tdcc1q0910q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period
ended
MARCH
31,
2009
Commission
File Number: 1-3433
THE
DOW CHEMICAL COMPANY
(Exact
name of registrant as specified in its charter)
|
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
38-1285128
(I.R.S.
Employer Identification No.)
|
2030
DOW CENTER, MIDLAND, MICHIGAN 48674
(Address
of principal executive offices) (Zip Code)
989-636-1000
(Registrant's
telephone number, including area code)
|
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 whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files). o
Yes o No
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
|
|
Large
accelerated filer 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 Exchange
Act). o
Yes þ
No
|
|
Class
Common
Stock, par value $2.50 per share
|
Outstanding at March 31, 2009
925,833,122
shares
|
The
Dow Chemical Company
QUARTERLY
REPORT ON FORM 10-Q
For
the quarterly period ended March 31, 2009
|
|
|
PAGE
|
|
PART
I – FINANCIAL INFORMATION
|
|
|
Item
1.
|
|
3
|
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
|
|
6
|
|
|
|
7
|
|
|
|
8
|
|
Item
2.
|
|
36
|
|
|
|
36
|
|
|
|
36
|
|
|
|
43
|
|
|
|
46
|
|
Item
3.
|
|
49
|
|
Item
4.
|
|
50
|
|
PART
II – OTHER INFORMATION
|
|
|
Item
1.
|
|
51
|
|
Item
1A.
|
|
51
|
|
Item
2.
|
|
54
|
|
Item
6.
|
|
54
|
|
|
56
|
|
|
57
|
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Dow Chemical Company and Subsidiaries |
Consolidated Statements of Income |
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
In
millions, except per share
amounts (Unaudited)
|
|
|
2009
|
|
|
2008
|
|
Net
Sales
|
|
|
$ |
9,087 |
|
|
$ |
14,824 |
|
Cost
of sales
|
|
|
|
8,165 |
|
|
|
12,908 |
|
Research
and development expenses
|
|
|
|
292 |
|
|
|
331 |
|
Selling,
general and administrative expenses
|
|
|
|
444 |
|
|
|
498 |
|
Amortization
of intangibles
|
|
|
|
22 |
|
|
|
22 |
|
Restructuring
charges
|
|
|
|
19 |
|
|
|
- |
|
Acquisition-related
expenses
|
|
|
|
48 |
|
|
|
- |
|
Equity
in earnings of nonconsolidated affiliates
|
|
|
|
65 |
|
|
|
274 |
|
Sundry
income (expense) - net
|
|
|
|
(3 |
) |
|
|
46 |
|
Interest
income
|
|
|
|
12 |
|
|
|
24 |
|
Interest
expense and amortization of debt discount
|
|
|
|
154 |
|
|
|
145 |
|
Income
before Income Taxes
|
|
|
|
17 |
|
|
|
1,264 |
|
Provision
(Credit) for income taxes
|
|
|
|
(18 |
) |
|
|
299 |
|
Net
Income
|
|
|
|
35 |
|
|
|
965 |
|
Net
income attributable to noncontrolling interests
|
|
|
|
11 |
|
|
|
24 |
|
Net
Income Attributable to The Dow Chemical Company
|
|
$ |
24 |
|
|
$ |
941 |
|
Share
Data
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - basic
|
|
|
$ |
0.03 |
|
|
$ |
1.00 |
|
Earnings
per common share - diluted
|
|
|
$ |
0.03 |
|
|
$ |
0.99 |
|
Common
stock dividends declared per share of common stock
|
|
$ |
0.15 |
|
|
$ |
0.42 |
|
Weighted-average
common shares outstanding - basic
|
|
|
925.4 |
|
|
|
942.1 |
|
Weighted-average
common shares outstanding - diluted
|
|
|
932.0 |
|
|
|
951.6 |
|
Depreciation
|
|
|
$ |
455 |
|
|
$ |
495 |
|
Capital
Expenditures
|
|
|
$ |
234 |
|
|
$ |
359 |
|
See
Notes to the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
The
Dow Chemical Company and Subsidiaries
|
Consolidated Balance Sheets |
|
|
March
31,
|
|
|
Dec.
31, |
|
In
millions (Unaudited)
|
|
2009
|
|
|
2008
|
|
Assets
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,956 |
|
|
$ |
2,800 |
|
Accounts
and notes receivable:
|
|
|
|
|
|
|
|
|
Trade
(net of allowance for doubtful receivables - 2009: $141; 2008:
$124)
|
|
|
3,819 |
|
|
|
3,782 |
|
Other
|
|
|
2,714 |
|
|
|
3,074 |
|
Inventories
|
|
|
5,916 |
|
|
|
6,036 |
|
Deferred
income tax assets - current
|
|
|
201 |
|
|
|
368 |
|
Total
current assets
|
|
|
15,606 |
|
|
|
16,060 |
|
Investments
|
|
|
|
|
|
|
|
|
Investment
in nonconsolidated affiliates
|
|
|
2,627 |
|
|
|
3,204 |
|
Other
investments
|
|
|
2,165 |
|
|
|
2,245 |
|
Noncurrent
receivables
|
|
|
336 |
|
|
|
276 |
|
Total
investments
|
|
|
5,128 |
|
|
|
5,725 |
|
Property
|
|
|
|
|
|
|
|
|
Property
|
|
|
47,370 |
|
|
|
48,391 |
|
Less
accumulated depreciation
|
|
|
33,547 |
|
|
|
34,097 |
|
Net
property
|
|
|
13,823 |
|
|
|
14,294 |
|
Other
Assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
3,392 |
|
|
|
3,394 |
|
Other
intangible assets (net of accumulated amortization - 2009: $853; 2008:
$825)
|
|
|
813 |
|
|
|
829 |
|
Deferred
income tax assets - noncurrent
|
|
|
3,865 |
|
|
|
3,900 |
|
Asbestos-related
insurance receivables - noncurrent
|
|
|
657 |
|
|
|
658 |
|
Deferred
charges and other assets
|
|
|
875 |
|
|
|
614 |
|
Total
other assets
|
|
|
9,602 |
|
|
|
9,395 |
|
Total
Assets
|
|
$ |
44,159 |
|
|
$ |
45,474 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Equity
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$ |
844 |
|
|
$ |
2,360 |
|
Long-term
debt due within one year
|
|
|
1,223 |
|
|
|
1,454 |
|
Accounts
payable:
|
|
|
|
|
|
|
|
|
Trade
|
|
|
2,885 |
|
|
|
3,306 |
|
Other
|
|
|
1,972 |
|
|
|
2,227 |
|
Income
taxes payable
|
|
|
305 |
|
|
|
637 |
|
Deferred
income tax liabilities - current
|
|
|
64 |
|
|
|
88 |
|
Dividends
payable
|
|
|
141 |
|
|
|
411 |
|
Accrued
and other current liabilities
|
|
|
2,318 |
|
|
|
2,625 |
|
Total
current liabilities
|
|
|
9,752 |
|
|
|
13,108 |
|
Long-Term
Debt
|
|
|
10,897 |
|
|
|
8,042 |
|
Other
Noncurrent Liabilities
|
|
|
|
|
|
|
|
|
Deferred
income tax liabilities - noncurrent
|
|
|
613 |
|
|
|
746 |
|
Pension
and other postretirement benefits - noncurrent
|
|
|
5,420 |
|
|
|
5,466 |
|
Asbestos-related
liabilities - noncurrent
|
|
|
800 |
|
|
|
824 |
|
Other
noncurrent obligations
|
|
|
2,998 |
|
|
|
3,208 |
|
Total
other noncurrent liabilities
|
|
|
9,831 |
|
|
|
10,244 |
|
Preferred
Securities of Subsidiaries
|
|
|
500 |
|
|
|
500 |
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
2,453 |
|
|
|
2,453 |
|
Additional
paid-in capital
|
|
|
825 |
|
|
|
872 |
|
Retained
earnings
|
|
|
16,896 |
|
|
|
17,013 |
|
Accumulated
other comprehensive loss
|
|
|
(4,674 |
) |
|
|
(4,389 |
) |
Treasury
stock at cost
|
|
|
(2,384 |
) |
|
|
(2,438 |
) |
The
Dow Chemical Company's stockholders' equity
|
|
|
13,116 |
|
|
|
13,511 |
|
Noncontrolling
interests
|
|
|
63 |
|
|
|
69 |
|
Total
equity
|
|
|
13,179 |
|
|
|
13,580 |
|
Total
Liabilities and Equity
|
|
$ |
44,159 |
|
|
$ |
45,474 |
|
See
Notes to the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
The
Dow Chemical Company and Subsidiaries
|
|
|
|
Three
Months Ended
|
|
|
March
31,
|
|
|
March
31,
|
|
In
millions (Unaudited)
|
|
2009
|
|
|
2008
|
|
Operating
Activities
|
|
|
|
|
|
|
Net
Income
|
|
$ |
35 |
|
|
$ |
965 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
508 |
|
|
|
574 |
|
Provision
(Credit) for deferred income tax
|
|
|
(83 |
) |
|
|
64 |
|
Earnings
of nonconsolidated affiliates less than dividends received
|
|
|
496 |
|
|
|
45 |
|
Pension
contributions
|
|
|
(51 |
) |
|
|
(43 |
) |
Net
loss (gain) on sale of consolidated companies
|
|
|
10 |
|
|
|
(18 |
) |
Net
loss (gain) on sales of investments
|
|
|
2 |
|
|
|
(18 |
) |
Net
gain on sales of property and businesses
|
|
|
(10 |
) |
|
|
(25 |
) |
Other
net loss
|
|
|
- |
|
|
|
1 |
|
Restructuring
charges
|
|
|
19 |
|
|
|
- |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
and notes receivable
|
|
|
(23 |
) |
|
|
(689 |
) |
Inventories
|
|
|
120 |
|
|
|
(786 |
) |
Accounts
payable
|
|
|
(614 |
) |
|
|
326 |
|
Other
assets and liabilities
|
|
|
(486 |
) |
|
|
51 |
|
Cash
provided by (used in) operating activities
|
|
|
(77 |
) |
|
|
447 |
|
Investing
Activities
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(234 |
) |
|
|
(359 |
) |
Proceeds
from sales of property, businesses and consolidated
companies
|
|
|
33 |
|
|
|
88 |
|
Acquisitions
of businesses
|
|
|
(5 |
) |
|
|
- |
|
Purchase
of previously leased assets
|
|
|
- |
|
|
|
(10 |
) |
Investments
in consolidated companies
|
|
|
(7 |
) |
|
|
(31 |
) |
Investments
in nonconsolidated affiliates
|
|
|
(17 |
) |
|
|
(27 |
) |
Distributions
from nonconsolidated affiliates
|
|
|
3 |
|
|
|
2 |
|
Purchases
of investments
|
|
|
(108 |
) |
|
|
(285 |
) |
Proceeds
from sales and maturities of investments
|
|
|
159 |
|
|
|
332 |
|
Cash
used in investing activities
|
|
|
(176 |
) |
|
|
(290 |
) |
Financing
Activities
|
|
|
|
|
|
|
|
|
Changes
in short-term notes payable
|
|
|
(1,564 |
) |
|
|
559 |
|
Proceeds
from revolving credit facility
|
|
|
3,000 |
|
|
|
- |
|
Payments
on long-term debt
|
|
|
(367 |
) |
|
|
(57 |
) |
Proceeds
from issuance of long-term debt
|
|
|
74 |
|
|
|
5 |
|
Purchases
of treasury stock
|
|
|
(5 |
) |
|
|
(411 |
) |
Proceeds
from sales of common stock
|
|
|
- |
|
|
|
21 |
|
Payment
of deferred financing costs
|
|
|
(265 |
) |
|
|
- |
|
Distributions
to noncontrolling interests
|
|
|
(23 |
) |
|
|
(22 |
) |
Dividends
paid to stockholders
|
|
|
(388 |
) |
|
|
(395 |
) |
Cash
provided by (used in) financing activities
|
|
|
462 |
|
|
|
(300 |
) |
Effect
of Exchange Rate Changes on Cash
|
|
|
(53 |
) |
|
|
80 |
|
Summary
|
|
|
|
|
|
|
|
|
Increase
(Decrease) in cash and cash equivalents
|
|
|
156 |
|
|
|
(63 |
) |
Cash
and cash equivalents at beginning of year
|
|
|
2,800 |
|
|
|
1,736 |
|
Cash
and cash equivalents at end of period
|
|
$ |
2,956 |
|
|
$ |
1,673 |
|
See
Notes to the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
The
Dow Chemical Company and Subsidiaries
|
|
|
|
Three Months Ended
|
|
|
March
31,
|
|
|
March
31,
|
|
In
millions (Unaudited)
|
|
2009
|
|
|
2008
|
|
Common
Stock
|
|
|
|
|
|
|
Balance
at beginning of year and end of period
|
|
$ |
2,453 |
|
|
$ |
2,453 |
|
Additional
Paid-in Capital
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
872 |
|
|
|
902 |
|
Stock-based
compensation
|
|
|
(47 |
) |
|
|
45 |
|
Balance
at end of period
|
|
|
825 |
|
|
|
947 |
|
Retained
Earnings
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
17,013 |
|
|
|
18,004 |
|
Net
income attributable to The Dow Chemical Company
|
|
|
24 |
|
|
|
941 |
|
Dividends
declared on common stock (Per share: $0.15 in 2009, $0.42 in
2008)
|
|
|
(139 |
) |
|
|
(391 |
) |
Other
|
|
|
(2 |
) |
|
|
(12 |
) |
Balance
at end of period
|
|
|
16,896 |
|
|
|
18,542 |
|
Accumulated
Other Comprehensive Income (Loss), Net of Tax
|
|
|
|
|
|
|
|
|
Unrealized
Gains (Losses) on Investments at beginning of year
|
|
|
(111 |
) |
|
|
71 |
|
Unrealized
losses
|
|
|
(24 |
) |
|
|
(29 |
) |
Balance
at end of period
|
|
|
(135 |
) |
|
|
42 |
|
Cumulative
Translation Adjustments at beginning of year
|
|
|
221 |
|
|
|
723 |
|
Translation
adjustments
|
|
|
(384 |
) |
|
|
573 |
|
Balance
at end of period
|
|
|
(163 |
) |
|
|
1,296 |
|
Pension
and Other Postretirement Benefit Plans at beginning of
year
|
|
|
(4,251 |
) |
|
|
(989 |
) |
Adjustments
to pension and other postretirement benefit plans
|
|
|
5 |
|
|
|
14 |
|
Pension
and Other Postretirement Benefit Plans at end of period
|
|
|
(4,246 |
) |
|
|
(975 |
) |
Accumulated
Derivative Gain (Loss) at beginning of year
|
|
|
(248 |
) |
|
|
25 |
|
Net
hedging results
|
|
|
(61 |
) |
|
|
22 |
|
Reclassification
to earnings
|
|
|
179 |
|
|
|
5 |
|
Balance
at end of period
|
|
|
(130 |
) |
|
|
52 |
|
Total
accumulated other comprehensive income (loss)
|
|
|
(4,674 |
) |
|
|
415 |
|
Treasury
Stock
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
(2,438 |
) |
|
|
(1,800 |
) |
Purchases
|
|
|
(5 |
) |
|
|
(411 |
) |
Issuance
to employees and employee plans
|
|
|
59 |
|
|
|
33 |
|
Balance
at end of period
|
|
|
(2,384 |
) |
|
|
(2,178 |
) |
The
Dow Chemical Company's Stockholders' Equity
|
|
|
13,116 |
|
|
|
20,179 |
|
Noncontrolling
Interests
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
69 |
|
|
|
414 |
|
Net
income attributable to noncontrolling interests
|
|
|
11 |
|
|
|
24 |
|
Other
|
|
|
(17 |
) |
|
|
(8 |
) |
Balance
at end of period
|
|
|
63 |
|
|
|
430 |
|
Total
Equity
|
|
$ |
13,179 |
|
|
$ |
20,609 |
|
See
Notes to the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
The
Dow Chemical Company and Subsidiaries
|
|
|
|
Three Months Ended
|
|
|
March
31,
|
|
|
March
31,
|
|
In
millions (Unaudited)
|
|
2009
|
|
|
2008
|
|
Net
Income
|
|
$ |
35 |
|
|
$ |
965 |
|
Other
Comprehensive Income (Loss), Net of Tax
|
|
|
|
|
|
|
|
|
Net
unrealized losses on investments
|
|
|
(24 |
) |
|
|
(29 |
) |
Translation
adjustments
|
|
|
(384 |
) |
|
|
573 |
|
Adjustments
to pension and other postretirement benefit plans
|
|
|
5 |
|
|
|
14 |
|
Net
gains on cash flow hedging derivative instruments
|
|
|
118 |
|
|
|
27 |
|
Total
other comprehensive income (loss)
|
|
|
(285 |
) |
|
|
585 |
|
Comprehensive
Income (Loss)
|
|
|
(250 |
) |
|
|
1,550 |
|
Comprehensive
income attributable to noncontrolling interests, net of
tax
|
|
|
11 |
|
|
|
24 |
|
Comprehensive
Income (Loss) Attributable to The Dow Chemical Company
|
|
$ |
(261 |
) |
|
$ |
1,526 |
|
See
Notes to the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
The Dow Chemical Company and
Subsidiaries
|
|
|
PART I – FINANCIAL
INFORMATION, Item 1. Financial Statements.
|
|
(Unaudited) |
|
|
NOTE
A – CONSOLIDATED FINANCIAL STATEMENTS
The
unaudited interim consolidated financial statements of The Dow Chemical Company
and its subsidiaries (“Dow” or the “Company”) were prepared in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”) and reflect all adjustments (including normal recurring accruals)
which, in the opinion of management, are considered necessary for the fair
presentation of the results for the periods presented. These statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008.
NOTE
B – RECENT ACCOUNTING PRONOUNCEMENTS
Accounting
for Noncontrolling Interests
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 160,
“Noncontrolling Interests in Consolidated Financial Statements - an
amendment of ARB No. 51.” The Statement established accounting and
reporting standards for noncontrolling interests in a subsidiary and for
deconsolidation of a subsidiary. The Statement was effective January 1, 2009 for
the Company. The retrospective presentation and disclosure requirements outlined
by SFAS No. 160 have been incorporated into this Quarterly Report on Form
10-Q for the interim period ended March 31, 2009.
The
implementation of SFAS No. 160 revised all previous references to “minority
interests” in the consolidated financial statement to “noncontrolling
interests,” and resulted in the following changes:
·
|
The
Consolidated Statements of Income now present “Net Income,” which includes
“Net income attributable to noncontrolling interests” and “Net Income
Attributable to The Dow Chemical Company.” “Net Income Attributable to The
Dow Chemical Company” is equivalent to the previously reported “Net Income
Available for Common Stockholders.” No change was required to the
presentation of earnings per share.
|
·
|
The
Consolidated Balance Sheets now present “Noncontrolling interests” as a
component of “Total equity.” “Noncontrolling interests” is equivalent to
the previously reported “Minority Interest in Subsidiaries.” “The Dow
Chemical Company’s stockholders’ equity” is equivalent to the previously
reported “Net stockholders’ equity.”
|
·
|
The
Consolidated Statements of Comprehensive Income now present “Comprehensive
Income,” which includes “Comprehensive income attributable to
noncontrolling interests” and “Comprehensive Income Attributable to The
Dow Chemical Company.” “Comprehensive Income Attributable to The Dow
Chemical Company” is equivalent to the previously reported “Comprehensive
Income.”
|
·
|
The
Consolidated Statements of Cash Flows now begin with “Net Income” instead
of “Net Income Available for Common Stockholders.”
|
·
|
Interim
Consolidated Statements of Equity have been added to fulfill the
disclosure requirements of SFAS
No. 160.
|
Other
Accounting Pronouncements
In
February 2008, the FASB issued FASB Staff Position (“FSP”) No.
FAS 157-2, “Effective Date of FASB Statement No. 157,” which delayed
the effective date of SFAS No. 157, “Fair Value Measurements,” for
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis, to fiscal years beginning after November 15, 2008. On
January 1, 2009, the Company adopted SFAS No. 157 for these assets and
liabilities. Since the Company’s existing fair value measurements for
nonfinancial assets and nonfinancial liabilities are consistent with the
guidance of the Statement, the adoption of the Statement did not have a material
impact on the Company’s consolidated financial statements.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities - an amendment of SFAS
No. 133.” The Statement requires enhanced disclosures about an entity’s
derivative and hedging activities. The Statement was effective for fiscal years
and interim periods beginning after November 15, 2008, which was
January 1, 2009 for the Company. The Company’s enhanced disclosures are
included in Note G.
