Table of Contents

 

 

 

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 SEPTEMBER 30, 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

(Do not check if a smaller reporting company)

 

 

 

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 September 30, 2008

Common Stock, par value $2.50 per share

 

923,779,819 shares

 

 

 



Table of Contents

 

The Dow Chemical Company

 

QUARTERLY REPORT ON FORM 10-Q

For the quarterly period ended September 30, 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.

 

28

 

 

 

 

 

 

 

Disclosure Regarding Forward-Looking Information

 

28

 

 

 

 

 

 

 

Results of Operations

 

29

 

 

 

 

 

 

 

Changes in Financial Condition

 

37

 

 

 

 

 

 

 

Other Matters

 

40

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

 

44

 

 

 

 

 

 

Item 4.

Controls and Procedures.

 

45

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings.

 

46

 

 

 

 

 

 

Item 1A.

Risk Factors.

 

46

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

49

 

 

 

 

 

 

Item 6.

Exhibits.

 

49

 

 

 

SIGNATURE

 

51

 

 

 

EXHIBIT INDEX

 

52

 

2



Table of Contents

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

 

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Income

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Sept. 30,

 

Sept. 30,

 

Sept. 30,

 

Sept. 30,

 

In millions, except per share amounts (Unaudited)

 

2008

 

2007

 

2008

 

2007

 

Net Sales

 

$

15,411

 

$

13,589

 

$

46,615

 

$

39,286

 

Cost of sales

 

13,975

 

11,864

 

41,526

 

33,867

 

Research and development expenses

 

334

 

329

 

1,000

 

951

 

Selling, general and administrative expenses

 

498

 

476

 

1,511

 

1,371

 

Amortization of intangibles

 

21

 

22

 

68

 

51

 

Restructuring credit

 

 

 

 

(4

)

Purchased in-process research and development charges

 

27

 

59

 

27

 

59

 

Acquisition-related expenses

 

18

 

 

18

 

 

Equity in earnings of nonconsolidated affiliates

 

266

 

296

 

791

 

828

 

Sundry income (expense) - net

 

(34

)

70

 

49

 

262

 

Interest income

 

23

 

28

 

72

 

101

 

Interest expense and amortization of debt discount

 

160

 

148

 

456

 

423

 

Income before Income Taxes and Minority Interests

 

633

 

1,085

 

2,921

 

3,759

 

Provision for income taxes

 

185

 

659

 

727

 

1,271

 

Minority interests’ share in income

 

20

 

23

 

63

 

73

 

Net Income Available for Common Stockholders

 

$

428

 

$

403

 

$

2,131

 

$

2,415

 

Share Data

 

 

 

 

 

 

 

 

 

Earnings per common share - basic

 

$

0.46

 

$

0.42

 

$

2.29

 

$

2.53

 

Earnings per common share - diluted

 

$

0.46

 

$

0.42

 

$

2.26

 

$

2.49

 

Common stock dividends declared per share of common stock

 

$

0.42

 

$

0.42

 

$

1.26

 

$

1.215

 

Weighted-average common shares outstanding - basic

 

925.2

 

948.9

 

932.4

 

955.6

 

Weighted-average common shares outstanding - diluted

 

934.0

 

961.5

 

941.7

 

968.3

 

Depreciation

 

$

505

 

$

499

 

$

1,497

 

$

1,439

 

Capital Expenditures

 

$

628

 

$

519

 

$

1,584

 

$

1,311

 

 

See Notes to the Consolidated Financial Statements.

 

3



Table of Contents

 

The Dow Chemical Company and Subsidiaries

Consolidated Balance Sheets

 

 

 

Sept. 30,

 

Dec. 31,

 

In millions (Unaudited)

 

2008

 

2007

 

Assets

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

2,261

 

$

1,736

 

Marketable securities and interest-bearing deposits

 

11

 

1

 

Accounts and notes receivable:

 

 

 

 

 

Trade (net of allowance for doubtful receivables - 2008: $122; 2007: $118)

 

5,480

 

5,944

 

Other

 

4,121

 

3,740

 

Inventories

 

7,542

 

6,885

 

Deferred income tax assets - current

 

261

 

348

 

Total current assets

 

19,676

 

18,654

 

Investments

 

 

 

 

 

Investment in nonconsolidated affiliates

 

3,358

 

3,089

 

Other investments

 

2,305

 

2,489

 

Noncurrent receivables

 

300

 

385

 

Total investments

 

5,963

 

5,963

 

Property

 

 

 

 

 

Property

 

48,230

 

47,708

 

Less accumulated depreciation

 

33,932

 

33,320

 

Net property

 

14,298

 

14,388

 

Other Assets

 

 

 

 

 

Goodwill

 

3,637

 

3,572

 

Other intangible assets (net of accumulated amortization - 2008: $786; 2007: $721)

 

808

 

781

 

Deferred income tax assets - noncurrent

 

2,274

 

2,126

 

Asbestos-related insurance receivables - noncurrent

 

662

 

696

 

Deferred charges and other assets

 

2,847

 

2,621

 

Total other assets

 

10,228

 

9,796

 

Total Assets

 

$

50,165

 

$

48,801

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Notes payable

 

$

2,407

 

$

1,548

 

Long-term debt due within one year

 

1,743

 

586

 

Accounts payable:

 

 

 

 

 

Trade

 

4,227

 

4,555

 

Other

 

2,218

 

1,981

 

Income taxes payable

 

580

 

728

 

