volume decreased 18 percent. Prices were significantly higher in all geographic areas as the business responded to higher feedstock and energy costs. Volume in the United States was significantly lower due to a planned maintenance turnaround at the Company’s Freeport, Texas manufacturing facility and the previously announced December 2007 shutdown of the Company’s polypropylene manufacturing facility at St. Charles Operations. Volume in Europe for the first quarter of 2008 was flat versus the same period last year. Despite higher prices, EBIT was lower due to higher feedstock and energy costs.

 

Polystyrene sales for the first quarter of 2008 were up 6 percent as prices increased 7 percent and volume decreased 1 percent. Price improvement was seen in all geographic areas as the business raised prices in response to higher feedstock and energy costs. Compared with the first quarter of 2007, volume improved in the United States despite some softening in demand during the later weeks of the quarter. Volume in Europe was lower as higher prices reduced customer demand and favorable economic conditions resulted in increased imports into the region by Middle East competitors. Volume in Asia Pacific declined as a result of increased industry supply and slightly lower demand. EBIT declined significantly from the first quarter of 2007 as the increase in prices did not offset the increase in raw material costs.

 

BASIC CHEMICALS

 

Basic Chemical sales were $1,559 million for the first quarter of 2008, up 23 percent from $1,271 million in the first quarter of 2007. Prices increased 26 percent, while volume declined 3 percent. Prices were up for most products within the segment, led by ethylene glycol (“EG”), which was up due to higher feedstock and energy costs and tight industry supply/demand balances as a result of unplanned industry outages. Volume for EG held steady, with a slight increase over the same period last year. Caustic soda also reported significant improvements in price, reflecting solid demand in all geographic areas. Volume for caustic soda declined slightly due to the sale of the Company’s caustic soda distribution business in Western Canada in the fourth quarter of 2007. Prices were flat for vinyl chloride monomer (“VCM”) despite higher raw material costs, as weak demand for polyvinyl chloride in North America hampered the business’ ability to raise prices.  Volume for VCM was down due to planned and unplanned plant outages at the Company’s two largest production facilities.  Solvents and intermediates reported strong price increases, which were driven by higher feedstock and energy costs; however, lower volumes resulted from production issues at various manufacturing facilities. EBIT for the first quarter of 2008 was $159 million, up from $134 million in the first quarter of last year. Higher equity earnings from MEGlobal, EQUATE and OPTIMAL and price increases across the segment more than offset increases in raw material costs and volume shortages due to plant outages.

 

HYDROCARBONS AND ENERGY

 

Hydrocarbons and Energy sales for the first quarter of 2008 were $2,165 million, up 34 percent from $1,612 million in the first quarter of 2007. Prices increased 33 percent, while volume increased 1 percent. The increase in selling price in the first quarter of 2008 was driven by higher overall commodity prices in feedstock and energy markets.

 

The Hydrocarbons and Energy business transfers materials to Dow’s derivatives businesses at cost (which increased significantly principally due to a sharp increase in the Company’s purchased feedstock and energy cost, up $2.2 billion or 42 percent compared with the first quarter of 2007). As a result, EBIT for this operating segment was at breakeven for the three months ended March 31, 2008 and 2007.

 

28



 

UNALLOCATED AND OTHER

 

Included in the results for Unallocated and Other are:

 

·                  results of insurance company operations,

 

·                  gains and losses on sales of financial assets,

 

·                  stock-based compensation expense,

 

·                  changes in the allowance for doubtful receivables,

 

·                  expenses related to New Ventures,

 

·                  asbestos-related defense and resolution costs,

 

·                  foreign exchange hedging results, and

 

·                  certain overhead and other cost recovery variances not allocated to the operating segments.

 

EBIT for the first quarter of 2008 was a loss of $132 million, compared with a loss of $257 million for the first quarter of 2007. Compared with the same quarter of last year, EBIT for the first quarter of 2008 reflected improved results from insurance company operations, a reduction in performance-based compensation expense (including stock-based compensation) compared with 2007 and the absence of tax contingencies of approximately $40 million related to franchise taxes recorded in the first quarter of 2007.