In June
2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) Issue
No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities.” The FSP addresses whether
instruments granted in share-based payment transactions are participating
securities prior to vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share under the two-class method. The FSP
affects entities that accrue dividends on share-based payment awards during the
awards’ service period when the dividends do not need to be returned if the
employees forfeit the award. This FSP was effective for fiscal years beginning
after December 15, 2008, which was January 1, 2009 for the Company.
The adoption of the FSP did not have a material impact on the Company’s
consolidated financial statements.
In
April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies.” The FSP requires that assets acquired and liabilities assumed in
a business combination that arise from contingencies be recognized at fair value
per SFAS No. 157, if the acquisition-date fair value can be reasonably
determined. If the fair value cannot be reasonably determined, then the asset or
liability should be recognized in accordance with SFAS No. 5, “Accounting
for Contingencies,” and FASB Interpretation (“FIN”) No. 14,
“Reasonable Estimation of the Amount of a Loss - an interpretation of FASB
Statement No. 5.” The FSP also requires new disclosures for the assets and
liabilities within the scope of the FSP. The Company is applying the guidance of
the FSP to business combinations completed on or after January 1, 2009. See
Note O for disclosures related to a recent business
combination.
Accounting
Standards Issued But Not Yet Adopted
In
December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’
Disclosures about Postretirement Benefit Plan Assets.” The FSP requires new
disclosures on investment policies and strategies, categories of plan assets,
fair value measurements of plan assets, and significant concentrations of risk,
and is effective for fiscal years ending after December 15, 2009, with
earlier application permitted. The Company will include the required disclosures
in the Company’s Annual Report on Form 10-K for the annual period ending
December 31, 2009.
In
April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments.” The FSP amends SFAS
No. 107, "Disclosures about Fair Value of Financial Instruments" and
Accounting Principles Board (“APB”) Opinion No. 28, “Interim Financial
Reporting,” to require disclosures about the fair value of financial instruments
during interim reporting periods. The FSP is effective for interim and annual
periods ending after June 15, 2009, which is June 30, 2009 for the
Company. The Company will include the required disclosures in the Company’s
Quarterly Report on Form 10-Q for the interim period ending June 30,
2009.
In
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2,
“Recognition and Presentation of Other-Than-Temporary Impairments.” The FSP
amends the other-than-temporary impairment guidance for debt securities to make
the guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments on debt and equity securities. The FSP is
effective for interim and annual periods ending after June 15, 2009, which
is June 30, 2009 for the Company. The FSP is not anticipated to have a
material impact on the Company’s consolidated financial statements.
In
April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly.” The FSP provides
additional guidance for estimating fair value when the market activity for an
asset or liability has declined significantly. The FSP is effective for interim
and annual periods ending after June 15, 2009, which is June 30, 2009
for the Company. The FSP is not anticipated to have a material impact on the
Company’s consolidated financial statements.
NOTE
C – RESTRUCTURING
2008
Restructuring
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 to be completed 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 was shown as
“Restructuring charges” in the 2008 consolidated statements of
income.
The
severance component of the 2008 restructuring charges of $321 million was
for the separation of approximately 3,000 employees under the terms of
Dow’s ongoing benefit arrangements, primarily over two years. At
December 31, 2008 a liability of $319 million remained for
approximately 2,965 employees. During the first quarter of 2009, the
Company increased the severance reserve by a net amount of $19 million,
including approximately 500 additional employees. In the first quarter of
2009, severance of $123 million was paid to 1,448 employees, leaving a
liability of $210 million for 2,033 employees at March 31,
2009.
The
following table summarizes 2009 activities related to the Company’s 2008
restructuring reserve:
2009
Activities Related to 2008 Restructuring
In
millions
|
|
Costs
associated
with
Exit or
Disposal
Activities
|
|
|
Severance
Costs
|
|
|
Total
|
|
Reserve
balance at December 31, 2008
|
|
$ |
128 |
|
|
$ |
319 |
|
|
$ |
447 |
|
Adjustment
to reserve
|
|
|
- |
|
|
|
19 |
|
|
|
19 |
|
Cash
payments
|
|
|
- |
|
|
|
(123 |
) |
|
|
(123 |
) |
Foreign
currency impact
|
|
|
- |
|
|
|
(5 |
) |
|
|
(5 |
) |
Reserve
balance at March 31, 2009
|
|
$ |
128 |
|
|
$ |
210 |
|
|
$ |
338 |
|
2007
Restructuring
On
December 3, 2007, the Company’s Board of Directors approved a restructuring plan
that includes the shutdown of a number of assets and organizational changes
within targeted support functions to improve the efficiency and cost
effectiveness of the Company’s global operations. As a result of these shutdowns
and organizational changes, which are scheduled to be completed by the end of
2009, the Company recorded pretax restructuring charges totaling
$590 million in the fourth quarter of 2007. The charges consisted of asset
write-downs and write-offs of $422 million, costs associated with exit or
disposal activities of $82 million and severance costs of $86 million.
The impact of the charges was shown as “Restructuring charges” in the 2007
consolidated statements of income.
The
severance component of the 2007 restructuring charges of $86 million was
for the separation of approximately 978 employees under the terms of Dow’s
ongoing benefit arrangements, primarily over two years. At December 31,
2008, a liability of $37 million remained for approximately 527 employees.
In the first quarter of 2009, severance of $12 million was paid to
102 employees, leaving a liability of $24 million for
425 employees at March 31, 2009.
Cash
payments of $18 million were made in the first quarter of 2009 related to
contract termination fees.
The
following table summarizes 2009 activities related to the Company’s 2007
restructuring reserve:
2009
Activities Related to 2007 Restructuring
In
millions
|
|
Costs
associated
with
Exit or
Disposal
Activities
|
|
|
Severance
Costs
|
|
|
Total
|
|
Reserve
balance at December 31, 2008
|
|
$ |
93 |
|
|
$ |
37 |
|
|
$ |
130 |
|
Cash
payments
|
|
|
(18 |
) |
|
|
(12 |
) |
|
|
(30 |
) |
Foreign
currency impact
|
|
|
1 |
|
|
|
(1 |
) |
|
|
- |
|
Reserve
balance at March 31, 2009
|
|
$ |
76 |
|
|
$ |
24 |
|
|
$ |
100 |
|
2006
Restructuring
On
August 29, 2006, the Company’s Board of Directors approved a plan to shut
down a number of assets around the world as the Company continues its drive to
improve the competitiveness of its global operations. As a consequence of these
shutdowns, which were completed in the first quarter of 2009, and other
optimization activities, the Company recorded pretax restructuring charges
totaling $591 million in 2006. The charges consisted of asset write-downs
and write-offs of $346 million, costs associated with exit or disposal
activities of $172 million and severance costs of $73 million. The
impact of the charges was shown as “Restructuring charges” in the 2006
consolidated statements of income.
The
severance component of the 2006 restructuring charges of $73 million was
for the separation of approximately 810 employees under the terms of Dow’s
ongoing benefit arrangements, primarily over two years. At December 31,
2008, a liability of $14 million remained for approximately 215 employees.
In the first quarter of 2009, severance of $4 million was paid to
40 employees, leaving a liability of $10 million for
175 employees at March 31, 2009.
The
following table summarizes 2009 activities related to the Company’s 2006
restructuring reserve:
2009
Activities Related to 2006 Restructuring
In
millions
|
|
Costs
associated
with
Exit or
Disposal
Activities
|
|
|
Severance
Costs
|
|
|
Total
|
|
Reserve
balance at December 31, 2008
|
|
$ |
92 |
|
|
$ |
14 |
|
|
$ |
106 |
|
Cash
payments
|
|
|
(3 |
) |
|
|
(4 |
) |
|
|
(7 |
) |
Foreign
currency impact
|
|
|
(1 |
) |
|
|
- |
|
|
|
(1 |
) |
Reserve
balance at March 31, 2009
|
|
$ |
88 |
|
|
$ |
10 |
|
|
$ |
98 |
|
NOTE
D – ACQUISITIONS
Acquisition-Related
Expenses
During
the first quarter of 2009, pretax charges totaling $48 million were
recorded for legal expense and other transaction costs related to the
April 1, 2009 acquisition of Rohm and Haas Company (“Rohm and Haas”); these
charges were reflected in Unallocated and Other. These charges were expensed in
accordance with Statement of Financial Accounting Standards No. 141
(revised 2007), “Business Combinations” (“SFAS 141R”).
Subsequent
Event
See
Note O for information on the acquisition of Rohm and Haas on April 1,
2009.
NOTE
E – INVENTORIES
The
following table provides a breakdown of inventories:
Inventories
In
millions
|
|
March
31,
2009
|
|
|
Dec.
31,
2008
|
|
Finished
goods
|
|
$ |
3,239 |
|
|
$ |
3,351 |
|
Work
in process
|
|
|
1,215 |
|
|
|
1,217 |
|
Raw
materials
|
|
|
823 |
|
|
|
830 |
|
Supplies
|
|
|
639 |
|
|
|
638 |
|
Total
inventories
|
|
$ |
5,916 |
|
|
$ |
6,036 |
|
The
reserves reducing inventories from the first-in, first-out (“FIFO”) basis to the
last-in, first-out (“LIFO”) basis amounted to $381 million at
March 31, 2009 and $627 million at December 31,
2008.
NOTE
F – GOODWILL AND OTHER INTANGIBLE ASSETS
The
following table shows the carrying amount of goodwill by operating
segment:
Goodwill
In
millions
|
|
Performance
Plastics
|
|
|
Performance
Chemicals
|
|
|
Agricultural
Sciences
|
|
|
Basic
Plastics
|
|
|
Hydrocarbons
and
Energy
|
|
|
Total
|
|
Balance
at December 31, 2008
|
|
$ |
874 |
|
|
$ |
1,001 |
|
|
$ |
1,391 |
|
|
$ |
65 |
|
|
$ |
63 |
|
|
$ |
3,394 |
|
Adjustment
to goodwill related to the 2008 acquisition of Dairyland Seed Co.,
Inc.
|
|
|
- |
|
|
|
- |
|
|
|
(2 |
) |
|
|
- |
|
|
|
- |
|
|
|
(2 |
) |
Balance
at March 31, 2009
|
|
$ |
874 |
|
|
$ |
1,001 |
|
|
$ |
1,389 |
|
|
$ |
65 |
|
|
$ |
63 |
|
|
$ |
3,392 |
|
Goodwill
Impairments
During
the fourth quarter of 2008, the Company recorded an estimated goodwill
impairment loss of $209 million for the Dow Automotive reporting unit. As
required by SFAS No. 142, “Goodwill and Other Intangible Assets,” the
second step of goodwill impairment testing to determine the implied fair value
of goodwill for the Dow Automotive reporting unit was finalized in the first
quarter of 2009 and no adjustment was required to be made to the estimated
impairment loss based on completion of the allocation process.
The
following table provides information regarding the Company’s other intangible
assets:
Other
Intangible Assets
|
|
At
March 31, 2009
|
|
|
At
December 31, 2008
|
|
In
millions
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Intangible
assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
and intellectual property
|
|
$ |
309 |
|
|
$ |
(197 |
) |
|
$ |
112 |
|
|
$ |
316 |
|
|
$ |
(192 |
) |
|
$ |
124 |
|
Patents
|
|
|
139 |
|
|
|
(101 |
) |
|
|
38 |
|
|
|
139 |
|
|
|
(100 |
) |
|
|
39 |
|
Software
|
|
|
719 |
|
|
|
(373 |
) |
|
|
346 |
|
|
|
700 |
|
|
|
(363 |
) |
|
|
337 |
|
Trademarks
|
|
|
174 |
|
|
|
(63 |
) |
|
|
111 |
|
|
|
169 |
|
|
|
(61 |
) |
|
|
108 |
|
Other
|
|
|
325 |
|
|
|
(119 |
) |
|
|
206 |
|
|
|
330 |
|
|
|
(109 |
) |
|
|
221 |
|
Total
|
|
$ |
1,666 |
|
|
$ |
(853 |
) |
|
$ |
813 |
|
|
$ |
1,654 |
|
|
$ |
(825 |
) |
|
$ |
829 |
|
The
following table provides information regarding amortization
expense:
Amortization
Expense
|
Three Months Ended
|
In
millions
|
March
31,
2009
|
March
31,
2008
|
Other
intangible assets, excluding software
|
$22
|
$22
|
Software,
included in “Cost of sales”
|
$14
|
$11
|
Total
estimated amortization expense for 2009 and the five succeeding fiscal years is
as follows:
Estimated
Amortization Expense
In
millions
|
2009
|
$140
|
2010
|
$143
|
2011
|
$132
|
2012
|
$114
|
2013
|
$93
|
2014
|
$85
|
NOTE
G – FINANCIAL INSTRUMENTS
Risk
Management
Dow's
business operations give rise to market risk exposure due to changes in interest
rates, foreign currency exchange rates, commodity prices and other market
factors such as equity prices. To manage such risks effectively, the Company
enters into hedging transactions, pursuant to established guidelines and
policies, which enable it to mitigate the adverse effects of financial market
risk. Derivatives used for this purpose are designated as cash flow, fair value
or net foreign investment hedges per SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended and interpreted,
where appropriate. SFAS No. 133 requires companies to recognize all
derivative instruments as either assets or liabilities at fair value in the
consolidated balance sheets. A secondary objective is to add value by creating
additional nonspecific exposures within established limits and policies;
derivatives used for this purpose are not designated as hedges per SFAS
No. 133. The potential impact of creating such additional exposures is not
material to the Company's results.
The
Company’s risk management program for interest rate, foreign currency and
commodity risks is based on fundamental, mathematical and technical models that
take into account the implicit cost of hedging. Risks created by derivative
instruments and the mark-to-market valuations of positions are strictly
monitored at all times, using value at risk and stress tests. Credit
risk arising from these contracts is not significant because the Company
minimizes counterparty concentration, deals primarily with major financial
institutions of solid credit quality, and the majority of its hedging
transactions mature in less than three months. In addition, the Company
minimizes concentrations of credit risk through its global orientation in
diverse businesses with a large number of diverse customers and suppliers. It is
the Company’s policy not to have credit-risk-related contingent features in its
derivative instruments. The Company does not anticipate losses from credit risk
and the net cash requirements arising from risk management activities are not
expected to be material in 2009. No significant concentration of credit risk
existed at March 31, 2009.
The
Company reviews its overall financial strategies and the impacts from using
derivatives in its risk management program with the Company’s Board of Directors
and revises its strategies as market conditions dictate.
Interest
Rate Risk Management
The
Company enters into various interest rate contracts with the objective of
lowering funding costs or altering interest rate exposures related to fixed and
variable rate obligations. In these contracts, the Company agrees with other
parties to exchange, at specified intervals, the difference between fixed and
floating interest amounts calculated on an agreed-upon notional principal
amount.
Foreign
Currency Risk Management
The
Company’s global operations require active participation in foreign exchange
markets. The Company enters into foreign exchange forward contracts, options and
cross-currency swaps to hedge various currency exposures or create desired
exposures. Exposures primarily relate to assets, liabilities and bonds
denominated in foreign currencies, as well as economic exposure, which is
derived from the risk that currency fluctuations could affect the dollar value
of future cash flows related to operating activities. The primary business
objective of the activity is to optimize the U.S. dollar value of the Company’s
assets, liabilities and future cash flows with respect to exchange rate
fluctuations. Assets and liabilities denominated in the same foreign currency
are netted, and only the net exposure is hedged. At March 31, 2009, the
Company had forward contracts, options and cross-currency swaps to buy, sell or
exchange foreign currencies. These contracts had various expiration dates,
primarily in the second quarter of 2009.
Commodity
Risk Management
The
Company has exposure to the prices of commodities in its procurement of certain
raw materials. The primary purpose of commodity hedging activities is to manage
the price volatility associated with these forecasted inventory purchases. At
March 31, 2009, the Company had futures contracts, options and swaps to
buy, sell or exchange commodities. These agreements had various expiration dates
primarily in 2009.
Accounting
for Derivative Instruments and Hedging Activities
Cash
Flow Hedges
For
derivative instruments that are designated and qualify as cash flow hedges, the
effective portion of the gain or loss on the derivative is recorded in
“Accumulated other comprehensive income (loss)” (“AOCI”); it is reclassified to
“Cost of sales” in the same period or periods that the hedged transaction
affects income. The unrealized amounts in AOCI fluctuate based on changes in the
fair value of open contracts at the end of each reporting period. The Company
anticipates volatility in AOCI and net income from its cash flow hedges. The
amount of volatility varies with the level of derivative activities and market
conditions during any period. Gains and losses on the derivative representing
either hedge ineffectiveness or hedge components excluded from the assessment of
effectiveness are recognized in current period income.
The
net loss from previously terminated interest rate cash flow hedges included in
AOCI at March 31, 2009 was $7 million after tax ($9 million after
tax at December 31, 2008). The Company had open interest rate derivatives
with a U.S. dollar equivalent of $14 million at March 31,
2009.
At
March 31, 2009, the Company had open foreign currency forward contracts in
a net gain position of $2 million (net gain position of $9 million at
December 31, 2008) designated as cash flow hedges of underlying forecasted
purchases of feedstocks. Current open contracts hedge forecasted transactions
until December 2009. The effective portion of the mark-to-market effects of the
foreign currency forward contracts is recorded in AOCI; it is reclassified to
income in the same period or periods that the underlying feedstock purchase
affects income. The net gain from the foreign currency hedges included in AOCI
at March 31, 2009 was $5 million after tax ($15 million after tax
at December 31, 2008). At March 31, 2009, the Company had open forward
contracts with various expiration dates to buy, sell or exchange foreign
currencies with a U.S. dollar equivalent of $2,957 million.
Commodity
swaps, futures and option contracts with maturities of not more than 36 months
are utilized and designated as cash flow hedges of forecasted commodity
purchases. Current open contracts hedge forecasted transactions until March
2010. The effective portion of the mark-to-market effects of the cash flow hedge
instruments is recorded in AOCI; it is reclassified to income in the same period
or periods that the underlying commodity purchase affects income. The net loss
from commodity hedges included in AOCI at March 31, 2009 was
$114 million after tax (net loss of $239 million after tax at
December 31, 2008). At March 31, 2009, the Company had an aggregate of
0.8 million barrels of outstanding notional volume of crude oil on
commodity forward contracts to hedge forecasted purchases.
Fair
Value Hedges
For
derivative instruments that are designated and qualify as fair value hedges, the
gain or loss on the derivative as well as the offsetting loss or gain on the
hedged item attributable to the hedged risk are recognized in current period
income and reflected as “Interest expense and amortization of debt discount” in
the consolidated statements of income. The short-cut method under SFAS No. 133
is used when the criteria are met. The Company had no open interest rate swaps
designated as fair value hedges of underlying fixed rate debt obligations at
March 31, 2009 and December 31, 2008.
Net
Foreign Investment Hedges
For
derivative instruments that are designated and qualify as net foreign investment
hedges, the effective portion of the gain or loss on the derivative is included
in “Cumulative Translation Adjustments” in AOCI. The results of hedges of the
Company’s net investment in foreign operations included in “Cumulative
Translation Adjustments” in AOCI was a net gain of $46 million after tax at
March 31, 2009 (net gain of $36 million after tax at December 31,
2008). At March 31, 2009, the Company had open forward contracts or
outstanding options to buy, sell or exchange foreign currencies with
April 2009 expiration dates with a U.S. dollar equivalent of
$198 million. At March 31, 2009, the Company had outstanding
foreign-currency denominated debt designated as a hedge of net foreign
investment of $1,190 million.
Other
Derivative Instruments
The
Company utilizes futures, options and swap instruments that are effective as
economic hedges of commodity price exposures, but do not meet the hedge
accounting criteria of SFAS No. 133. At March 31, 2009, the Company
had net derivative assets of $8 million and net derivative liabilities of
$7 million related to these instruments, with the related mark-to-market
effects included in “Cost of sales” in the consolidated statements of income. At
December 31, 2008, the Company had net derivative assets of
$19 million and net derivative liabilities of $17 million related to
these instruments. The Company had no outstanding commodity forward contracts at
March 31, 2009.