Deferred income tax liabilities - current

 

112

 

117

 

Dividends payable

 

392

 

418

 

Accrued and other current liabilities

 

2,470

 

2,512

 

Total current liabilities

 

14,149

 

12,445

 

Long-Term Debt

 

8,257

 

7,581

 

Other Noncurrent Liabilities

 

 

 

 

 

Deferred income tax liabilities - noncurrent

 

912

 

854

 

Pension and other postretirement benefits - noncurrent

 

3,006

 

3,014

 

Asbestos-related liabilities - noncurrent

 

904

 

1,001

 

Other noncurrent obligations

 

3,239

 

3,103

 

Total other noncurrent liabilities

 

8,061

 

7,972

 

Minority Interest in Subsidiaries

 

70

 

414

 

Preferred Securities of Subsidiaries

 

500

 

1,000

 

Stockholders’ Equity

 

 

 

 

 

Common stock

 

2,453

 

2,453

 

Additional paid-in capital

 

865

 

902

 

Retained earnings

 

18,954

 

18,004

 

Accumulated other comprehensive loss

 

(687

)

(170

)

Treasury stock at cost

 

(2,457

)

(1,800

)

Net stockholders’ equity

 

19,128

 

19,389

 

Total Liabilities and Stockholders’ Equity

 

$

50,165

 

$

48,801

 

 

See Notes to the Consolidated Financial Statements.

 

4



Table of Contents

 

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Cash Flows

 

 

 

Nine Months Ended

 

 

 

Sept. 30,

 

Sept. 30,

 

In millions (Unaudited)

 

2008

 

2007

 

Operating Activities

 

 

 

 

 

Net Income Available for Common Stockholders

 

$

2,131

 

$

2,415

 

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

 

 

 

 

 

Depreciation and amortization

 

1,681

 

1,601

 

Purchased in-process research and development charges

 

27

 

59

 

Provision for deferred income tax

 

74

 

712

 

Earnings of nonconsolidated affiliates in excess of dividends received

 

(115

)

(310

)

Minority interests’ share in income

 

63

 

73

 

Pension contributions

 

(122

)

(137

)

Net gain on sales of investments

 

(24

)

(120

)

Net gain on sales of property, businesses and consolidated companies

 

(45

)

(71

)

Other net loss (gain)

 

5

 

(88

)

Restructuring credit

 

 

(4

)

Excess tax benefits from share-based payment arrangements

 

(8

)

(14

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts and notes receivable

 

123

 

(857

)

Inventories

 

(698

)

(614

)

Accounts payable

 

(177

)

469

 

Other assets and liabilities

 

(453

)

140

 

Cash provided by operating activities

 

2,462

 

3,254

 

Investing Activities

 

 

 

 

 

Capital expenditures

 

(1,584

)

(1,311

)

Proceeds from sales of property, businesses and consolidated companies

 

209

 

110

 

Acquisitions of businesses

 

 

(143

)

Purchase of previously leased assets

 

(63

)

(12

)

Investments in consolidated companies

 

(316

)

(742

)

Investments in nonconsolidated affiliates

 

(128

)

(60

)

Distributions from nonconsolidated affiliates

 

6

 

5

 

Proceeds from sale of ownership interests in nonconsolidated affiliates

 

 

30

 

Purchases of investments

 

(725

)

(1,367

)

Proceeds from sales and maturities of investments

 

664

 

1,404

 

Cash used in investing activities

 

(1,937

)

(2,086

)

Financing Activities

 

 

 

 

 

Changes in short-term notes payable

 

880

 

38

 

Payments on long-term debt

 

(84

)

(71

)

Proceeds from issuance of long-term debt

 

1,265

 

13

 

Purchases of treasury stock

 

(898

)

(1,144

)

Proceeds from sales of common stock

 

59

 

291

 

Payment of deferred financing costs

 

(66

)

 

Excess tax benefits from share-based payment arrangements

 

8

 

14

 

Distributions to minority interests

 

(44

)

(48

)

Dividends paid to stockholders

 

(1,174

)

(1,115

)

Cash used in financing activities

 

(54

)

(2,022

)

Effect of Exchange Rate Changes on Cash

 

54

 

42

 

Summary

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

525

 

(812

)

Cash and cash equivalents at beginning of year

 

1,736

 

2,757

 

Cash and cash equivalents at end of period

 

$

2,261

 

$

1,945

 

 

See Notes to the Consolidated Financial Statements.

 

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Table of Contents

 

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Comprehensive Income

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Sept. 30,

 

Sept. 30,

 

Sept. 30,

 

Sept. 30,

 

In millions (Unaudited)

 

2008

 

2007

 

2008

 

2007

 

Net Income Available for Common Stockholders

 

$

428

 

$

403

 

$

2,131

 

$

2,415

 

Other Comprehensive Income (Loss), Net of Tax

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses) on investments

 

(89

)

15

 

(173

)

24

 

Translation adjustments

 

(748

)

353

 

(208

)

487

 

Adjustments to pension and other postretirement benefit plans

 

13

 

32

 

30

 

108

 

Net gains (losses) on cash flow hedging derivative instruments

 

(237

)

26

 

(166

)

56

 

Total other comprehensive income (loss)

 

(1,061

)

426

 

(517

)

675

 

Comprehensive Income (Loss)

 

$

(633

)

$

829

 

$

1,614

 

$

3,090

 

 

See Notes to the Consolidated Financial Statements.

