tdccform10-k2008.htm
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended DECEMBER 31, 2008
 
Commission file number: 1-3433
 
THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of
incorporation or organization)
38-1285128
(I.R.S. Employer Identification No.)
 
2030 DOW CENTER, MIDLAND, MICHIGAN  48674
(Address of principal executive offices)                             (Zip Code)
 
Registrant’s telephone number, including area code:  989-636-1000
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $2.50 per share
 
 
Debentures, 6.85%, final maturity 2013
Name of each exchange on which registered
Common Stock registered on the New York and
Chicago Stock Exchanges
 
Debentures registered on the New York Stock Exchange
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
       
             þ Yes    o No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
       
             o Yes    þ No
 
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.                                                                                                                                                                                                        þ Yes    o No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K
                                                       þ
 
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 þ
            Accelerated filer o
                                                  Non-accelerated filer o
                                          Smaller reporting company  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
       o Yes    þ No
 
The aggregate market value of voting stock held by non-affiliates as of June 30, 2008 (based upon the closing price of $34.91 per common share as quoted on the New York Stock Exchange), was approximately $32.2 billion. For purposes of this computation, it is assumed that the shares of voting stock held by Directors, Officers and the Dow Employees’ Pension Plan Trust would be deemed to be stock held by affiliates. Non-affiliated common stock outstanding at June 30, 2008 was 922,805,097 shares.
 
Total common stock outstanding at January 31, 2009 was 924,346,271 shares.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Part III:  Proxy Statement for the Annual Meeting of Stockholders to be held on May 14, 2009.

 
 

 


 
ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 2008
 
TABLE OF CONTENTS
   
PAGE
 
PART I
     
Business.
3
 
Risk Factors.
10
 
Unresolved Staff Comments.
13
 
Properties.
14
 
Legal Proceedings.
15
 
Submission of Matters to a Vote of Security Holders.
20
 
       
PART II
     
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
23
 
Selected Financial Data.
24
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
26
 
Quantitative and Qualitative Disclosures About Market Risk.
62
 
Financial Statements and Supplementary Data.
63
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
126
 
Controls and Procedures.
126
 
Other Information.
128
 
       
PART III
     
Directors, Executive Officers and Corporate Governance.
129
 
Executive Compensation.
129
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters.
129
 
Certain Relationships and Related Transactions, and Director Independence.
129
 
Principal Accounting Fees and Services.
129
 
       
PART IV
     
Exhibits, Financial Statement Schedules.
130
 
       
133
 
       


 
2

 

The Dow Chemical Company and Subsidiaries
PART I, Item 1. Business.
 


THE COMPANY

The Dow Chemical Company was incorporated in 1947 under Delaware law and is the successor to a Michigan corporation, of the same name, organized in 1897. Except as otherwise indicated by the context, the terms “Company” or “Dow” as used herein mean The Dow Chemical Company and its consolidated subsidiaries. On February 6, 2001, the merger of Union Carbide Corporation (“Union Carbide”) with a subsidiary of The Dow Chemical Company was completed, and Union Carbide became a wholly owned subsidiary of Dow.
 
The Company is engaged in the manufacture and sale of chemicals, plastic materials, agricultural and other specialized products and services.
 
The Company’s principal executive offices are located at 2030 Dow Center, Midland, Michigan 48674, telephone 989-636-1000. Its Internet website address is www.dow.com. All of the Company’s filings with the U.S. Securities and Exchange Commission are available free of charge through the Investor Relations page on this website, immediately upon filing.


BUSINESS AND PRODUCTS

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 2008, Dow had annual sales of $57.5 billion and employed approximately 46,000 people worldwide. The Company has 150 manufacturing sites in 35 countries and produces approximately 3,300 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 is a leading global provider of technology-driven solutions that meet consumer demands for vehicles that are safer, stronger, quieter, lighter, cleaner, more comfortable and stylish. The business provides plastics, adhesives, glass bonding systems, emissions control technology, films, fluids, structural enhancement and acoustical management solutions to original equipment manufacturers, tier, aftermarket and commercial transportation customers. With offices and application development centers around the world, Dow Automotive provides materials science expertise and comprehensive technical capabilities to its customers worldwide.
 
 
·
Products: BETAFOAM™ NVH and structural foams; BETAMATE™ structural adhesives; BETASEAL™ glass bonding systems; DOW™ polyethylene resins; IMPAXX™ energy management foam; INSPIRE™ performance polymers; INTEGRAL™ adhesive films; ISONATE™ pure and modified methylene diphenyl diisocyanate (MDI) products; MAGNUM™ ABS resins; PELLETHANE™ thermoplastic polyurethane elastomers; Premium brake fluids and lubricants; PULSE™ engineering resins; SPECFLEX™ semi-flexible polyurethane foam systems; VORACTIV™ polyether and copolymer 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™ epoxy systems; D.E.H.™ epoxy curing agents or hardeners; D.E.N.™ epoxy novolac resins; D.E.R.™ epoxy resins (liquids, solids and solutions); Epoxy resin waterborne emulsions and dispersions; Epoxy intermediates (acetone, allyl chloride, bisphenol A, epichlorohydrin, and phenol); FORTEGRA™ epoxy tougheners; Glycidyl methacrylate (GMA); UCAR™ solution vinyl resins

The Polyurethanes and Polyurethane Systems business is a leading global producer of polyurethane raw materials and polyurethane systems. Dow’s polyurethane products and fully formulated polyurethane systems are used for a broad range of applications including construction, automotive, appliance, furniture, bedding, shoe soles, decorative molding, athletic equipment and more.
 
 
·
Products: ECHELON™ polyurethane prepolymer; ENFORCER™ and ENHANCER™ for polyurethane carpet and turf backing; HYPOL™ prepolymers; ISONATE™ MDI; MONOTHANE™ single component polyurethane elastomers; PAPI™ polymeric MDI; Propylene glycol; Propylene oxide; RENUVA™ Renewable Resource Technology; SPECFLEX™ copolymer polyols; TRAFFIDECK™ and VERDISEAL™ waterproofing systems; VORACOR™ and VORALAST™ polyurethane systems and VORALAST™ R renewable content system; VORALUX™ and VORAMER™ MR series; VORANATE™ isocyanate; VORANOL™ VORACTIV™ polyether and copolymer polyols; VORASTAR™ polyurethane systems; XITRACK™ polyurethane rail ballast stabilization systems

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 Mass ABS process technology 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™ SELECTOR™ technology and NORMAX™ catalysts; METEOR™ EO/EG process technology and catalysts; PTA process technology; UNIPOL™ PP process technology and SHAC™ and SHAC™ ADT 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 technology-based solutions for desalination, water purification, trace contaminant removal and water recycling. Also in Designed Polymers, businesses such as Dow Wolff Cellulosics, Dow Biocides and ANGUS Chemical Company (a wholly owned subsidiary of Dow), develop and market a range of products that enhance or enable key physical and sensory properties of end-use products in applications such as food, pharmaceuticals, oil and gas, paints and coatings, personal care, and building and construction.
 
 
·
Products and Services: Acrolein derivatives; Basic nitroparaffins and nitroparaffin-based specialty chemicals; CANGUARD™ BIT preservatives; CELLOSIZE™ hydroxyethyl cellulose; Chiral compounds and biocatalysts; CLEAR+STABLE™ carboxymethyl cellulose; CYCLOTENE™ advanced electronics resins; DOW™ electrodeionization; DOW™ latex powders; DOW™ ultrafiltration; DOWEX™ ion exchange resins; DOWICIDE™ antimicrobial bactericides and fungicides; FILMTEC™ elements; FORTEFIBER™ soluble dietary fiber; Hydrocarbon resins; Industrial biocides; METHOCEL™ cellulose ethers; POLYOX™ water-soluble resins; Quaternaries; Reverse osmosis, electrodeionization and ultrafiltration modules; SATINFX™ delivery system; SATISFIT™ Weight Care Technology; SILK™ semiconductor dielectric resins; SOLTERRA™ boost; UCARE™ polymers; WALOCEL™ cellulose polymers; WALSRODER™ nitrocellulose

The Dow Latex business provides the broadest line of styrene-butadiene products supporting customers in paper and paperboard applications, as well as carpet and artificial turf backings. UCAR Emulsion Systems manufactures and sells latexes for use in architectural and industrial coatings, adhesives, construction products and traffic paint.
 
 
·
Products: 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 in a diverse range of applications, such as 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.
 
 
·
Products: Acrylic acid/Acrylic esters; AMBITROL™ and NORKOOL™ industrial coolants; Butyl CARBITOL™ and Butyl CELLOSOLVE™ solvents; CARBOWAX™ and CARBOWAX™ SENTRY™ polyethylene glycols and methoxypolyethylene glycols; DOW™ polypropylene glycols; DOWANOL™ glycol ethers; DOWCAL™, DOWFROST™ and DOWTHERM™ heat transfer fluids; DOWFAX™, TERGITOL™ and TRITON™ surfactants; Dow Haltermann Custom Processing and Haltermann Products; Ethanolamines; Ethyleneamines; SAFE-TAINER™ closed-loop delivery system; SYNALOX™ lubricants; UCAR™ deicing fluids; UCARSOL™ formulated solvents; UCON™ fluids and VERSENE™ chelating agents

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 and healthy oils.


 
 
·
Products: AGROMEN™ seeds; BRODBECK™ seed; CLINCHER™ herbicide; DAIRYLAND™ seed; DELEGATE™ insecticide; DITHANE™ fungicide; EXZACT™ precision traits; FORTRESS™ fungicide; GARLON™ herbicide; GLYPHOMAX™ herbicide; GRANITE™ herbicide; HERCULEX™ I, HERCULEX™ RW and HERCULEX™ XTRA insect protection; KEYSTONE™ herbicides; LAREDO™ fungicide; LONTREL™ herbicide; LORSBAN™ insecticides; MILESTONE™ herbicide; MUSTANG™ herbicide; MYCOGEN™ seeds; NEXERA™ canola and sunflower seeds; PHYTOGEN™ brand cottonseeds; PROFUME™ gas fumigant; RENZE™ seed; 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 Americas Styrenics LLC, as well as 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)

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 by-products; 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.


Industry Segments and Geographic Area Results
See Note T to the Consolidated Financial Statements for information by operating segment and geographic area.

Number of Products
Dow manufactures and supplies approximately 3,300 products. No single product accounted for more than 5 percent of the Company’s consolidated net sales in 2008.

Competition
Historically, the chemical industry has operated in a competitive environment, and that environment is expected to continue. The Company experiences substantial competition in each of its operating segments and in each of the geographic areas in which it operates. In addition to other chemical companies, the chemical divisions of major international oil companies provide substantial competition in the United States and abroad. Dow competes worldwide on the basis of quality, price and customer service, and for 2008, continued to be the largest U.S. producer of chemicals and plastics, in terms of sales.

Raw Materials
The Company operates in an integrated manufacturing environment. Basic raw materials are processed through many stages to produce a number of products that are sold as finished goods at various points in those processes.
 
The two major raw material streams that feed the integrated production of the Company’s finished goods are chlorine-based and hydrocarbon-based raw materials.

 
Salt, limestone and natural brine are the base raw materials used in the production of chlor-alkali products and derivatives. The Company owns salt deposits in Louisiana, Michigan and Texas; Alberta, Canada; Brazil; and Germany. The Company also owns natural brine deposits in Michigan and limestone deposits in Texas.
 
The Company purchases hydrocarbon raw materials including liquefied petroleum gases, crude oil, naphtha, natural gas and condensate. These raw materials are used in the production of both saleable products and energy. The Company also purchases electric power, benzene, ethylene, propylene and styrene to supplement internal production. Expenditures for hydrocarbon feedstocks and energy accounted for 48 percent of the Company’s production costs and operating expenses for the year ended December 31, 2008. The Company purchases these raw materials on both short- and long-term contracts.
 
Other significant raw materials include acrylonitrile, aniline, bisphenol, co-monomers (for linear low density polyethylene), methanol, rubber, carbon black, ammonia, formaldehyde and toluene diamine. The Company purchases these raw materials on both short- and long-term contracts.
 
The Company had adequate supplies of raw materials during 2008, and expects to continue to have adequate supplies of raw materials in 2009.

Method of Distribution
All products and services are marketed primarily through the Company’s sales force, although in some instances more emphasis is placed on sales through distributors.
 
Twenty percent of the sales of the Basic Chemicals segment in 2008 were to one customer, with which the Company has an ongoing supply contract. In addition, sales to MEGlobal, a 50:50 joint venture with Petrochemical Industries Company (K.S.C.) of Kuwait, represented approximately 11 percent of the sales in the Basic Chemicals segment. Excess ethylene glycol produced in Dow’s plants in the United States and Europe is sold to MEGlobal. Other than the sales to these customers, no significant portion of the business of any operating segment is dependent upon a single customer.

Research and Development
The Company is engaged in a continuous program of basic and applied research to develop new products and processes, to improve and refine existing products and processes, and to develop new applications for existing products. Research and development expenses were $1,310 million in 2008, $1,305 million in 2007 and $1,164 million in 2006. At December 31, 2008, the Company employed approximately 6,000 people in various research and development activities.