The
Company also uses foreign exchange forward contracts, options and cross-currency
swaps that are not designated as hedging instruments primarily to manage foreign
currency and interest rate exposure. At March 31, 2009, the Company had net
derivative assets of $68 million ($111 million at December 31,
2008) and net derivative liabilities of $110 million ($160 million at
December 31, 2008) related to these instruments. The Company had open
forward contracts, options and cross-currency swaps with various expiration
dates to buy, sell or exchange foreign currencies with a U.S. dollar equivalent
of $9,677 million at March 31, 2009.
The
following table provides the fair value and gross balance sheet classification
of derivative instruments at March 31, 2009 and December 31,
2008:
Fair
Value of Derivative Instruments In millions
|
Balance
Sheet Classification
|
|
March
31,
2009
|
|
|
Dec.
31,
2008
|
|
Asset
Derivatives
|
|
|
|
|
|
|
|
Derivatives
designated as hedges:
|
|
|
|
|
|
|
|
Foreign
currency
|
Accounts
and notes receivable – Other
|
|
$ |
44 |
|
|
$ |
77 |
|
Commodities
|
Accounts
and notes receivable – Other
|
|
|
79 |
|
|
|
68 |
|
Total
derivatives designated as hedges
|
|
|
$ |
123 |
|
|
$ |
145 |
|
Derivatives
not designated as hedges:
|
|
|
|
|
|
|
|
|
|
Foreign
currency
|
Accounts
and notes receivable – Other
|
|
$ |
114 |
|
|
$ |
235 |
|
Commodities
|
Accounts
and notes receivable – Other
|
|
|
37 |
|
|
|
63 |
|
Total
derivatives not designated as hedges
|
|
|
$ |
151 |
|
|
$ |
298 |
|
Total
asset derivatives
|
|
|
$ |
274 |
|
|
$ |
443 |
|
Liability
Derivatives
|
|
|
|
|
|
|
|
|
|
Derivatives
designated as hedges:
|
|
|
|
|
|
|
|
|
|
Foreign
currency
|
Accounts
payable – Other
|
|
$ |
47 |
|
|
$ |
69 |
|
Commodities
|
Accounts
payable – Other
|
|
|
171 |
|
|
|
262 |
|
Commodities
|
Other
noncurrent obligations
|
|
|
- |
|
|
|
22 |
|
Total
derivatives designated as hedges
|
|
|
$ |
218 |
|
|
$ |
353 |
|
Derivatives
not designated as hedges:
|
|
|
|
|
|
|
|
|
|
Foreign
currency
|
Accounts
payable – Other
|
|
$ |
156 |
|
|
$ |
284 |
|
Commodities
|
Accounts
payable – Other
|
|
|
36 |
|
|
|
61 |
|
Total
derivatives not designated as hedges
|
|
|
$ |
192 |
|
|
$ |
345 |
|
Total
liability derivatives
|
|
|
$ |
410 |
|
|
$ |
698 |
|
Effect
of Derivative Instruments for the three months ended March 31,
2009
In
millions
|
|
Change in
Unrealized
Gain (Loss)
in AOCI (1,2)
|
|
|
Income
Statement Classification
|
|
|
Gain (Loss) Reclassified
from AOCI to
Income (3)
|
|
|
Additional Loss Recognized in
Income (3,4)
|
|
Derivatives
designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rates
|
|
|
- |
|
|
Cost
of sales
|
|
|
$ |
(3 |
) |
|
|
- |
|
Commodities
|
|
$ |
(5 |
) |
|
Cost
of sales
|
|
|
|
(187 |
) |
|
$ |
(1 |
) |
Foreign
currency
|
|
|
(10 |
) |
|
Cost
of sales
|
|
|
|
11 |
|
|
|
- |
|
Net
foreign investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency
|
|
|
(3 |
) |
|
n/a |
|
|
|
- |
|
|
|
- |
|
Total
derivatives designated as hedges
|
|
$ |
(18 |
) |
|
|
|
|
|
$ |
(179 |
) |
|
$ |
(1 |
) |
Derivatives
not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency (5)
|
|
|
- |
|
|
Sundry
income – net
|
|
|
|
- |
|
|
$ |
(94 |
) |
Commodities
|
|
|
- |
|
|
Cost
of sales
|
|
|
|
- |
|
|
|
(1 |
) |
Total
derivatives not designated as hedges
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
$ |
(95 |
) |
Total
derivatives
|
|
$ |
(18 |
) |
|
|
|
|
|
$ |
(179 |
) |
|
$ |
(96 |
) |
(1)
|
Accumulated
other comprehensive income (loss)
(“AOCI”)
|
(2)
|
Net
unrealized gains/losses from hedges related to interest rates and
commodities are included in “Accumulated Derivative Gain (Loss) – Net
hedging results” in the consolidated statements of equity; net unrealized
gains/losses from hedges related to foreign currency (net of tax) are
included in “Cumulative Translation Adjustments – Translation adjustments”
in the consolidated statements of
equity.
|
(4)
|
Amounts
impacting income not related to AOCI reclassification; also includes
immaterial amounts of hedge
ineffectiveness.
|
(5)
|
Foreign
currency derivatives not designated as hedges under SFAS No. 133 are
offset by foreign exchange gains of $93 million resulting from the
underlying exposures of foreign currency denominated assets and
liabilities per SFAS No. 52, “Foreign Currency
Translation.”
|
The
net after-tax amounts to be reclassified from AOCI to income within the next 12
months are a $6 million loss for interest rate contracts, a
$108 million loss for commodity contracts and a $5 million gain for
foreign currency contracts.
NOTE
H – FAIR VALUE MEASUREMENTS
The
following table summarizes the bases used to measure certain assets and
liabilities at fair value on a recurring basis in the consolidated balance
sheets:
Basis
of Fair Value Measurements at March 31, 2009
In
millions
|
|
Quoted
Prices
in
Active
Markets
for Identical Items
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Counterparty
and Cash Collateral
Netting (1)
|
|
|
Total
|
|
Assets
at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities (2)
|
|
$ |
321 |
|
|
$ |
21 |
|
|
|
- |
|
|
$ |
342 |
|
Debt
securities (2)
|
|
|
- |
|
|
|
1,430 |
|
|
|
- |
|
|
|
1,430 |
|
Derivatives
relating to: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency
|
|
|
- |
|
|
|
158 |
|
|
$ |
(84 |
) |
|
|
74 |
|
Commodities
|
|
|
- |
|
|
|
116 |
|
|
|
(67 |
) |
|
|
49 |
|
Total
assets at fair value
|
|
$ |
321 |
|
|
$ |
1,725 |
|
|
$ |
(151 |
) |
|
$ |
1,895 |
|
Liabilities
at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
relating to: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency
|
|
|
- |
|
|
$ |
203 |
|
|
$ |
(84 |
) |
|
$ |
119 |
|
Commodities
|
|
|
- |
|
|
|
207 |
|
|
|
(67 |
) |
|
|
140 |
|
Total
liabilities at fair value
|
|
|
- |
|
|
$ |
410 |
|
|
$ |
(151 |
) |
|
$ |
259 |
|
(1)
|
Cash
collateral is classified as “Accounts and notes receivable – Other” in the
consolidated balance sheets. Amounts represent the effect of legally
enforceable master netting arrangements between the Company and its
counterparties and the payable or receivable for cash collateral held or
placed with the same counterparty.
|
(2)
|
The
Company’s investments in equity and debt securities are classified as
available-for-sale, and are included in “Other investments” in the
consolidated balance sheets.
|
(3)
|
See
Note G for the classification of derivatives in the consolidated
balance sheets.
|
For
assets and liabilities classified as Level 1 (measured using quoted prices
in active markets), the total fair value is either the price of the most recent
trade at the time of the market close or the official close price as defined by
the exchange in which the asset is most actively traded on the last trading day
of the period, multiplied by the number of units held without consideration of
transaction costs.
For
Level 2 assets and liabilities, the fair value is based on the price a
dealer would pay for the security or similar securities, adjusted for any terms
specific to that asset or liability. Market inputs are obtained from well
established and recognized vendors of market data and placed through
tolerance/quality checks. For long-term debt as well as derivative assets and
liabilities, the fair value is calculated using standard industry models used to
calculate the fair value of the various financial instruments based on
significant observable market inputs such as foreign exchange rates, commodity
prices, swap rates, interest rates, and implied volatilities obtained from
various market sources.
For
all other assets and liabilities for which observable inputs are used, fair
value is derived through the use of fair value models, such as a discounted cash
flow model or other standard pricing models. See Note G for further
information on the types of instruments used by the Company for risk
management.
Assets
and liabilities related to forward contracts, interest rate swaps, currency
swaps, options and other conditional or exchange contracts executed with the
same counterparty under a master netting arrangement are netted. Per the
guidance of FSP FIN No. 39-1, “Amendment of FASB Interpretation
No. 39,” collateral accounts are netted with corresponding assets and
liabilities. The Company had no cash collateral at March 31,
2009.
NOTE
I – COMMITMENTS AND CONTINGENT LIABILITIES
Litigation
Breast
Implant Matters
On
May 15, 1995, Dow Corning Corporation (“Dow Corning”), in which the Company is a
50 percent shareholder, voluntarily filed for protection under Chapter 11
of the Bankruptcy Code to resolve litigation related to Dow Corning’s breast
implant and other silicone medical products. On June 1, 2004, Dow Corning’s
Joint Plan of Reorganization (the “Joint Plan”) became effective and Dow Corning
emerged from bankruptcy. The Joint Plan contains release and injunction
provisions resolving all tort claims brought against various entities, including
the Company, involving Dow Corning’s breast implant and other silicone medical
products.
To
the extent not previously resolved in state court actions, cases involving Dow
Corning’s breast implant and other silicone medical products filed against the
Company were transferred to the U.S. District Court for the Eastern District of
Michigan (the “District Court”) for resolution in the context of the Joint Plan.
On October 6, 2005, all such cases then pending in the District Court against
the Company were dismissed. Should cases involving Dow Corning’s breast implant
and other silicone medical products be filed against the Company in the future,
they will be accorded similar treatment. It is the opinion of the Company’s
management that the possibility is remote that a resolution of all future cases
will have a material adverse impact on the Company’s consolidated financial
statements.
As
part of the Joint Plan, Dow and Corning Incorporated have agreed to provide a
credit facility to Dow Corning in an aggregate amount of $300 million. The
Company’s share of the credit facility is $150 million and is subject to
the terms and conditions stated in the Joint Plan. At March 31, 2009, no
draws had been taken against the credit facility.
DBCP
Matters
Numerous
lawsuits have been brought against the Company and other chemical companies,
both inside and outside of the United States, alleging that the manufacture,
distribution or use of pesticides containing dibromochloropropane (“DBCP”) has
caused personal injury and property damage, including contamination of
groundwater. It is the opinion of the Company’s management that the possibility
is remote that the resolution of such lawsuits will have a material adverse
impact on the Company’s consolidated financial statements.
Environmental
Matters
Accruals
for environmental matters are recorded when it is probable that a liability has
been incurred and the amount of the liability can be reasonably estimated, based
on current law and existing technologies. At March 31, 2009, the Company
had accrued obligations of $308 million for environmental remediation and
restoration costs, including $21 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. Inherent
uncertainties exist in these estimates primarily due to unknown conditions,
changing governmental regulations and legal standards regarding liability, and
emerging remediation technologies for handling site remediation and restoration.
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.
Midland
Site Environmental Matters
On
June 12, 2003, the Michigan Department of Environmental Quality (“MDEQ”)
issued a Hazardous Waste Operating License (the “License”) to the Company’s
Midland, Michigan manufacturing site (the “Midland site”), which included
provisions requiring the Company to conduct an investigation to determine the
nature and extent of off-site contamination in Midland area soils; Tittabawassee
and Saginaw River sediment and floodplain soils; and Saginaw Bay. The License
required the Company, by August 11, 2003, to propose a detailed Scope of
Work for the off-site investigation for the City of Midland and the
Tittabawassee River and floodplain for review and approval by the MDEQ. Revised
Scopes of Work were approved by the MDEQ on October 18, 2005. The Company
was required to submit a Scope of Work for the investigation of the Saginaw
River and Saginaw Bay by August 11, 2007. The Company submitted the Scope
of Work for the Saginaw River and Saginaw Bay on July 13, 2007. The Company
received a Notice of Deficiency dated August 29, 2007, from the MDEQ with
respect to the Scope of Work for the Saginaw River and Saginaw Bay. The Company
submitted a revised Scope of Work for the Saginaw River and Saginaw Bay to the
MDEQ on October 15, 2007. On February 1, 2008, the Company received an approval
with modification for the Saginaw River and Saginaw Bay Scope of Work. The
Company appealed the MDEQ’s approval with modification action in Midland Circuit
Court on February 21, 2008 and then by filing a Contested Case Petition
with the Michigan Office of Administrative Hearings and Rules on March 28,
2008. Following subsequent discussions between the Company and the MDEQ, a
Remedial Investigation Work Plan along with a revised Scope of Work for the
Saginaw River was submitted to the MDEQ on June 10, 2008. The Midland
Circuit Court matter has been stayed by agreement of the parties.
Discussions
between the Company and the MDEQ that occurred in 2004 and early 2005 regarding
how to proceed with off-site corrective action under the License resulted in the
execution of the Framework for an Agreement Between the State of Michigan and
The Dow Chemical Company (the “Framework”) on January 20, 2005. The Framework
committed the Company to propose a remedial investigation work plan by the end
of 2005, conduct certain studies, and take certain immediate interim remedial
actions in the City of Midland and along the Tittabawassee River.
Remedial
Investigation Work Plans
The
Company submitted Remedial Investigation Work Plans for the City of Midland and
for the Tittabawassee River on December 29, 2005. By letters dated
March 2, 2006 and April 13, 2006, the MDEQ provided two Notices of
Deficiency (“Notices”) to the Company regarding the Remedial Investigation Work
Plans. The Company responded, as required, to some of the items in the Notices
on May 1, 2006, and as required responded to the balance of the items and
submitted revised Remedial Investigation Work Plans on December 1, 2006. In
response to subsequent discussions with the MDEQ, the Company submitted further
revised Remedial Investigation Work Plans on September 17, 2007, for the
Tittabawassee River and on October 15, 2007, for the City of Midland. On
June 10, 2008, the Company submitted revised Human Health Risk Assessment
and Ecological Risk Assessment Work Plans for the Tittabawassee River in
addition to a Work Plan for the collection of fish for analysis in support of
the Human Health Risk Assessment Work Plan. Also on June 10, 2008, the
Company submitted the Remedial Investigation Work Plan for the Saginaw River and
the Saginaw Bay. The Company has not received comments on these
plans.
Studies
Conducted
On
July 12, 2006, the MDEQ approved the sampling for the first six miles of
the Tittabawassee River. On December 1, 2006, the MDEQ approved the
Sampling and Analysis Plan in Support of Bioavailability Study for Midland (the
“Plan”). The results of the Plan were provided to the MDEQ on March 22,
2007. On May 3, 2007, the MDEQ approved the GeoMorph® Pilot Site
Characterization Report for the first six miles and approved this approach for
the balance of the Tittabawassee River with some qualifications. On
July 12, 2007, the MDEQ approved, with qualifications, the sampling for the
next 11 miles of the Tittabawassee River. On March 1, 2008 the Company
submitted to the MDEQ the Tittabawassee River Site Characterization Report that
incorporated the data obtained from the 2006 and 2007 field investigations. On
June 30, 2008, the Company submitted the Lower Tittabawassee River Sampling
and Analysis Plan to the MDEQ. The Sampling and Analysis Plan was approved by
the MDEQ by letters dated July 10, 2008 and August 15, 2008. The
sampling work has been completed and the results are due to be submitted in a
report to MDEQ by June 1, 2009.
Interim
Remedial Actions
The
Company has been working with the MDEQ to implement Interim Response Activities
and Pilot Corrective Action Plans in specific areas in and along the
Tittabawassee River, where elevated levels of dioxins and furans were found
during the investigation of the first six miles of the river. In
September 2008, the Company and the MDEQ reached agreement to implement
pilot projects to evaluate their applicability to future actions.
Removal
Actions
On
June 27, 2007, the U.S. Environmental Protection Agency (“EPA”) sent a
letter to the Company demanding that the Company enter into consent orders under
Section 106 of the Comprehensive Environmental Response, Compensation, and
Liability Act (“CERCLA”) for three areas identified during investigation of the
first six miles of the Tittabawassee River as areas for interim remedial actions
under MDEQ oversight. The EPA sought a commitment that the Company immediately
engage in remedial actions to remove soils and sediments. Three removal orders
were negotiated and were signed on July 12, 2007, and the soil and sediment
removal work required by these orders has been completed. On November 15,
2007, the Company and the EPA entered into a CERCLA removal order requiring the
Company to remove sediment in the Saginaw River where elevated concentrations
were identified during investigative work conducted on the Saginaw River. The
sediment removal work was completed in December 2007. On July 11, 2008, the
Company and the EPA entered into a removal order under which the Company is
required to remove soil, pave a road and driveways, and clean homes along a
strip of land approximately 150 feet by 1,000 feet along the lower part of the
Tittabawassee River. The work required under this removal order was completed in
December 2008. On February 27, 2009, the Company and the EPA entered into a
removal order under which the Company is required to remove soil, pave a parking
lot at a township park, and further assess and cover or remove some soil on
residential properties that border the park. The work required under this order
is expected to be completed in mid-2009.
The
Framework also contemplates that the Company, the State of Michigan and other
federal and tribal governmental entities will negotiate the terms of an
agreement or agreements to resolve potential governmental claims against the
Company related to historical off-site contamination associated with the Midland
site. The Company and the governmental parties began to meet in the fall of 2005
and entered into a Confidentiality Agreement in December 2005. The Company
continues to conduct negotiations with the governmental parties under the
Federal Alternative Dispute Resolution Act.
On
September 12, 2007, the EPA issued a press release reporting that they were
withdrawing from the alternative dispute resolution process. On September 28,
2007, the Company entered into a Funding and Participation Agreement with the
natural resource damage trustees that addressed the Company’s payment of past
costs incurred by the trustees, payment of the costs of a trustee coordinator
and a process to review additional cooperative studies that the Company might
agree to fund or conduct with the natural resource damage trustees.
On
October 10, 2007, the EPA presented a Special Notice Letter to the Company
offering to enter into negotiations for an administrative order on consent for
the Company to conduct or fund a remedial investigation, a feasibility study,
interim remedial actions and a remedial design for the Tittabawassee River,
Saginaw River, and Saginaw Bay. The Company agreed to enter into negotiations
and submitted its Good Faith Offer to the EPA on December 10, 2007. On January
4, 2008, the EPA terminated negotiations under the Special Notice
Letter.
On
March 18, 2008, the Company and the natural resource damage trustees
entered into a Memorandum of Understanding to provide a mechanism for the
Company to fund cooperative studies related to the assessment of natural
resource damages. On April 7, 2008 the natural resource damage trustees
released for public review and comment their “Natural Resource Damage Assessment
Plan for the Tittabawassee River System Assessment Area.”
On
October 31, 2008, the EPA informed the Company that the Company would
receive a Special Notice Letter (“Letter”) on or about December 15, 2008
offering to enter into negotiations for an administrative order on consent for
the Company to conduct or fund a remedial investigation, a feasibility study and
a remedial design for the Tittabawassee River, Saginaw River and Saginaw Bay. On
November 18, 2008, the Company entered into a Confidentiality Agreement
with the EPA and the MDEQ regarding the Letter negotiations. On
December 15, 2008, the Company received the Letter from the EPA, proposing
that the Company enter into negotiations on an administrative order on consent
to perform a remedial investigation, a feasibility study, an engineering
evaluation, a cost analysis and a remedial design for the Tittabawassee River,
Saginaw River and Saginaw Bay. The December 15, 2008 Letter also included a
demand for $1.8 million for the EPA’s response costs through
October 31, 2008. On December 22, 2008, the Company indicated it was
willing to enter into negotiations, which have since commenced. On
February 13, 2009, the Company made a proposal to the EPA to perform the
work. Following the Company’s proposal, the EPA suspended discussions and sent
representatives to the mid-Michigan area to speak with the Company, MDEQ and
community stakeholders to discuss the situation and the process to date. The
Company is awaiting notification of if and when negotiations will
resume.
At
the end of 2008, the Company had an accrual for off-site corrective action of
$8 million (included in the total accrued obligation of $312 million
at December 31, 2008) based on the range of activities that the Company
proposed and discussed implementing with the MDEQ and which is set forth in the
Framework. At March 31, 2009, the accrual for off-site corrective action
was $9 million (included in the total accrued obligation of
$308 million at March 31, 2009).