 

6



Table of Contents

 

The Dow Chemical Company and Subsidiaries

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

Notes to the Consolidated Financial Statements

(Unaudited)

 

NOTE A – CONSOLIDATED FINANCIAL STATEMENTS

 

The unaudited interim consolidated financial statements of The Dow Chemical Company and its subsidiaries (“Dow” or the “Company”) were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect all adjustments (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, 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 No. 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 G for expanded disclosures about fair value measurements.

 

In October 2008, the FASB issued FSP FAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” The FSP clarifies the application of SFAS No. 157, “Fair Value Measurements,” when the market for a financial asset is not active. The FSP was effective upon issuance, including reporting for prior periods for which financial statements have not been issued. The adoption of the FSP for reporting as of September 30, 2008 did not have a material impact on the Company’s consolidated financial statements. See Note G for further information on 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, which is January 1, 2009 for the Company. The Company will provide the required disclosures in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2009.

 

In April 2008, the FASB issued FSP FAS No. 142-3, “Determination of the Useful Life of Intangible Assets.” The FSP amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, “Goodwill and Other Intangible Assets.” The FSP must be applied prospectively to intangible assets acquired after the effective date. The Company will apply the guidance of the FSP to intangible assets acquired after January 1, 2009.

 

In May 2008, the FASB issued FSP Accounting Principles Board (“APB”) Opinion No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” The FSP applies to convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash. The FSP, which is effective January 1, 2009 for the Company, is to be applied retrospectively to all past periods presented. The

 

7



Table of Contents

 

Company has not issued convertible debt securities; therefore, the FSP is not anticipated to have an impact on the Company’s consolidated financial statements.

 

In June 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. The FSP affects entities that accrue dividends on share-based payment awards during the awards’ service period when the dividends do not need to be returned if the employees forfeit the award. This FSP is effective for fiscal years beginning after December 15, 2008. The Company does not have share-based payment awards that contain rights to nonforfeitable dividends, thus this FSP is not anticipated to have an impact on the Company’s consolidated financial statements.

 

In September 2008, the FASB issued FSP FAS No. 133-1 and FIN 45-4, “Disclosures About Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161.” The FSP amends and enhances the disclosure requirements for sellers of credit derivatives (including hybrid instruments that have embedded credit derivatives) and financial guarantees. This FSP is effective for reporting periods ending after November 15, 2008. The Company currently does not hold any of these derivatives, thus this FSP is not anticipated to have an impact on the disclosures in the Company’s consolidated financial statements.

 

In September 2008, the FASB ratified the consensus reached by the EITF with respect to EITF Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value With a Third-Party Credit Enhancement.” The Issue which is effective in the first reporting period beginning on or after December 15, 2008, instructs issuers of a liability with a third-party credit enhancement that is inseparable from the liability to treat the liability and the credit enhancement as two units of accounting, and provide related disclosures. The Company does not carry any liabilities with inseparable third-party credit enhancements, thus the Issue is not anticipated to have an impact on the Company’s consolidated financial statements.

 

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.

 

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 September 30, 2008, severance of $36 million had been paid to 348 employees and a liability of $49 million remained for approximately 630 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

 

Cash payments

 

(1

)

(13

)

(14

)

Reserve balance at June 30, 2008

 

$

79

 

$

67

 

$

146

 

Cash payments

 

 

(15

)

(15

)

Foreign currency impact

 

(5

)

(3

)

(8

)

Reserve balance at September 30, 2008

 

$

74

 

$

49

 

$

123

 

 

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Table of Contents

 

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. At December 31, 2007, a liability of $39 million remained for approximately 410 employees. As of September 30, 2008, severance of $13 million had been paid to 162 employees in 2008, and a liability of $22 million remained for approximately 250 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

)

(8

)

(9

)

Foreign currency impact

 

1

 

 

1

 

Reserve balance at March 31, 2008

 

$

130

 

$

31

 

$

161

 

Cash payments

 

(5

)

(3

)

(8

)

Foreign currency impact

 

2

 

(1

)

1

 

Reserve balance at June 30, 2008

 

$

127

 

$

27

 

$

154

 

Cash payments

 

(3

)

(2

)

(5

)

Foreign currency impact

 

(4

)

(3

)

(7

)

Reserve balance at September 30, 2008

 

$

120

 

$

22

 

$

142

 

 

NOTE D – ACQUISITIONS

 

Purchased In-Process Research and Development

 

Purchased in-process research and development (“IPR&D”) represents the value assigned in a business combination to acquired research and development projects that, as of the date of the acquisition, had not established technological feasibility and had no alternative future use. In accordance with GAAP, amounts assigned to IPR&D meeting these criteria must be charged to expense as part of the allocation of the purchase price of the business combination.

 

The Company recorded pretax charges totaling $27 million in the third quarter of 2008 and $59 million in the third quarter of 2007 for IPR&D projects associated with recent acquisitions. The estimated values assigned to the IPR&D projects were determined based on a discounted cash flow model and are shown below:

 

In-Process Research and Development Projects Acquired

 

In millions

 

Date of Acquisition

 

Estimated
Value Assigned
to IPR&D

 

2008 IPR&D:

 

 

 

 

 

Germplasm from Texas Triumph Seed Co., Inc.

 

February 29, 2008

 

$

4

 

Germplasm from Dairyland Seed Co., Inc. and Bio-Plant Research Ltd.