 

Sales Volume and Price by Operating Segment and Geographic Area

 

 

Three Months Ended
March 31, 2008

 

Percentage change from prior year

 

Volume

 

Price

 

Total

 

Operating segments

 

 

 

 

 

 

 

Performance Plastics

 

3

%

9

%

12

%

Performance Chemicals

 

7

 

9

 

16

 

Agricultural Sciences

 

16

 

11

 

27

 

Basic Plastics

 

(3

)

24

 

21

 

Basic Chemicals

 

(3

)

26

 

23

 

Hydrocarbons and Energy

 

1

 

33

 

34

 

Total

 

2

%

17

%

19

%

Geographic area sales

 

 

 

 

 

 

 

United States

 

(3

)%

16

%

13

%

Europe

 

1

 

21

 

22

 

Rest of World

 

8

 

14

 

22

 

Total

 

2

%

17

%

19

%

 

OUTLOOK

 

Softness in the United States appears to have extended somewhat beyond the housing and automotive sectors, resulting in U.S. customers taking a cautious approach to business. Demand in Western Europe is slowing, but seems to be holding reasonably well, while Eastern Europe remains strong. Emerging economies in Asia Pacific are expected to continue to show strong growth, with China’s growth rate close to 10 percent, although a slowing U.S. economy could have an impact on consumer goods exporters in Asia Pacific.

 

In the chemical industry, supply and demand are expected to remain reasonably balanced in the ethylene chain for the first half of 2008, but may be impacted by additional industry capacity in the second half of the year and beyond. Chlor-vinyl industry conditions may soften with weaker demand from a slower U.S. economy, including the housing sector, and with additional industry capacity anticipated in 2008.

 

Continued growth for the Company outside of the United States is anticipated, with strong growth in emerging geographies. Purchased feedstock and energy costs are expected to remain high and volatile in the second quarter, and while the pace of the increase is expected to slow from that of recent quarters, both feedstock and energy costs are expected to be higher in the second quarter than in the first. If the sequential increase in feedstock and energy costs is moderate, margins should hold steady or expand slightly in several Performance businesses and in Basic Plastics, as price increases cover higher raw material costs. In Basic Chemicals, higher raw material costs, coupled with price pressure, are expected to squeeze margins. EO/EG prices may trend down compared with the first quarter, as a competitor’s plant returns to operation, increasing industry supply. Dow AgroSciences should again show very strong results, with a seasonal pattern similar to that of the last two years, although spending for new product development and launch may impact profit growth in the short term.

 

Overall, the Company’s view is that the second quarter will be another good quarter, and that 2008 will be another year of solid earnings performance for Dow.

 

29



 

CHANGES IN FINANCIAL CONDITION

 

The Company’s cash flows from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows, are summarized in the following table:

 

Cash Flow Summary

 

Three Months Ended

 

In millions

 

March 31,
2008

 

March 31,
2007

 

Cash provided by (used in):

 

 

 

 

 

Operating activities

 

$

447

 

$

536

 

Investing activities

 

(290

)

(290

)

Financing activities

 

(300

)

(619

)

Effect of exchange rate changes on cash

 

80

 

(7

)

Net change in cash and cash equivalents

 

$

(63

)

$

(380

)

 

Cash provided by operating activities decreased in the first three months of 2008 compared with the same period last year due primarily to increased working capital requirements, with an increase in inventories driven by higher raw material costs and an increase in accounts receivable due to the higher level of sales.

 

Cash used in investing activities in the first three months of 2008 was flat compared with the same period last year as an increase in investments in consolidated and nonconsolidated affiliates was offset by higher net proceeds from purchases and sales/maturities of investments.

 

Cash used in financing activities in the first three months of 2008 decreased compared with the same period last year due to the issuance of commercial paper, offset by a reduction in proceeds from sales of common stock (related to the exercise of stock options and the Employees’ Stock Purchase Plan) compared with the first quarter of 2007.

 

Days-sales-in-inventory (“DSI”) rose from 61 days at December 31, 2007 to 67 days at March 31, 2008 as a result of increased exports (which have a longer supply chain), an increase in inventories built in preparation for plant turnarounds scheduled for the second quarter of 2008, and product mix.