Environmental
Matters Summary
It
is the opinion of the Company’s management that the possibility is remote that
costs in excess of those disclosed will have a material adverse impact on the
Company’s consolidated financial statements.
Asbestos-Related
Matters of Union Carbide Corporation
Union
Carbide Corporation (“Union Carbide”), a wholly owned subsidiary of the Company,
is and has been involved in a large number of asbestos-related suits filed
primarily in state courts during the past three decades. These suits principally
allege personal injury resulting from exposure to asbestos-containing products
and frequently seek both actual and punitive damages. The alleged claims
primarily relate to products that Union Carbide sold in the past, alleged
exposure to asbestos-containing products located on Union Carbide’s premises,
and Union Carbide’s responsibility for asbestos suits filed against a former
Union Carbide subsidiary, Amchem Products, Inc. (“Amchem”). In many cases,
plaintiffs are unable to demonstrate that they have suffered any compensable
loss as a result of such exposure, or that injuries incurred in fact resulted
from exposure to Union Carbide’s products.
Influenced
by the bankruptcy filings of numerous defendants in asbestos-related litigation
and the prospects of various forms of state and national legislative reform, the
rate at which plaintiffs filed asbestos-related suits against various companies,
including Union Carbide and Amchem, increased in 2001, 2002 and the first half
of 2003. Since then, the rate of filing has significantly abated. Union Carbide
expects more asbestos-related suits to be filed against Union Carbide and Amchem
in the future, and will aggressively defend or reasonably resolve, as
appropriate, both pending and future claims.
Based
on a study completed by Analysis, Research & Planning Corporation (“ARPC”)
in January 2003, Union Carbide increased its December 31, 2002
asbestos-related liability for pending and future claims for the 15-year period
ending in 2017 to $2.2 billion, excluding future defense and processing
costs. Since then, Union Carbide has compared current asbestos claim and
resolution activity to the results of the most recent ARPC study at each balance
sheet date to determine whether the accrual continues to be appropriate. In
addition, Union Carbide has requested ARPC to review Union Carbide’s historical
asbestos claim and resolution activity each November since 2004 to determine the
appropriateness of updating the most recent ARPC study.
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 for the 15-year period
ending in 2021 to $1.2 billion at December 31, 2006.
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
the asbestos-related liability for pending and future claims by $54 million
to $952 million, which covered the 15-year period ending in 2023, excluding
future defense and processing costs. 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.
Based
on Union Carbide’s review of 2009 activity, Union Carbide determined that no
adjustment to the accrual was required at March 31, 2009. Union Carbide’s
asbestos-related liability for pending and future claims was $910 million
at March 31, 2009. Approximately 22 percent of the recorded liability
related to pending claims and approximately 78 percent related to future
claims.
At
December 31, 2002, Union Carbide increased the receivable for insurance
recoveries related to its asbestos liability to $1.35 billion,
substantially exhausting its asbestos product liability coverage. The insurance
receivable related to the asbestos liability was determined by Union Carbide
after a thorough review of applicable insurance policies and the 1985 Wellington
Agreement, to which Union Carbide and many of its liability insurers are
signatory parties, as well as other insurance settlements, with due
consideration given to applicable deductibles, retentions and policy limits, and
taking into account the solvency and historical payment experience of various
insurance carriers. The Wellington Agreement and other agreements with insurers
are designed to facilitate an orderly resolution and collection of Union
Carbide’s insurance policies and to resolve issues that the insurance carriers
may raise.
In
September 2003, Union Carbide filed a comprehensive insurance coverage case, now
proceeding in the Supreme Court of the State of New York, County of New York,
seeking to confirm its rights to insurance for various asbestos claims and to
facilitate an orderly and timely collection of insurance proceeds. This lawsuit
was filed against insurers that are not signatories to the Wellington Agreement
and/or do not otherwise have agreements in place with Union Carbide regarding
their asbestos-related insurance coverage, in order to facilitate an orderly
resolution and collection of such insurance policies and to resolve issues that
the insurance carriers may raise. Although the lawsuit is continuing, through
the end of the first quarter of 2009, 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 March 31, 2009 and December 31, 2008. At
March 31, 2009 and December 31, 2008, 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 the
asbestos-related liability, Union Carbide had receivables for defense and
resolution costs submitted to insurance carriers for reimbursement as
follows:
Receivables
for Costs Submitted to Insurance Carriers
|
|
In
millions
|
|
March
31,
2009
|
|
|
Dec.
31,
2008
|
|
Receivables
for defense costs
|
|
$ |
26 |
|
|
$ |
28 |
|
Receivables
for resolution costs
|
|
|
245 |
|
|
|
244 |
|
Total
|
|
$ |
271 |
|
|
$ |
272 |
|
Union
Carbide expenses defense costs as incurred. The pretax impact for defense and
resolution costs, net of insurance, was $11 million in the first quarter of
2009 and $14 million in the first quarter of 2008 and was reflected in
“Cost of sales.”
After
a review of its insurance policies, with due consideration given to applicable
deductibles, retentions and policy limits, after taking into account the
solvency and historical payment experience of various insurance carriers;
existing insurance settlements; and the advice of outside counsel with respect
to the applicable insurance coverage law relating to the terms and conditions of
its insurance policies, Union Carbide continues to believe that its recorded
receivable for insurance recoveries from all insurance carriers is probable of
collection.
The
amounts recorded by Union Carbide for the asbestos-related liability and related
insurance receivable described above were based upon current, known facts.
However, future events, such as the number of new claims to be filed and/or
received each year, the average cost of disposing of each such claim, coverage
issues among insurers and the continuing solvency of various insurance
companies, as well as the numerous uncertainties surrounding asbestos litigation
in the United States, could cause the actual costs and insurance recoveries for
Union Carbide to be higher or lower than those projected or those
recorded.
Because
of the uncertainties described above, Union Carbide’s management cannot estimate
the full range of the cost of resolving pending and future asbestos-related
claims facing Union Carbide and Amchem. Union Carbide’s management believes that
it is reasonably possible that the cost of disposing of Union Carbide’s
asbestos-related claims, including future defense costs, could have a material
adverse impact on Union Carbide’s results of operations and cash flows for a
particular period and on the consolidated financial position of Union
Carbide.
It
is the opinion of Dow’s management that it is reasonably possible that the cost
of Union Carbide disposing of its asbestos-related claims, including future
defense costs, could have a material adverse impact on the Company’s results of
operations and cash flows for a particular period and on the consolidated
financial position of the Company.
Synthetic
Rubber Industry Matters
In
2003, the U.S., Canadian and European competition authorities initiated separate
investigations into alleged anticompetitive behavior by certain participants in
the synthetic rubber industry. Certain subsidiaries of the Company (but as to
the investigation in Europe only) have responded to requests for documents and
are otherwise cooperating in the investigations.
On
June 10, 2005, the Company received a Statement of Objections from the
European Commission (the “EC”) stating that it believed that the Company and
certain subsidiaries of the Company (the “Dow Entities”), together with other
participants in the synthetic rubber industry, engaged in conduct in violation
of European competition laws with respect to the butadiene rubber and emulsion
styrene butadiene rubber businesses. In connection therewith, on
November 29, 2006, the EC issued its decision alleging infringement of
Article 81 of the Treaty of Rome and imposed a fine of
Euro 64.575 million (approximately $85 million) on the Dow
Entities. Several other companies were also named and fined. In the fourth
quarter of 2006, the Company recognized a loss contingency of $85 million
related to the fine. The Company has appealed the EC’s decision. Subsequent to
the imposition of the fine, the Company and/or certain subsidiaries of the
Company became named parties in various related U.S., United Kingdom and Italian
civil actions.
Additionally,
on March 10, 2007, the Company received a Statement of Objections from the
EC stating that it believed that DuPont Dow Elastomers L.L.C. (“DDE”), a former
50:50 joint venture with E.I. du Pont de Nemours and Company (“DuPont”),
together with other participants in the synthetic rubber industry, engaged in
conduct in violation of European competition laws with respect to the
polychloroprene business. This Statement of Objections specifically names the
Company, in its capacity as a former joint venture owner of DDE. On
December 5, 2007, the EC announced its decision to impose a fine on the
Company, among others, in the amount of Euro 48.675 million
(approximately $70 million). The Company previously transferred its joint
venture ownership interest in DDE to DuPont in 2005, and DDE then changed its
name to DuPont Performance Elastomers L.L.C. (“DPE”). In February 2008, DuPont,
DPE and
the
Company each filed an appeal of the December 5, 2007 decision of the EC.
Based on the Company’s allocation agreement with DuPont, the Company’s share of
this fine, regardless of the outcome of the appeals, will not have a material
adverse impact on the Company’s consolidated financial statements.
Other
Litigation Matters
In
addition to breast implant, DBCP, environmental and synthetic rubber industry
matters, the Company is party to a number of other claims and lawsuits arising
out of the normal course of business with respect to commercial matters,
including product liability, governmental regulation and other actions. Certain
of these actions purport to be class actions and seek damages in very large
amounts. All such claims are being contested. Dow has an active risk management
program consisting of numerous insurance policies secured from many carriers at
various times. These policies provide coverage that will be utilized to minimize
the impact, if any, of the contingencies described above.
Summary
Except
for the possible effect of Union Carbide’s asbestos-related liability described
above, it is the opinion of the Company’s management that the possibility is
remote that the aggregate of all claims and lawsuits will have a material
adverse impact on the Company’s consolidated financial statements.
Purchase
Commitments
The
Company has numerous agreements for the purchase of ethylene-related products
globally. The purchase prices are determined primarily on a cost-plus basis.
Total purchases under these agreements were $1,502 million in 2008,
$1,624 million in 2007 and $1,356 million in 2006. The Company’s
take-or-pay commitments associated with these agreements at December 31,
2008 are included in the table below.
The
Company also has various commitments for take-or-pay and throughput agreements.
Such commitments are at prices not in excess of current market prices. The terms
of all but two of these agreements extend from one to 25 years. One agreement
has terms extending to 36 years and another has terms extending to 80 years. The
determinable future commitment for these agreements are included for 10 years in
the following table which presents the fixed and determinable portion of
obligations under the Company’s purchase commitments at December 31,
2008:
Fixed
and Determinable Portion of Take-or-Pay and
Throughput
Obligations at December 31, 2008
In
millions
|
|
2009
|
|
$ |
2,023 |
|
2010
|
|
|
1,708 |
|
2011
|
|
|
1,798 |
|
2012
|
|
|
1,392 |
|
2013
|
|
|
895 |
|
2014
and beyond
|
|
|
5,969 |
|
Total
|
|
$ |
13,785 |
|
In
addition to the take-or-pay obligations at December 31, 2008, the Company
had outstanding commitments which ranged from one to nine years for steam,
electrical power, materials, property and other items used in the normal course
of business of approximately $327 million. Such commitments were at prices
not in excess of current market prices.
Guarantees
The
Company provides a variety of guarantees as described more fully in the
following sections.
Guarantees
Guarantees
arise during the ordinary course of business from relationships with customers
and nonconsolidated affiliates when the Company undertakes an obligation to
guarantee the performance of others (via delivery of cash or other assets) if
specified triggering events occur. With guarantees, such as commercial or
financial contracts, non-performance by the guaranteed party triggers the
obligation of the Company to make payments to the beneficiary of the guarantee.
The majority of the Company’s guarantees relate to debt of nonconsolidated
affiliates, which have expiration dates ranging from less than one year to seven
years, and trade financing transactions in Latin America and Asia Pacific, which
typically expire within one year of their inception. The Company’s current
expectation is that future payment or performance related to the non-performance
of others is considered unlikely.
Residual
Value Guarantees
The
Company provides guarantees related to leased assets specifying the residual
value that will be available to the lessor at lease termination through sale of
the assets to the lessee or third parties.
The
following tables provide a summary of the final expiration, maximum future
payments and recorded liability reflected in the consolidated balance sheets for
each type of guarantee:
Guarantees
at March 31, 2009
In
millions
|
Final
Expiration
|
|
Maximum
Future Payments
|
|
|
Recorded
Liability
|
|
Guarantees
|
2014
|
|
$ |
452 |
|
|
$ |
16 |
|
Residual
value guarantees
|
2015
|
|
|
974 |
|
|
|
5 |
|
Total
guarantees
|
|
|
$ |
1,426 |
|
|
$ |
21 |
|
Guarantees
at December 31, 2008
In
millions
|
Final
Expiration
|
|
Maximum
Future Payments
|
|
|
Recorded
Liability
|
|
Guarantees
|
2014
|
|
$ |
330 |
|
|
$ |
23 |
|
Residual
value guarantees
|
2015
|
|
|
985 |
|
|
|
4 |
|
Total
guarantees
|
|
|
$ |
1,315 |
|
|
$ |
27 |
|
Asset
Retirement Obligations
The
Company has recognized asset retirement obligations for the following
activities: demolition and remediation activities at manufacturing
sites in the United States, Canada and Europe; capping activities at landfill
sites in the United States, Canada, Italy and Brazil; and asbestos encapsulation
as a result of planned demolition and remediation activities at manufacturing
and administrative sites in the United States, Canada and Europe.
The
aggregate carrying amount of asset retirement obligations recognized by the
Company was $104 million at March 31, 2009 and $106 million at
December 31, 2008. The discount rate used to calculate the Company’s asset
retirement obligation was 7.13 percent. These obligations are included in
the consolidated balance sheets as “Other noncurrent obligations.”
The
Company has not recognized conditional asset retirement obligations for which a
fair value cannot be reasonably estimated in its consolidated financial
statements. It is the opinion of the Company’s management that the possibility
is remote that such conditional asset retirement obligations, when estimable,
will have a material adverse impact on the Company’s consolidated financial
statements based on current costs.
NOTE
J – LONG-TERM DEBT
On
March 9, 2009 the Company borrowed $3 billion under its Five Year
Competitive Advance and Revolving Credit Facility Agreement, dated
April 24, 2006. The funds are due in April 2011 and bear interest at a
variable LIBOR-plus rate. The Company is using the funds to finance day-to-day
operations, to repay indebtedness maturing in the ordinary course of business
and for other general corporate purposes.
Annual
Installments on Long-Term Debt
for
Next Five Years
In
millions
|
2009
|
$1,148
|
2010
|
$1,027
|
2011
|
$4,472
|
2012
|
$1,008
|
2013
|
$611
|
2014
|
$135
|
Subsequent
Event
See
Note O for information on borrowing related to the acquisition of Rohm and
Haas on April 1, 2009.
NOTE
K – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Net
Periodic Benefit Cost for All Significant Plans
|
|
Three
Months Ended
|
|
In
millions
|
|
March
31,
2009
|
|
|
March
31,
2008
|
|
Defined
Benefit Pension Plans:
|
|
|
|
|
|
|
Service
cost
|
|
$ |
58 |
|
|
$ |
67 |
|
Interest
cost
|
|
|
238 |
|
|
|
241 |
|
Expected
return on plan assets
|
|
|
(288 |
) |
|
|
(310 |
) |
Amortization
of prior service cost
|
|
|
8 |
|
|
|
8 |
|
Amortization
of net loss
|
|
|
26 |
|
|
|
11 |
|
Net
periodic benefit cost
|
|
$ |
42 |
|
|
$ |
17 |
|
|
|
|
|
|
|
|
|
|
Other
Postretirement Benefits:
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
4 |
|
|
$ |
4 |
|
Interest
cost
|
|
|
29 |
|
|
|
30 |
|
Expected
return on plan assets
|
|
|
(4 |
) |
|
|
(7 |
) |
Amortization
of prior service credit
|
|
|
(1 |
) |
|
|
(1 |
) |
Net
periodic benefit cost
|
|
$ |
28 |
|
|
$ |
26 |
|
NOTE
L – STOCK-BASED COMPENSATION
The
Company grants stock-based compensation to employees under the Employees’ Stock
Purchase Plans (“ESPP”) and the 1988 Award and Option Plan (the “1988 Plan”) and
to non-employee directors under the 2003 Non-Employee Directors’ Stock Incentive
Plan.
During
the first quarter of 2009, employees subscribed to the right to purchase
10.5 million shares with a weighted-average exercise price of
$20.81 per share and a weighted-average fair value of $1.00 per share
under the ESPP.
During
the first quarter of 2009, the Company granted the following stock-based
compensation awards to employees under the 1988 Plan:
|
·
|
11.4 million
stock options with a weighted-average exercise price of $9.53 per
share and a weighted-average fair value of $2.60 per
share.
|
|
·
|
5.2 million
shares of deferred stock with a weighted-average fair value of
$9.50 per share.
|
During
the first quarter of 2009, the Company granted the following stock-based
compensation awards to non-employee directors under the 2003 Non-Employee
Directors’ Stock Incentive Plan:
|
·
|
53,600
shares of restricted stock with a weighted-average fair value of
$6.47 per share.
|
Total
unrecognized compensation cost at March 31, 2009, including unrecognized cost
related to the first quarter of 2009 activity, is provided in the following
table:
Total
Unrecognized Compensation Cost at March 31, 2009
|
In
millions
|
Unrecognized
Compensation
Cost
|
Weighted-average
Recognition
Period
|
ESPP
purchase rights
|
$8
|
6.5
months
|
Unvested
stock options
|
$54
|
0.76
year
|
Deferred
stock awards
|
$117
|
1.01
years
|
Performance
deferred stock awards
|
$8
|
0.58
year
|
NOTE
M – EARNINGS PER SHARE CALCULATIONS
Earnings
Per Share Calculations
|
Three
Months Ended
March
31, 2009
|
Three
Months Ended
March
31, 2008
|
In
millions, except per share amounts
|
Basic
|
Diluted
|
Basic
|
Diluted
|
Net
Income Attributable to The Dow Chemical Company
|
$24
|
$24
|
$941
|
$941
|
Weighted-average
common shares outstanding
|
925.4
|
925.4
|
942.1
|
942.1
|
Add
dilutive effect of stock options and awards
|
-
|
6.6
|
-
|
9.5
|
Weighted-average
common shares for EPS calculations
|
925.4
|
932.0
|
942.1
|
951.6
|
Earnings
per common share
|
$0.03
|
$0.03
|
$1.00
|
$0.99
|
Stock
options and deferred stock awards excluded from EPS calculations (1)
|
|
65.8
|
|
34.0
|
(1)
|
Outstanding
options to purchase shares of common stock and deferred stock awards that
were not included in the calculation of diluted earnings per share because
the effect of including them would have been
anti-dilutive.
|
NOTE
N – OPERATING SEGMENTS AND GEOGRAPHIC AREAS
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.
Transfers
of products between operating segments are generally valued at cost. However,
transfers of products to Agricultural Sciences from other segments are generally
valued at market-based prices; the revenues generated by these transfers in the
first three months of 2009 and 2008 were immaterial and eliminated in
consolidation.
Following
the April 1, 2009 acquisition of Rohm and Haas, the Company announced a new
management organization. As such, in the second quarter of 2009, the Company
will reevaluate the reportable operating segments. The Company also plans to
reevaluate its measure of profit or loss for segment reporting.