Patents, Licenses and Trademarks
The Company continually applies for and obtains U.S. and foreign patents. At December 31, 2008, the Company owned 2,266 active U.S. patents and 9,478 active foreign patents as follows:
 
Patents Owned at December 31, 2008
 
U.S.
Foreign
Performance Plastics
1,029
5,286
Performance Chemicals
349
1,406
Agricultural Sciences
508
1,604
Basic Plastics
247
757
Basic Chemicals
38
78
Hydrocarbons and Energy
27
185
Unallocated and Other
68
162
Total
2,266
9,478

Dow’s primary purpose in obtaining patents is to protect the results of its research for use in operations and licensing. Dow is also party to a substantial number of patent licenses and other technology agreements. The Company had revenue related to patent and technology royalties totaling $307 million in 2008, $247 million in 2007 and $512 million in 2006. Revenue related to licensing was higher in 2006 due to lump sum licensing revenue that was earned in the first quarter of 2006. The Company incurred royalties to others of $60 million in 2008, $57 million in 2007 and $64 million in 2006. Dow also has a substantial number of trademarks and trademark registrations in the United States and in other countries, including the “Dow in Diamond” trademark. Although the Company considers that its patents, licenses and trademarks in the aggregate constitute a valuable asset, it does not regard its business as being materially dependent upon any single patent, license or trademark.



Principal Partly Owned Companies
Dow’s principal nonconsolidated affiliates at December 31, 2008, including direct or indirect ownership interest for each, are listed below:
 
 
·
Americas Styrenics LLC – 50 percent – a U.S. limited liability company that manufactures polystyrene and styrene monomer.
 
 
·
Compañía Mega S.A. – 28 percent – an Argentine company that owns a natural gas separation and fractionation plant, which provides feedstocks to the Company’s petrochemical plant located in Bahia Blanca, Argentina.
 
 
·
Dow Corning Corporation – 50 percent – a U.S. company that manufactures silicone and silicone products. See Note K to the Consolidated Financial Statements.
 
 
·
EQUATE Petrochemical Company K.S.C. – 42.5 percent – a Kuwait-based company that manufactures ethylene, polyethylene and ethylene glycol.
 
 
·
Equipolymers – 50 percent – a company, headquartered in Horgen, Switzerland, that manufactures purified terephthalic acid, and manufactures and markets polyethylene terephthalate resins.
 
 
·
MEGlobal – 50 percent – a company, headquartered in Dubai, United Arab Emirates, that manufactures and markets monoethylene glycol and diethylene glycol.
 
 
·
The OPTIMAL Group of Companies [consisting of OPTIMAL Olefins (Malaysia) Sdn. Bhd. – 23.75 percent; OPTIMAL Glycols (Malaysia) Sdn. Bhd. – 50 percent; OPTIMAL Chemicals (Malaysia) Sdn. Bhd. – 50 percent] – Malaysian companies that operate an ethane/propane cracker, an ethylene glycol facility and a production facility for ethylene and propylene derivatives within a world-scale, integrated chemical complex located in Kertih, Terengganu, Malaysia.
 
 
·
The SCG-Dow Group [consisting of Siam Polyethylene Company Limited – 49 percent; Siam Polystyrene Company Limited – 50 percent; Siam Styrene Monomer Co., Ltd. – 50 percent; Siam Synthetic Latex Company Limited – 50 percent] – Thailand-based companies that manufacture polyurethanes, polyethylene, polystyrene, styrene and latex.
 
 
·
Univation Technologies, LLC – 50 percent – a U.S. limited liability company that develops, markets and licenses polyethylene process technology and related catalysts.
 
See Note F to the Consolidated Financial Statements for additional information.

Financial Information About Foreign and Domestic Operations and Export Sales
In 2008, the Company derived 68 percent of its sales and had 47 percent of its property investment outside the United States. While the Company’s international operations may be subject to a number of additional risks, such as changes in currency exchange rates, the Company does not regard its foreign operations, on the whole, as carrying any greater risk than its operations in the United States. Information on sales and long-lived assets by geographic area for each of the last three years appears in Note T to the Consolidated Financial Statements, and discussions of the Company’s risk management program for foreign exchange and interest rate risk management appear in Item 1A. Risk Factors, Item 7A. Quantitative and Qualitative Disclosures About Market Risk, and Note H to the Consolidated Financial Statements.

Protection of the Environment
Matters pertaining to the environment are discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Notes A and K to the Consolidated Financial Statements.

Employees
Personnel count was 46,102 at December 31, 2008; 45,856 at December 31, 2007; and 42,578 at December 31, 2006. Headcount increased in 2008 from year-end 2007 primarily due to recent acquisitions. Headcount is expected to decline due to actions announced in the fourth quarter of 2008 to eliminate approximately 5,000 jobs (including planned divestitures). During 2007, headcount was impacted by the addition of research and development employees in India and China in support of the Company’s growth initiatives; the addition of approximately 110 employees with the second quarter acquisition of Hyperlast Limited; and the addition of approximately 1,700 employees with the second quarter acquisition of Wolff Walsrode AG.

Other Activities
Dow engages in the property and casualty insurance and reinsurance business primarily through its Liana Limited subsidiaries.

The Dow Chemical Company and Subsidiaries
PART I, Item 1A. Risk Factors.
 


The factors described below represent the Company’s principal risks. Except as otherwise indicated, these factors may or may not occur and the Company is not in a position to express a view on the likelihood of any such factor occurring. Other factors may exist that the Company does not consider significant based on information that is currently available or that the Company is not currently able to anticipate.

Volatility in purchased feedstock and energy costs impacts Dow’s operating costs and adds variability to earnings.
During 2008, purchased feedstock and energy costs were higher overall than in 2007, adding an additional $5.9 billion of costs compared with 2007 and accounting for 48 percent of the Company’s total production costs and operating expenses in 2008, down from 49 percent in 2007 and 2006. Purchased feedstock and energy costs are expected to remain volatile throughout 2009. The Company uses its feedstock flexibility and financial and physical hedging programs to lower overall feedstock costs. However, when these costs increase, the Company is not always able to immediately raise selling prices and, ultimately, its ability to pass on underlying cost increases is greatly dependent on market conditions. As a result, increases in these costs could negatively impact the Company’s results of operations.

The Company is party to a number of 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 the claims and lawsuits facing the Company purport to be class actions and seek damages in very large amounts. All such claims are being contested. With the exception of the possible effect of the asbestos-related liability of Union Carbide Corporation (“Union Carbide”) and the ongoing litigation with Rohm and Haas Company (“Rohm and Haas”), described below, it is the opinion of the Company’s management that the possibility is remote that the aggregate of all such claims and lawsuits will have a material adverse impact on the Company’s consolidated financial statements.
 
Union Carbide is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. At December 31, 2008, Union Carbide’s asbestos-related liability for pending and future claims was $934 million and its receivable for insurance recoveries related to its asbestos liability was $403 million. At December 31, 2008, Union Carbide also had receivables of $272 million for insurance recoveries for defense and resolution costs. It is the opinion of the Company’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.
 
The Company is involved in a lawsuit, filed in the Court of Chancery of the State of Delaware by Rohm and Haas for specific performance related to the July 10, 2008 agreement to acquire Rohm and Haas for $78 per share. The lawsuit was filed on January 26, 2009 following notification to Rohm and Haas that the Company would not close the proposed acquisition on or before January 27, 2009. It is the opinion of the Company’s management that it is reasonably possible that the ultimate resolution of the litigation could have a material adverse impact on the Company’s consolidated financial statements.

A downgrade of the Company’s credit rating could have a negative impact on the Company’s ability to access credit markets.
The Company’s credit rating is investment grade. The Company’s long-term credit ratings were downgraded on December 29, 2008 by Moody’s from A3 to Baa1 with outlook under review for possible downgrade and by Standard & Poor’s from A- to BBB with credit watch negative. The Company’s short-term credit rating is A2/P2 negative/negative. If the Company’s credit rating is further downgraded, it could have a negative impact on the Company’s ability to access credit markets and could increase borrowing costs.

Volatility and disruption of financial markets could affect access to credit.
The current difficult economic market environment is causing contraction in the availability of credit in the marketplace. This could potentially reduce the sources of liquidity for the Company.

The value of investments are influenced by economic and market conditions.
The current economic environment is negatively impacting the fair value of pension and insurance assets, which could trigger increased future funding requirements of the pension trusts and could result in additional other-than-temporary impairment losses for certain insurance assets.


Adverse conditions in the global economy and disruption of financial markets could continue to negatively impact Dow’s customers and therefore Dow’s results of operations.
An economic downturn in the businesses or geographic areas in which Dow sells its products could further reduce demand for these products and result in a decrease in sales volume that could have a negative impact on Dow’s results of operations. Volatility and disruption of financial markets could limit customers’ ability to obtain adequate financing to maintain operations and could result in a decrease in sales volume that could have a negative impact on Dow’s results of operations.

The earnings generated by the Company’s basic chemical and basic plastic products will vary from period to period based in part on the balance of supply relative to demand within the industry.
The balance of supply relative to demand within the industry may be significantly impacted by the addition of new capacity. For basic commodities, capacity is generally added in large increments as world-scale facilities are built. This may disrupt industry balances and result in downward pressure on prices due to the increase in supply, which could negatively impact the Company’s results of operations.

If key suppliers are unable to provide the raw materials required for production, Dow may not be able to obtain the raw materials from other sources on as favorable terms.
The Company purchases hydrocarbon raw materials including liquefied petroleum gases, crude oil, naphtha, natural gas and condensate. The Company also purchases electric power, benzene, ethylene, propylene and styrene to supplement internal production, and other raw materials. If the Company’s key suppliers are unable to provide the raw materials required for production, it could have a negative impact on Dow’s results of operations. For example, during 2005 and again in the third quarter of 2008, the Company experienced temporary supply disruptions related to major hurricanes on the U.S. Gulf Coast. In addition, volatility and disruption of financial markets could limit suppliers’ ability to obtain adequate financing to maintain operations, which could have a negative impact on Dow’s results of operations.

The Company experiences substantial competition in each of the operating segments and geographic areas in which it operates.
Historically, the chemical industry has operated in a competitive environment, and that environment is expected to continue. In addition to other chemical companies, the chemical divisions of major international oil companies provide substantial competition. Dow competes worldwide on the basis of quality, price and customer service. Increased levels of competition could result in lower prices or lower sales volume, which would have a negative impact on the Company’s results of operations.

Actual or alleged violations of environmental laws or permit requirements could result in restrictions or prohibitions on plant operations, substantial civil or criminal sanctions, as well as the assessment of strict liability and/or joint and several liability.
The Company is subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances relating to pollution, protection of the environment and the generation, storage, handling, transportation, treatment, disposal and remediation of hazardous substances and waste materials. At December 31, 2008, the Company had accrued obligations of $312 million for environmental remediation and restoration costs, including $22 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 approximately twice that amount. Costs and capital expenditures relating to environmental, health or safety matters are subject to evolving regulatory requirements and will depend on the timing of the promulgation and enforcement of specific standards which impose the requirements. Moreover, changes in environmental regulations could inhibit or interrupt the Company’s operations, or require modifications to its facilities. Accordingly, environmental, health or safety regulatory matters may result in significant unanticipated costs or liabilities.

Local, state and federal governments have begun a regulatory process that could lead to new regulations impacting the security of chemical plant locations and the transportation of hazardous chemicals.
Growing public and political attention has been placed on protecting critical infrastructure, including the chemical industry, from security threats. Terrorist attacks and natural disasters have increased concern regarding the security of chemical production and distribution. In addition, local, state and federal governments have begun a regulatory process that could lead to new regulations impacting the security of chemical plant locations and the transportation of hazardous chemicals, which could result in higher operating costs and interruptions in normal business operations.


Failure to develop new products could make the Company less competitive.
The Company is engaged in a continuous program of basic and applied research to develop new products and processes, to improve and refine existing products and processes, and to develop new applications for existing products. Failure to develop new products could make the Company less competitive.

Failure to protect the Company’s intellectual property could negatively affect its future performance and growth.
The Company continually applies for and obtains U.S. and foreign patents to protect the results of its research for use in operations and licensing. Dow is also party to a substantial number of patent licenses and other technology agreements. The Company relies on patents, confidentiality agreements and internal security measures to protect its intellectual property. Failure to protect this intellectual property could negatively affect the Company’s future performance and growth.

Weather-related matters could impact the Company’s results of operations.
In 2005 and again in the third quarter of 2008, major hurricanes caused significant disruption in Dow’s operations on the U.S. Gulf Coast, logistics across the region and the supply of certain raw materials, which had an adverse impact on volume and cost for some of Dow’s products. If similar weather-related matters occur in the future, it could negatively affect Dow’s results of operations, due to the Company’s substantial presence on the U.S. Gulf Coast.

The Company’s global business operations give rise to market risk exposure.
The Company’s global business operations give rise to market risk exposure related to changes in foreign exchange rates, interest rates, commodity prices and other market factors such as equity prices. To manage such risks, Dow enters into hedging transactions, pursuant to established guidelines and policies. If Dow fails to effectively manage such risks, it could have a negative impact on the Company’s consolidated financial statements.

The Dow Chemical Company and Subsidiaries
PART I, Item 1B. Unresolved Staff Comments.
 


UNRESOLVED STAFF COMMENTS

None.


The Dow Chemical Company and Subsidiaries
PART I, Item 2. Properties.
 