 

On August 29, 2006, the Board of Directors approved a plan (the “2006 Plan”) to shut down a number of the Company’s manufacturing facilities. These shutdowns are scheduled to be completed by the end of the first quarter of 2009. On December 3, 2007, the Board of Directors approved a restructuring plan (the “2007 Plan”) that includes the shutdown of a number of assets and organizational changes within targeted functions. These restructuring activities are expected to be completed by the end of 2009. The restructuring activities related to both the 2006 Plan and the 2007 Plan are expected to result in additional cash expenditures of approximately $321 million over the next few years related to severance costs, contract termination fees, asbestos abatement and environmental remediation (see Note C to the Consolidated Financial Statements). Dow expects to incur future costs related to its restructuring activities, as the Company continually looks for ways to enhance the efficiency and cost effectiveness of its operations, to ensure competitiveness across its businesses and across geographic areas. Future costs are expected to include demolition costs related to the closed facilities, which will be recognized as incurred. The Company also expects to incur additional employee-related costs, including involuntary termination benefits, related to its other optimization activities, and pension plan settlement costs. These costs cannot be reasonably estimated at this time.

 

The following tables present working capital, total debt and certain balance sheet ratios:

 

Working Capital

In millions

 

March 31,
2008

 

Dec. 31,
2007

 

Current assets

 

$

20,136

 

$

18,654

 

Current liabilities

 

13,404

 

12,445

 

Working capital

 

$

6,732

 

$

6,209

 

Current ratio

 

1.50:1

 

1.50:1

 

Days-sales-outstanding-in-receivables

 

38

 

38

 

Days-sales-in-inventory

 

67

 

61

 

 

Total Debt

In millions

 

March 31,
2008

 

Dec. 31,
2007

 

Notes payable

 

$

2,114

 

$

1,548

 

Long-term debt due within one year

 

827

 

586

 

Long-term debt

 

7,392

 

7,581

 

Total debt

 

$

10,333

 

$

9,715

 

Debt as a percent of total capitalization

 

32.3

%

31.8

%

 

30



 

As part of its ongoing financing activities, Dow has the ability to issue promissory notes under its U.S. and Euromarket commercial paper programs. At March 31, 2008, there was $1.7 billion of commercial paper outstanding. In the event Dow has short-term liquidity needs and is unable to access these short-term markets for any reason, Dow has the ability to access liquidity through its committed and available $3 billion five-year revolving credit facility with various U.S. and foreign banks. This credit facility matures in April 2011.

 

At March 31, 2008, the Company had $455 million of SEC-registered securities available for issuance under a U.S. shelf registration, Euro 5 billion (approximately $7.9 billion) available for issuance under the Company’s Euro Medium Term Note Program, as well as Japanese yen 50 billion (approximately $504 million) of securities available for issuance under a shelf registration filed with the Tokyo Stock Exchange on July 31, 2006. In addition, as a well-known seasoned issuer, the Company filed an automatic shelf registration for an unspecified amount of mixed securities with the SEC on February 23, 2007. Under this shelf registration, the Company may offer common stock, preferred stock, depositary shares, debt securities, warrants, stock purchase contracts and stock purchase units.

 

Dow’s public debt instruments and documents for its private funding transactions contain, among other provisions, certain covenants and default provisions. At March 31, 2008, the Company was in compliance with all of these covenants and default provisions.

 

On October 26, 2006, the Company announced that its Board of Directors had approved a share buy-back program, authorizing up to $2 billion to be spent on the repurchase of the Company’s common stock (the “2006 Program”). Purchases under the 2006 Program began in March 2007. In 2007, the Company purchased 26,225,207 shares of the Company’s common stock under the 2006 Program. In the first quarter of 2008, the Company purchased 10,767,901 shares of the Company’s common stock under the 2006 Program. See PART II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds for additional information.

 

Contractual Obligations

 

In January 2008, the Company entered into a new 11-year contract for the purchase of ethylene-related products beginning in 2010. At March 31, 2008, the fixed and determinable portion of the take-or-pay commitment associated with this new contract is $57 million in 2010, $114 million in 2011, $114 million in 2012 and $912 million in 2013 and beyond. There have been no other material changes in the Company’s contractual obligations or commercial commitments since December 31, 2007. See Note G to the Consolidated Financial Statements for further information on purchase commitments.