 

August 29, 2008

 

23

 

Total 2008 IPR&D

 

 

 

$

27

 

2007 IPR&D:

 

 

 

 

 

Germplasm from Maize Technologies International

 

May 1, 2007

 

$

2

 

Manufacturing process R&D from Wolff Walsrode

 

June 30, 2007

 

9

 

Germplasm from Agromen Tecnologia Ltda.

 

August 1, 2007

 

26

 

Germplasm from Duo Maize

 

August 30, 2007

 

3

 

Intellectual property for crop trait discovery from Exelixis Plant Sciences

 

September 4, 2007

 

19

 

Total 2007 IPR&D

 

 

 

$

59

 

 

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Table of Contents

 

IPR&D charges are shown as “Purchased in-process research and development charges” in the consolidated statements of income. The third quarter 2008 charges were related to projects within the Agricultural Sciences segment. The third quarter 2007 charges of $50 million related to projects within the Agricultural Sciences segment; $9 million related to IPR&D acquired from Wolff Walsrode and impacted the results for the Performance Chemicals segment.

 

Acquisition-Related Expenses

 

During the third quarter of 2008, pretax charges totaling $18 million were recorded for legal expenses and other transaction costs related to the pending acquisition of Rohm and Haas Company; these charges are reflected in Unallocated and Other. These charges were expensed in anticipation of a 2009 closing of the acquisition and the application of revised SFAS No. 141, “Business Combinations.”

 

NOTE E – INVENTORIES

 

The following table provides a breakdown of inventories:

 

Inventories

 

In millions

 

Sept. 30,
2008

 

Dec. 31,
2007

 

Finished goods

 

$

4,223

 

$

4,085

 

Work in process

 

1,617

 

1,595

 

Raw materials

 

1,022

 

566

 

Supplies

 

680

 

639

 

Total inventories

 

$

7,542

 

$

6,885

 

 

The reserves reducing inventories from the first-in, first-out (“FIFO”) basis to the last-in, first-out (“LIFO”) basis amounted to $1,909 million at September 30, 2008 and $1,511 million at December 31, 2007.

 

NOTE F – 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.

 

 

 

3

 

 

 

3

 

Dairyland Seed Co., Inc.

 

 

 

5

 

 

 

5

 

STEVENS ROOFING SYSTEMS™

 

34

 

 

 

 

 

34

 

Adjustment to goodwill related to the formation of Americas Styrenics LCC

 

 

 

 

(5

)

 

(5

)

Adjustments to goodwill related to 2007 acquisitions of:

 

 

 

 

 

 

 

 

 

 

 

 

 

Wolff Walsrode

 

 

6

 

 

 

 

6

 

Hyperlast Limited

 

11

 

 

 

 

 

11

 

GNS Technologies, LLC

 

3

 

 

 

 

 

3

 

Poly-Carb Inc.

 

(4

)

 

 

 

 

(4

)

UPPC AG

 

11

 

 

 

 

 

11

 

Edulan A/S

 

(6

)

 

 

 

 

(6

)

Balance at September 30, 2008

 

$

1,090

 

$

1,001

 

$

1,388

 

$

95

 

$

63

 

$

3,637

 

 

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Table of Contents

 

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

 

Other Intangible Assets

 

 

 

At September 30, 2008

 

At December 31, 2007

 

In millions

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Licenses and intellectual property

 

$

321

 

$

(179

)

$

142

 

$

302

 

$

(165

)

$

137

 

Patents

 

140

 

(99

)

41

 

145

 

(104

)

41

 

Software

 

661

 

(351

)

310

 

575

 

(318

)

257

 

Trademarks

 

176

 

(58

)

118

 

173

 

(51

)

122

 

Other

 

296

 

(99

)

197

 

307

 

(83

)

224

 

Total

 

$

1,594

 

$

(786

)

$

808

 

$

1,502

 

$

(721

)

$

781

 

 

The following table provides information regarding amortization expense:

 

Amortization Expense

 

 

 

Three Months Ended

 

Nine Months Ended

 

In millions

 

Sept. 30,
2008

 

Sept. 30,
2007

 

Sept. 30,
2008

 

Sept. 30,
2007

 

Other intangible assets, excluding software

 

$

21

 

$

22

 

$

68

 

$

51

 

Software, included in “Cost of sales”

 

$

13

 

$

11

 

$

35

 

$

32

 

 

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

 

Estimated Amortization Expense

 

In millions

 

 

 

2008

 

$

137

 

2009

 

$

132

 

2010

 

$

128

 

2011

 

$

118

 

2012

 

$

113

 

2013

 

$

78

 

 

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NOTE G – 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

 

In millions

 

At
Sept. 30,
2008

 

Quoted Prices
in Active
Markets for
Identical Items
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Assets at fair value:

 

 

 

 

 

 

 

Equity securities (1)

 

$

445

 

$

416

 

$

29

 

Debt securities (1)

 

1,443

 

 

1,443

 

Derivatives relating to:

 

 

 

 

 

 

 

Foreign currency

 

86

 

 

86

 

Interest Rates

 

2

 

 

2

 

Commodities

 

55

 

 

55

 

Total assets at fair value

 

$

2,031

 

$

416

 

$

1,615

 

Liabilities at fair value:

 

 

 

 

 

 

 

Derivatives relating to:

 

 

 

 

 

 

 

Foreign currency

 

$

(30

)

 

$

(30

)

Interest Rates

 

(2

)

 

(2

)

Commodities

 

(220

)

 

(220

)

Total liabilities at fair value

 

$

(252

)

 

$

(252

)

 

 


(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.