PROPERTIES

The Company operates 150 manufacturing sites in 35 countries. Properties of Dow include facilities which, in the opinion of management, are suitable and adequate for the manufacture and distribution of Dow’s products. During 2008, the Company’s chemicals and plastics production facilities and plants operated at approximately 77 percent of capacity. The Company’s major production sites are as follows:

United States:
Plaquemine and Hahnville, Louisiana; Midland, Michigan; Freeport, Seadrift and Texas City, Texas; South Charleston, West Virginia.
Canada:
Fort Saskatchewan and Prentiss, Alberta.
Germany:
Boehlen; Leuna; Rheinmuenster; Schkopau; Stade.
France:
Drusenheim.
The Netherlands:
Terneuzen.
Spain:
Tarragona.
Argentina:
Bahia Blanca.
Brazil:
Aratu.

Including the major production sites, the Company has plants and holdings in the following geographic areas:

United States:
42 manufacturing locations in 16 states.
Canada:
  6 manufacturing locations in 3 provinces.
Europe:
48 manufacturing locations in 16 countries.
Latin America:
26 manufacturing locations in 5 countries.
Asia Pacific:
23 manufacturing locations in 8 countries.
India, Middle East and Africa:
  5 manufacturing locations in 4 countries.

All of Dow’s plants are owned or leased, subject to certain easements of other persons which, in the opinion of management, do not substantially interfere with the continued use of such properties or materially affect their value. Dow leases ethylene plants in Fort Saskatchewan, Alberta, Canada, and Terneuzen, The Netherlands.
 
A summary of properties, classified by type, is provided in Note E to the Consolidated Financial Statements. Additional information regarding leased properties can be found in Note N to the Consolidated Financial Statements.


The Dow Chemical Company and Subsidiaries
PART I, Item 3. Legal Proceedings.
 


LEGAL PROCEEDINGS

Asbestos-Related Matters of Union Carbide Corporation
Introduction
Union Carbide Corporation (“Union Carbide”), a wholly owned subsidiary of the Company, is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to Union Carbide’s products.
 
Influenced by the bankruptcy filings of numerous defendants in asbestos-related litigation and the prospects of various forms of state and national legislative reform, the rate at which plaintiffs filed asbestos-related suits against various companies, including Union Carbide and Amchem, increased in 2001, 2002 and the first half of 2003. Since then, the rate of filing has significantly abated. Union Carbide expects more asbestos-related suits to be filed against Union Carbide and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.
 
The table below provides information regarding asbestos-related claims filed against Union Carbide and Amchem:

   
2008
   
2007
   
2006
 
Claims unresolved at January 1
    90,322       111,887       146,325  
Claims filed
    10,922       10,157       16,386  
Claims settled, dismissed or otherwise resolved
    (25,538 )     (31,722 )     (50,824 )
Claims unresolved at December 31
    75,706       90,322       111,887  
Claimants with claims against both UCC and Amchem
    24,213       28,937       38,529  
Individual claimants at December 31
    51,493       61,385       73,358  

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

Estimating the Liability
Based on a study completed by Analysis, Research & Planning Corporation (“ARPC”) in January 2003, Union Carbide increased its December 31, 2002 asbestos-related liability for pending and future claims for the 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. Since then, Union Carbide has compared current asbestos claim and resolution activity to the results of the most recent ARPC study at each balance sheet date to determine whether the accrual continues to be appropriate. In addition, Union Carbide has requested ARPC to review Union Carbide’s historical asbestos claim and resolution activity each November since 2004 to determine the appropriateness of updating the most recent ARPC study.
 
In November 2006, Union Carbide requested ARPC to review Union Carbide’s historical asbestos claim and resolution activity and determine the appropriateness of updating its January 2005 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2006 and concluded that the experience from 2004 through 2006 was sufficient for the purpose of forecasting future filings and values of asbestos claims filed against Union Carbide and Amchem, and could be used in place of previous assumptions to update the January 2005 study. The resulting study, completed by ARPC in December 2006, stated that the undiscounted cost of resolving pending and future asbestos-related claims against Union Carbide and Amchem, excluding future defense and processing costs, through 2021 was estimated to be between approximately $1.2 billion and $1.5 billion. As in its January 2003 and January 2005 studies, ARPC provided estimates for a longer period of time in its December 2006 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.

 
Based on ARPC’s December 2006 study and Union Carbide’s own review of the asbestos claim and resolution activity, Union Carbide decreased its asbestos-related liability for pending and future claims to $1.2 billion at December 31, 2006 which covered the 15-year period ending in 2021, excluding future defense and processing costs. The reduction was $177 million and was shown as “Asbestos-related credit” in the consolidated statements of income.
 
In November 2007, Union Carbide requested ARPC to review Union Carbide’s 2007 asbestos claim and resolution activity and determine the appropriateness of updating its 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.
 
In November 2008, Union Carbide requested ARPC to review Union Carbide’s historical 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, 2008. The resulting study, completed by ARPC in December 2008, stated that the undiscounted cost of resolving pending and future asbestos-related claims against UCC and Amchem, excluding future defense and processing costs, through 2023 was estimated to be between $952 million and $1.2 billion. As in its earlier studies, ARPC provided estimates for a longer period of time in its December 2008 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.
 
In December 2008, based on ARPC’s December 2008 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 $952 million, which covered the 15-year period ending 2023, excluding future defense and processing costs. The reduction was $54 million and was shown as “Asbestos-related credit” in the consolidated statements of income. At December 31, 2008, the asbestos-related liability for pending and future claims was $934 million.
 
At December 31, 2008, approximately 21 percent of the recorded liability related to pending claims and approximately 79 percent related to future claims. At December 31, 2007, approximately 31 percent of the recorded liability related to pending claims and approximately 69 percent related to future claims.

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

Defense and Resolution Costs
 
Aggregate Costs
In millions
2008
2007
2006
 
to Date as of
Dec. 31, 2008
Defense costs
$60
$84
$62
 
$625
Resolution costs
$116
$88
$117
 
$1,386

The average resolution payment per asbestos claimant and the rate of new claim filings has fluctuated both up and down since the beginning of 2001. Union Carbide’s management expects such fluctuations to continue in the future based upon a number of factors, including the number and type of claims settled in a particular period, the jurisdictions in which such claims arose, and the extent to which any proposed legislative reform related to asbestos litigation is being considered.
 
Union Carbide expenses defense costs as incurred. The pretax impact for defense and resolution costs, net of insurance, was $53 million in 2008, $84 million in 2007 and $45 million in 2006, and was reflected in “Cost of sales” in the consolidated statements of income.

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


In September 2003, Union Carbide filed a comprehensive insurance coverage case, now proceeding in the Supreme Court of the State of New York, County of New York, seeking to confirm its rights to insurance for various asbestos claims and to facilitate an orderly and timely collection of insurance proceeds. This lawsuit was filed against insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place with Union Carbide regarding their asbestos-related insurance coverage, in order to facilitate an orderly resolution and collection of such insurance policies and to resolve issues that the insurance carriers may raise. Although the lawsuit is continuing, through the end of 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 $403 million at December 31, 2008 and $467 million at December 31, 2007. At December 31, 2008 and December 31, 2007, all of the receivable for insurance recoveries was related to insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place regarding their asbestos-related insurance coverage.
 
In addition to the receivable for insurance recoveries related to its asbestos liability, Union Carbide had receivables for defense and resolution costs submitted to insurance carriers for reimbursement as follows:

Receivables for Costs Submitted to Insurance Carriers
at December 31
 
In millions
 
2008
   
2007
 
Receivables for defense costs
  $ 28     $ 18  
Receivables for resolution costs
    244       253  
Total
  $ 272     $ 271  

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

Summary
The amounts recorded by Union Carbide for the asbestos-related liability and related insurance receivable described above were based upon current, known facts. However, future events, such as the number of new claims to be filed and/or received each year, the average cost of disposing of each such claim, coverage issues among insurers, and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries for Union Carbide to be higher or lower than those projected or those recorded.
 
Because of the uncertainties described above, Union Carbide’s management cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing Union Carbide and Amchem. Union Carbide’s management believes that it is reasonably possible that the cost of disposing of Union Carbide’s asbestos-related claims, including future defense costs, could have a material adverse impact on Union Carbide’s results of operations and cash flows for a particular period and on the consolidated financial position of Union Carbide.
 
It is the opinion of Dow’s management that it is reasonably possible that the cost of Union Carbide disposing of its asbestos-related claims, including future defense costs, could have a material adverse impact on the Company’s results of operations and cash flows for a particular period and on the consolidated financial position of the Company.

Environmental Matters
On October 1, 2007, the Company received a Notice of Enforcement (“NOE”) from the Texas Commission on Environmental Quality (“TCEQ”) related to alleged air emission events at the Company’s Freeport, Texas site. The NOE seeks a total civil penalty of $354,000. While the Company expects that the penalty will ultimately be reduced, resolution of the NOE may result in a civil penalty in excess of $100,000.
 
On various dates, the Company received additional NOEs from the TCEQ for alleged violations of air regulations related to nine independent air emission events that occurred between May 2007 and April 2008 at eight different plants at the Company’s Freeport, Texas site. During the fourth quarter of 2008, these nine independent events were officially combined by the TCEQ into a single enforcement matter seeking an initial combined civil penalty of $312,325. The TCEQ Staff and the Company have tentatively agreed to settle this single enforcement matter for $202,325, half of which will be paid to the TCEQ, with the balance to be used to purchase low emission school buses for use near the Company's Freeport, Texas site. This settlement remains subject to final approval by the TCEQ Commissioners.

 
        The Company received an Administrative Complaint dated September 26, 2008 from the United States Environmental Protection Agency (“EPA”) - Region 1 office notifying the Company of the EPA’s intent to assess civil penalties in the proposed amount of $330,112 for seven alleged violations of the Company’s Allyn’s Point, Connecticut manufacturing facilities’ Title V Clean Air Act Operating Permit and Title V regulations. The seven alleged violations relate primarily to environmental recordkeeping infractions, failure to follow required work practices and one alleged violation of volatile organic compound (“VOC”) emission requirements. The Company has requested an informal settlement conference and intends to request a formal administrative hearing to contest the allegations and the proposed penalty, if necessary. While the Company expects that the penalty will be reduced, resolution may result in a civil penalty in excess of $100,000.
 
Matters Involving the Acquisition of Rohm and Haas Company
Introduction
On July 10, 2008, the Company and Rohm and Haas Company (“Rohm and Haas”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) for the acquisition of Rohm and Haas for $78 in cash per share of Rohm and Haas common stock (the “Merger”). The Merger did not close in January 2009, as originally anticipated, in light of the Company’s determination that recent material developments had created unacceptable uncertainties with respect to the funding and economics of the combined Dow and Rohm and Haas enterprise. This assessment was based on several macro-economic factors such as the continued crisis in global financial and credit markets and unprecedented demand destruction, combined with the failure of PIC to fulfill its obligation to close the K-Dow joint venture transaction and fund the initial purchase price on January 2, 2009.

Litigation
On January 26, 2009, Rohm and Haas commenced an action in the Court of Chancery of the State of Delaware to compel the Company to acquire Rohm and Haas for $78 in cash per share of Rohm and Haas common stock (plus a “ticking fee” commencing on January 10, 2009). The complaint (the “Complaint”) in the action alleges that all conditions to the Company’s obligation to close the Merger were met on January 23, 2009 and that the Company, pursuant to the terms of the Merger Agreement, was required to close the Merger within two business days thereafter, i.e., by January 27, 2009. The Complaint further alleges that the Company advised Rohm and Haas on January 25, 2009 that it would not close the Merger on or by January 27, 2009, and that the Company knowingly and intentionally breached the Merger Agreement.
 
On January 27, 2009, the Court determined to expedite proceedings in the case and ordered that the trial commence on March 9, 2009. The trial will relate to the issue of whether the Court should order specific performance and thus require the Company to close the Merger. The Court also stated that it strongly encouraged the parties to focus on a business solution to the dispute.
 
On February 3, 2009, the Company filed its answer (the “Answer”) to the Complaint. The Answer denied that all conditions to closing had been met as of January 23, 2009, noting that the United States Federal Trade Commission (“FTC”) action on January 23, 2009 was only a provisional acceptance of the proposed consent order and not final approval, and that the FTC reserves discretion to reject the proposed consent order after the close of the public comment period. The Answer denied that Rohm and Haas is entitled to a decree of specific performance, and asserted affirmative defenses of frustration of purpose, commercial impracticability, impossibility of performance and undue hardship – all arising from the sudden and rapid economic and financial downturn, the dramatic falloff in the Company’s earnings in the fourth quarter of 2008 and continuing into the first quarter of 2009, the risk of the Company’s inability to comply with financial covenants contained in the bridge loan expected to provide temporary financing for the Merger, the risk of the Company losing access to the capital markets due to potential loss of its investment grade rating, and the collapse of the K-Dow joint venture. The Company also asserted that specific performance is not appropriate because Rohm and Haas has adequate remedies at law for any breach of the Merger Agreement.

Summary
Because of the uncertainties associated with the litigation described above, management cannot estimate the impact of the ultimate resolution of the litigation. It is the opinion of the Company’s management that it is reasonably possible that the ultimate resolution could have a material adverse impact on the consolidated financial statements of the Company.

18

 
Derivative Litigation
On February 9, 2009, Michael D. Blum, in the name of and on behalf of the Company, commenced an action in the Court of Chancery of the State of Delaware against certain officers and directors of the Company (“Defendants”) alleging, among other things, that Defendants breached their fiduciary duty by causing the Company to enter into the Merger Agreement without any contingencies for failure of financing or to receive the proceeds of the K-Dow transaction. The relief sought includes the implementation of certain corporate governance reforms by the Company as well as monetary damages and attorneys’ fees. The Defendants have not yet answered or otherwise responded to the Complaint.
 