Operating
Segments
|
|
Three
Months Ended
|
In
millions
|
|
March
31,
2009
|
|
|
March
31,
2008
|
|
Sales
by operating segment
|
|
|
|
|
|
|
Performance
Plastics
|
|
$ |
2,435 |
|
|
$ |
3,963 |
|
Performance
Chemicals
|
|
|
1,517 |
|
|
|
2,323 |
|
Agricultural
Sciences
|
|
|
1,446 |
|
|
|
1,314 |
|
Basic
Plastics
|
|
|
1,847 |
|
|
|
3,492 |
|
Basic
Chemicals
|
|
|
801 |
|
|
|
1,559 |
|
Hydrocarbons
and Energy
|
|
|
988 |
|
|
|
2,165 |
|
Unallocated
and Other
|
|
|
53 |
|
|
|
8 |
|
Total
|
|
$ |
9,087 |
|
|
$ |
14,824 |
|
EBIT
(1) by operating
segment
|
|
|
|
|
|
|
|
|
Performance
Plastics
|
|
$ |
30 |
|
|
$ |
329 |
|
Performance
Chemicals
|
|
|
115 |
|
|
|
271 |
|
Agricultural
Sciences
|
|
|
338 |
|
|
|
331 |
|
Basic
Plastics
|
|
|
4 |
|
|
|
427 |
|
Basic
Chemicals
|
|
|
(92 |
) |
|
|
159 |
|
Hydrocarbons
and Energy
|
|
|
- |
|
|
|
- |
|
Unallocated
and Other
|
|
|
(236 |
) |
|
|
(132 |
) |
Total
|
|
$ |
159 |
|
|
$ |
1,385 |
|
Equity
in earnings (losses) of nonconsolidated affiliates by operating segment
(included in EBIT)
|
|
Performance
Plastics
|
|
$ |
2 |
|
|
$ |
18 |
|
Performance
Chemicals
|
|
|
11 |
|
|
|
95 |
|
Agricultural
Sciences
|
|
|
1 |
|
|
|
1 |
|
Basic
Plastics
|
|
|
13 |
|
|
|
42 |
|
Basic
Chemicals
|
|
|
40 |
|
|
|
97 |
|
Hydrocarbons
and Energy
|
|
|
(2 |
) |
|
|
22 |
|
Unallocated
and Other
|
|
|
- |
|
|
|
(1 |
) |
Total
|
|
$ |
65 |
|
|
$ |
274 |
|
(1)
|
The
Company uses EBIT (which Dow defines as earnings before interest, income
taxes and noncontrolling interests) as its measure of profit/loss for
segment reporting purposes. EBIT by operating segment includes all
operating items relating to the businesses; items that principally apply
to the Company as a whole are assigned to Unallocated and Other. A
reconciliation of EBIT to “Net Income Attributable to The Dow Chemical
Company” is provided
below:
|
|
|
Three
Months Ended
|
In
millions
|
|
March
31,
2009
|
|
|
March
31,
2008
|
|
EBIT
|
|
$ |
159 |
|
|
$ |
1,385 |
|
+
Interest income
|
|
|
12 |
|
|
|
24 |
|
- Interest
expense and amortization of debt discount
|
|
|
154 |
|
|
|
145 |
|
- Provision
(credit) for income taxes
|
|
|
(18 |
) |
|
|
299 |
|
- Net
income attributable to noncontrolling interests
|
|
|
11 |
|
|
|
24 |
|
Net
Income Attributable to The Dow Chemical Company
|
|
$ |
24 |
|
|
$ |
941 |
|
Geographic
Areas
|
|
Three
Months Ended
|
In
millions
|
|
March
31,
2009
|
|
|
March
31,
2008
|
|
Sales
by geographic area
|
|
|
|
|
|
|
United
States
|
|
$ |
2,964 |
|
|
$ |
4,658 |
|
Europe
|
|
|
3,289 |
|
|
|
5,858 |
|
Rest
of World
|
|
|
2,834 |
|
|
|
4,308 |
|
Total
|
|
$ |
9,087 |
|
|
$ |
14,824 |
|
NOTE
O – SUBSEQUENT EVENTS
Acquisition
of Rohm and Haas Company
On
April 1, 2009, the Company completed the acquisition of Rohm and Haas
Company (“Rohm and Haas”). Pursuant to the July 10, 2008 Agreement and Plan
of Merger (the “Merger Agreement”), Ramses Acquisition Corp., a direct wholly
owned subsidiary of the Company, merged with and into Rohm and Haas (the
“Merger”), with Rohm and Haas continuing as the surviving corporation becoming a
direct wholly owned subsidiary of the Company.
The
Company pursued the acquisition of Rohm and Haas to make the Company a 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
acquisition of Rohm and Haas is being accounted for under Statement of Financial
Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS
141R”), which was effective for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008, which was January 1, 2009 for the
Company.
Pursuant
to the terms and conditions of the Merger Agreement, each outstanding share of
Rohm and Haas common stock was converted into the right to receive cash of
$78 per share, plus additional cash consideration of $0.97 per share (the
“ticking fee”). The additional cash consideration represented 8 percent per
annum on the $78 per share consideration from January 10, 2009 to the
closing of the Merger, less dividends declared by Rohm and Haas with a dividend
record date between January 10, 2009 and the closing of the Merger. All
options to purchase shares of common stock of Rohm and Haas granted under the
Rohm and Haas stock option plans and all other Rohm and Haas equity-based
compensation awards, whether vested or unvested as of April 1, 2009, became
fully vested and converted into the right to receive cash of $78.97 per
share, less any applicable exercise price. Total cash consideration paid to Rohm
and Haas shareholders was $15.7 billion. As part of the purchase price of
$15,681 million, $552 million in cash was paid to the Rohm and Haas
Company Employee Stock Ownership Plan (“ESOP”) on April 1, 2009 for
7.0 million shares of Rohm and Haas common stock held by the
ESOP.
As
a condition of the United States Federal Trade Commission’s (“FTC”) approval of
the Merger, the Company is required to divest a portion of its acrylic monomer
business, a portion of its latex polymers business and its hollow sphere
particle business within eight months of the closing of the Merger. Total net
sales and cost of sales for these businesses amounted to approximately one
percent of the Company’s 2008 net sales and cost of sales. The divestiture of
these businesses is expected to have an immaterial impact on the Company’s
consolidated financial statements.
No
Rohm and Haas financial activity has been included in the Company’s consolidated
financial statements as of March 31, 2009.
The
following table provides pro forma results of operations for the three-month
periods ended March 31, 2009 and March 31, 2008 as if Rohm and Haas
had been acquired as of the beginning of each year. The unaudited pro forma
results reflect certain adjustments such as the preliminary estimated fair
values of the assets acquired and liabilities assumed from Rohm and Haas,
additional depreciation and amortization resulting from the fair value
adjustments, the elimination of sales between the Company and Rohm and Haas, the
divestiture of businesses as required by the FTC, the divestiture of the Rohm
and Haas salt business, and the additional interest costs on the acquisition
debt. The pro forma results do not include any anticipated cost synergies or
other effects of the planned integration of Rohm and Haas. Accordingly, such pro
forma amounts are not necessarily indicative of the results that actually would
have occurred had the acquisition been completed on the dates indicated, nor is
it indicative of the future operating results of the combined
company.
Pro
Forma Results
|
Three
Months Ended
|
In
millions
|
March
31,
2009
|
March
31,
2008
|
Net
Sales
|
$10,331
|
$16,640
|
Net
Income (Loss)
|
$(273)
|
$893
|
Net
Income (Loss) Available to The Dow Chemical Company Common
Stockholders
|
$(461)
|
$672
|
The
following table summarizes the preliminary estimated fair values of the assets
acquired and liabilities assumed from Rohm and Haas on April 1, 2009, based
on the current best estimates of management. Accordingly, the fair values of the
assets and liabilities included in the table below are subject to change. The
Company is in the process of finalizing its assessment of the fair value of the
assets acquired and liabilities assumed as well as the gross contractual amounts
receivable and the corresponding allowances. The completion of the fair
valuation of the assets acquired and liabilities assumed may result in
adjustments to the carrying value of Rohm and Haas’ assets and liabilities,
revisions of the
remaining
useful lives of fixed assets and/or revisions of the useful lives of intangible
assets, and the determination of any residual amounts that will be recognized as
goodwill. The related depreciation and amortization expense for the acquired
assets is therefore also subject to revision based on the final
valuation.
Assets
Acquired and Liabilities Assumed
In
millions
|
|
At
April 1, 2009
|
|
Purchase
Price
|
|
$ |
15,681 |
|
Fair
Value of Assets Acquired
|
|
|
|
|
Current
assets
|
|
$ |
2,912 |
|
Property
|
|
|
3,810 |
|
Other
intangible assets
|
|
|
4,545 |
|
Other
assets
|
|
|
1,153 |
|
Net
salt assets
|
|
|
1,570 |
|
Total
Assets Acquired
|
|
$ |
13,990 |
|
Fair
Value of Liabilities and Noncontrolling Interests Assumed
|
|
|
|
|
Current
liabilities
|
|
$ |
1,190 |
|
Long-term
debt
|
|
|
2,624 |
|
Accrued
and other liabilities and noncontrolling interests
|
|
|
686 |
|
Pension
benefits
|
|
|
914 |
|
Deferred
tax liabilities - noncurrent
|
|
|
2,067 |
|
Total
Liabilities and Noncontrolling Interests Assumed
|
|
$ |
7,481 |
|
Goodwill
|
|
$ |
9,172 |
|
Based
on a review of Rohm and Haas’ summary of significant accounting policies
disclosed in Rohm and Haas’ 2008 financial statements, as well as preliminary
discussions with Rohm and Haas management, the nature and amount of any
adjustments to conform the two companies’ accounting policies are not expected
to be significant. Further review of Rohm and Haas’ accounting policies to
conform the accounting policies of the two companies may impact actual
results.
Based
on preliminary estimates of the fair values of assets acquired and liabilities
assumed from Rohm and Haas, the acquisition will result in the recognition of
approximately $9.2 billion in goodwill. None of the goodwill is expected to
be deductible for tax purposes. Allocation of goodwill by segment will take
place in the second quarter of 2009.
Goodwill
largely consists of expected synergies resulting from the acquisition. Key areas
of cost savings include increased purchasing power for raw materials;
manufacturing and supply chain work process improvements; and the elimination of
redundant corporate overhead for shared services and governance. The Company
also anticipates that the transaction will produce significant growth synergies
through the application of each company’s innovative technologies and as a
consequence of the combined businesses’ broader product portfolio in key
industry segments with strong global growth rates.
Financing
for Rohm and Haas Acquisition
Financing
for the acquisition of Rohm and Haas includes debt financing and preferred stock
as follows.
Debt
Financing
Debt
financing for the acquisition was provided by a $9,226 million draw on a
Term Loan Agreement (“Term Loan”) on April 1, 2009. The Term Loan matures
on April 1, 2010, provided however, that the original maturity date may be
extended for an additional year at the option of the Company, for a maximum
outstanding balance of $8.0 billion. The actual interest rate of the Term
Loan and the resulting fees that the Company will ultimately pay for the Term
Loan can vary significantly and are dependent on the current short-term interest
rates in effect, the mode of borrowing (Base Rate or Eurodollar), the Company’s
actual current long-term debt rating by Moody’s and Standard & Poor’s, the
outstanding amount of the Term Loan at the end of each fiscal quarter, and the
progress toward key targets such as the issuance of equity financing, among
other factors. Prepaid up-front debt issuance costs of $304 million will be
amortized over the 24-month term of the Term Loan. The Term Loan is expected to
be repaid through a combination of proceeds obtained through asset sales, the
issuance of debt securities and/or the issuance of equity
securities.
Preferred
Stock
Cumulative
Convertible Perpetual Preferred Stock, Series A
Equity
securities in the form of Cumulative Convertible Perpetual Preferred Stock,
Series A (“preferred series A”) were issued on April 1, 2009 to
Berkshire Hathaway Inc. in the amount of $3 billion (3 million shares)
and the Kuwait Investment Authority in the amount of $1 billion
(1 million shares). The Company will pay cumulative dividends on preferred
series A at a rate of 8.5 percent per annum in either cash, shares of
common stock, or any combination thereof, at the option of the Company.
Dividends may be deferred indefinitely, at the Company’s option. If deferred,
common stock dividends must also be deferred, subject to certain exceptions. Any
past due and unpaid dividends will accrue additional dividends at a rate of
10 percent per annum. If dividends are deferred for six quarters, the
preferred series A shareholders, as part of a class with other preferred
shareholders of the Company, may elect two directors to the Company’s Board of
Directors until all past due dividends are paid.
Shareholders
of preferred series A may convert all or any portion of their shares, at
their option, at any time, into shares of the Company’s common stock at an
initial conversion rate of 24.2010 shares of common stock for each share of
preferred series A. Under certain circumstances, the Company will be
required to adjust the conversion rate. On or after the fifth anniversary of the
issuance date, if the common stock price exceeds $53.72 per share for any
20 trading days in a consecutive 30-day window, the Company may, at its
option, at any time, in whole or in part, convert preferred series A into
common stock at the then applicable conversion rate.
Cumulative
Perpetual Preferred Stock, Series B
At
the time of the Merger, the Haas Family Trusts and Paulson & Co. Inc.
(“Paulson”) purchased from the Company Cumulative Perpetual Preferred Stock,
Series B (“preferred series B”) in the amount of 2.5 million
shares (Haas Family Trusts – 1.5 million shares; Paulson – 1.0 million
shares) for an aggregate price of $2.5 billion (Haas Family Trusts –
$1.5 billion; Paulson – $1.0 billion). The Company will pay cumulative
dividends on preferred series B at a rate of 7 percent per annum in
cash and 8 percent per annum either in cash or as an increase in the
liquidation preference of the preferred series B, at the Company’s option.
Dividends may be deferred indefinitely, at the Company’s option. If deferred,
common stock dividends are limited to a maximum of $0.01 per share, subject to
certain exceptions. Any past due cash dividends will accrue additional dividends
at a rate of 3 percent per annum which will be payable as an increase in
the liquidation preference of preferred series B. If dividends are deferred
for six quarters, the preferred series B shareholders, as part of a class
with other preferred shareholders of the Company, may elect two directors to the
Company’s Board of Directors until all past due dividends are paid.
Preferred
series B securities may, at the option of the preferred series B
shareholders, be redeemed on March 31, 2069 for either cash or common
stock, at the Company’s option. The Company may, at its option, after the fifth
anniversary of issuance but prior to March 31, 2069, redeem the shares for
cash. The Company has provided a covenant for the benefit of the holders of
certain of its long-term indebtedness that it will redeem the preferred
series B only out of the proceeds of an issuance of securities of equal or
greater equity content 180 days prior to the redemption.
Cumulative
Convertible Perpetual Preferred Stock, Series C
At
the time of the Merger, the Haas Family Trusts invested $500 million in
Cumulative Convertible Perpetual Preferred Stock, Series C (“preferred
series C”). Prior to June 1, 2009, the Company will pay cumulative
dividends on preferred series C at a rate of 7 percent per annum in
cash and 8 percent per annum either in cash or as an increase in the
liquidation preference of the preferred series C, at the Company’s option.
On and after June 1, 2009, if the preferred series C shares have not
been converted to common stock, the Company will be required to pay cumulative
dividends of 12 percent per annum in cash. Dividends may be deferred
indefinitely, at the Company’s option. If deferred, common stock dividends are
limited to a maximum of $0.01 per share, subject to certain exceptions. Any past
due cash dividends will accrue additional dividends at a rate of 3 percent
per annum which will be payable as an increase in the liquidation preference of
preferred series C. If dividends are deferred for six quarters, the
preferred series C shareholders, as part of a class with other preferred
shareholders of the Company, may elect two directors to the Company’s Board of
Directors until all past due dividends are paid.
At
any time following ten full trading days after April 1, 2009 and before
June 1, 2009, holders of preferred series C, at their option, may
convert their shares into shares of the Company’s common stock. The preferred
series C shares automatically convert to common stock on the date
immediately following the ten full trading days commencing on the date on which
there is an effective shelf registration statement relating to the common stock
underlying the preferred series C, if such registration statement is
effective prior to June 1, 2009. In either case, all shares of preferred
series C will convert into shares of the Company’s common stock at a
conversion price per share of common stock equal to 95 percent of the
average of the common stock volume-weighted average price for the ten trading
days preceding the conversion. On or after June 1, 2009, if the preferred
series C shares are still outstanding, the holders of preferred
series C, at their option, may convert their shares into shares of the
Company’s common stock at a conversion price per share of common stock equal to
110 percent of the lowest one-day volume-weighted average common stock
price observed during the period between April 1, 2009 and June 1,
2009.
Divestiture
of Rohm and Haas Salt Business
On
April 1, 2009, the Company announced the entry into a definitive agreement
to sell the stock of Morton International, Inc. (“Morton”), the salt business of
Rohm and Haas, to K+S Aktiengesellschaft. The transaction is subject to
customary closing conditions, including regulatory approval, and is expected to
close in mid-2009. The transaction values Morton at $1,675 million, with
proceeds subject to customary post-closing adjustments.
The Dow Chemical Company and
Subsidiaries
|
|
Analysis
of Financial Condition and Results of
Operations.
|
The
Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
forward-looking statements made by or on behalf of The Dow Chemical Company and
its subsidiaries (“Dow” or the “Company”). This section covers the current
performance and outlook of the Company and each of its operating segments. The
forward-looking statements contained in this section and in other parts of this
document involve risks and uncertainties that may affect the Company’s
operations, markets, products, services, prices and other factors as more fully
discussed elsewhere and in filings with the U.S. Securities and Exchange
Commission (“SEC”). These risks and uncertainties include, but are not limited
to, economic, competitive, legal, governmental and technological factors.
Accordingly, there is no assurance that the Company’s expectations will be
realized. The Company assumes no obligation to provide revisions to any
forward-looking statements should circumstances change, except as otherwise
required by securities and other applicable laws.
OVERVIEW
·
|
The
Company reported sales in the first quarter of 2009 of $9.1 billion,
down 39 percent from $14.8 billion in the first quarter of 2008.
Prices were down 20 percent and volume was down 19 percent,
reflecting deflation in feedstock and energy costs and worsening economic
conditions.
|
·
|
Purchased
feedstock and energy costs, which account for almost half of Dow’s total
costs, decreased 49 percent or $3.1 billion compared with the
first quarter of 2008.
|
·
|
Operating
expenses declined during the first quarter of 2009 as a result of
management’s cost cutting initiatives and actions taken related to the
2008 restructuring plan.
|
·
|
Equity
earnings were $65 million in the first quarter of 2009, down
significantly from the first quarter of 2008, and up compared with the
fourth quarter of 2008.
|
·
|
Capital
spending was $234 million in the first quarter of 2009, on track with
the full-year pre-acquisition target of $1.1 billion; debt as a
percent of total capitalization was 48.7 percent, up
3 percentage points from year-end 2008.
|
·
|
On
April 1, 2009, the Company completed the $15.7 billion
acquisition of Rohm and Haas Company, financed by $7 billion of
preferred equity securities and $9.2 billion of
debt.
|
Selected
Financial Data
|
Three
Months Ended
|
In
millions, except per share amounts
|
March
31,
2009
|
March
31,
2008
|
Net
sales
|
$9,087
|
$14,824
|
|
|
|
Cost
of sales
|
$8,165
|
$12,908
|
Percent
of net sales
|
89.9%
|
87.1%
|
|
|
|
Research
and development, and selling, general and administrative
expenses
|
$736
|
$829
|
Percent
of net sales
|
8.1%
|
5.6%
|
|
|
|
Net
Income Attributable to The Dow Chemical Company
|
$24
|
$941
|
|
|
|
Earnings
per common share – basic
|
$0.03
|
$1.00
|
Earnings
per common share – diluted
|
$0.03
|
$0.99
|
|
|
|
Operating
rate percentage
|
68%
|
86%
|
Net
sales for the first quarter of 2009 were $9.1 billion, down 39 percent
from $14.8 billion in the first quarter of last year. Compared with the
same quarter of 2008, prices decreased 20 percent, driven by decreases in
feedstock and energy costs. Double-digit price declines were reported in all
geographic areas and all operating segments with the exception of Performance
Chemicals where prices were down 7 percent and Agricultural Sciences where
prices were unchanged from the same quarter last year. Price declines were most
pronounced in Basic Plastics (35 percent) and Hydrocarbons and Energy
(41 percent), and from a geographic standpoint, in Europe
(26 percent). Compared with the first quarter of 2008, volume decreased
19 percent, driven by decreased global demand. Double-digit volume declines
were reported in all geographic areas and all operating segments with the
exception of Agricultural Sciences where volume increased
10 percent,
in part due to recent acquisitions. Volume declines were most pronounced in
Performance Plastics, Performance Chemicals and Basic Chemicals, all down
28 percent. For additional details regarding the change in net sales, see
the Sales Volume and Price table at the end of the section entitled “Segment
Results.”
Gross
margin was $922 million for the first quarter of 2009, down from
$1,916 million in the first quarter of last year. Despite lower feedstock
and energy costs (down approximately $3.1 billion or 49 percent), gross margin
declined due to lower selling prices and lower volume.
The
Company’s global plant operating rate (for its chemicals and plastics
businesses) was 68 percent in the first quarter of 2009, down from
86 percent in the first quarter of 2008. Operating rates declined across
most businesses, impacted by actions taken by management in response to lower
demand resulting from the slowing global economy.
Personnel
count was 43,567 at March 31, 2009, down from 46,102 at December 31,
2008 and 45,530 at March 31, 2008. Headcount decreased from year-end 2008
primarily due to actions taken related to the 2008 restructuring plan, which
accounted for 1,600 of the decline. Compared with year-end 2008, headcount was
also reduced by approximately 650 employees due to asset and business
divestitures, and approximately 170 employees transferred to a joint
venture.