 

NOTE H – 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 September 30, 2008, no draws had been taken against the credit facility.

 

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Table of Contents

 

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 September 30, 2008, the Company had accrued obligations of $306 million for environmental remediation and restoration costs, including $23 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. Following subsequent discussions between the Company and the MDEQ, a Remedial Investigation Work Plan along with a revised Scope of Work for the Saginaw River was submitted to the MDEQ on June 10, 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 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. On June 10, 2008, the Company submitted revised Human Health Risk Assessment and Ecological Risk Assessment Work Plans for the Tittabawassee River in addition to a Work Plan for the collection of fish for analysis in support of the Human Health Risk Assessment Work Plan. Also on June 10, 2008, the Company submitted the Remedial Investigation Work Plan for the Saginaw River and the Saginaw Bay.

 

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Table of Contents

 

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. On June 30, 2008, the Company submitted the Lower Tittabawassee River Sampling and Analysis Plan to the MDEQ. The Sampling and Analysis Plan was approved by the MDEQ by letters dated July 10, 2008 and August 15, 2008.

 

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. In September 2008, the Company and the MDEQ reached agreement to implement pilot projects to evaluate their applicability to future actions.

 

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. On July 11, 2008, the Company and the EPA entered into a removal order under which the Company is required to remove soil, pave a road and driveways, and clean homes along a strip of land approximately 150 feet by 1,000 feet along the lower part of the Tittabawassee River.

 

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 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 September 30, 2008, the accrual for off-site corrective action was $18 million (included in the total accrued obligation of $306 million at September 30, 2008).

 

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Table of Contents

 

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 September 30, 2008. Union Carbide’s asbestos-related liability for pending and future claims was $1.0 billion at September 30, 2008. Approximately 27 percent of the recorded liability related to pending claims and approximately 73 percent related to future claims.

 

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

 

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Table of Contents

 

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 third 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 $415 million at September 30, 2008 and $467 million at December 31, 2007. At September 30, 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

 

Sept. 30,
2008

 

Dec. 31,
2007

 

Receivables for defense costs

 

$

35

 

$

18

 

Receivables for resolution costs

 

245

 

253

 

Total

 

$

280

 

$

271

 

 

Union Carbide expenses defense costs as incurred. The pretax impact for defense and resolution costs, net of insurance, was $14 million in the third quarter of 2008 ($16 million in the third quarter of 2007) and $30 million in the first nine months of 2008 ($58 million in the first nine months 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 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

 

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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. 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. Subsequent to the imposition of the fine, the Company and/or certain subsidiaries of the Company became named parties in various related U.S., United Kingdom and Italian civil actions.

 

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 $70 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

 

 

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 September 30, 2008, the fixed and determinable portion of the take-or-pay commitment associated with this new contract was $59 million in 2010, $118 million in 2011, $118 million in 2012 and $944 million in 2013 and beyond. In June 2008, the Company entered into a new 20-year contract for the purchase of power and steam beginning in 2011. At September 30, 2008, the fixed and determinable portion of the take-or-pay commitment associated with this new contract was $23 million in 2011, $69 million in 2012 and $1,460 million in 2013 and beyond.

 

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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 September 30, 2008

 

In millions

 

Final
Expiration

 

Maximum Future
Payments

 

Recorded
Liability

 

Guarantees

 

2014

 

$

348

 

$

19

 

Residual value guarantees

 

2015

 

984

 

4

 

Total guarantees

 

 

 

$

1,332

 

$

23

 

 

Guarantees at December 31, 2007

 

In millions

 

Final
Expiration

 

Maximum Future
Payments

 

Recorded
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 $108 million at September 30, 2008 and $116 million at 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.

 

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NOTE I – LONG-TERM DEBT

 

On September 29, 2008, Calvin Capital LLC (“Calvin”), a newly formed wholly owned subsidiary of the Company, issued a three-year $674 million note payable (“Note”) with a floating rate based on London Interbank Offered Rate (“LIBOR”). The Note was issued in exchange for the redemption of the other partner’s ownership in Hobbes Capital S.A and was a non-cash transaction (see Note K for further information on this transaction). The Note is recorded in “Long-term debt due within one year” in the consolidated balance sheets since the Note holder has the annual option to require the Company to prepay the outstanding principal.

 

The Note was issued under a note purchase agreement which contains, among other provisions, covenants with which Calvin must comply while the Note is outstanding. Such covenants include compliance with Calvin’s Limited Liability Company Agreement, the obligation to not merge or consolidate with any other corporation or sell or convey all or substantially all of Calvin’s assets, and limitations on making distributions and incurring other debt. Failure of Calvin to comply with any of these covenants could result in a default under the agreement which would allow the Note holder to accelerate the due date of the outstanding principal and accrued interest on the Note. Although a consolidated subsidiary, Calvin is a separate and distinct legal entity with separate assets of $1,342 million consisting of a $1,317 million note receivable from the Company with a three-year term and optional prepayment at the end of each fiscal quarter, and cash and cash equivalents of $25 million; separate liabilities consisting of the $674 million Note; and separate business and operations.

 

On May 1, 2008, the Company issued $800 million in unsecured notes with a coupon rate of 5.70 percent, semi-annual interest payments due every May and November, and the principal amount due at maturity on May 15, 2018. In the second quarter of 2008, the Company also issued $116 million in medium-term notes with varying maturities in 2013 and 2015 and at various interest rates averaging 5.07 percent. In the third quarter of 2008, the Company issued $298 million in medium-term notes with varying maturities in 2013, 2015 and 2018 and at various interest rates averaging 5.81 percent.