The Company believes the complaint in the action to be entirely without merit and intends to oppose it vigorously.




The Dow Chemical Company and Subsidiaries
PART I, Item 4. Submission of Matters to a Vote of Security Holders.
 


SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders during the fourth quarter of 2008.


EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is information related to the Company’s executive officers as of February 18, 2009.

WILLIAM F. BANHOLZER, 52.  DOW EXECUTIVE VICE PRESIDENT AND CHIEF TECHNOLOGY OFFICER. Employee of Dow since 2005. General Electric Company, Chemical Engineer 1983-1989. Laboratory Manager and Leader R&D Center 1989-1992. Engineering Manager of Superabrasives Business 1992-1997. Vice President of Global Engineering, GE Lighting 1997-1999. Vice President of Global Technology, GE Advanced Materials 1999-2005. Dow Corporate Vice President and Chief Technology Officer 2005-February 2009. Executive Vice President and Chief Technology Officer February 2009 to date. Director of Dow Corning Corporation* and Mycogen Corporation*. Member of Dow Corning Corporation Corporate Responsibility Committee. Elected to the U.S. National Academy of Engineering (“NAE”) in 2002. Elected NAE Councilor 2005. Member of American Chemical Society and American Institute of Chemical Engineers. Advisory Board member for chemistry and chemical engineering at Massachusetts Institute of Technology and University of California, Berkeley.

CAROL A. DUDLEY, 50.  DOW SENIOR VICE PRESIDENT, BASIC CHEMICALS DIVISION. Employee of Dow since 1980. Director of Analytical Science Lab 1993-1995. Global R&D Director Epoxy Products and Intermediates Business 1995-1999. North America Chlor-Alkali Assets Business Operations Leader, Site Leader 1999-2000. Business Vice President Chlor-Alkali Assets 2000-2003. Vice President Global Purchasing 2003-2004. R&D Vice President Hydrocarbons & Energy, Chemicals & Intermediates and Corporate R&D 2004-2005. Vice President Business Development Market Facing Businesses 2005-2006. Vice President R&D, Performance Plastics & Chemicals Portfolio 2006-2007. Corporate Vice President Market Facing, Business Development and Licensing 2007-2008. Senior Vice President Basic Chemicals Division December 2008 to date. Advisory Board member Engineering Department at Carnegie Mellon University. Member of Society of Women Engineers. Member of American Institute of Chemical Engineers.

GREGORY M. FREIWALD, 55.  DOW EXECUTIVE VICE PRESIDENT, HUMAN RESOURCES, CORPORATE AFFAIRS AND AVIATION. Employee of Dow since 1979. Human Resources Manager, Chemical & Performance Business-U.S. Region 1992-1993. Human Resources Director for Executive, Finance, Law and Corporate 1993-1994. Latin America Human Resources and Quality Performance Director 1994-1996. Latin America Human Resources Leader and PBBPolisur S.A.* Human Resources Integration Leader 1996-1997. Global Human Resources, Resources Center Director 1997-2001. Senior Human Resources Director for Global Human Resources, Resource Center and Human Resources Director for Geographic Council 2001-2004. Human Resources Vice President, Operations 2004-2005. Human Resources Vice President 2005-2006. Vice President, Corporate Affairs, Aviation and Executive Compensation 2006-2007. Senior Vice President, Human Resources, Corporate Affairs and Aviation 2008 to February 2009. Executive Vice President, Human Resources, Corporate Affairs and Aviation February 2009 to date.

MICHAEL R. GAMBRELL, 55.  DOW EXECUTIVE VICE PRESIDENT, MANUFACTURING AND ENGINEERING OPERATIONS. Employee of Dow since 1976. Business Director for the North America Chlor-Alkali Assets Business 1989-1992. General Manager for the Plastic Lined Pipe Business 1992-1994. Vice President of Operations for Latin America 1994-1996. Corporate Director, Technology Centers and Global Process Engineering 1996-1998. Global Business Director, Chlor-Alkali Assets Business 1998-2000. Business Vice President, EDC/VCM & ECU Management 2000-2003. Business Vice President, Chlor-Vinyl Business 2003. Senior Vice President, Chemicals and Intermediates 2003-2005. Executive Vice President, Basic Plastics and Chemicals Portfolio 2005-2007. Executive Vice President, Basic Plastics and Chemicals, and Manufacturing and Engineering 2007 to February 2009. Executive Vice President, Manufacturing and Engineering Operations February 2009 to date. Ex-officio member of the Dow Board of Director’s Environment, Health and Safety Committee. Board member of Oman Petrochemical Industries Company LLC*. Director of TRW Automotive Holdings Corporation. Director of the National Association of Manufacturers. Member of U.S.-India Business Council. Recipient of the President’s Distinguished Alumnus Award from Rose-Hulman Institute of Technology 1996.


HEINZ HALLER, 53.  DOW EXECUTIVE VICE PRESIDENT, HEALTH, AGRICULTURE AND INFRASTRUCTURE GROUP. Employee of Dow 1980-1994 and since 2006. Sales representative 1980-1983. Marketing manager, Chlorinated Solvents 1984-1985. Frankfurt Sales office manager and Regional manager, Emulsion Polymers and Specialty Chemicals 1986-1989. Dow business operations manager, Emulsion Polymers, New Ventures and Plastic Lined Pipe 1989-1992. Global business director, Emulsion Polymers 1993-1994. Managing Director in Horgen, Plüss-Staufer AG 1994-1999. Chief Executive Officer, Red Bull Sauber AG and Sauber Petronas Engineering AG 2000-2002. Managing Director, Allianz Capital Partners GmbH 2002-2006. Dow Corporate Vice President, Strategic Development and New Ventures 2006-2007. Executive Vice President, Performance Plastics and Chemicals 2007 to February 2009. Executive Vice President, Health, Agriculture and Infrastructure Group February 2009 to date. Director of Mycogen Corporation* and Dow Corning Corporation*. Member of the Dow AgroSciences LLC* Members Committee. Director of the Michigan Molecular Institute.

CHARLES J. KALIL, 57.  DOW EXECUTIVE VICE PRESIDENT, LAW AND GOVERNMENT AFFAIRS, GENERAL COUNSEL AND CORPORATE SECRETARY. Employee of Dow since 1980. U.S. Department of Justice – Assistant U.S. Attorney, Eastern District of Michigan 1977-1980. General Counsel of Petrokemya (a former 50:50 joint venture of the Company) 1982-1983. Regional Counsel to Middle East/Africa 1983-1986. Senior Environmental Attorney 1986-1987. Litigation Staff Counsel and Group Leader 1987-1990. Senior Financial Law Counsel, Mergers and Acquisitions 1990-1992. General Counsel and Area Director of Government and Public Affairs for Dow Latin America 1992-1997. Special Counsel and Manager of INSITE™ legal issues 1997-2000. Assistant General Counsel for Corporate and Financial Law 2000-2003. Associate General Counsel for Corporate Legal Affairs 2003-2004. Dow Corporate Vice President and General Counsel 2004-2007. Senior Vice President and General Counsel 2007-2008. Executive Vice President and General Counsel March 2008 to date. Corporate Secretary 2005 to date. Board member of Dow Corning Corporation*, Dorinco Reinsurance Company*, Liana Limited* and Oman Petrochemical Industries Company LLC*. Member of the Conference Board’s Council of Chief Legal Officers. Member of the American Bar Association, District of Columbia Bar and the State Bar of Michigan.

DAVID E. KEPLER, 56. DOW EXECUTIVE VICE PRESIDENT, BUSINESS SERVICES, CHIEF SUSTAINABILITY OFFICER AND CHIEF INFORMATION OFFICER. Employee of Dow since 1975. Computer Services Manager of Dow U.S.A. Eastern Division 1984-1988. Commercial Director of Dow Canada Performance Products 1989-1991. Director of Pacific Area Information Systems 1991-1993. Manager of Information Technology for Chemicals and Plastics 1993-1994. Director of Global Information Systems Services 1994-1995. Director of Global Information Application 1995-1998. Vice President 1998-2000. Chief Information Officer 1998 to date. Corporate Vice President with responsibility for eBusiness 2000 to date. Responsibility for Advanced Electronic Materials 2002-2003. Responsibility for Shared Services – Customer Service, Information Systems, Purchasing, Six Sigma, Supply Chain, and Work Process Improvement 2004 to date. Senior Vice President with responsibility for EH&S 2006-2008. Responsibility as Chief Sustainability Officer 2007 to date. Executive Vice President March 2008 to date. Director of Dorinco Reinsurance Company* and Liana Limited*. Director of Teradata Corporation. Chairman of the MidMichigan Innovation Center Board of Directors. Member of U.S. Chamber of Commerce Board of Directors and Vice Chairman of the Great Lakes Region. Member of the American Chemical Society and the American Institute of Chemical Engineers.

ANDREW N. LIVERIS, 54. DOW PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN. DIRECTOR SINCE 2004. Employee of Dow since 1976. General manager of Dow's Thailand operations 1989-1992. Group business director for Emulsion Polymers and New Ventures 1992-1993. General manager of Dow's start-up businesses in Environmental Services 1993-1994. Vice President of Dow's start-up businesses in Environmental Services 1994-1995. President of Dow Chemical Pacific Limited* 1995-1998. Vice President of Specialty Chemicals 1998-2000. Business Group President for Performance Chemicals 2000-2003. President and Chief Operating Officer 2003-2004. President and Chief Executive Officer 2004 to date and Chairman 2006 to date. Director of Citigroup, Inc. Chairman of the U.S.-China Business Council; Vice Chairman of the U.S. Business Council; Past Chairman of the American Chemistry Council and the International Council of Chemical Associations. Member of the United States Climate Action Partnership, the American Australian Association, the Business Roundtable, the Detroit Economic Club, the National Petroleum Council and the Société de Chimie Industrielle. Member of the Board of Trustees of Tufts University.


 

JUAN R. LUCIANO, 47.  DOW SENIOR VICE PRESIDENT, HYDROCARBONS AND BASIC PLASTICS DIVISION. Employee of Dow since 1985. Sales & Marketing Manager Specialty Chemicals 1994-1996. Senior Marketing Manager for the Americas, Polyglycols within Specialty Chemicals Portfolio 1996-1999. Business Director Chelants, Specialty Chemicals 1999-2000. Global Business Director LDPE/PRIMACOR™/SARAN™/Slurry PE 2000-2001. Global Business Director Polypropylene 2001-2004. Business Vice President Engineering Polymers 2004-2006. Global Business Vice President Olefins and Aromatics 2006-2007. Business Group President Hydrocarbons and Energy 2007-2008. Senior Vice President Hydrocarbons and Basic Plastics Division December 2008 to date.
 
JAMES D. MCILVENNY, 51.  DOW SENIOR VICE PRESIDENT, PERFORMANCE PRODUCTS DIVISION. Employee of Dow since 1982. Business Manager Separation Systems 1989-1994. Director of Marketing, Sales and Service Liquid Separations 1994-1995. Global Business Director Liquid Separations 1995-1998. President and Chief Executive Officer FilmTec Corporation* 1995-1998. President and Chief Executive Officer Hampshire Chemical Corp.* 1998-2001. Business Vice President Specialty Polymers 2001-2004. President Greater China 2004-2006. President Dow Asia Pacific and Greater China 2006-2008. Senior Vice President Performance Products Division December 2008 to date.

GEOFFERY E. MERSZEI, 57. DOW EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER. DIRECTOR SINCE 2005. Employee of Dow 1977-2001 and since 2005. Dow Middle East/Africa Credit Manager 1977-1980. Dow Asia Pacific Credit Manager 1980-1982. Dow Asia Pacific Finance and Credit Manager 1982-1983. Dow Germany and Eastern Europe Treasurer 1983-1986. Dow Foreign Exchange Manager 1986-1988. Director of Finance for Dow Asia Pacific 1988-1991. Director of Finance/Treasurer for Dow Europe 1991-1996. Dow Vice President and Treasurer 1996-2001. Alcan, Inc., Executive Vice President and Chief Financial Officer 2001-2005. Dow Executive Vice President and Chief Financial Officer 2005 to date. Board member of Dow Corning Corporation*, Dow Credit Corporation*, Dow Financial Services Inc.*, Mycogen Corporation*, and Oman Petrochemical Industries Company LLC*. Chairman of Dorinco Reinsurance Company*, Dow International Holdings, S.A.* and Liana Limited*. Board member of Chemical Financial Corporation. Chairman of the Conference Board’s Council of Financial Executives. Trustee and Executive Committee Member of the United States Council for International Business.

FERNANDO RUIZ, 53.  DOW CORPORATE VICE PRESIDENT AND TREASURER. Employee of Dow since 1980. Treasurer, Ecuador Region 1982-1984. Treasurer, Mexico Region 1984-1988. Financial Operations Manager, Corporate Treasury 1988-1991. Assistant Treasurer, USA Area 1991-1992. Senior Finance Manager, Corporate Treasury 1992-1996. Assistant Treasurer 1996-2001. Corporate Director of Insurance and Risk Management 2001. Corporate Vice President and Treasurer 2001 to date. President and Chief Executive Officer, Liana Limited* and Dorinco Reinsurance Company* 2001 to date. President of Dow Credit Corporation* 2001 to date. Director of Dow Financial Services Inc.* Member of Financial Executives International and Michigan State University (Eli Broad College of Business) Advisory Board. Member of DeVry, Inc. Board of Directors.