Operating
expenses (research and development, and selling, general and administrative
expenses) totaled $736 million in the first quarter of 2009, down
$93 million from $829 million in the first quarter of last year.
Compared with last year, research and development (“R&D”) expenses decreased
$39 million, and selling, general and administrative (“SG&A”) expenses
decreased $54 million. Spending decreased in response to management’s cost
cutting initiatives and as a result of actions taken related to the 2008
restructuring plan.
During
the first quarter of 2009, pretax charges totaling $48 million were
recorded for legal expenses and other transaction costs related to the
April 1, 2009 acquisition of Rohm and Haas Company; these charges were
reflected in Unallocated and Other. These charges were expensed in accordance
with revised SFAS No. 141, “Business
Combinations.”
Amortization
of intangibles was $22 million in the first quarter of 2009, flat compared
with first quarter of last year. See Note F to the Consolidated Financial
Statements for additional information on 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. In the first quarter of 2009,
the Company recorded a pretax adjustment of $19 million to the 2008
restructuring charge for additional severance. The impact of the adjustment is
shown as “Restructuring charges” in the consolidated statements of income and is
reflected in Unallocated and Other. See Note C to the Consolidated
Financial Statements for details on the Company’s restructuring
activities.
Dow’s
share of the earnings of nonconsolidated affiliates was $65 million in the
first quarter of 2009, down significantly from $274 million in the first
quarter of last year. Equity earnings in the first quarter of 2009 were
negatively impacted by $29 million for the Company’s share of a
restructuring charge recognized by Dow Corning Corporation (“Dow Corning”) in
the first quarter. Compared with the same quarter of last year, earnings
declined at most of the Company’s principal joint ventures, as the joint
ventures also faced the overall decrease in global demand.
Sundry
income (expense) – 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 (expense) –
net for the first quarter of 2009 was net expense of $3 million, compared
with net income of $46 million in the same quarter of 2008, and reflected a
decrease in gains on the sale of miscellaneous assets, none of which were
material.
Net
interest expense (interest expense less capitalized interest and interest
income) was $142 million in the first quarter of 2009, compared with
$121 million in the first quarter of last year. Compared with last year,
interest income was down $12 million principally due to lower interest
rates on investments, while interest expense increased $9 million primarily
due to increased debt.
The
Company reported a tax benefit of $18 million in the first quarter of 2009
primarily due to audit settlements in the United States as well as the reversal
of tax valuation allowances in Asia Pacific. This compared with tax expense of
$299 million and an effective tax rate of 23.7 percent for the first
quarter of 2008. The Company’s effective tax rate fluctuates based on, among
other factors, where income is earned and the level of income relative to tax
credits available.
Net
income attributable to The Dow Chemical Company was $24 million or $0.03
per share for the first quarter of 2009, compared with $941 million or
$0.99 per share for the first quarter of 2008.
The
following table summarizes the impact of certain items recorded in the
three-month period ended March 31, 2009, and previously described in this
section:
|
|
Pretax
Impact (1)
|
|
|
Impact
on
Net Income (2)
|
|
|
Impact
on
EPS (3)
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
In
millions, except per share amounts
|
|
March
31,
2009
|
|
|
March
31,
2008
|
|
|
March
31,
2009
|
|
|
March.
31,
2008
|
|
|
March
31,
2009
|
|
|
March.
31,
2008
|
|
Restructuring
charges
|
|
$ |
(19 |
) |
|
|
- |
|
|
$ |
(17 |
) |
|
|
- |
|
|
$ |
(0.02 |
) |
|
|
- |
|
Acquisition-related
expenses
|
|
|
(48 |
) |
|
|
- |
|
|
|
(41 |
) |
|
|
- |
|
|
|
(0.04 |
) |
|
|
- |
|
Dow
Corning restructuring
|
|
|
(29 |
) |
|
|
- |
|
|
|
(27 |
) |
|
|
- |
|
|
|
(0.03 |
) |
|
|
- |
|
Total
|
|
$ |
(96 |
) |
|
|
- |
|
|
$ |
(85 |
) |
|
|
- |
|
|
$ |
(0.09 |
) |
|
|
- |
|
(1)
|
Impact
on “Income before Income Taxes”
|
(2)
|
Impact
on “Net Income Attributable to The Dow Chemical
Company”
|
(3)
|
Impact
on “Earnings per common share –
diluted”
|
On
April 1, 2009, the Company completed the acquisition of Rohm and Haas
Company (“Rohm and Haas”). Pursuant to the July 10, 2008 Agreement and Plan
of Merger (the “Merger Agreement”), Ramses Acquisition Corp., a direct wholly
owned subsidiary of the Company, merged with and into Rohm and Haas (the
“Merger”), with Rohm and Haas continuing as the surviving corporation becoming a
direct wholly owned subsidiary of the Company.
The
Company pursued the acquisition of Rohm and Haas to make the Company a 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.
Pursuant
to the terms and conditions of the Merger Agreement, each outstanding share of
Rohm and Haas common stock was converted into the right to receive cash of
$78 per share, plus additional cash consideration of $0.97 per share (the
“ticking fee”). The additional cash consideration represented 8 percent per
annum on the $78 per share consideration from January 10, 2009 to the
closing of the Merger, less dividends declared by Rohm and Haas with a dividend
record date between January 10, 2009 and the closing of the Merger. All
options to purchase shares of common stock of Rohm and Haas granted under the
Rohm and Haas stock option plans and all other equity-based compensation awards,
whether vested or unvested as of April 1, 2009, became fully vested and
converted into the right to receive cash of $78.97 per share, less any
applicable exercise price. Total cash consideration paid to Rohm and Haas
shareholders was $15.7 billion.
The
Company expects the transaction to create $1.3 billion in estimated pretax
annual cost synergies and savings including increased purchasing power for
raw materials; manufacturing and supply chain work process improvements; and the
elimination of redundant corporate overhead for shared services and governance.
The Company also anticipates that the transaction will produce significant
growth synergies through the application of each company’s innovative
technologies and as a consequence of the combined business’ broader product
portfolio in key industry segments with strong global growth rates.
See
Note O to the Consolidated Financial Statements for more information on
this transaction.
SEGMENT
RESULTS
The
Company uses EBIT (which Dow defines as earnings before interest, income taxes
and noncontrolling interests) as its measure of profit/loss for segment
reporting purposes. EBIT by operating segment includes all operating items
relating to the businesses; items that principally apply to the Company as a
whole are assigned to Unallocated. See Note N to the Consolidated Financial
Statements for a reconciliation of EBIT to “Net Income Attributable to The Dow
Chemical Company.” Following the April 1, 2009 acquisition of Rohm and
Haas, the Company announced a new management organization. As such, in the
second quarter of 2009, the Company will reevaluate the reportable operating
segments. The Company also plans to reevaluate its measure of profit or loss for
segment reporting.
PERFORMANCE
PLASTICS
Performance
Plastics sales were $2,435 million for the first quarter of 2009, down
39 percent from $3,963 million in the first quarter of 2008. Volume
declined 28 percent while prices declined 11 percent. The global
economic downturn drove double-digit volume declines in all geographic areas and
across all businesses in the segment with the exception of Technology Licensing
and Catalyst. The most significant volume decline was reported in Dow
Automotive, which suffered from the continued weakness in the global automotive
industry. EBIT for the segment totaled $30 million in the first quarter of
2009, down significantly from $329 million in the same period last year.
The impact of lower sales
volume
combined with falling prices and lower operating rates exceeded the benefit from
lower feedstock and raw material costs and lower freight and operating
expenses.
Dow
Automotive sales for the first quarter of 2009 were down 51 percent versus
the same quarter last year driven by a 46 percent decline in volume and a
5 percent decline in prices, primarily due to currency. Original equipment
manufacturers in North America and Europe, which the business serves,
experienced the largest volume declines. Despite lower operating expenses and
raw material costs, EBIT decreased significantly from the same quarter last
year, primarily due to lower prices and a sharp decline in volume. Restructuring
steps taken by the business, which included divesting Body Protection and
Damping, began to deliver cost improvement in the first quarter of 2009 and are
expected to increase during the course of the year.
Dow
Building Solutions sales in the first quarter of 2009 declined 29 percent
versus the same quarter last year as volume decreased 22 percent and prices
declined 7 percent, largely due to currency. The decline in volume was
driven by weakness in the residential housing industry, particularly in North
America and Eastern Europe where new housing starts were down significantly from
the same period last year. The commercial construction industry also showed
signs of weakness in North America due to tighter credit markets and oversupply
of available space. The revenue decline experienced by Dow Building Solutions,
while closely linked to industry conditions in Europe and North America, was
tempered by a broad portfolio of products serving residential, commercial and
do-it-yourself applications. EBIT declined primarily due to lower sales volume
and lower operating rates across the businesses’ manufacturing facilities. The
business took steps during the quarter to reduce spending while maintaining
focus on key development projects, including conversion to new foaming agent
technology for expandable polystyrene manufacturing plants in North
America.
Dow
Epoxy sales for the quarter were down 48 percent from the first quarter of
2008 as volume declined 33 percent and prices fell 15 percent. The
significant decline in volume was balanced across all geographic areas due to
weakness in the housing and consumer electronics industries. In addition,
tighter credit conditions negatively impacted the growth of wind farm
applications, and customer inventory de-stocking efforts were noted across
various sectors of the business. The decline in prices was also geographically
widespread, driven by low levels of demand and competitive pressure to secure
volumes. Compared with the first quarter of 2008, EBIT declined due to lower
margin on lower sales volume, the unfavorable impact of lower operating rates,
and the impact of lower prices which more than offset the benefit from reduced
feedstock costs.
Polyurethanes
and Polyurethane Systems sales for the quarter were down 34 percent from
the first quarter of 2008. Volume declined 18 percent while prices
decreased 16 percent (approximately one third due to currency). The severe
downturn in the global economy resulted in lower demand and reduced sales volume
across all geographic areas for polyurethane and polyurethane system products in
key applications including furniture, bedding, appliance and construction.
Prices fell due to declining demand with the most significant impacts in Europe
and Asia Pacific. EBIT for the business was significantly lower in the first
quarter of 2009 due to lower margin on declining sales volume and reduced
operating rates at manufacturing facilities, coupled with the significant impact
of declining prices which was only partially offset by lower feedstock and
energy and other raw material costs.
Specialty
Plastics and Elastomers sales in the first quarter of 2009 were down
38 percent from the same period last year. Volume declined 32 percent
and prices declined 6 percent. The decline in volume was relatively
consistent across the geographic areas as the business suffered from weakness in
global automotive, construction and optical media industries. The decline in
demand added pressure on pricing with the most significant impact reported in
Europe. EBIT for the business declined from a year ago due to reduced margin on
lower sales volumes and the unfavorable impact of lower operating rates.
Compared with the same period last year, feedstock and energy costs declined,
providing some relief.
Technology
Licensing and Catalyst sales for the first quarter of 2009 decreased
4 percent driven by lower royalties which are directly related to the
output of manufacturing facilities. The drop in revenue, combined with lower
equity earnings from Univation Technologies, LLC, resulted in reduced EBIT for
the business.
PERFORMANCE
CHEMICALS
Performance
Chemicals sales were $1,517 million for the first quarter of 2009, down
35 percent from $2,323 million in the first quarter of 2008. Compared
with last year, volume declined 28 percent and prices dropped
7 percent, including a 3 percent unfavorable currency impact. The drop
in prices was broad-based, with decreases reported in all geographic areas and
across all major product groups. The decrease in volume was also broad-based and
driven by global demand destruction, particularly in the housing and automotive
industries. EBIT for the first quarter of 2009 was $115 million, down
significantly from $271 million in the first quarter of 2008, as lower
sales volume and lower prices exceeded the benefit from lower raw material costs
and reduced operating expenses. EBIT for the first quarter of 2009 was reduced
by $29 million for the Company’s share of restructuring charges recognized
by Dow Corning.
Designed
Polymers sales for the first quarter of 2009 were down 24 percent from the
same quarter last year driven by a 22 percent decrease in volume and a
2 percent decrease in prices, primarily due to currency. The decrease in
volume was principally due to continued deterioration of demand in the housing
and construction industries and lower volume in Dow Water Solutions, partially
offset by higher volume in methyl cellulosics used in pharmaceutical
applications. Compared with the first quarter of last year, EBIT decreased as
the impact of lower sales and lower operating rates more than offset the benefit
of decreases in raw material costs and operating expenses.
Dow
Latex sales for the first quarter of 2009 were down 44 percent from the
first quarter of 2008, as volume decreased 35 percent and prices decreased
9 percent (with one third due to currency). Volume was down due to
continued softness in the housing industry and difficult conditions in the paper
industry. Paper and carpet latex prices were down in all geographic areas except
North America. Despite the decrease in volume and prices, EBIT for the first
quarter of 2009 increased compared with the same period last year, principally
due to lower raw material costs.
Specialty
Chemicals sales for the first quarter of 2009 were down 35 percent compared
with the same quarter last year as volume decreased 27 percent and prices
declined 8 percent. Volume decreased across all geographic areas, while
prices were lower across most product groups, driven by significant decreases in
raw material costs. EBIT was down significantly from the same quarter of last
year due to decreased selling prices and volume, as well as lower equity
earnings from the OPTIMAL Group of Companies (“OPTIMAL”).
AGRICULTURAL
SCIENCES
Agricultural
Sciences sales were $1,446 million in the first quarter of 2009, up
10 percent from $1,314 million in the first quarter of 2008, posting a
new quarterly sales record for the segment. Compared with the first quarter of
2008, volume improved 10 percent and prices were flat with a 6 percent
increase in selling prices offset by an unfavorable currency impact. Seed
business acquisitions in 2008 delivered excellent results, with Seeds, Traits
and Oils reporting growth of 75 percent in the first quarter of 2009
compared with the first quarter of 2008. Sales of new agricultural chemical
products nearly doubled compared with the first quarter of 2008, as sales
of penoxsulam rice herbicide and pyroxsulam cereal herbicide continued to
receive excellent channel support. North America and Asia Pacific recorded
strong sales increases of 38 percent and 6 percent respectively,
compared with the first quarter of 2008. EBIT for the first quarter of 2009 was
$338 million, also a new quarterly record for the segment, up from
$331 million in the first quarter of 2008 as the improvement in sales
volume exceeded increase in operating expenses related to growth
initiatives.
BASIC
PLASTICS
Basic
Plastics sales were $1,847 million for the first quarter of 2009, down
47 percent from $3,492 million in the first quarter of 2008. During
the fourth quarter of 2008, an unprecedented decline in feedstock costs and
growing concerns about the depth of the global economic downturn led to
significant price declines in all regions and product lines. The weakness in
demand and pricing continued into the first quarter of 2009, resulting in prices
that were 35 percent below those of the first quarter of 2008. Volume
improved modestly in the India, Middle East and Africa (“IMEA”) geographic area,
however weak economic conditions led to lower volume in all other geographic
areas, with volume declining 12 percent for the segment overall. Volume in
North America was significantly lower as a result of the May 2008 formation of
Americas Styrenics LLC. EBIT was $4 million for the first quarter of 2009,
down significantly from $427 million in the first quarter of 2008. While
the segment benefited from significantly lower feedstock and energy costs, and
lower freight costs, operating expenses and manufacturing costs, these were more
than offset by the collapse in prices. Equity earnings from EQUATE Petrochemical
Company K.S.C. (“EQUATE”) were also significantly lower than in the first
quarter of 2008.
Polyethylene
sales were down significantly from the first quarter of 2008, as prices
decreased 38 percent and volume decreased 4 percent. The decline in
feedstock costs during the fourth quarter of 2008 resulted in significant global
price declines that continued into the first quarter of 2009, although the
business did see slight improvement in prices over the course of the quarter.
Overall prices, however, remain significantly lower than in the first quarter of
2008. Volume was lower in all geographic areas except IMEA; however, as the
quarter progressed, the business saw modest volume improvement as a result of
customers restocking their depleted inventories. EBIT for the first quarter of
2009 declined significantly compared with the same period last year as the
favorable impact of lower feedstock and energy costs, and improved equity
earnings from Siam Polyethylene Company Limited and The Kuwait Olefins Company
K.S.C. were more than offset by the sharp decline in selling prices and lower
equity earnings from EQUATE.
Polypropylene
sales were down 53 percent from the first quarter of 2008 as prices
decreased 41 percent and volume declined 12 percent. Prices were
significantly lower in all geographic areas as a result of lower feedstock costs
and the impact of the global economic downturn. While volume was up slightly in
North America and Latin America, volume was significantly lower in Europe due to
lower demand for durables and an unplanned outage at Dow’s Wesseling, Germany
site. Europe reported stable demand for products used in food packaging, hygiene
and some film applications; however, demand for products used in the manufacture
of durable goods remained soft. EBIT was significantly lower than in the first
quarter of 2008 as the decline in prices and higher manufacturing costs related
to a turnaround more than offset a reduction in feedstock and energy
costs.
Polystyrene
sales for the first quarter of 2009 were down 66 percent as volume
decreased 44 percent and prices decreased 22 percent. In Europe,
volume for products used in packaging applications remained stable; however, the
automotive, construction, and appliance industries experienced continued
weakness. Volume in Asia Pacific, while lower than in the first quarter of 2008,
improved slightly during the quarter as customers began to restock and idle
industry capacity led to limited supply availability. In North America and Latin
America, volume was lower due to the May 2008 formation of Americas Styrenics
LLC. Significant price declines were seen in all geographic areas following the
decline in feedstock costs that occurred during the last months of 2008 and
continued into the first quarter of this year. EBIT improved slightly from the
first quarter of 2008 as the decrease in prices and equity losses from Americas
Styrenics LLC were more than offset by the favorable impact of lower feedstock
and energy costs, lower freight and lower manufacturing costs.
BASIC
CHEMICALS
Sales
for Basic Chemicals were $801 million for the first quarter of 2009
compared with $1,559 million for the first quarter of 2008. Sales decreased
49 percent as prices fell 21 percent and volume declined
28 percent. Prices and volume were down for all businesses, led by ethylene
glycol, where volume was down due to steep declines in demand and overcapacity
in the market. Caustic soda reported a significant decrease in volume as it
faced an oversupply in all geographic areas along with the impact of a plant
shutdown. Extended customer shutdowns, along with customer pulp and paper plant
closures and alumina refinery closures were the cause of the caustic volume
decline. Volume for vinyl chloride monomer (“VCM”), particularly in North
America and Europe, declined due to continued weakness in residential
construction and tight credit markets. The decline in VCM prices was a result of
a large inventory correction in the polyvinyl chloride industry in late 2008,
from which prices failed to recover, as well as the drop in feedstock and energy
costs. EBIT for the first quarter of 2009 was a loss of $92 million, compared
with EBIT of $159 million in the first quarter of 2008. Despite lower
feedstock and energy costs, EBIT declined due to lower prices and volume, lower
operating rates and a decline in equity earnings from EQUATE and OPTIMAL,
compared with the first quarter of 2008.
HYDROCARBONS
AND ENERGY
Hydrocarbons
and Energy sales were $988 million for the first quarter of 2009, down
54 percent from $2,165 million in the first quarter of 2008. Prices
decreased 41 percent, while volume decreased 13 percent. The sharp decrease
in selling prices was directly related to declines in crude oil and related
commodity prices, as well as the price impact of weak monomer demand. The
decrease in volume during the quarter was marked by relatively low ethylene
cracker operating rates, which impacted the volume of co-product sales, and
lower refinery sales due to a planned maintenance turnaround.
The
Company uses derivatives of crude oil and natural gas as feedstocks in its
ethylene facilities, while natural gas is used as fuel. The Company’s cost of
purchased feedstocks and energy decreased approximately $3.1 billion (or
49 percent) compared with same quarter last year.
The
Hydrocarbons and Energy business transfers materials to Dow’s derivatives
businesses at cost. As a result, EBIT for this operating segment was breakeven
for the first quarters of 2009 and 2008.
UNALLOCATED
AND OTHER
Included
in the results for Unallocated and Other are:
|
·
|
results
of insurance company operations,
|
|
·
|
gains
and losses on sales of financial assets,
|
|
·
|
stock-based
compensation expense and severance costs,
|
|
·
|
changes
in the allowance for doubtful receivables,
|
|
·
|
expenses
related to New Ventures,
|
|
·
|
asbestos-related
defense and resolution costs,
|
|
·
|
foreign
exchange hedging results, and
|
|
·
|
certain
overhead and other cost recovery variances not allocated to the operating
segments.
|
EBIT
for the first quarter of 2009 was a loss of $236 million, compared with a
loss of $132 million in the first quarter of 2008. EBIT for the first
quarter of 2009 was impacted by decreased earnings from insurance company
operations, spending related to the April 1, 2009 acquisition of Rohm and
Haas of $48 million and a net unfavorable adjustment to the 2008
restructuring plan of $19 million. These items were partially offset by a
decrease in performance-based compensation (including stock-based
compensation).