 

The Company’s public debt has been issued under indentures which contain, among other provisions, covenants with which the Company must comply while the underlying notes are outstanding. Such covenants include obligations to not allow liens on principal U.S. manufacturing facilities, enter into sale and lease-back transactions with respect to principal U.S. manufacturing facilities, or merge or consolidate with any other corporation or sell or convey all or substantially all of the Company’s assets. Failure of the Company to comply with any of the covenants could result in a default under the applicable indenture which would allow the note holders to accelerate the due date of the outstanding principal and accrued interest on the subject notes. At September 30, 2008, the Company was in compliance with all of its covenants and default provisions.

 

Annual Installments on Long-Term Debt

for Next Five Years at September 30, 2008

 

In millions

 

 

 

2008

 

$

500

 

2009

 

$

1,452

 

2010

 

$

1,049

 

2011

 

$

1,526

 

2012

 

$

1,004

 

2013

 

$

498

 

 

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NOTE J – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

 

Net Periodic Benefit Cost for All Significant Plans

 

 

 

Three Months Ended

 

Nine Months Ended

 

In millions

 

Sept. 30,
2008

 

Sept. 30,
2007

 

Sept. 30,
2008

 

Sept. 30,
2007

 

Defined Benefit Pension Plans:

 

 

 

 

 

 

 

 

 

Service cost

 

$

67

 

$

72

 

$

202

 

$

215

 

Interest cost

 

242

 

218

 

726

 

652

 

Expected return on plan assets

 

(310

)

(294

)

(931

)

(877

)

Amortization of prior service cost

 

8

 

6

 

24

 

18

 

Amortization of net loss

 

11

 

48

 

34

 

147

 

Termination benefits/curtailment costs

 

 

 

 

1

 

Net periodic benefit cost

 

$

18

 

$

50

 

$

55

 

$

156

 

 

 

 

 

 

 

 

 

 

 

Other Postretirement Benefits:

 

 

 

 

 

 

 

 

 

Service cost

 

$

4

 

$

5

 

$

13

 

$

15

 

Interest cost

 

29

 

29

 

88

 

86

 

Expected return on plan assets

 

(7

)

(9

)

(21

)

(27

)

Amortization of prior service credit

 

(1

)

(1

)

(3

)

(3

)

Amortization of net loss

 

 

1

 

 

3

 

Net periodic benefit cost

 

$

25

 

$

25

 

$

77

 

$

74

 

 

NOTE K – VARIABLE INTEREST ENTITIES AND PREFERRED SECURITIES OF SUBSIDIARIES

 

During the third quarter of 2008, the other partner of Hobbes Capital S.A. (“Hobbes”), which is a consolidated foreign subsidiary of the Company, redeemed its $674 million ownership in Hobbes. Prior to redemption, the other partner’s $500 million of preferred securities were classified as “Preferred Securities of Subsidiaries” in the consolidated balance sheets; the other partner’s $174 million of reinvested preferred returns were included in “Minority Interest in Subsidiaries” in the consolidated balance sheets; and the preferred return was included in “Minority interests’ share in income” in the consolidated statements of income. See Note I for further information on this transaction.

 

NOTE L – 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. Most of the Company’s stock-based compensation awards are granted in the first quarter of each year. Details for awards granted in the first quarter of 2008 are included in the following paragraphs. There was minimal grant activity in the second and third quarters of 2008. During the second quarter of 2008, the Company settled 0.9 million shares of performance deferred stock for $35 million in cash.

 

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.

 

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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

 

 

NOTE M – EARNINGS PER SHARE CALCULATIONS

 

Earnings Per Share Calculations

 

 

 

Three Months Ended
Sept. 30, 2008

 

Three Months Ended
Sept. 30, 2007

 

In millions, except per share amounts

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Net income available for common stockholders

 

$

428

 

$

428

 

$

403

 

$

403

 

Weighted-average common shares outstanding

 

925.2

 

925.2

 

948.9

 

948.9

 

Add dilutive effect of stock options and awards

 

 

8.8

 

 

12.6

 

Weighted-average common shares for EPS calculations

 

925.2

 

934.0

 

948.9

 

961.5

 

Earnings per common share

 

$

0.46

 

$

0.46

 

$

0.42

 

$

0.42

 

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

 

 

 

46.6

 

 

 

25.7

 

 

Earnings Per Share Calculations

 

 

 

Nine Months Ended
Sept. 30, 2008

 

Nine Months Ended
Sept. 30, 2007

 

In millions, except per share amounts

 

Basic

 

Diluted

 

Basic

 

Diluted

 

Net income available for common stockholders

 

$

2,131

 

$

2,131

 

$

2,415

 

$

2,415

 

Weighted-average common shares outstanding

 

932.4

 

932.4

 

955.6

 

955.6

 

Add dilutive effect of stock options and awards

 

 

9.3

 

 

12.7

 

Weighted-average common shares for EPS calculations

 

932.4

 

941.7

 

955.6

 

968.3

 

Earnings per common share

 

$

2.29

 

$

2.26

 

$

2.53

 

$

2.49

 

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

 

 

 

38.3

 

 

 

20.4

 

 


(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 N – LIMITED PARTNERSHIP

 

During the second quarter of 2008, the minority outside investor in Chemtech II, a limited partnership, presented the Company with a liquidation notice, resulting in Dow’s election to purchase the outside investor’s share in the partnership for $200 million. The purchase transaction was completed in the second quarter of 2008. Prior to the liquidation, the outside investor’s limited partner interest was included in “Minority Interest in Subsidiaries” in the consolidated balance sheets.