 

The Company had outstanding guarantees at March 31, 2008. Additional information related to these guarantees can be found in the “Guarantees” table provided in Note G to the Consolidated Financial Statements.

 

Dividends

 

On February 14, 2008, the Company declared a quarterly dividend of $0.42 per share, payable on April 30, 2008, to stockholders of record on March 31, 2008. Since 1912, the Company has paid a cash dividend every quarter and, in each instance, Dow has maintained or increased the amount of the dividend, adjusted for stock splits. During that 96-year period, Dow has increased the amount of the quarterly dividend 47 times (approximately 12 percent of the time) and maintained the amount of the quarterly dividend approximately 88 percent of the time.

 

OTHER MATTERS

 

Recent Accounting Pronouncements

 

See Note B to the Consolidated Financial Statements for a summary of recent accounting pronouncements. In addition, see Note F to the Consolidated Financial Statements for the Company’s disclosures about fair value measurements. The sensitivity of fair value estimates is immaterial relative to the assets and liabilities measured at fair value, as well as to the total equity of the Company.

 

Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note A to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 (“2007 10-K”) describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. Dow’s critical accounting policies that are impacted by judgments, assumptions and estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2007 10-K. Since December 31, 2007, there have been no material changes in the Company’s critical accounting policies.

 

31



 

Asbestos-Related Matters of Union Carbide Corporation

 

Introduction

 

Union Carbide Corporation (“Union Carbide”), a wholly owned subsidiary of the Company, is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to Union Carbide’s products.

 

Influenced by the bankruptcy filings of numerous defendants in asbestos-related litigation and the prospects of various forms of state and national legislative reform, the rate at which plaintiffs filed asbestos-related suits against various companies, including Union Carbide and Amchem, increased in 2001, 2002 and the first half of 2003. Since then, the rate of filing has significantly abated. Union Carbide expects more asbestos-related suits to be filed against Union Carbide and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.

 

The table below provides information regarding asbestos-related claims filed against Union Carbide and Amchem:

 

 

 

2008

 

2007

 

Claims unresolved at January 1

 

90,322

 

111,887

 

Claims filed

 

2,716

 

3,085

 

Claims settled, dismissed or otherwise resolved

 

(2,854

)

(2,225

)

Claims unresolved at March 31

 

90,184

 

112,747

 

Claimants with claims against both UCC and Amchem

 

28,893

 

38,901

 

Individual claimants at March 31

 

61,291

 

73,846

 

 

Plaintiffs’ lawyers often sue dozens or even hundreds of defendants in individual lawsuits on behalf of hundreds or even thousands of claimants. As a result, the damages alleged are not expressly identified as to Union Carbide, Amchem or any other particular defendant, even when specific damages are alleged with respect to a specific disease or injury. In fact, there are no personal injury cases in which only Union Carbide and/or Amchem are the sole named defendants. For these reasons and based upon Union Carbide’s litigation and settlement experience, Union Carbide does not consider the damages alleged against Union Carbide and Amchem to be a meaningful factor in its determination of any potential asbestos liability.

 

Estimating the Liability

 

Based on a study completed by Analysis, Research & Planning Corporation (“ARPC”) in January 2003, Union Carbide increased its December 31, 2002 asbestos-related liability for pending and future claims for the 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. Since then, Union Carbide has compared current asbestos claim and resolution activity to the results of the most recent ARPC study at each balance sheet date to determine whether the accrual continues to be appropriate. In addition, Union Carbide has requested ARPC to review Union Carbide’s historical asbestos claim and resolution activity each November since 2004 to determine the appropriateness of updating the most recent ARPC study.

 

In November 2006, Union Carbide requested ARPC to review Union Carbide’s historical asbestos claim and resolution activity and determine the appropriateness of updating its most recent study from January 2005. In response to that request, ARPC reviewed and analyzed data through October 31, 2006 and concluded that the experience from 2004 through 2006 was sufficient for the purpose of forecasting future filings and values of asbestos claims filed against Union Carbide and Amchem, and could be used in place of previous assumptions to update the January 2005 study. The resulting study, completed by ARPC in December 2006, stated that the undiscounted cost of resolving pending and future asbestos-related claims against Union Carbide and Amchem, excluding future defense and processing costs, through 2021 was estimated to be between approximately $1.2 billion and $1.5 billion. As in its January 2003 and January 2005 studies, ARPC provided estimates for a longer period of time in its December 2006 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.