WILLIAM H. WEIDEMAN, 54.  DOW VICE PRESIDENT AND CONTROLLER. Employee of Dow since 1976. Controller of Texas Operations 1994-1996. Global Business Controller for Specialty Chemicals 1996-1998. Global Finance Director for Specialty Chemicals 1998-2000. Global Finance Director for Performance Chemicals 2000-2004. Finance Vice President, Chemicals and Intermediates and Dow Ventures 2004-2006. Group Finance Vice President for Basic Chemicals and Plastics Portfolio 2006. Vice President and Controller 2006 to date. Director of Diamond Capital Management, Inc.*, Dorinco Reinsurance Company* and Liana Limited*. Director of the Dow Chemical Employees’ Credit Union and Family and Children’s Services of Midland. Board and finance committee member of Mid Michigan Medical Center. Member of Financial Executives International Committee on Corporate Reporting, Member of Central Michigan University Accounting Advisory Committee and Central Michigan University Development Board.




 







* A number of Company entities are referenced in the biographies and are defined as follows.  Some of these entities have had various names over the years.  The names and relationships to the Company, unless otherwise indicated, are stated in this footnote as they existed as of February 13, 2009.  Dow Corning Corporation and Oman Petrochemical Industries Company LLC – companies ultimately 50 percent owned by Dow.  Diamond Capital Management, Inc.; Dorinco Reinsurance Company; Dow AgroSciences LLC; Dow Chemical Pacific Limited; Dow Credit Corporation; Dow Financial Services Inc.; Dow International Holdings, S.A.; FilmTec Corporation, Hampshire Chemical Corp., Liana Limited; Mycogen Corporation and PBBPolisur S.A. – all ultimately wholly owned subsidiaries of Dow.  Ownership by Dow described above may be either direct or indirect.

The Dow Chemical Company and Subsidiaries
PART II, Item 5. Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities.
 


MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The principal market for the Company’s common stock is the New York Stock Exchange, traded under the symbol “DOW.”
 
Quarterly market and dividend information can be found in Quarterly Statistics at the end of Part II, Item 8. Financial Statements and Supplementary Data, following the Notes to the Consolidated Financial Statements.
 
At December 31, 2008, there were 94,605 registered common stockholders. The Company estimates that there were an additional 587,000 stockholders whose shares were held in nominee names at December 31, 2008. At January 30, 2009, there were 94,558 registered common stockholders.
 
On February 12, 2009, the Board of Directors announced a quarterly dividend of $0.15 per share, payable April 30, 2009, to stockholders of record on March 31, 2009. Since 1912, the Company has paid a cash dividend every quarter and, in each instance prior to this dividend, has maintained or increased the amount of the dividend, adjusted for stock splits. During this 97-year period, Dow has increased the amount of the quarterly dividend 47 times (approximately 12 percent of the time), and maintained the amount of the quarterly dividend approximately 88 percent of the time. The dividend was reduced in February 2009, for the first time in the 97-year period, due to uncertainty in the credit markets, unprecedented lower demand for chemical products, the ongoing global recession and pending business issues. The Company declared dividends of $1.68 per share in 2008, $1.635 per share in 2007 and $1.50 per share in 2006.
 
See Part III, Item 11. Executive Compensation for information relating to the Company’s equity compensation plans.
 
The following table provides information regarding purchases of the Company’s common stock by the Company during the three months ended December 31, 2008:

Issuer Purchases of Equity Securities
Total number of shares
purchased as part of the
Company’s publicly
announced share
repurchase program (2)
Approximate dollar value
of shares that may yet be
purchased under the
Company’s publicly
announced share
repurchase program (2)
Period
Total number of
shares purchased (1)
Average price
 paid per share
October 2008
67
$25.59
-
-
November 2008
-
-
-
-
December 2008
3,463
$20.11
-
-
Fourth quarter 2008
3,530
$20.21
-
-
(1)
Shares received from employees and non-employee directors to pay taxes owed to the Company as a result of the exercise of stock options or the delivery of deferred stock. For information regarding the Company’s stock option plans, see Note O to the Consolidated Financial Statements.
(2)
On October 26, 2006, the Company announced that the Board of Directors had approved a share buy-back program, authorizing up to $2 billion to be spent on the repurchase of the Company’s common stock. Purchases under this program began in March 2007 and were completed in the third quarter of 2008.



 
 

 
The Dow Chemical Company and Subsidiaries
In millions, except as noted   (Unaudited)
 
2008
   
2007
   
2006
   
2005
   
2004
 
Summary of Operations
                             
Net sales (1)
  $ 57,514     $ 53,513     $ 49,124     $ 46,307     $ 40,161  
Cost of sales (1)
    52,019       46,400       41,526       38,276       34,244  
Research and development expenses
    1,310       1,305       1,164       1,073       1,022  
Selling, general and administrative expenses
    1,969       1,864       1,663       1,545       1,436  
Amortization of intangibles
    92       72       50       55       81  
Purchased in-process research and development charges
    44       57       -       -       -  
Special charges, merger-related expenses, and restructuring charges
    1,127       578       591       114       543  
Asbestos-related charge (credit)
    (54 )     -       (177 )     -       -  
Equity in earnings of nonconsolidated affiliates
    787       1,122       959       964       923  
Other income
    89       324       137       755       699  
Interest expense - net
    562       454       431       564       661  
Income (Loss) before income taxes and minority interests
    1,321       4,229       4,972       6,399       3,796  
Provision (Credit) for income taxes
    667       1,244       1,155       1,782       877  
Minority interests' share in income
    75       98       93       82       122  
Preferred stock dividends
    -       -       -       -       -  
Income (Loss) before cumulative effect of changes in
                                       
        accounting principles
    579       2,887       3,724       4,535       2,797  
Cumulative effect of changes in accounting principles
    -       -       -       (20 )     -  
Net income (loss) available for common stockholders
  $ 579     $ 2,887     $ 3,724     $ 4,515     $ 2,797  
Per share of common stock (in dollars): (2)
                                       
   Earnings (Loss) before cumulative effect of changes in
                                       
        accounting principles per common share - basic
  $ 0.62     $ 3.03     $ 3.87     $ 4.71     $ 2.98  
   Earnings (Loss) per common share - basic
    0.62       3.03       3.87       4.69       2.98  
   Earnings (Loss) before cumulative effect of changes in
                                       
        accounting principles per common share - diluted
    0.62       2.99       3.82       4.64       2.93  
   Earnings (Loss) per common share - diluted
    0.62       2.99       3.82       4.62       2.93  
   Cash dividends declared per share of common stock
    1.68       1.635       1.50       1.34       1.34  
   Cash dividends paid per share of common stock
    1.68       1.59       1.46       1.34       1.34  
   Book value per share of common stock
    14.62       20.62       17.81       15.84       12.88  
Weighted-average common shares outstanding - basic (2)
    930.4       953.1       962.3       963.2       940.1  
Weighted-average common shares outstanding - diluted (2)
    939.0       965.6       974.4       976.8       953.8  
Convertible preferred shares outstanding
    -       -       -       -       -  
Year-end Financial Position
                                       
Total assets
  $ 45,474     $ 48,801     $ 45,581     $ 45,934     $ 45,885  
Working capital
    2,952       6,209       6,608       6,741       5,384  
Property - gross
    48,391       47,708       44,381       41,934       41,898  
Property - net
    14,294       14,388       13,722       13,537       13,828  
Long-term debt and redeemable preferred stock
    8,042       7,581       8,036       9,186       11,629  
Total debt
    11,856       9,715       9,546       10,706       12,594  
Net stockholders' equity
    13,511       19,389       17,065       15,324       12,270  
Financial Ratios
                                       
Research and development expenses as percent of net sales (1)
    2.3 %     2.4 %     2.4 %     2.3 %     2.5 %
Income (Loss) before income taxes and minority interests
                                       
   as percent of net sales (1)
    2.3 %     7.9 %     10.1 %     13.8 %     9.5 %
Return on stockholders' equity (3)
    4.3 %     14.9 %     21.8 %     29.5 %     22.8 %
Debt as a percent of total capitalization
    45.7 %     31.8 %     34.1 %     39.1 %     47.9 %
General
                                       
Capital expenditures
  $ 2,276     $ 2,075     $ 1,775     $ 1,597     $ 1,333  
Depreciation
    2,016       1,959       1,904       1,904       1,904  
Salaries and wages paid
    4,681       4,404       3,935       4,309       3,993  
Cost of employee benefits
    981       1,130       1,125       988       885  
Number of employees at year-end (thousands)
    46.1       45.9       42.6       42.4       43.2  
Number of Dow stockholders of record at year-end (thousands) (4)
    94.6       98.7       103.1       105.6       108.3  
 
(1)    Adjusted for reclassification of freight on sales in 2000 and reclassification
(4) Stockholders of record as reported by the transfer agent. The
 
of insurance operations in 2002.
      Company estimates that there were an additional 587,000
(2)    Adjusted for 3-for-1 stock split in 2000.
      stockholders whose shares were held in nominee names at
(3)    Included Temporary Equity in 1997-1999.
      December 31, 2008.
     

 
24

 
The Dow Chemical Company and Subsidiaries
 
PART II, Item 6. Selected Financial Data.
 
In millions, except as noted   (Unaudited)
 
2003
   
2002
   
2001
   
2000
   
1999
   
1998
 
Summary of Operations
                                   
Net sales (1)
  $ 32,632     $ 27,609     $ 28,075     $ 29,798     $ 26,131     $ 25,396  
Cost of sales (1)
    28,177       23,780       23,892       24,310       20,422       19,566  
Research and development expenses
    981       1,066       1,072       1,119       1,075       1,026  
Selling, general and administrative expenses
    1,392       1,598       1,765       1,825       1,776       1,964  
Amortization of intangibles
    63       65       178       139       160       106  
Purchased in-process research and development charges
    -       -       69       6       6       349  
Special charges, merger-related expenses, and restructuring charges
    -       280       1,487       -       94       458  
Asbestos-related charge (credit)
    -       828       -       -       -       -  
Equity in earnings of nonconsolidated affiliates
    322       40       29       354       95       31  
Other income
    146       54       394       352       329       1,135  
Interest expense - net
    736       708       648       519       432       458  
Income (Loss) before income taxes and minority interests
    1,751       (622 )     (613 )     2,586       2,590       2,635  
Provision (Credit) for income taxes
    (82 )     (280 )     (228 )     839       874       902  
Minority interests' share in income
    94       63       32       72       74       20  
Preferred stock dividends
    -       -       -       -       5       6  
Income (Loss) before cumulative effect of changes in
                                               
        accounting principles
    1,739       (405 )     (417 )     1,675       1,637       1,707  
Cumulative effect of changes in accounting principles
    (9 )     67       32       -       (20 )     -  
Net income (loss) available for common stockholders
  $ 1,730     $ (338 )   $ (385 )   $ 1,675     $ 1,617     $ 1,707  
Per share of common stock (in dollars): (2)
                                               
   Earnings (Loss) before cumulative effect of changes in
                                               
        accounting principles per common share - basic
  $ 1.89     $ (0.44 )   $ (0.46 )   $ 1.88     $ 1.87     $ 1.92  
   Earnings (Loss) per common share - basic
    1.88       (0.37 )     (0.43 )     1.88       1.85       1.92  
   Earnings (Loss) before cumulative effect of changes in
                                               
        accounting principles per common share - diluted
    1.88       (0.44 )     (0.46 )     1.85       1.84       1.89  
   Earnings (Loss) per common share - diluted
    1.87       (0.37 )     (0.43 )     1.85       1.82       1.89  
   Cash dividends declared per share of common stock
    1.34       1.34       1.295       1.16       1.16       1.16  
   Cash dividends paid per share of common stock
    1.34       1.34       1.25       1.16       1.16       1.16  
   Book value per share of common stock
    9.89       8.36       11.04       13.22       12.40       11.34  
Weighted-average common shares outstanding - basic (2)
    918.8       910.5       901.8       893.2       874.9       888.1  
Weighted-average common shares outstanding - diluted (2)
    926.1       910.5       901.8       904.5       893.5       904.8  
Convertible preferred shares outstanding
    -       -       -       -       1.3       1.4  
Year-end Financial Position
                                               
Total assets
  $ 41,891     $ 39,562     $ 35,515     $ 35,991     $ 33,456     $ 31,121  
Working capital
    3,578       2,519       2,183       1,150       2,848       1,570  
Property - gross
    40,812       37,934       35,890       34,852       33,333       32,844  
Property - net
    14,217       13,797       13,579       13,711       13,011       12,628  
Long-term debt and redeemable preferred stock
    11,763       11,659       9,266       6,613       6,941       5,890  
Total debt
    13,109       13,036       10,883       9,450       8,708       8,099  
Net stockholders' equity
    9,175       7,626       9,993       11,840       10,940       9,878  
Financial Ratios
                                               
Research and development expenses as percent of net sales (1)
    3.0 %     3.9 %     3.8 %     3.8 %     4.1 %     4.0 %
Income (Loss) before income taxes and minority interests
                                               
   as percent of net sales (1)
    5.4 %     (2.3 )%     (2.2 )%     8.7 %     9.9 %     10.4 %
Return on stockholders' equity (3)
    18.9 %     (4.4 )%     (3.9 )%     14.1 %     14.7 %     17.2 %
Debt as a percent of total capitalization
    55.4 %     59.2 %     48.9 %     42.5 %     42.2 %     43.6 %
General
                                               
Capital expenditures
  $ 1,100     $ 1,623     $ 1,587     $ 1,808     $ 2,176     $ 2,328  
Depreciation
    1,753       1,680       1,595       1,554       1,516       1,559  
Salaries and wages paid
    3,608       3,202       3,215       3,395       3,536       3,579  
Cost of employee benefits
    783       611       540       486       653       798  
Number of employees at year-end (thousands)
    46.4       50.0       52.7       53.3       51.0       50.7  
Number of Dow stockholders of record at year-end (thousands) (4)
    113.1       122.5       125.1       87.9       87.7       93.0  
 
(1)    Adjusted for reclassification of freight on sales in 2000 and reclassification
(4) Stockholders of record as reported by the transfer agent. The
 
of insurance operations in 2002.
      Company estimates that there were an additional 587,000
(2)    Adjusted for 3-for-1 stock split in 2000.
      stockholders whose shares were held in nominee names at
(3)    Included Temporary Equity in 1997-1999.
      December 31, 2008.
     