 

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NOTE O – 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; 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 60 years.

 

·                  Products: FROTH-PAK™ polyurethane spray foam; GREAT STUFF™ polyurethane foam sealant; INSTA-STIK™ roof insulation adhesive; SARAN™ vapor retarder film and tape; STYROFOAM™ brand insulation products (including XPS and polyisocyanurate rigid foam sheathing products); THERMAX™ brand insulation; TILE BOND™ roof tile adhesive; WEATHERMATE™ weather barrier solutions (housewraps, sill pans, flashings and tapes)

 

Dow Epoxy is a leading global producer of epoxy resins, intermediates and specialty resins and epoxy systems for a wide range of industries and applications such as coatings, electrical laminates, civil engineering, wind energy, 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: AIRSTONE™ Systems for Wind Energy; 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); UCAR™ solution vinyl resins

 

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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: BYKFIL™; CILBOND™; CILCAST™; DUOTHANE™ polyurethane elastomer systems; ECHELON™ polyurethane prepolymer; ENFORCER™ Technology and ENHANCER™ Technology for polyurethane carpet and turf backing; HYPOL™ prepolymers; ISOFIL™; ISONATE™ MDI; MONOTHANE™ single component polyurethane elastomers; PAPI™ polymeric MDI; POR-A-MOLD™; Propylene glycol; Propylene oxide; RENUVA™ Renewable Resource Technology for natural oil-based polyols; SOLIDAIR™ tyre filling elastomers; SPECFLEX™ copolymer polyols; SYNTACTIC™; TRAFFIDECK™ waterproofing and anti-slip surfacing systems; TRAFIGRIP™ anti-slip systems; TYRBOND™; VERDISEAL™ waterproofing system; VORACOR™, VORALAST™ soling systems and VORALAST™ R renewable content system; VORALUX™ and VORAMER™ MR series; VORANATE™ isocyanate; VORANOL™ and VORANOL™ VORACTIV™ polyether and copolymer polyols; VORASTAR™ polyurethane systems; XITRACK™ polyurethane rail ballast stabilization

 

Specialty Plastics and Elastomers includes a broad range of engineering plastics and compounds, performance elastomers and plastomers, monomers, specialty copolymers, synthetic rubber, polyvinylidene chloride resins and films (PVDC), and specialty film substrates. Key applications include automotive, adhesives, civil construction, wire and cable, building and construction, consumer electronics and appliances, food and specialty packaging, textiles, 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

 

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.

 

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·                  Products and Services: Acrolein derivatives; Basic nitroparaffins and nitroparaffin-based specialty chemicals; CANGUARD™ BIT preservatives; CELLOSIZE™ hydroxyethyl cellulose; Chiral compounds and biocatalysts; CLEAR+STABLE™ carboxymethyl cellulose; CYCLOTENE™ advanced electronics resins; DOW™ electrodeionization; DOW™ latex powders; DOW™ ultrafiltration; DOWEX™ ion exchange resins; DOWICIDE™ antimicrobial bactericides and fungicides; ETHOCEL™ ethylcellulose resins; FILMTEC™ elements; FORTEFIBER™ soluble dietary fiber; Hydrocarbon resins; Industrial biocides; METHOCEL™ cellulose ethers; OPTIM™ synthetic glycerine; Pfēnex Expression Technology™; POLYOX™ water-soluble resins; Quaternaries; SATINFX™ delivery system; SILK™ semiconductor dielectric resins; UCARE™ polymers; WALOCEL™ cellulose polymers

 

Dow Emulsion Polymers and UCAR Emulsion Systems are major global suppliers of latexes, for a wide range of industries and applications. Dow Emulsion Polymers 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 UCAR™ acrylic, vinyl-acrylic and styrene acrylic latexes, EVOCAR™ vinyl acetate ethylene (VAE) 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™ vinyl acetate ethylene; FOUNDATIONS™ latex; NEOCAR™ branched vinyl ester latexes; Styrene-acrylic latex; Styrene-butadiene latex; 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

 

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 biotechnology business in agricultural seeds, traits, healthy oils, and animal health.

 

·                  Products: AGROMEN™ seeds; CLINCHER™ herbicide; DAIRYLAND™ seed; DELEGATE™ insecticide; DITHANE™ fungicide; FORTRESS™ fungicide; GARLON™ herbicide; GLYPHOMAX™ herbicide;

 

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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; TRIUMPH™ seed; 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.

 

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)

 

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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 nine months of 2008 and 2007 were immaterial and eliminated in consolidation.