Sales
Volume and Price by Operating Segment and Geographic Area
|
|
|
|
Three
Months Ended
March
31, 2009
|
|
Percentage
change from prior year
|
|
Volume
|
|
|
Price
|
|
|
Total
|
|
Operating
segments
|
|
|
|
|
|
|
|
|
|
Performance
Plastics
|
|
|
(28 |
)% |
|
|
(11 |
)% |
|
|
(39 |
)% |
Performance
Chemicals
|
|
|
(28 |
) |
|
|
(7 |
) |
|
|
(35 |
) |
Agricultural
Sciences
|
|
|
10 |
|
|
|
- |
|
|
|
10 |
|
Basic
Plastics
|
|
|
(12 |
) |
|
|
(35 |
) |
|
|
(47 |
) |
Basic
Chemicals
|
|
|
(28 |
) |
|
|
(21 |
) |
|
|
(49 |
) |
Hydrocarbons
and Energy
|
|
|
(13 |
) |
|
|
(41 |
) |
|
|
(54 |
) |
Total
|
|
|
(19 |
)% |
|
|
(20 |
)% |
|
|
(39 |
)% |
Geographic
area sales
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
(20 |
)% |
|
|
(16 |
)% |
|
|
(36 |
)% |
Europe
|
|
|
(18 |
) |
|
|
(26 |
) |
|
|
(44 |
) |
Rest
of World
|
|
|
(17 |
) |
|
|
(17 |
) |
|
|
(34 |
) |
Total
|
|
|
(19 |
)% |
|
|
(20 |
)% |
|
|
(39 |
)% |
OUTLOOK
Following
a steep decline in manufacturing activity at the end of 2008 which continued
through the first quarter of 2009, the outlook for the remainder of 2009 is
mixed. Although the rate of decline of key economic indicators - such as
industrial production and consumer spending - has slowed, lower business
spending, weak manufacturing activity and growing unemployment warrant a
cautious approach in the near-term. In the United States, continued economic
contraction is expected through at least the first half of the year, with a
return to positive growth expected in the second half of 2009 as economic
stimulus spending ramps up. In Europe, recovery is not anticipated until 2010,
and then at a modest pace. China has emerged as a potential bright spot. The
decline in growth rates in that country appears to have bottomed out in the
fourth quarter of 2008, with Chinese domestic demand showing resilience in
response to aggressive government stimulus programs. Going forward, the Chinese
economy will be viewed cautiously in light of its large dependence on export
markets, predominantly in developed economies.
Purchased
feedstock and energy costs are expected to be much lower than last year, as weak
economic growth has negatively impacted demand. Within the chemical industry,
ethylene chain supply fundamentals are expected to be impacted by significant
capacity additions that are expected to come on-line throughout 2009. The
influence of the new capacity is already being felt, resulting in trough margins
in the United States and Europe. When combined with the dramatic demand
destruction that has occurred during the past six months, further
rationalization of industry capacity is likely to occur in the coming years.
Chlor-vinyl industry conditions remain soft and caustic soda prices, which were
a bright spot in late 2008, have begun to decline. Both caustic soda and
chlorine are in oversupply globally.
As
the Company continues to implement its strategy, the focus will remain on
financial discipline and the implementation of the de-leveraging plan outlined
earlier in the year, which includes divestitures and the accelerated integration
of the Rohm and Haas acquisition to realize cost and growth synergies as quickly
as possible. In addition, the Company will continue to tightly manage price and
volume decisions in an effort to limit margin compression in an intensely
competitive environment.
The
Company’s cash flows from operating, investing and financing activities, as
reflected in the Consolidated Statements of Cash Flows, are summarized in the
following table:
Cash
Flow Summary
|
|
Three
Months Ended
|
|
In
millions
|
|
March
31,
2009
|
|
|
March
31,
2008
|
|
Cash
provided by (used in):
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
(77 |
) |
|
$ |
447 |
|
Investing
activities
|
|
|
(176 |
) |
|
|
(290 |
) |
Financing
activities
|
|
|
462 |
|
|
|
(300 |
) |
Effect
of exchange rate changes on cash
|
|
|
(53 |
) |
|
|
80 |
|
Net
change in cash and cash equivalents
|
|
$ |
156 |
|
|
$ |
(63 |
) |
In
the first three months of 2009, cash provided by operating activities decreased
compared with the same period last year primarily due to lower earnings
partially offset by an increase in dividends received from nonconsolidated
affiliates in excess of earnings.
Cash
used in investing activities in the first three months of 2009 decreased
compared with the same period last year primarily due to a decrease in capital
expenditures.
Cash
provided by financing activities in the first three months of 2009 increased
significantly compared with the same period last year primarily due to proceeds
from a $3 billion draw on the Five Year Competitive Advance and Revolving
Credit Facility Agreement dated April 24, 2006 and a decline in purchases
of treasury stock, offset by the reduction in notes payable and higher payments
on long-term debt.
Despite
the ongoing difficult economic market environment, management expects that the
Company will continue to have sufficient liquidity and financial flexibility to
meet all of its business obligations.
On
August 29, 2006, the Board of Directors approved a plan (the “2006 Plan”)
to shut down a number of the Company’s manufacturing facilities. These shutdowns
were completed in the first quarter of 2009. On December 3, 2007, the Board
of Directors approved a restructuring plan (the “2007 Plan”) that includes the
shutdown of a number of assets and organizational changes within targeted
functions. These restructuring activities are scheduled to be completed by the
end of 2009. On December 5, 2008, the Board of Directors approved a
restructuring plan (the “2008 Plan”) that includes the shutdown of a number of
facilities and a global workforce reduction. These restructuring activities are
targeted to be completed by the end of 2010. The restructuring activities
related to the 2006 Plan, the 2007 Plan and the 2008 Plan are expected to result
in additional cash expenditures of approximately $536 million over the next
two years related to severance costs, contract termination fees, asbestos
abatement and environmental remediation (see Note C to the Consolidated
Financial Statements). The Company expects to incur future costs related to its
restructuring activities, as the Company continually looks for ways to enhance
the efficiency and cost effectiveness of its operations, to ensure
competitiveness across its businesses and across geographic areas. Future costs
are expected to include demolition costs related to the closed facilities, which
will be recognized as incurred. The Company also expects to incur additional
employee-related costs, including involuntary termination benefits, related to
its other optimization activities, and pension plan settlement costs. These
costs cannot be reasonably estimated at this time.
The
following tables present working capital, total debt and certain balance sheet
ratios:
Working
Capital
In
millions
|
|
March
31,
2009
|
|
|
Dec.
31,
2008
|
|
Current
assets
|
|
$ |
15,606 |
|
|
$ |
16,060 |
|
Current
liabilities
|
|
|
9,752 |
|
|
|
13,108 |
|
Working
capital
|
|
$ |
5,854 |
|
|
$ |
2,952 |
|
Current
ratio
|
|
1.60:1
|
|
|
1.23:1
|
|
Days-sales-outstanding-in-receivables
|
|
|
42 |
|
|
|
42 |
|
Days-sales-in-inventory
|
|
|
71 |
|
|
|
58 |
|
Total
Debt
In
millions
|
|
March
31,
2009
|
|
|
Dec.
31,
2008
|
|
Notes
payable
|
|
$ |
844 |
|
|
$ |
2,360 |
|
Long-term
debt due within one year
|
|
|
1,223 |
|
|
|
1,454 |
|
Long-term
debt
|
|
|
10,897 |
|
|
|
8,042 |
|
Total
debt
|
|
$ |
12,964 |
|
|
$ |
11,856 |
|
Debt
as a percent of total capitalization
|
|
|
48.7 |
% |
|
|
45.7 |
% |
On
March 9, 2009, The Dow Chemical Company borrowed $3 billion under its
Five Year Competitive Advance and Revolving Credit Facility Agreement dated
April 24, 2006. The funds are due in April 2011 and bear interest at a variable
LIBOR-plus rate. The Company is using the funds to finance its day-to
day-operations, to repay indebtedness maturing in the ordinary course of
business and for other general corporate purposes. At March 31, 2009, there
was $427 million of commercial paper outstanding.
At
March 31, 2009, the Company had $365 million of SEC-registered
securities available for issuance under the Company’s U.S. retail medium-term
note program (InterNotes), Euro 5 billion (approximately $6.6 billion)
available for issuance under the Company’s Euro Medium Term Note Program, as
well as Japanese yen 50 billion (approximately $509 million) of
securities available for issuance under a shelf registration filed with the
Tokyo Stock Exchange on July 31, 2006, and renewed on July 31, 2008.
In addition, as a well-known seasoned issuer, the Company filed an automatic
shelf registration for an unspecified amount of mixed securities with the SEC on
February 23, 2007. Under this shelf registration, the Company may offer
common stock, preferred stock, depositary shares, debt securities, warrants,
stock purchase contracts and stock purchase units.
Dow’s
public debt instruments and documents for its private funding transactions
contain, among other provisions, certain covenants and default provisions. At
March 31, 2009, management believes the Company was in compliance with all
of these covenants and default provisions.
The
Company’s credit rating is currently investment grade. The Company’s long-term
credit ratings were downgraded by Moody’s on April 22, 2009 from Baa1 to
Baa3 with outlook negative, and by Standard & Poor’s on April 1, 2009
from BBB to BBB- with credit watch negative. The Company’s short-term credit
ratings are A-3/P-3 negative/negative by Standard & Poor’s and
Moody’s. If the Company’s credit ratings are further downgraded, it could have a
negative impact on the Company’s ability to access credit markets and could
increase borrowing costs.
On
April 1, 2009, the Company completed the acquisition of Rohm and Haas.
Pursuant to the July 10, 2008 Agreement and Plan of Merger (the “Merger
Agreement”), Ramses Acquisition Corp., a direct wholly owned subsidiary of the
Company, merged with and into Rohm and Haas (the “Merger”), with Rohm and Haas
continuing as the surviving corporation and a direct wholly owned subsidiary of
the Company.
Financing
for the transaction included debt of $9.2 billion obtained through a Term
Loan Agreement, as well as equity investments by Berkshire Hathaway Inc. (“BHI”)
and by the Kuwait Investment Authority (“KIA”) in the form of Cumulative
Convertible Perpetual Preferred Stock, Series A of 3 million shares
for $3 billion (BHI) and 1 million shares for $1 billion
(KIA).
In
connection with the closing of the Merger, the Company entered into an
Investment Agreement with the Haas Family Trusts and Paulson & Co. Inc.
(“Paulson”), each of whom was a significant shareholder of Rohm and Haas common
stock at the time of the Merger. Under the Investment Agreement, the Haas Family
Trusts and Paulson purchased from the Company 2.5 million shares (Haas
Family Trusts – 1.5 million shares; Paulson - 1.0 million shares) of
Cumulative Perpetual Preferred Stock, Series B for an aggregate price of
$2.5 billion, with $1.5 billion from the Haas Family Trusts and
$1.0 billion from Paulson. The Haas Family Trusts made an additional
investment in 0.5 million shares of Cumulative Convertible Perpetual
Preferred Stock, Series C for an aggregate price of
$500 million.
See
Note O to the Consolidated Financial Statements for more information on
this transaction.
Contractual
Obligations
Information
related to the Company’s contractual obligations and commercial commitments at
December 31, 2008 can be found in Notes K, L, M, N and S to the
Consolidated Financial Statements in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2008. With the exception of the items noted
below, there have been no material changes in the Company’s contractual
obligations or commercial commitments since December 31, 2008.
The
following table represents long-term debt obligations and expected cash
requirements for interest at March 31, 2009, reflecting the borrowing of
$3 billion under the Five Year Competitive Advance and Revolving Credit
Facility Agreement dated April 24, 2006, in the first quarter of
2009.
Contractual
Obligations at March 31, 2009
|
|
Payments
Due by Year
|
|
|
In
millions
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
and beyond
|
Total
|
Long-term
debt – current and noncurrent (1)
|
$1,148
|
$1,027
|
$4,472
|
$1,008
|
$611
|
$3,854
|
$12,120
|
Expected
cash requirements for interest (1)
|
$548
|
$514
|
$452
|
$350
|
$289
|
$3,989
|
$6,142
|
(1)
|
Updated
to reflect additional debt issued in the first quarter of 2009 (see Note J
to the Consolidated Financial
Statements).
|
Contractual
Obligations at December 31, 2008
|
|
Payments
Due by Year
|
|
|
In
millions
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
and beyond
|
Total
|
Long-term
debt – current and noncurrent
|
$1,454
|
$1,060
|
$1,523
|
$1,004
|
$601
|
$3,854
|
$9,496
|
Expected
cash requirements for interest
|
$552
|
$501
|
$438
|
$356
|
$298
|
$4,096
|
$6,241
|
The
Company had outstanding guarantees at March 31, 2009. Additional
information related to these guarantees can be found in the “Guarantees” section
of Note I to the Consolidated Financial Statements.
Fair
Value Measurements
The
Company’s assets and liabilities measured at fair value are classified in the
fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation.
Assets and liabilities that are traded on an exchange with a quoted price are
classified as Level 1. Assets and liabilities that are valued based on a
bid or bid evaluation are classified as Level 2. The custodian of the
Company’s debt and equity securities uses multiple industry-recognized vendors
for pricing information and established processes for validation and
verification to assist the Company in its process for determining and validating
fair values for these assets. The Company currently has no assets or liabilities
that are valued using unobservable inputs and therefore no assets or liabilities
classified as Level 3. The sensitivity of fair
value estimates is immaterial relative to the assets and liabilities measured at
fair value, as well as to the total equity of the Company. See
Note H to the Consolidated Financial Statements for the Company’s
disclosures about fair value measurements.
Portfolio
managers and external investment managers regularly review all of the Company’s
holdings to determine if any investments are other-than-temporarily impaired.
The analysis includes reviewing the amount of the temporary impairment, as well
as the length of time it has been impaired. In addition, specific guidelines for
each instrument type are followed to determine if an other-than-temporary
impairment has occurred. For debt securities, the credit rating of the issuer,
current credit rating trends and the trends of the issuer’s overall sector are
considered in determining impairment. For equity securities, the Company’s
investments are primarily in Standard & Poor’s (“S&P”) 500 companies;
however, the Company also allows investments in companies outside of the S&P
500. In the first quarter of 2009, other-than-temporary impairment write-downs
were $18 million.
Dividends
On
February 12, 2009, the Board of Directors declared 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 and the ongoing global recession.
Recent
Accounting Pronouncements
See
Note B to the Consolidated Financial Statements for a summary of recent
accounting pronouncements.
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
(“GAAP”) requires management to make judgments, assumptions and estimates that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Note A to the Consolidated Financial Statements in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2008
(“2008 10-K”) describes the significant accounting policies and methods used in
the preparation of the consolidated financial statements. Dow’s critical
accounting policies that are impacted by judgments, assumptions and estimates
are described in Management’s Discussion and Analysis of Financial Condition and
Results of Operations in the Company’s 2008 10-K. Since December 31, 2008,
there have been no material changes in the Company’s critical accounting
policies.
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:
|
|
2009
|
|
|
2008
|
|
Claims
unresolved at January 1
|
|
|
75,706 |
|
|
|
90,322 |
|
Claims
filed
|
|
|
2,295 |
|
|
|
2,716 |
|
Claims
settled, dismissed or otherwise resolved
|
|
|
(3,199 |
) |
|
|
(2,854 |
) |
Claims
unresolved at March 31
|
|
|
74,802 |
|
|
|
90,184 |
|
Claimants
with claims against both UCC and Amchem
|
|
|
24,126 |
|
|
|
28,893 |
|
Individual
claimants at March 31
|
|
|
50,676 |
|
|
|
61,291 |
|
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.
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 for the 15-year period
ending in 2021 to $1.2 billion at December 31, 2006.
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 by $54 million
to $952 million, which covered the 15-year period ending in 2023, excluding
future defense and processing costs. 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.
Based
on Union Carbide’s review of 2009 activity, Union Carbide determined that no
adjustment to the accrual was required at March 31, 2009. Union Carbide’s
asbestos-related liability for pending and future claims was $910 million
at March 31, 2009. Approximately 22 percent of the recorded liability
related to pending claims and approximately 78 percent related to future
claims.
Defense
and Resolution Costs
The
following table provides information regarding defense and resolution costs
related to asbestos-related claims filed against Union Carbide and
Amchem:
Defense
and Resolution Costs
|
Three
Months Ended
|
|
Aggregate
Costs
|
In
millions
|
March
31,
2009
|
March
31,
2008
|
|
to
Date as of
March
31, 2009
|
Defense
costs
|
$11
|
$14
|
|
$636
|
Resolution
costs
|
$24
|
$42
|
|
$1,410
|
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 $11 million in the first quarter of
2009 and $14 million in the first quarter of 2008 and was reflected in
“Cost of sales.”
Insurance
Receivables
At
December 31, 2002, Union Carbide increased the receivable for insurance
recoveries related to its asbestos liability to $1.35 billion, substantially
exhausting its asbestos product liability coverage. The insurance receivable
related to the asbestos liability was determined by Union Carbide after a
thorough review of applicable insurance policies and the 1985 Wellington
Agreement, to which Union Carbide and many of its liability insurers are
signatory parties, as well as other insurance settlements, with due
consideration given to applicable deductibles, retentions and policy limits, and
taking into account the solvency and historical payment experience of various
insurance carriers. The Wellington Agreement and other agreements with insurers
are designed to facilitate an orderly resolution and collection of Union
Carbide’s insurance policies and to resolve issues that the insurance carriers
may raise.
In
September 2003, Union Carbide filed a comprehensive insurance coverage case, now
proceeding in the Supreme Court of the State of New York, County of New York,
seeking to confirm its rights to insurance for various asbestos claims and to
facilitate an orderly and timely collection of insurance proceeds. This lawsuit
was filed against insurers that are not signatories to the Wellington Agreement
and/or do not otherwise have agreements in place with Union
Carbide
regarding their asbestos-related insurance coverage, in order to facilitate an
orderly resolution and collection of such insurance policies and to resolve
issues that the insurance carriers may raise. Although the lawsuit is
continuing, through the end of the first quarter of 2009, Union Carbide had
reached settlements with several of the carriers involved in this
litigation.
Union
Carbide’s receivable for insurance recoveries related to the asbestos liability
was $403 million at March 31, 2009 and December 31, 2008. At
March 31, 2009 and December 31, 2008, 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 the
asbestos-related liability, Union Carbide had receivables for defense and
resolution costs submitted to insurance carriers for reimbursement as
follows:
Receivables
for Costs Submitted to Insurance Carriers
|
|
In
millions
|
|
March
31, 2009
|
|
|
Dec.
31, 2008
|
|
Receivables
for defense costs
|
|
$ |
26 |
|
|
$ |
28 |
|
Receivables
for resolution costs
|
|
|
245 |
|
|
|
244 |
|
Total
|
|
$ |
271 |
|
|
$ |
272 |
|
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.
The Dow Chemical Company and
Subsidiaries
|
PART I – FINANCIAL
INFORMATION
|
Dow’s
business operations give rise to market risk exposure due to changes in foreign
exchange rates, interest rates, commodity prices and other market factors such
as equity prices. To manage such risks effectively, the Company enters into
hedging transactions, pursuant to established guidelines and policies, which
enable it to mitigate the adverse effects of financial market risk. Derivatives
used for this purpose are designated as hedges per Statement of Financial
Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended and interpreted, where
appropriate. A secondary objective is to add value by creating additional
non-specific exposure within established limits and policies; derivatives used
for this purpose are not designated as hedges per SFAS No. 133. The
potential impact of creating such additional exposures is not material to the
Company’s results.
The
global nature of Dow’s business requires active participation in the foreign
exchange markets. As a result of investments, production facilities and other
operations on a global basis, the Company has assets, liabilities and cash flows
in currencies other than the U.S. dollar. The primary objective of the Company’s
foreign exchange risk management is to optimize the U.S. dollar value of net
assets and cash flows, keeping the adverse impact of currency movements to a
minimum. To achieve this objective, the Company hedges on a net exposure basis
using foreign currency forward contracts, over-the-counter option contracts,
cross-currency swaps, and nonderivative instruments in foreign currencies.