 
 

 
The Dow Chemical Company and Subsidiaries
PART II, Item 7.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
 


Management’s Discussion and Analysis of Financial Condition and Results of Operations
Page
2008 Overview
27
Results of Operations
29
Segment Results
34
Performance Plastics
34
Performance Chemicals
37
Agricultural Sciences
38
Basic Plastics
39
Basic Chemicals
41
Hydrocarbons and Energy
42
Sales Price and Volume Chart (Percent change from prior year)
44
Liquidity and Capital Resources
44
Cash Flow
44
Working Capital
45
Debt
45
Capital Expenditures
47
Contractual Obligations
48
Off-Balance Sheet Arrangements
48
Fair Value Measurements
48
Dividends
49
Outlook for 2009
49
Critical Accounting Policies
50
Environmental Matters
53
Asbestos-Related Matters of Union Carbide Corporation
57
Matters Involving the Formation of K-Dow Petrochemicals
60
Matters Involving the Acquisition of Rohm and Haas Company
61


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.


ABOUT DOW
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 offers a broad range of products and services, 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. Dow is the largest U.S. producer of chemicals and plastics, in terms of sales, with total sales of $57.5 billion in 2008. The Company conducts its worldwide operations through global businesses, which are reported in six operating segments: Performance Plastics, Performance Chemicals, Agricultural Sciences, Basic Plastics, Basic Chemicals, and Hydrocarbons and Energy.
 
In 2008, the Company sold its approximately 3,300 products and its services to customers in approximately 160 countries throughout the world. Thirty-six percent of the Company’s sales were to customers in North America; 38 percent were in Europe; while the remaining 26 percent were to customers in Asia Pacific and Latin America. The Company employs approximately 46,000 people and has a broad, global reach with 150 manufacturing sites in 35 countries.



2008 OVERVIEW
Significant challenges were presented to Dow and the chemical industry as a whole in 2008. The first half of the year was characterized by rising feedstock and energy costs, coupled with continued economic weakness in the United States, particularly in the automotive and residential construction sectors. The latter half of the year was marked by the escalation of a global financial crisis, the landfall of two major hurricanes along the U.S. Gulf Coast, and the sharp deterioration of the global economic environment. Consequently, in the fourth quarter of the year, the industry saw substantially lower end-market demand and steep inventory de-stocking across most value chains. In response, Dow shut down or idled capacity and took measures to manage costs and preserve cash, consistent with its commitment to financial discipline.
 
Dow’s sales increased 7 percent to $57.5 billion, setting a new sales record for the Company, as a 12 percent increase in prices outweighed a 5 percent decline in volume. Volatile feedstock and energy costs presented a significant challenge during the year, which the Company reacted to with responsive price and volume management, including the implementation of two broad-based pricing initiatives in the middle of the year. The Company’s purchased feedstock and energy costs increased $5.9 billion (28 percent) compared with 2007, making this the sixth consecutive year of double-digit percentage increases in feedstock and energy costs.
 
The combined Performance segments (Performance Plastics, Performance Chemicals and Agricultural Sciences) mitigated rising raw material costs with higher prices across all operating segments, offsetting a slight decline in volume that was predominantly driven by weakness in the fourth quarter. The Agricultural Sciences segment had an exceptional year, setting new records for both sales and earnings. Dow’s combined Basics segments (Basic Plastics, Basic Chemicals, and Hydrocarbons and Energy) swiftly enacted measures in the face of volatile feedstock and energy costs. These actions led to double-digit percent price increases, which helped mitigate declining volumes. In addition, the benefit of Dow’s strategic decision to invest for growth through joint ventures was again reflected in this year’s results, with Dow’s equity in earnings of nonconsolidated affiliates totaling $787 million.
 
Overall, Dow’s focus on price and volume management, control of discretionary spending and capital expenditures, and active portfolio management helped to partially offset deteriorating results in a challenging economic environment. Capital expenditures were $2.3 billion, above the level of depreciation but in line with the target for the year. Working capital fell $3.3 billion compared with year-end 2007 due in part to a decline in fourth quarter sales and inventories as the Company reduced operating rates in the fourth quarter of 2008. The Company ended the year with $2.8 billion of cash and cash equivalents and reported strong cash flow from operating activities of $4.7 billion. Despite the difficult economic conditions in the latter part of the year, the Company had sufficient liquidity and financial flexibility to meet all of its business obligations.
 
In 2008, the Company continued its effort to implement its strategy, which is designed to reduce earnings cyclicality and improve earnings growth by increasing investment in the Performance businesses, maintaining integration with the Basics businesses, and growing the Basics businesses through cost-advantaged joint ventures. Actions taken during 2008 included:
 
 
·
Dow announced plans to invest in a state-of-the-art membrane chlor-alkali production facility at its Freeport, Texas site. The new facility will replace several facilities that are nearing the end of their economic life.
 
 
·
Dow Agrosciences broadened its product portfolio and geographic reach with the announcements of six bolt-on acquisitions: Triumph Seed Co., Inc.; Dairyland Seed Co., Inc.; Bio-Plant Research Ltd.; assets of Renze Hybrids Inc.; assets of Südwestsaat GbR; and assets of Brodbeck Seed Inc.
 
 
·
Dow Polyurethanes broke ground on a major capacity expansion at its polyols plant in Terneuzen, The Netherlands.
 
 
·
Dow Epoxy Systems introduced AIRSTONE™ epoxy systems, a family of products with performance characteristics that are well-suited for use in the fabrication of wind blades.
 
·
Americas Styrenics LLC, a joint venture between Dow and Chevron Phillips Chemical Company LP, began operations.
 
·
The Company announced two broad-based pricing initiatives to combat surging feedstock and energy costs. The first announcement, in May, called for an increase of up to 20 percent on all products. The second initiative, announced in June, called for an additional price increase of up to 25 percent as well as freight surcharges.
 
·
The SCG-Dow Group, a joint venture between Dow and The Siam Cement Group, broke ground on a world-scale propylene oxide facility in Thailand that will use innovative hydrogen peroxide to propylene oxide technology jointly developed by Dow and BASF. In 2008, the SCG-Dow Group announced a 50:50 joint venture to construct a specialty elastomers train, also in Thailand.
 


 
·
Dow Water Solutions announced plans to expand its Edina, Minnesota manufacturing facility to produce additional products for advanced water solutions. It will be the third expansion at this location in the past eight years.
 
·       Dow Building Solutions completed its acquisition of STEVENS ROOFING SYSTEMS™ and Geomembrane Systems.
 
·
Dow Izolan, a joint venture between Dow and Russia-based Scientific Manufacturing Company Izolan Ltd., broke ground on a state-of-the-art polyurethane systems manufacturing facility in Vladimir, Russia.
 
·
The Kuwait Olefins Company, a joint venture between Dow and Petrochemical Industries Company (K.S.C.) (“PIC”), announced the launch of commercial operations of its Olefins II Kuwait Program Ethylene Unit and its Ethylene Glycol Unit.
 
        ·
On November 28, 2008, the Company and PIC signed a Joint Venture Formation Agreement (“JVFA”) to form a 50:50 global petrochemicals joint venture, K-Dow Petrochemicals (“K-Dow”). However, PIC failed to close the K-Dow transaction on January 2, 2009, as required by the JVFA. As a result, the Company is pursuing all legal options available to it relating to PIC’s failure to close the proposed K-Dow joint venture. In addition, the Company is in the process of seeking an alternative joint venture partner. See Matters Involving the Formation of K-Dow Petrochemicals at the end of Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information regarding these matters.
 
        ·
As economic conditions worsened toward the end of the year, Dow announced a restructuring plan as part of a series of actions to advance the Company’s strategy and respond to the recent, severe economic downturn. The restructuring plan included the elimination of approximately 5,000 jobs (including planned divestitures) and the closure of facilities in high-cost locations. Related to this plan, the Company recorded a pretax restructuring charge of $785 million in the fourth quarter. In addition, the Company announced the temporary idling of nearly 200 plants.
 
        ·
On July 10, 2008, the Company and Rohm and Haas Company (“Rohm and Haas”) announced a definitive agreement, under which the Company would acquire all outstanding shares of Rohm and Haas common stock for $78 per share in cash. The acquisition of Rohm and Haas would make the Company the world’s leading specialty chemicals and advanced materials company, combining the two organizations’ best-in-class technologies, broad geographic reach and strong industry channels to create a business portfolio with significant growth opportunities. The Rohm and Haas transaction did not close in January 2009 in light of the Company’s determination that recent material developments created unacceptable uncertainties related to the funding and economics of the combined Dow and Rohm and Haas enterprise. This assessment was based on several macro-economic factors such as the continued crisis in global financial and credit markets, combined with the failure of PIC to fulfill its obligation to complete the formation of the proposed K-Dow joint venture. See Matters Involving the Acquisition of Rohm and Haas Company at the end of Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part I, Item 3. Legal Proceedings for additional information regarding these matters.
 
Looking to 2009, there are growing signs of a prolonged global economic slowdown, with growth rates in developed economies in North America and Europe projected to remain weak well into the first half of the year and possibly continuing for the entire year. With approximately two-thirds of its sales outside the United States, Dow’s global reach is expected to enable it to continue to capture opportunities in developing regions, such as Brazil, India and China, where growth rates are projected to be more positive than in the developed world, although not nearly as strong as in 2008. As the Company continues to implement its strategy in a volatile global economic environment, its focus will remain on financial discipline, with an emphasis on cash preservation measures to ensure financial flexibility.
 
Dow’s results of operations and financial condition for the year ended December 31, 2008 are described in further detail in the following discussion and analysis.
 



RESULTS OF OPERATIONS
Dow reported record sales of $57.5 billion in 2008, up 7 percent from $53.5 billion in 2007 and up 17 percent from $49.1 billion in 2006. Compared with last year, prices rose 12 percent (with currency accounting for approximately 3 percent of the increase), with increases in all operating segments and in all geographic areas. In 2008, double-digit price increases were reported in all operating segments except Performance Plastics (which was up 8 percent), driven by continuing increases in feedstock and energy costs. In 2008, volume declined 5 percent from last year, decreasing in all segments except Agricultural Sciences (up 8 percent) and Hydrocarbons and Energy (up 5 percent). Through the first half of the year, volume improved 3 percent overall despite a 5 percent decline in the United States, but fell in the second half and most notably in the fourth quarter as global demand collapsed. From a geographic standpoint, 2008 volume was down in all geographic areas, except India, Middle East and Africa (“IMEA”), which was up 3 percent from 2007. The most significant volume decline was in the United States, which ended the year down 11 percent from 2007.
 
In 2007, sales rose 9 percent, as prices rose 7 percent, with increases in all operating segments and in all geographic areas. In 2007, the most significant price increases were reported in Basic Plastics and Hydrocarbons and Energy, driven by continuing increases in feedstock and energy costs. Volume improved 2 percent in 2007, with growth in all segments with the exception of a slight decline in Basic Chemicals. From a geographic standpoint, 2007 volume in the United States was down slightly from 2006, due in part to weakness in the housing and automotive industries, while Europe and the rest of the world reported significant volume growth. Growth was strong in Asia Pacific, up 8 percent from 2006, and in Latin America, up 7 percent.
 
Sales in the United States accounted for 32 percent of total sales in 2008, compared with 34 percent in 2007 and 37 percent in 2006. See the Sales Price and Volume table at the end of the section titled “Segment Results” for details regarding the change in sales by operating segment and geographic area. In addition, sales and other information by operating segment and geographic area are provided in Note T to the Consolidated Financial Statements.

               

Gross margin for 2008 was $5.5 billion, compared with $7.1 billion in 2007 and $7.6 billion in 2006. Despite the $6.8 billion impact of higher selling prices, gross margin declined compared with 2007, due to an increase of $5.9 billion in feedstock and energy costs, lower sales volume, higher costs of other raw materials, significantly reduced operating rates and the unfavorable impact of currency on costs. Gross margin was also impacted by Hurricanes Gustav and Ike, which hit the U.S. Gulf Coast, resulting in temporary outages for several of the Company’s Gulf Coast production facilities and resulting in $181 million in additional manufacturing expenses including the repair of property damage, clean-up costs, unabsorbed fixed costs and inventory write-offs. In addition, gross margin was reduced by legal expenses and other costs of $69 million in the fourth quarter of 2008 related to the K-Dow transaction; these costs were expensed (to “Cost of sales”) upon PIC’s refusal to close the K-Dow transaction (reflected in Unallocated and Other). In 2007, gross margin declined compared with 2006, due to an increase of $2.5 billion in feedstock and energy costs, higher costs of other raw materials, the unfavorable impact of currency on costs and increased freight costs.
 