 

Based on ARPC’s December 2006 study and Union Carbide’s own review of the asbestos claim and resolution activity, Union Carbide decreased its asbestos-related liability for pending and future claims to $1.2 billion at

 

32



 

December 31, 2006 which covered the 15-year period ending in 2021 (excluding future defense and processing costs). The reduction was $177 million and was shown as “Asbestos-related credit” in the consolidated statements of income.

 

In November 2007, Union Carbide requested ARPC to review Union Carbide’s 2007 asbestos claim and resolution activity and determine the appropriateness of updating its 2006 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2007. In December 2007, ARPC stated that an update of its study would not provide a more likely estimate of future events than the estimate reflected in its study of the previous year and, therefore, the estimate in that study remained applicable. Based on Union Carbide’s own review of the asbestos claim and resolution activity and ARPC’s response, Union Carbide determined that no change to the accrual was required. At December 31, 2007, Union Carbide’s asbestos-related liability for pending and future claims was $1.1 billion. At December 31, 2007, approximately 31 percent of the recorded liability related to pending claims and approximately 69 percent related to future claims.

 

Based on Union Carbide’s review of 2008 activity, Union Carbide determined that no adjustment to the accrual was required at March 31, 2008. Union Carbide’s asbestos-related liability for pending and future claims was $1.1 billion at March 31, 2008. Approximately 30 percent of the recorded liability related to pending claims and approximately 70 percent related to future claims.

 

Defense and Resolution Costs

 

The following table provides information regarding defense and resolution costs related to asbestos-related claims filed against Union Carbide and Amchem:

 

Defense and Resolution Costs

 

Three Months Ended

 

Aggregate Costs

 

In millions

 

March 31,
2008

 

March 31,
2007

 

to Date as of
March 31, 2008

 

Defense costs

 

$

14

 

$

17

 

$

579

 

Resolution costs

 

$

42

 

$

16

 

$

1,312

 

 

The average resolution payment per asbestos claimant and the rate of new claim filings has fluctuated both up and down since the beginning of 2001. Union Carbide’s management expects such fluctuations to continue in the future based upon a number of factors, including the number and type of claims settled in a particular period, the jurisdictions in which such claims arose, and the extent to which any proposed legislative reform related to asbestos litigation is being considered.

 

Union Carbide expenses defense costs as incurred. The pretax impact for defense and resolution costs, net of insurance, was $14 million in the first quarter of 2008 and $17 million in the first quarter of 2007, and was reflected in “Cost of sales.”

 

Insurance Receivables

 

At December 31, 2002, Union Carbide increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion, substantially exhausting its asbestos product liability coverage. The insurance receivable related to the asbestos liability was determined by Union Carbide after a thorough review of applicable insurance policies and the 1985 Wellington Agreement, to which Union Carbide and many of its liability insurers are signatory parties, as well as other insurance settlements, with due consideration given to applicable deductibles, retentions and policy limits, and taking into account the solvency and historical payment experience of various insurance carriers. The Wellington Agreement and other agreements with insurers are designed to facilitate an orderly resolution and collection of Union Carbide’s insurance policies and to resolve issues that the insurance carriers may raise.

 

In September 2003, Union Carbide filed a comprehensive insurance coverage case, now proceeding in the Supreme Court of the State of New York, County of New York, seeking to confirm its rights to insurance for various asbestos claims and to facilitate an orderly and timely collection of insurance proceeds. This lawsuit was filed against insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place with Union Carbide regarding their asbestos-related insurance coverage, in order to facilitate an orderly resolution and collection of such insurance policies and to resolve issues that the insurance carriers may raise. Although the lawsuit is continuing, through the end of the first quarter of 2008, Union Carbide has reached settlements with several of the carriers involved in this litigation.

 

Union Carbide’s receivable for insurance recoveries related to its asbestos liability was $465 million at March 31, 2008 and $467 million at December 31, 2007. At March 31, 2008 and December 31, 2007, all of the receivable for insurance recoveries was related to insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place regarding their asbestos-related insurance coverage.