Exposures related to assets and liabilities are found in all global regions,
with the largest exposures denominated in the currencies of Europe, the Japanese
yen and the Canadian dollar. Exposures also exist in other currencies of Asia
Pacific, Latin America, and India, Middle East and Africa. Bonds denominated in
foreign currencies, mainly the euro, and economic exposure derived from the risk
that currency fluctuations could affect the U.S. dollar value of future cash
flows.
The
main objective of interest rate risk management is to reduce the total funding
cost to the Company and to alter the interest rate exposure to the desired risk
profile. Dow uses interest rate swaps, “swaptions,” and exchange-traded
instruments to accomplish this objective. The Company’s primary exposure is to
the U.S. dollar yield curve.
Dow
has a portfolio of equity securities derived primarily from the investment
activities of its insurance subsidiaries. This exposure is managed in a manner
consistent with the Company’s market risk policies and procedures.
Inherent
in Dow’s business is exposure to price changes for several commodities. Some
exposures can be hedged effectively through liquid tradable financial
instruments. Feedstocks for ethylene production and natural gas constitute the
main commodity exposures. Over-the-counter and exchange traded instruments are
used to hedge these risks when feasible.
Dow
uses value at risk (“VAR”), stress testing and scenario analysis for risk
measurement and control purposes. VAR estimates the maximum potential loss in
fair market values, given a certain move in prices over a certain period of
time, using specified confidence levels. The VAR methodology used by the Company
is a historical simulation model which captures co-movements in market rates
across different instruments and market risk exposure categories. The historical
simulation model uses a 97.5 percent confidence level and the historical
scenario period includes at least six months of historical data. The
March 31, 2009, 2008 year-end and 2008 average daily VAR for the aggregate
of all positions are shown below. These amounts are immaterial relative to the
total equity of the Company:
Total Daily
VAR
|
|
Dec. 31, 2008
|
In
millions
|
At
March 31, 2009
|
Year-end
|
2008
Average
|
Foreign
exchange
|
$3
|
$1
|
$3
|
Interest
rate
|
$152
|
$161
|
$105
|
Equity
exposures, net of hedges
|
$22
|
$24
|
$16
|
Commodities
|
$5
|
$6
|
$13
|
Composite
|
$153
|
$158
|
$112
|
The
Company’s daily VAR for the aggregate of all positions decreased slightly from a
composite VAR of $158 million at December 31, 2008 to a total of
$153 million at March 31, 2009. The decrease related primarily to a
decrease in the interest rate VAR from $161 million to $152 million,
principally due to a net reduction in interest rate exposure.
See
Note G to the Consolidated Financial Statements for further disclosure
regarding market risk.
Evaluation
of Disclosure Controls and Procedures
As
of the end of the period covered by this Quarterly Report on Form 10-Q, the
Company carried out an evaluation, under the supervision and with the
participation of the Company’s Disclosure Committee and the Company’s
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures pursuant to paragraph (b) of Exchange Act
Rules 13a-15 or 15d-15. Based upon that evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the Company’s disclosure controls
and procedures were effective.
Changes
in Internal Control Over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of
Exchange Act Rules 13a-15 or 15d-15 that was conducted during the last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
The Dow Chemical Company and
Subsidiaries
|
PART II – OTHER
INFORMATION
|
Asbestos-Related
Matters of Union Carbide Corporation
No
material developments regarding this matter occurred during the first quarter of
2009. For a summary of the history and current status of this matter, see
Note I to the Consolidated Financial Statements; and Management’s
Discussion and Analysis of Financial Condition and Results of Operations,
Asbestos-Related Matters of Union Carbide Corporation.
Matters
Involving the Acquisition of Rohm and Haas Company
On
January 26, 2009, Rohm and Haas Company (“Rohm and Haas”) commenced an
action in the Court of Chancery of the State of Delaware (the “Litigation”) 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 “Merger”) pursuant to an Agreement and Plan of Merger entered into by the
parties on July 10, 2008 (the “Merger Agreement”). On March 9, 2009,
the Company announced that it had entered into an agreement with Rohm and Haas
to complete the Merger on April 1, 2009 and, as a consequence, the
Litigation was settled.
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. On
February 12, 2009, Norman R. Meier, also in the name of and on behalf of
the Company, filed a nearly identical action in the same court. Since that time,
the court has consolidated the two actions and determined that the complaint
filed by Norman Meier shall be the operative complaint. The relief sought in
this litigation includes the implementation of certain corporate governance
reforms by the Company as well as monetary damages and attorneys’ fees. The
Company believes these lawsuits to be entirely without merit and intends to
continue to oppose them vigorously. On April 15, 2009, the Defendants filed
a motion to dismiss the litigation.
The
factors described below represent the Company’s principal risks.
The
Company operates in a global, competitive environment in each of its operating
segments and geographic areas.
The
Company sells its broad range of products and services in a competitive, global
environment. In addition to other large multinational 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.
The
earnings generated by the Company’s basic chemical and basic plastic products
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.
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 results of operations.
Volatility
in purchased feedstock and energy costs impacts Dow’s operating costs and adds
variability to earnings.
Since
2005, purchased feedstock and energy costs have accounted for almost half of the
Company’s total production costs and operating expenses. 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. Conversely, when these costs decline,
selling prices decline as well, usually at a faster rate. As a result,
volatility 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”), 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 March 31,
2009, Union Carbide’s asbestos-related liability for pending and future claims
was $910 million ($934 million at December 31, 2008) and its
receivable for insurance recoveries related to the asbestos liability was
$403 million (unchanged from December 31, 2008). At March 31,
2009, Union Carbide also had receivables of $271 million ($272 million
at December 31, 2008) 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.
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 and 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, as well as 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.
Adverse
conditions in the global economy and disruption of financial markets could
negatively impact Dow’s customers and therefore Dow’s results of
operations.
A
continuation of the economic downturn in the businesses or geographic areas in
which Dow sells its products could 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. In addition, volatility and disruption of financial markets could
limit customers’ ability to obtain adequate financing to maintain operations,
which could result in a decrease in sales volume and have a negative impact on
Dow’s results of operations.
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.
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
March 31, 2009, the Company had accrued obligations of $308 million
($312 million at December 31, 2008) for environmental remediation and
restoration costs, including $21 million ($22 million at
December 31, 2008) 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 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 could 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.
International terrorism, natural disasters and political unrest in some areas of
the world 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.
Increased
concerns regarding the safety of chemicals in commerce and their potential
impact on the environment could lead to new regulations.
Concerns
regarding the safety of chemicals in commerce and their potential impact on the
environment reflect a growing trend in societal demands for increasing levels of
product safety and environmental protection. These concerns could manifest
themselves in stockholder proposals, preferred purchasing and continued pressure
for more stringent regulatory intervention. In addition, these concerns could
influence public perceptions, the viability of the Company’s products, the
Company’s reputation, the cost to comply with regulations, and the ability to
attract and retain employees, which could have a negative impact on the
Company’s results of operations.
The
value of investments is influenced by economic and market conditions, which
could have a negative impact on the Company’s financial condition and results of
operations.
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.
Volatility
and disruption of financial markets could affect access to credit.
The
current economic environment is causing contraction in the availability of
credit in the marketplace. This could reduce sources of liquidity for the
Company.
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 currently investment grade. The Company’s long-term
credit rating was downgraded by Standard & Poor’s on April 1, 2009 from
BBB to BBB- with credit watch negative and by Moody’s on April 22, 2009
from Baa1 to Baa3 with outlook negative. The Company’s short-term credit ratings
were reduced to A-3/P-3 negative/negative by Standard & Poor’s/Moody’s.
If the Company’s credit ratings are further downgraded, it could have a negative
impact on the Company’s ability to access credit markets and could increase
borrowing costs.
Increased
costs related to the financing of the Rohm and Haas acquisition could reduce the
Company’s flexibility to respond to changing business and economic conditions or
fund capital expenditures or working capital needs.
The
Company borrowed $9.2 billion pursuant to a Term Loan Agreement and issued
preferred equity securities in the amount of $7 billion to finance the
April 1, 2009 acquisition of Rohm and Haas. This financing requires
additional interest and dividend payments and thus may reduce the Company’s
flexibility to respond to changing business and economic conditions or fund
capital expenditure or working capital needs. This may also increase the
Company’s vulnerability to adverse economic conditions.
Failure
to effectively integrate Rohm and Haas could adversely impact the Company’s
financial condition and results of operations.
The
April 1, 2009 acquisition of Rohm and Haas is a significant acquisition and
a significant step in the implementation of Dow’s strategy. While the Company
has acquired businesses in the past, the magnitude of the integration of this
acquisition could present significant challenges and costs, especially given the
effects of the current global economic environment. If the integration of Rohm
and Haas is not completed as planned, the Company may not realize
the
benefits,
such as cost synergies and savings and growth synergies, anticipated from the
acquisition and the costs of achieving those benefits may be higher than, and
the timing different from, the Company’s current expectations. Realizing the
benefits of the acquisition requires the successful integration of some or all
of the sales and marketing, distribution, manufacturing, engineering, finance,
information technology systems and administrative operations of Rohm and Haas
with those of Dow. This will require substantial attention from the management
of the combined company, which may decrease the time management devotes to
normal and customary operations. In addition, the integration and implementation
activities could result in higher expenses and/or the use of more cash or other
financial resources than expected. If the integration of Rohm and Haas is not
successfully executed, it could adversely affect the Company’s financial
condition and results of operations.
An
impairment of goodwill would negatively impact the Company’s financial
results.
Based
on preliminary valuations, the April 1, 2009 acquisition of Rohm and Haas
will increase the Company’s goodwill by an estimated $9.2 billion. At least
annually, the Company performs an impairment test for goodwill. Under current
accounting guidance, if the carrying value of goodwill exceeds the estimated
fair value, impairment is deemed to have occurred and the carrying value of
goodwill is written down to fair value with a charge against earnings.
Accordingly, any determination requiring the write-off of a significant portion
of goodwill recorded in connection with the acquisition could negatively impact
the Company’s results of operations.
Failure
to execute certain asset divestitures could adversely affect Dow’s financial
condition and results of operations.
The
Company is focused on reducing its indebtedness and intends to pursue a strategy
of divesting certain assets to achieve that goal. If the Company is unable to
successfully sell such assets, Dow could have difficulty reducing its
indebtedness, which could result in further downgrades of its credit ratings and
adversely affect the Company’s financial condition and results of
operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS.
The
following table provides information regarding purchases of the Company’s common
stock by the Company during the three months ended March 31,
2009:
Issuer
Purchases of Equity Securities
|
Total
number of
shares
purchased as
part
of the Company’s
publicly
announced
share
repurchase
program
|
Approximate
dollar
value
of shares that
may
yet be purchased
under
the Company’s
publicly
announced
share
repurchase
program
|
Period
|
Total number
of shares
purchased (1)
|
Average
price
paid
per
share
|
January
2009
|
-
|
-
|
-
|
-
|
February
2009
|
477,588
|
$9.78
|
-
|
-
|
March
2009
|
543
|
$6.73
|
-
|
-
|
First
quarter 2009
|
478,131
|
$9.78
|
-
|
-
|
(1)
|
Represents
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.
|
See
the Exhibit Index on page 57 of this Quarterly Report on Form 10-Q for exhibits
filed with this report.
The Dow Chemical Company and
Subsidiaries
|
Trademark
Listing
|
|
The following
trademarks or service marks of The Dow Chemical Company and certain
affiliated companies of Dow appear in this
report: AFFINITY, AIRSTONE, AMBITROL, AMPLIFY, ASPUN,
ATTANE, BETAFOAM, BETAMATE, BETASEAL, CALIBRE, CANGUARD, CARBITOL,
CARBOWAX, CELLOSIZE, CELLOSOLVE, CLEAR+STABLE, COMBOTHERM, CONTINUUM,
CYCLOTENE, D.E.H., D.E.N., D.E.R., DOW, DOW XLA, DOWANOL, DOWCAL, DOWEX,
DOWFAX, DOWFLAKE, DOWFROST, DOWICIDE, DOWLEX, DOWPER, DOWTHERM, ECHELON,
ELITE, EMERGE, ENFORCER, ENGAGE, ENHANCER, EVOCAR, FILMTEC, FLEXOMER,
FORTEFIBER, FORTEGRA, FOUNDATIONS, FROTH-PAK, GREAT STUFF, HYPOL, IMPAXX,
INSPIRE, INSTA-STIK, INTEGRAL, ISONATE, ISOPLAST, LIQUIDOW, LP OXO,
MAGNUM, MAXICHECK, MAXISTAB, METEOR, METHOCEL, MONOTHANE, NEOCAR, NORDEL,
NORKOOL, NORMAX, PAPI, PELADOW, PELLETHANE, POLYOX, POLYPHOBE, PRIMACOR,
PROCITE, PULSE, REDI-LINK, RENUVA, SAFE-TAINER, SARAN, SARANEX, SATINFX,
SATISFIT, SELECTOR, SENTRY, SHAC, SI-LINK, SILK, SOLTERRA, SPECFLEX,
STYROFOAM, STYRON, STYRON A-TECH, STYRON C-TECH, SYNALOX, TERGITOL,
THERMAX, TILE BOND, TRAFFIDECK, TRENCHCOAT, TRITON, TUFLIN, TYRIL, TYRIN,
UCAR, UCARE, UCARHIDE, UCARSOL, UCON, UNIGARD, UNIPOL, UNIPURGE, UNIVAL,
VERDISEAL, VERSENE, VERSIFY, VORACOR, VORACTIV, VORALAST, VORALUX,
VORAMER, VORANATE, VORANOL, VORASTAR, WALOCEL, WALSRODER, WEATHERMATE,
XITRACK
|
|
The following
trademarks or service marks of Dow AgroSciences LLC and certain affiliated
companies of Dow AgroSciences LLC appear in this
report: AGROMEN, BRODBECK, CLINCHER, DAIRYLAND,
DELEGATE, DITHANE, EXZACT, FORTRESS, GARLON, GLYPHOMAX, GRANITE, HERCULEX,
KEYSTONE, LAREDO, LONTREL, LORSBAN, MILESTONE, MUSTANG, MYCOGEN, NEXERA,
PHYTOGEN, PROFUME, RENZE, SENTRICON, SIMPLICITY, STARANE, TELONE, TORDON,
TRACER NATURALYTE, TRIUMPH, VIKANE,
WIDESTRIKE
|
The
following trademark of Ann Arbor Technical Services, Inc. appears in this
report: GeoMorph
The Dow Chemical Company and
Subsidiaries
|
|
Pursuant
to the requirements of the Securities Exchange Act of
1934,
the registrant has duly caused this report to be signed
on
its behalf by the undersigned thereunto duly authorized.
THE DOW CHEMICAL
COMPANY
Registrant
Date:
May 4, 2009
/s/ WILLIAM H.
WEIDEMAN
William H. Weideman
Vice President and Controller
The Dow Chemical Company and
Subsidiaries
|
|
|
2(d)
|
Stock
Purchase Agreement, dated as of April 1, 2009, between Rohm and Haas
Company and K+S Aktiengesellschaft, incorporated by reference to
Exhibit 2.1 to The Dow Chemical Company Current Report on
Form 8-K filed on April 7,
2009.
|
|
3(i)(a)
|
Certificate
of Designations for the Cumulative Convertible Perpetual Preferred Stock,
Series A, as filed with the Secretary of State, State of Delaware on
March 31, 2009, incorporated by reference to Exhibit 3.1 to The
Dow Chemical Company Current Report on Form 8-K filed on
April 1, 2009.
|
|
3(i)(b)
|
Certificate
of Designations for the Cumulative Perpetual Preferred Stock,
Series B, as filed with the Secretary of State, State of Delaware on
March 31, 2009, incorporated by reference to Exhibit 3.2 to The
Dow Chemical Company Current Report on Form 8-K filed on
April 1, 2009.
|
|
3(i)(c)
|
Certificate
of Designations for the Cumulative Convertible Perpetual Preferred Stock,
Series C, as filed with the Secretary of State, State of Delaware on
March 31, 2009, incorporated by reference to Exhibit 3.3 to The
Dow Chemical Company Current Report on Form 8-K filed on
April 1, 2009.
|
|
|
A
copy of The Dow Chemical Company 1979 Award and Option Plan, as amended
and restated on May 13, 1983.
|
|
|
A
copy of a resolution adopted by the Board of Directors of The Dow Chemical
Company on April 12, 1984 amending The Dow Chemical Company 1979
Award and Option Plan.
|
|
|
A
copy of a resolution adopted by the Board of Directors of The Dow Chemical
Company on April 18, 1985 amending The Dow Chemical Company 1979
Award and Option Plan.
|
|
|
A
copy of a resolution adopted by the Executive Committee of the Board of
Directors of The Dow Chemical Company on October 30, 1987 amending
The Dow Chemical Company 1979 Award and Option
Plan.
|
|
|
A
copy of The Dow Chemical Company Dividend Unit
Plan.
|
|
|
A
copy of The Dow Chemical Company 1994 Non-Employee Directors’ Stock
Plan.
|
|
10(mm)(i)
|
First
Amendment to the Term Loan Agreement, dated as of March 4, 2009,
among The Dow Chemical Company, the lenders party to the Term Loan
Agreement dated as of September 8, 2008, Citibank, N.A., as
administrative agent, and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Morgan Stanley Senior Funding, Inc., as co-syndication
agents, incorporated by reference to Exhibit 10.1 to The Dow Chemical
Company Current Report on Form 8-K filed on March 6,
2009.
|
|
10(pp)
|
Securities
Issuance Letter, dated March 4, 2009, among The Dow Chemical Company,
Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Morgan Stanley Senior Funding, Inc., incorporated
by reference to Exhibit 10.2 to The Dow Chemical Company Current
Report on Form 8-K filed on March 6,
2009.
|
|
10(qq)
|
Commitment
to Close, dated March 9, 2009, among The Dow Chemical Company, Ramses
Acquisition Corp. and Rohm and Haas Company, incorporated by reference to
Exhibit 10.1 to The Dow Chemical Company Current Report on
Form 8-K filed on March 12,
2009.
|
|
10(rr)
|
Investment
Agreement, dated March 9, 2009, among The Dow Chemical Company,
Paulson & Co. Inc. and the Haas Family Trusts, incorporated by
reference to Exhibit 10.2 to The Dow Chemical Company Current Report
on Form 8-K filed on March 12,
2009.
|
|
10(ss)
|
Letter
Agreement, dated March 9, 2009, among The Dow Chemical Company,
Ramses Acquisition Corp. and the Haas Family Trusts, incorporated by
reference to Exhibit 10.3 to The Dow Chemical Company Current Report
on Form 8-K filed on March 12,
2009.
|
|
10(tt)
|
Letter
Agreement, dated March 9, 2009, among The Dow Chemical Company,
Ramses Acquisition Corp. and Paulson & Co. Inc., incorporated by
reference to Exhibit 10.4 to The Dow Chemical Company Current Report
on Form 8-K filed on March 12,
2009.
|
|
|
Computation
of Ratio of Earnings to Fixed
charges.
|
|
|
Analysis,
Research & Planning Corporation’s
Consent.
|
|
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
99.1
|
Replacement
Capital Covenant, dated April 1, 2009, relating to the Cumulative
Perpetual Preferred Stock, Series B, incorporated by reference to
Exhibit 99.2 to The Dow Chemical Company Current Report on
Form 8-K filed on April 1,
2009.
|
|
99.2
|
Replacement
Capital Covenant, dated April 1, 2009, relating to the Cumulative
Convertible Perpetual Preferred Stock, Series C, incorporated by
reference to Exhibit 99.3 to The Dow Chemical Company Current Report
on Form 8-K filed on April 1,
2009.
|
|
99.3
|
Guarantee
relating to the 5.60% Notes of Rohm and Haas Company, incorporated by
reference to Exhibit 99.4 to The Dow Chemical Company Current Report
on Form 8-K filed on April 1,
2009.
|
|
99.4
|
Guarantee
relating to the 6.00% Notes of Rohm and Haas Company, incorporated by
reference to Exhibit 99.5 to The Dow Chemical Company Current Report
on Form 8-K filed on April 1,
2009.
|
|
99.5
|
Guarantee
relating to the 9.80% Debentures of Rohm and Haas Company, incorporated by
reference to Exhibit 99.6 to The Dow Chemical Company Current Report
on Form 8-K filed on April 1,
2009.
|