Dow’s global plant operating rate (for its chemicals and plastics businesses) was 77 percent of capacity in 2008, down from 87 percent of capacity in 2007 and 85 percent of capacity in 2006. Operating rates declined across the businesses in 2008, particularly in the second half of the year, impacted by actions taken by management in response to lower demand resulting from the slowing global economy, as well as by Hurricanes Gustav and Ike which hit the U.S. Gulf Coast in the third quarter of 2008. In 2007, operating rates improved compared with 2006 for most of the Company’s businesses, reflecting a higher level of demand and the closure of some of the Company’s manufacturing facilities. Depreciation expense was $2,016 million in 2008, $1,959 million in 2007 and $1,904 million in 2006.


 

Personnel count was 46,102 at December 31, 2008, 45,856 at December 31, 2007 and 42,578 at December 31, 2006. Headcount increased slightly in 2008 from year-end 2007 primarily due to recent acquisitions. Headcount is expected to decline due to actions announced in the fourth quarter of 2008 to eliminate approximately 5,000 jobs (including planned divestitures). During 2007, headcount was impacted by the addition of research and development employees in India and China in support of the Company’s growth initiatives; the addition of approximately 110 employees with the second quarter acquisition of Hyperlast Limited; and the addition of approximately 1,700 employees with the second quarter acquisition of Wolff Walsrode.
 
Operating expenses (research and development, and selling, general and administrative expenses) totaled $3,279 million in 2008, up 3 percent from $3,169 million in 2007. Operating expenses were $2,827 million in 2006. Research and development (“R&D”) expenses were $1,310 million in 2008, compared with $1,305 million in 2007 and $1,164 million in 2006. Selling, general and administrative expenses were $1,969 million in 2008, compared with $1,864 million in 2007 and $1,663 million in 2006. In 2008, the increase in operating expenses was primarily related to planned spending for growth initiatives in the Performance businesses and operating expenses for new acquisitions. In 2007, consistent with the Company’s strategy, approximately 75 percent of the increase in operating expenses was related to spending for growth initiatives and product development in the Performance businesses, including expenses related to the 2007 acquisition of Wolff Walsrode and Hyperlast Limited, and for early stage research into new growth opportunities. The balance of the increase in 2007 was related to the global expansion of the Company’s corporate branding campaign and other corporate expenses. Operating expenses were 5.7 percent of sales in 2008, 5.9 percent of sales in 2007 and 5.8 percent of sales in 2006.

               

The following table illustrates the relative size of the primary components of total production costs and operating expenses of Dow. More information about each of these components can be found in other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations, Notes to the Consolidated Financial Statements, and Part II, Item 6. Selected Financial Data.


Production Costs and Operating Expenses
 
Cost components as a percent of total
 
2008
   
2007
   
2006
 
Hydrocarbon feedstocks and energy
    48 %     49 %     49 %
Salaries, wages and employee benefits
    10       11       11  
Maintenance
    3       3       3  
Depreciation
    4       4       4  
Restructuring charges
    1       1       1  
Supplies, services and other raw materials
    34       32       32  
Total
    100 %     100 %     100 %

Amortization of intangibles was $92 million in 2008, $72 million in 2007 and $50 million in 2006. Amortization of intangibles was up in 2008 due to several small acquisitions in 2007. During the fourth quarter of 2008, the Company performed its annual impairment tests for goodwill. As a result of this review, it was determined that goodwill associated with the Dow Automotive and Polypropylene reporting units was impaired. The impairment was based on a review performed by management in which discounted cash flows did not support the carrying value of the goodwill. The Company recorded pretax charges totaling $239 million for goodwill impairment losses including $209 million for the Dow Automotive reporting unit (impacting the Performance Plastics segment) and $30 million for the Polypropylene reporting unit (impacting the Basic Plastics segment). See Note G to the Consolidated Financial Statements for additional information regarding goodwill and other intangible assets.
 
On December 5, 2008, the Company’s Board of Directors approved a restructuring plan as part of a series of actions to advance the Company’s strategy and respond to the recent, severe economic downturn. The restructuring plan includes the shutdown of a number of facilities and a global workforce reduction, which are targeted for completion by the end of 2010. As a result of the shutdowns and global workforce reduction, the Company recorded pretax restructuring charges of $785 million in the fourth quarter of 2008. The charges consisted of asset write-downs and write-offs of $336 million, costs associated with exit or disposal activities of $128 million and severance costs of $321 million. The impact of the charges is shown as “Restructuring charges” in the consolidated statements of income and was reflected in the Company’s segment results as follows: $109 million in Performance Plastics, $24 million in Performance Chemicals, $98 million in Basic Plastics, $106 million in Basic Chemicals, $18 million in Hydrocarbons and Energy, and $430 million in Unallocated and Other. In addition to the charges related to the 2008 restructuring plan, the Company also recorded additional pretax charges of $60 million related to the 2007 restructuring plan, primarily impacting the Basic Plastics segment, and a reduction of $6 million related to the 2006 restructuring plan. When the 2008 restructuring plan has been fully implemented, the Company expects to realize ongoing annual savings of approximately $700 million. See Note B to the Consolidated Financial Statements for details on the restructuring charges.
 
On December 3, 2007, the Company’s Board of Directors approved a restructuring plan that included 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 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 charges were reflected in the Company’s segment results as follows: $184 million in Performance Plastics, $85 million in Performance Chemicals, $77 million in Agricultural Sciences, $88 million in Basic Plastics, $7 million in Basic Chemicals, $44 million in Hydrocarbons and Energy, and $105 million in Unallocated and Other. In 2007, the Company also recorded a $12 million reduction of the 2006 restructuring charges, which included an $8 million reduction of the estimated severance costs (included in Unallocated and Other) and a $4 million reduction of the reserve for contract termination fees (included in Performance Plastics). When the 2007 restructuring plan has been fully implemented, the Company expects to realize ongoing annual savings of approximately $180 million. See Note B to the Consolidated Financial Statements for details on the restructuring charges.


        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 continued its drive to improve the competitiveness of its global operations. As a consequence of these shutdowns, which are scheduled to be completed at the end of the first quarter of 2009, and other optimization activities, the Company recorded pretax restructuring charges totaling $591 million in 2006. The charges included 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 charges were shown as “Restructuring charges” in the consolidated statements of income and were reflected in the Company’s segment results as follows: $242 million in Performance Plastics, $12 million in Performance Chemicals, $16 million in Basic Plastics, $184 million in Basic Chemicals, and $137 million in Unallocated and Other. When the 2006 restructuring plan has been fully implemented, the Company expects to realize ongoing annual savings of approximately $160 million. See Note B to the Consolidated Financial Statements for details on the restructuring charges.
 
During 2008, pretax charges totaling $44 million were recorded for purchased in-process research and development (“IPR&D”) impacting the Agricultural Sciences segment. Purchased IPR&D in 2007 amounted to $57 million in pretax charges; $50 million was related to acquisitions within the Agricultural Sciences segment and $7 million was related to the acquisition of Wolff Walsrode on June 30, 2007 and impacted the results of the Performance Chemicals segment. Future costs required to bring the purchased IPR&D projects to technological feasibility are expected to be immaterial. See Note C to the Consolidated Financial Statements for information regarding these charges.
 
During 2008, pretax charges totaling $49 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 Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.”
 
Following the December 2008 completion of a study to review Union Carbide’s asbestos claim and resolution activity, Union Carbide decreased its asbestos-related liability for pending and future claims (excluding future defense and processing costs) by $54 million. The reduction was shown as “Asbestos-related credit” in the consolidated statements of income and was reflected in the results of Unallocated and Other. In 2006, following the December 2006 completion of a study to review Union Carbide’s asbestos claim and resolution activity, Union Carbide decreased its asbestos-related liability for pending and future claims (excluding future defense and processing costs) by $177 million. See Note K to the Consolidated Financial Statements for additional information regarding asbestos-related matters of Union Carbide.
 
Dow’s share of the earnings of nonconsolidated affiliates in 2008 was $787 million, compared with $1,122 million in 2007 and $959 million in 2006. Equity earnings declined compared with 2007, reflecting volatile feedstock and energy costs in 2008 and the collapse in global demand that took place in the fourth quarter of 2008. Equity earnings for 2008 reflected decreased earnings from MEGlobal, EQUATE Petrochemical Company K.S.C. (“EQUATE”), Equipolymers and Siam Polyethylene Company Limited (“Siam Polyethylene”); partially offset by increased earnings from Dow Corning Corporation and the OPTIMAL Group of Companies (“OPTIMAL”). Equity earnings in 2007 exceeded $1 billion for the first time in the Company’s history, reflecting increased earnings from EQUATE, MEGlobal and OPTIMAL. See Note F to the Consolidated Financial Statements for additional information on nonconsolidated affiliates.



Sundry income - net includes a variety of income and expense items such as the gain or loss on foreign currency exchange, dividends from investments, and gains and losses on sales of investments and assets. Sundry income for 2008 was $89 million, down from $324 million in 2007 and $137 million in 2006. In 2008, net sundry income reflected unfavorable foreign exchange hedging results and a decrease in net gains on the sale of assets. In 2007, net sundry income reflected the impact of favorable foreign exchange hedging results and gains on the sale of miscellaneous assets. In 2006, sundry income was reduced by the recognition of a loss contingency of $85 million (reflected in the Performance Plastics segment) related to a fine imposed by the European Commission (“EC”) associated with synthetic rubber industry matters (see Note K to the Consolidated Financial Statements for additional information).
 
Net interest expense (interest expense less capitalized interest and interest income) was $562 million in 2008, up from $454 million in 2007 and $431 million in 2006. Interest income was $86 million in 2008, down from $130 million in 2007 and $185 million in 2006 principally due to lower interest rates on investments. Interest expense (net of capitalized interest) and amortization of debt discount totaled $648 million in 2008, $584 million in 2007 and $616 million in 2006. Interest expense increased due to an increased level of debt, throughout 2008 compared with 2007.
 
The provision for income taxes was $667 million in 2008, compared with $1,244 million in 2007 and $1,155 million in 2006. The Company’s effective tax rate fluctuates based on, among other factors, where income is earned and the level of income relative to tax credits available. For example, as the percentage of foreign sourced income increases, the Company’s effective tax rate declines. The Company’s tax rate is also influenced by the level of equity earnings, since most of the earnings from the Company’s equity companies are taxed at the joint venture level. In 2008, the effective tax rate was 50.5 percent compared with 29.4 percent in 2007 and 23.2 percent in 2006. In addition to the above factors, the tax rate for 2008 was negatively impacted by goodwill impairment losses that are not deductible for tax purposes. The tax rate for 2007 was negatively impacted by a change in German tax law that was enacted in August 2007 and included a reduction in the German income tax rate. As a result of the change, the Company adjusted the value of its net deferred tax assets in Germany (using the lower tax rate) and recorded a charge of $362 million against the “Provision for income taxes” in the third quarter of 2007. Also in 2007, the Company changed the legal ownership structure of its investment in EQUATE, resulting in a favorable impact to the “Provision for income taxes” of $113 million in the fourth quarter of 2007. Excluding these items, the effective tax rate was 23.5 percent in 2007.
 
Based on tax strategies developed in Brazil during 2006, as well as projections of future earnings, it was determined that it was more likely than not that tax loss carryforwards would be utilized, resulting in a reversal of existing valuation allowances of $63 million. This impact, combined with strong financial results in jurisdictions with lower tax rates than the United States, enacted reductions in the tax rates in Canada and The Netherlands, and improved earnings from a number of the Company’s joint ventures, resulted in an effective tax rate for 2006 that was lower than the U.S. statutory rate. Excluding the reversal of the valuation allowances in 2006, the effective tax rate for 2006 was 24.5 percent. The underlying factors affecting Dow’s overall effective tax rates are summarized in Note S to the Consolidated Financial Statements.
 
Minority interests’ share in income was $75 million in 2008, $98 million in 2007 and $93 million in 2006. The decline in 2008 was related to the third quarter 2008 redemption by the outside partner of its ownership interest in Hobbes Capital S.A. (see Note Q to the Consolidated Financial Statements).
 
Net income available for common stockholders was $579 million in 2008 ($0.62 per share) compared with $2,887 million in 2007 ($2.99 per share) and $3,724 million in 2006 ($3.82 per share).