 

33



 

In addition to the receivable for insurance recoveries related to its asbestos liability, Union Carbide had receivables for defense and resolution costs submitted to insurance carriers for reimbursement as follows:

 

Receivables for Costs Submitted to Insurance Carriers

 

In millions

 

March 31,
2008

 

Dec. 31,
2007

 

Receivables for defense costs

 

$

22

 

$

18

 

Receivables for resolution costs

 

248

 

253

 

Total

 

$

270

 

$

271

 

 

After a review of its insurance policies, with due consideration given to applicable deductibles, retentions and policy limits, after taking into account the solvency and historical payment experience of various insurance carriers; existing insurance settlements; and the advice of outside counsel with respect to the applicable insurance coverage law relating to the terms and conditions of its insurance policies, Union Carbide continues to believe that its recorded receivable for insurance recoveries from all insurance carriers is probable of collection.

 

Summary

 

The amounts recorded by Union Carbide for the asbestos-related liability and related insurance receivable described above were based upon current, known facts. However, future events, such as the number of new claims to be filed and/or received each year, the average cost of disposing of each such claim, coverage issues among insurers, and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries for Union Carbide to be higher or lower than those projected or those recorded.

 

Because of the uncertainties described above, Union Carbide’s management cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing Union Carbide and Amchem. Union Carbide’s management believes that it is reasonably possible that the cost of disposing of Union Carbide’s asbestos-related claims, including future defense costs, could have a material adverse impact on Union Carbide’s results of operations and cash flows for a particular period and on the consolidated financial position of Union Carbide.

 

It is the opinion of Dow’s management that it is reasonably possible that the cost of Union Carbide disposing of its asbestos-related claims, including future defense costs, could have a material adverse impact on the Company’s results of operations and cash flows for a particular period and on the consolidated financial position of the Company.

 

34



 

The Dow Chemical Company and Subsidiaries

PART I – FINANCIAL INFORMATION

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Dow’s business operations give rise to market risk exposure due to changes in foreign exchange rates, interest rates, commodity prices and other market factors such as equity prices. To manage such risks effectively, the Company enters into hedging transactions, pursuant to established guidelines and policies, which enable it to mitigate the adverse effects of financial market risk. Derivatives used for this purpose are designated as hedges per SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” where appropriate. A secondary objective is to add value by creating additional non-specific exposure within established limits and policies; derivatives used for this purpose are not designated as hedges per SFAS No. 133. The potential impact of creating such additional exposures is not material to the Company’s results.

 

The global nature of Dow’s business requires active participation in the foreign exchange markets. As a result of investments, production facilities and other operations on a global basis, the Company has assets, liabilities and cash flows in currencies other than the U.S. dollar. The primary objective of the Company’s foreign exchange risk management is to optimize the U.S. dollar value of net assets and cash flows, keeping the adverse impact of currency movements to a minimum. To achieve this objective, the Company hedges on a net exposure basis using foreign currency forward contracts, over-the-counter option contracts, cross-currency swaps, and nonderivative instruments in foreign currencies. Main exposures are related to assets and liabilities denominated in the currencies of Europe, Asia Pacific and Canada; bonds denominated in foreign currencies – mainly the Euro; and economic exposure derived from the risk that currency fluctuations could affect the U.S. dollar value of future cash flows. The majority of the foreign exchange exposure is related to European currencies and the Japanese yen.

 

The main objective of interest rate risk management is to reduce the total funding cost to the Company and to alter the interest rate exposure to the desired risk profile. Dow uses interest rate swaps, “swaptions,” and exchange-traded instruments to accomplish this objective. The Company’s primary exposure is to the U.S. dollar yield curve.

 

Dow has a portfolio of equity securities derived from its acquisition and divestiture activity. This exposure is managed in a manner consistent with the Company’s market risk policies and procedures.

 

Inherent in Dow’s business is exposure to price changes for several commodities. Some exposures can be hedged effectively through liquid tradable financial instruments. Feedstocks for ethylene production and natural gas constitute the main commodity exposures. Over-the-counter and exchange traded instruments are used to hedge these risks when feasible.