 

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Table of Contents

 

Operating Segments

 

 

 

Three Months Ended

 

Nine Months Ended

 

In millions

 

Sept. 30,
2008

 

Sept. 30,
2007

 

Sept. 30,
2008

 

Sept. 30,
2007

 

Sales by operating segment

 

 

 

 

 

 

 

 

 

Performance Plastics

 

$

4,252

 

$

3,877

 

$

12,633

 

$

11,148

 

Performance Chemicals

 

2,462

 

2,152

 

7,261

 

6,225

 

Agricultural Sciences

 

976

 

788

 

3,650

 

2,915

 

Basic Plastics

 

3,535

 

3,316

 

10,807

 

9,390

 

Basic Chemicals

 

1,500

 

1,507

 

4,701

 

4,233

 

Hydrocarbons and Energy

 

2,611

 

1,828

 

7,394

 

5,063

 

Unallocated and Other

 

75

 

121

 

169

 

312

 

Total

 

$

15,411

 

$

13,589

 

$

46,615

 

$

39,286

 

EBIT(1) by operating segment

 

 

 

 

 

 

 

 

 

Performance Plastics

 

$

146

 

$

409

 

$

743

 

$

1,232

 

Performance Chemicals

 

275

 

219

 

836

 

825

 

Agricultural Sciences

 

61

 

15

 

727

 

505

 

Basic Plastics

 

481

 

556

 

1,296

 

1,612

 

Basic Chemicals

 

64

 

205

 

252

 

504

 

Hydrocarbons and Energy

 

(1

)

 

(1

)

(1

)

Unallocated and Other

 

(256

)

(199

)

(548

)

(596

)

Total

 

$

770

 

$

1,205

 

$

3,305

 

$

4,081

 

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

 

 

 

 

 

 

 

 

 

Performance Plastics

 

$

(1

)

$

15

 

$

29

 

$

55

 

Performance Chemicals

 

137

 

90

 

351

 

299

 

Agricultural Sciences

 

2

 

1

 

4

 

1

 

Basic Plastics

 

55

 

39

 

130

 

141

 

Basic Chemicals

 

61

 

115

 

229

 

270

 

Hydrocarbons and Energy

 

11

 

35

 

49

 

62

 

Unallocated and Other

 

1

 

1

 

(1

)

 

Total

 

$

266

 

$

296

 

$

791

 

$

828

 

 


(1)

The Company uses EBIT (which Dow defines as earnings (loss) 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

 

Nine Months Ended

 

In millions

 

Sept. 30,
2008

 

Sept. 30,
2007

 

Sept. 30,
2008

 

Sept. 30,
2007

 

EBIT

 

$

770

 

$

1,205

 

$

3,305

 

$

4,081

 

+ Interest income

 

23

 

28

 

72

 

101

 

- Interest expense and amortization of debt discount

 

160

 

148

 

456

 

423

 

- Provision for income taxes

 

185

 

659

 

727

 

1,271

 

- Minority interests’ share in income

 

20

 

23

 

63

 

73

 

Net Income Available for Common Stockholders

 

$

428

 

$

403

 

$

2,131

 

$

2,415

 

 

Geographic Areas

 

 

 

Three Months Ended

 

Nine Months Ended

 

In millions

 

Sept. 30,
2008

 

Sept. 30,
2007

 

Sept. 30,
2008

 

Sept. 30,
2007

 

Sales by geographic area

 

 

 

 

 

 

 

 

 

United States

 

$

4,925

 

$

4,700

 

$

14,815

 

$

13,613

 

Europe

 

5,786

 

4,872

 

17,991

 

14,347

 

Rest of World

 

4,700

 

4,017

 

13,809

 

11,326

 

Total

 

$

15,411

 

$

13,589

 

$

46,615

 

$

39,286

 

 

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Table of Contents

 

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 third quarter of 2008 of $15.4 billion, up 13 percent from $13.6 billion in the third quarter of 2007. Prices increased 22 percent while volume decreased 9 percent principally due to declining demand.

 

·                  Purchased feedstock and energy costs, which account for approximately half of Dow’s total costs, increased 48 percent or $2.6 billion compared with the third quarter of 2007, the largest year-over-year increase in quarterly costs in the Company’s history, and more than the increase for all of 2007.

 

·                  The results of the quarter were unfavorably impacted by $127 million of pretax costs as a result of Hurricanes Gustav and Ike, which hit the U.S. Gulf Coast in the third quarter of 2008 resulting in temporary plant outages.

 

·                  Operating expenses rose during the third quarter of 2008 compared with the third quarter of 2007, reflecting the impact of recent acquisitions, as well as increased investment in research and development and increased selling expenses in the Performance businesses, as Dow continued the disciplined implementation of its growth strategy. Operating expenses were down in the third quarter of 2008 compared with the prior quarter.

 

·                  Equity earnings were $266 million in the third quarter of 2008, the seventh consecutive quarter in which equity earnings have exceeded $250 million.

 

·                  Capital spending was $628 million in the third quarter of 2008, on track with the revised full-year target of $2.1 billion; debt as a percent of total capitalization was 38.6 percent, up approximately 7 percentage points from year-end 2007; and the Company completed the current share repurchase program.

 

Selected Financial Data

 

 

 

Three Months Ended

 

Nine Months Ended

 

In millions, except per share amounts

 

Sept. 30,
2008

 

Sept. 30,
2007

 

Sept. 30,
2008

 

Sept. 30,
2007

 

Net sales

 

$

15,411

 

$

13,589

 

$

46,615

 

$

39,286

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

$

13,975

 

$

11,864

 

$

41,526

 

$

33,867

 

Percent of net sales

 

90.7

%

87.3

%

89.1

%

86.2

%

 

 

 

 

 

 

 

 

 

 

Research and development, and selling, general and administrative expenses

 

$

832

 

$

805

 

$

2,511

 

$

2,322

 

Percent of net sales

 

5.4

%

5.9

%

5.4

%

5.9

%

 

 

 

 

 

 

 

 

 

 

Effective tax rate (1)