        The following table summarizes the impact of certain items recorded in 2008, 2007 and 2006:

   
Pretax
Impact (1)
   
Impact on
Net Income (2)
   
Impact on
EPS (3)
 
In millions, except per share amounts
 
2008
   
2007
   
2006
   
2008
   
2007
   
2006
   
2008
   
2007
   
2006
 
Cost of sales:
                                                     
Impact of Hurricanes Gustav and Ike
  $ (181 )     -       -     $ (115 )     -       -     $ (0.12 )     -       -  
K-Dow related expenses
    (69 )     -       -       (44 )     -       -       (0.05 )     -       -  
Goodwill impairment losses
    (239 )     -       -       (230 )     -       -       (0.25 )     -       -  
Restructuring charges
    (839 )   $ (578 )   $ (591 )     (628 )   $ (436 )   $ (445 )     (0.68 )   $ (0.46 )   $ (0.46 )
Purchased in-process research and development charges
    (44 )     (57 )     -       (44 )     (50 )     -       (0.05 )     (0.05 )     -  
Acquisition-related expenses
    (49 )     -       -       (43 )     -       -       (0.05 )     -       -  
Asbestos-related credit
    -       -       177       -       -       112       -       -       0.12  
Sundry income - net:
                                                                       
Loss contingency related to EC fine
    -       -       (85 )     -       -       (84 )     -       -       (0.09 )
Provision for income taxes:
                                                                       
German tax law change
    -       -       -       -       (362 )     -       -       (0.38 )     -  
Change in EQUATE legal ownership structure
    -       -       -       -       113       -       -       0.12       -  
Total
  $ (1,421 )   $ (635 )   $ (499 )   $ (1,104 )   $ (735 )   $ (417 )   $ (1.20 )   $ (0.77 )   $ (0.43 )
(1)
Impact on “Income before Income Taxes and Minority Interests”
(2)
Impact on “Net Income Available for Common Stockholders”
(3)
Impact on “Earnings per common share - diluted”

SEGMENT RESULTS
The Company uses EBIT (which Dow defines as earnings before interest, income taxes and minority interests) as its measure of profit/loss for segment reporting purposes. EBIT includes all operating items relating to the businesses and excludes items that principally apply to the Company as a whole. Additional information regarding the Company’s operating segments and a reconciliation of EBIT to “Net Income Available for Common Stockholders” can be found in Note T to the Consolidated Financial Statements.

PERFORMANCE PLASTICS
Performance Plastics sales were $15,793 million in 2008, up from $15,116 million in 2007 and $13,944 million in 2006. Compared with 2007, sales increased 4 percent as prices rose 8 percent, including a 3 percent favorable impact of currency, and volume declined 4 percent. The improvement in prices was broad-based with increases in all geographic areas, as well as across all businesses with the exception of Dow Building Solutions, which was flat versus last year. Volume declined in 2008 due to the significant downturn in the global economy in the fourth quarter of 2008. In 2007, prices increased 6 percent over 2006 and volume improved 2 percent.

               

EBIT for 2008 was $264 million, compared with $1,390 million in 2007 and $1,629 million in 2006. Results for 2008 were negatively impacted by a goodwill impairment loss of $209 million, costs of $48 million related to the U.S. Gulf Coast hurricanes, and restructuring charges of $111 million related to the closure or impairment of several manufacturing facilities announced in the fourth quarter. Despite the improvement in prices, EBIT for 2008 declined from 2007 primarily due to the slowing global economy, which resulted in lower sales volumes and reduced operating rates across the Company’s


manufacturing facilities, lower equity earnings, significant increases in feedstock and raw material costs, and the unfavorable impact of currency on costs.
 
Results for 2007 were negatively impacted by net restructuring charges of $180 million related to the fourth quarter of 2007 announced closure or impairment of a number of manufacturing facilities. EBIT for 2007 declined from 2006 primarily due to lump sum technology licensing revenue realized in 2006 that did not recur in 2007 and an increase in operating expenses related to the Company’s effort to expand geographic markets and develop new technologies and product applications within the Performance Plastics segment. EBIT for 2006 included a fine of $85 million imposed by the European Commission associated with the synthetic rubber industry matter and $242 million in asset restructuring costs as part of the plan announced by the Company in the third quarter of 2006, which included the permanent shutdown of the Company’s toluene diisocyanate (“TDI”) plant in Porto Marghera, Italy. See Note B to the Consolidated Financial Statements for information on restructuring charges.
 
Dow Automotive sales for 2008 declined 1 percent from 2007, as a 10 percent improvement in price was more than offset by an 11 percent decline in volume, driven by a severe downturn in the global automotive industry. During 2008, the business worked to restore margins compressed by higher raw material costs and was successful in raising prices across all geographic areas. The decline in volume was most significant in North America where a weak economy and a drop in consumer confidence, coupled with tight credit markets, limited demand. Automotive manufacturers took action in the fourth quarter to reduce inventories and preserve cash, driving demand further downward for the year. Due to the significant downturn across the industry, when the Company performed its annual review of goodwill in the fourth quarter, it was determined that the goodwill associated with the Dow Automotive reporting unit was impaired, resulting in a charge of $209 million. In addition, the Company announced a restructuring plan in the fourth quarter of 2008 that included a charge of $27 million for impairment of the automotive sealants business in Europe, which will be divested in the first quarter of 2009. EBIT declined in 2008 as a result of these charges and the downturn in the automotive industry, which resulted in lower sales volumes and reduced operating rates. EBIT for 2007 was reduced by a $64 million charge primarily associated with the Company’s decision in the fourth quarter of 2007 to exit the automotive sealants business in North America, Latin America and Asia Pacific.
 
Dow Building Solutions sales for 2008 were up slightly versus the prior year due to a 1 percent improvement in volume. Prices were flat versus 2007 as a 4 percent decline in prices was offset by a 4 percent favorable currency impact. Results for the business were heavily impacted by the financial crisis in North America, resulting in a decline in demand for building and construction materials in 2008. EBIT in 2008 was negatively impacted by restructuring charges of $13 million associated with the closure of three manufacturing plants. Compared with 2007, EBIT for 2008 was down due to sharply higher hydrocarbon and raw material costs in the first half of the year and the significant economic downturn in the second half of the year. EBIT for 2007 was reduced by $21 million of restructuring charges related to the closure of five small manufacturing plants.
 
Dow Epoxy sales in 2008 declined 7 percent compared with last year, as an 11 percent drop in volume more than offset a 4 percent improvement in price, including a 2 percent favorable impact of currency. Demand declined in all geographic areas and key market segments as a result of the financial crisis and global economic downturn. The decline in volume was most noticeable in Asia Pacific where demand for electrical laminate applications in consumer electronics trended sharply lower in the second half of the year. The improvement in price was largely due to a more favorable overall sales mix, with particular strength in the business’ specialty product offerings. Results for 2008 included a restructuring charge of $28 million related to the Company’s fourth quarter decision to exit the solution vinyl resin business and shut down its manufacturing plant located in Texas City, Texas. In addition, the business incurred costs of $15 million due to the U.S. Gulf Coast hurricanes in the second half of 2008. Compared with 2007, EBIT declined in 2008 due to the slowdown in the global economy, which resulted in lower sales volume and reduced operating rates, significantly higher hydrocarbon and raw material costs and increased operating expenses. In 2007, EBIT was negatively impacted by a $2 million charge related to the Company’s decision to exit the hydroxyalkyl acrylate business.
 
Polyurethanes and Polyurethane Systems sales for 2008 increased 3 percent versus the prior year with a 10 percent increase in price offset by a 7 percent decline in volume. The improvement in price was reported in all geographic areas and product lines, supported by significantly higher hydrocarbon and raw material prices during most of the year. The decline in volume was driven by a sharp drop in demand late in the year due to the weakened global economy and efforts by customers to preserve cash and reduce inventory levels. EBIT for 2008 was negatively impacted by $25 million of costs related to the third quarter hurricanes, and $1 million of restructuring charges. Compared with last year, EBIT declined significantly due to the global economic slowdown, which resulted in a significant decline in sales volume and reduced operating rates, and significantly higher raw material costs.
 
Specialty Plastics and Elastomers established a new sales record in 2008, up 14 percent from 2007 due to a 12 percent improvement in price and a 2 percent increase in volume. Double-digit price improvement was reported in all geographic areas except Asia Pacific where prices improved 9 percent. The gain in volume was largely due to a new marketing agreement between the Company and Nippon Unicar Company Limited (“NUC”), a nonconsolidated affiliate, which became effective in


the first quarter of 2008. Excluding the impact of the new marketing agreement with NUC, volume was flat with 2007. EBIT for 2008 was reduced by restructuring charges of $42 million, which included $40 million for the Company’s fourth quarter decision to shut down facilities that manufacture NORDEL™ hydrocarbon rubber in Seadrift, Texas, and TYRIN™ chlorinated polyethylene in Plaquemine, Louisiana, and a $2 million adjustment to the 2007 restructuring charge related to contract cancellation penalties associated with the decision to shut down the rubber plant located in Berre, France. In addition, EBIT was reduced $7 million due to the impact of the hurricanes in the second half of 2008. Compared with 2007, EBIT for the business declined due to lower operating rates, lower equity earnings and higher raw material costs. Results for 2007 included restructuring charges of $97 million which included impairment charges related to the rubber plant in Berre, France and a fiber solutions plant in Tarragona, Spain.
 
Technology Licensing and Catalyst sales and EBIT were up significantly in 2008 due to increased licensing of polyethylene technology in Europe and increased licensing of polypropylene technology and catalyst sales in IMEA.

Performance Plastics Outlook for 2009
Due to an expectation of continued softness in the global economy, Performance Plastics sales are expected to decline in 2009, with particular weakness in the first half of the year. Expectations are for a recovery to begin late in 2009 as demand begins to improve and spending related to announced economic stimulus plans increases. A number of the businesses within the Performance Plastics segment stand to benefit from increased spending on infrastructure projects. In addition to lower sales volume in 2009, hydrocarbon and raw material costs are expected to be lower, creating downward pressure on selling prices.
 
Dow Automotive expects sales to be down for the year, in line with global automotive industry trends, driven by a lack of consumer confidence and tight credit markets. North America and Europe are expected to experience the most significant declines. Prices are expected to be in line with 2008 as competitive pressure associated with the downturn in the automotive industry will make price increases difficult to implement. Dow Automotive will continue to take action in 2009 to exit low margin business.
 
Dow Building Solutions expects sales volume to decline in 2009 due to the expanding effects of the global economic crisis. The construction industry in general is not expected to improve before late in 2009. North American producers of extruded polystyrene foam are required by the Montreal Protocol to have new foaming agent formulations implemented by year end 2009. This will result in manufacturers incurring additional costs and capital spending in 2009. The process of converting the various manufacturing plants is expected to reduce North American production capacity. Further, it is expected that some capacity will be permanently shut down as manufacturers decide not to invest in the foaming agent conversion. Dow Building Solutions has previously announced its decision to shut down three extruded polystyrene plants by the end of 2009.
 
Dow Epoxy volume is expected to be down in 2009 due to the fourth quarter of 2008 decision to exit the solution vinyl resin business and the expectation that overall industry demand will remain low in the first half of 2009, although some improvement is expected late in the year. Sales of epoxy systems into wind energy applications are expected to continue growing despite the downturn in the global economy. Excess capacity across the industry will create a very competitive market place in 2009.
 
Polyurethanes and Polyurethane Systems expect volume to be soft in the first half of 2009 with some recovery in the second half of the year linked to overall improvement in global economic conditions. Prices are expected to be lower in 2009 consistent with lower hydrocarbon and other raw material costs. Recent capacity additions are expected to keep industry operating rates depressed.
 
Specialty Plastics and Elastomers expect sales volume in 2009 to be well below 2008 levels with particular weakness in the first half of the year. Prices are projected to be lower in 2009 due to declining hydrocarbon and other raw material costs and increased competitive pressure as market participants aggressively pursue sales volume in a weak market. Medical and food packaging applications are proving to be somewhat less impacted by the global downturn, and governmental economic stimulus plans that target increased spending on infrastructure projects could help fuel growth in some niche applications like wire and cable.
 
Technology Licensing and Catalyst revenue for certain products is expected to grow in 2009 due to increased catalyst demand associated with new plants starting up in 2009. However, demand from existing plants is expected to be down due to lower operating rates.


PERFORMANCE CHEMICALS
Performance Chemicals sales increased 11 percent to $9,229 million in 2008, compared with $8,351 million in 2007; sales were $7,867 million in 2006. Compared with 2007, prices increased 14 percent; volume fell 3 percent as demand dropped in the second half of the year. The increase in prices in 2008 was driven by higher raw material costs. In 2007, volume increased 2 percent from 2006 due in large part to the acquisition of Wolff Walsrode, while prices rose 4 percent.

                

EBIT for 2008 was $1,010 million, compared with $949 million in 2007 and $1,242 million in 2006. EBIT increased in 2008 as higher prices and increased equity earnings from OPTIMAL and Dow Corning were partially offset by higher raw material costs and reduced operating rates. In addition, EBIT for 2008 was reduced by restructuring charges totaling $24 million and $15 million of costs related to the U.S. Gulf Coast hurricanes. The restructuring charges included the write-down of manufacturing assets (due to plant closures in Xiaolan, China; Varennes, Quebec, Canada; King’s Lynn, United Kingdom; Pittsburg, California; Plaquemine, Louisiana; and Midland, Michigan). In 2007, EBIT declined as higher raw material and energy costs and higher operating expenses related to product development and growth initiatives more than offset higher selling prices. In addition, EBIT in 2007 was reduced by restructuring charges totaling $85 million and a $7 million charge for IPR&D related to the acquisition of Wolff Walsrode. In 2006, EBIT was reduced by restructuring charges totaling $12 million. See Notes B and C to the Consolidated Financial Statements for additional information regarding restructuring charges and IPR&D.
 
Designed Polymers sales increased 20 percent versus 2007, with volume growth of 13 percent and price increases of 7 percent including a 3 percent favorable impact of currency. The improvement in volume was driven by the full-year impact of