 

Dow uses value at risk (“VAR”), stress testing and scenario analysis for risk measurement and control purposes. VAR estimates the potential gain or loss in fair market values that could arise in one day, given a certain move in prices over a certain period of time, using specified confidence levels. Through the end of 2007, the VAR methodology used by the Company was based primarily on a variance/covariance statistical model. The year-end VAR and average daily VAR for the aggregate of non-trading and trading positions using this model for 2007 and 2006 are shown below. These amounts are immaterial relative to the total equity of the Company.

 

Total Daily VAR at December 31*

 

2007

 

2006

 

In millions

 

Year-end

 

Average

 

Year-end

 

Average

 

Foreign exchange

 

$

7

 

$

5

 

$

3

 

$

4

 

Interest rate

 

$

57

 

$

44

 

$

34

 

$

43

 

Equities

 

$

15

 

$

16

 

$

9

 

$

3

 

Commodities

 

$

17

 

$

11

 

$

14

 

$

19

 

 


*Using a 95 percent confidence level

 

The Company’s daily VAR for the aggregate of trading and non-trading positions using the variance/covariance statistical model increased from a total VAR of $96 million at December 31, 2007 to a total of $102 million at March 31, 2008. The increase related primarily to an increase in the interest rate VAR from $57 million to $72 million, principally due to an increase in interest rate volatility, and a decrease in the commodities VAR from $17 million to $8 million, due to a reduction in commodities hedges.

 

In the first quarter of 2008, the Company changed its primary VAR methodology from a variance/covariance statistical model to a historical simulation model to more effectively capture co-movements in market rates across different asset classes. In the new historical simulation model, a 97.5 percent confidence level is used and the historical scenario period includes at least six months of historical data. The new historical simulation model resulted in a composite daily VAR of $87 million at March 31, 2008; VAR for the components was $4 million for foreign exchange exposure, $77 million for interest rate exposure, $12 million for equities exposure and $4 million for commodities exposure.

 

Since December 31, 2007, there have been no material changes in the Company’s risk management policies.

 

35



 

ITEM 4.  CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Disclosure Committee and the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to paragraph (b) of Exchange Act Rules 13a-15 or 15d-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

36



 

The Dow Chemical Company and Subsidiaries

PART II – OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS.

 

Asbestos-Related Matters of Union Carbide Corporation

 

No material developments regarding this matter occurred during the first quarter of 2008. For a summary of the history and current status of this matter, see Note G to the Consolidated Financial Statements; and Management’s Discussion and Analysis of Financial Condition and Results of Operations, Asbestos-Related Matters of Union Carbide Corporation.

 

Environmental Matters

 

On June 19, 2007, the Ohio Environmental Protection Agency issued a Proposed Findings and Orders (the “Order”) alleging violations by Poly-Carb, Inc., an Ohio corporation then unaffiliated with the Company, regarding the management of hazardous materials and wastes at its facility in Solon, Ohio. The Order proposes a total civil penalty of $120,000. On September 12, 2007, the Company acquired U.S. Laboratories, Inc., including its subsidiary, Poly-Carb, Inc., from its stockholders who retained the financial responsibility for all costs and expenses related to the resolution of the Order.

 

ITEM 1A.  RISK FACTORS.

 

There were no material changes in the Company’s risk factors in the first quarter of 2008.

 

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

The following table provides information regarding purchases of the Company’s common stock by the Company during the three months ended March 31, 2008:

 

Issuer Purchases of Equity Securities

 

 

 

 

Period

 

Total number
of shares
purchased 
(1)

 

Average
price paid
per share

 

Total number of 
shares purchased as
part of the Company’s
publicly announced
share repurchase
program 
(2)

 

Approximate dollar
value of shares that
may yet be purchased
under the Company’s
publicly announced
share repurchase
program(2)

 

January 2008

 

1,000,000

 

$

38.58

 

1,000,000

 

$

813,961,731

 

February 2008

 

5,418,666

 

$

38.74

 

5,398,412

 

$

604,798,488

 

March 2008

 

4,374,758

 

$

37.13

 

4,369,489

 

$

442,563,218

 

First quarter 2008

 

10,793,424

 

$

38.07

 

10,767,901

 

$

442,563,218