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SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year
ended DECEMBER 31,
2008
Commission
file number: 1-3433
THE
DOW CHEMICAL COMPANY
(Exact
name of registrant as specified in its charter)
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Delaware
(State
or other jurisdiction of
incorporation
or organization)
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38-1285128
(I.R.S.
Employer Identification No.)
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2030
DOW CENTER, MIDLAND, MICHIGAN 48674
(Address
of principal executive
offices) (Zip
Code)
Registrant’s
telephone number, including area code: 989-636-1000
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
Common
Stock, par value $2.50 per share
Debentures,
6.85%, final maturity 2013
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Name of each exchange on which
registered
Common
Stock registered on the New York and
Chicago
Stock Exchanges
Debentures
registered on the New York Stock Exchange
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
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þ Yes o
No
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Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act.
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o Yes þ
No
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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
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by
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reference
in Part III of this Form 10-K or any amendment to this Form
10-K
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þ
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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.
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Large
accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
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o
Yes þ
No
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The
aggregate market value of voting stock held by non-affiliates as of June
30, 2008 (based upon the closing price of $34.91 per common share as
quoted on the New York Stock Exchange), was approximately
$32.2 billion. For purposes of this computation, it is assumed that
the shares of voting stock held by Directors, Officers and the Dow
Employees’ Pension Plan Trust would be deemed to be stock held by
affiliates. Non-affiliated common stock outstanding at June 30, 2008 was
922,805,097 shares.
Total
common stock outstanding at January 31, 2009 was 924,346,271
shares.
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DOCUMENTS
INCORPORATED BY REFERENCE
Part
III: Proxy Statement for the Annual Meeting of Stockholders to
be held on May 14, 2009.
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ANNUAL
REPORT ON FORM 10-K
For
the fiscal year ended December 31, 2008
TABLE
OF CONTENTS
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PAGE
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PART
I
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Business.
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3
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Risk
Factors.
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10
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Unresolved
Staff Comments.
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13
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Properties.
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14
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Legal
Proceedings.
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15
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Submission
of Matters to a Vote of Security Holders.
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20
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PART
II
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
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23
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Selected
Financial Data.
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24
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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26
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Quantitative
and Qualitative Disclosures About Market Risk.
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62
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Financial
Statements and Supplementary Data.
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63
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure.
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126
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Controls
and Procedures.
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126
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Other
Information.
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128
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PART
III
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Directors,
Executive Officers and Corporate Governance.
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129
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Executive
Compensation.
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129
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholders Matters.
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129
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Certain
Relationships and Related Transactions, and Director
Independence.
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129
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Principal
Accounting Fees and Services.
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129
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PART
IV
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Exhibits,
Financial Statement Schedules.
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130
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133
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2
The
Dow Chemical Company and Subsidiaries
The
Dow Chemical Company was incorporated in 1947 under Delaware law and is the
successor to a Michigan corporation, of the same name, organized in 1897. Except
as otherwise indicated by the context, the terms “Company” or “Dow” as used
herein mean The Dow Chemical Company and its consolidated subsidiaries. On
February 6, 2001, the merger of Union Carbide Corporation (“Union Carbide”) with
a subsidiary of The Dow Chemical Company was completed, and Union Carbide became
a wholly owned subsidiary of Dow.
The
Company is engaged in the manufacture and sale of chemicals, plastic materials,
agricultural and other specialized products and services.
The
Company’s principal executive offices are located at 2030 Dow Center, Midland,
Michigan 48674, telephone 989-636-1000. Its Internet website address is www.dow.com. All of the
Company’s filings with the U.S. Securities and Exchange Commission are available
free of charge through the Investor Relations page on this website, immediately
upon filing.
BUSINESS
AND PRODUCTS
Corporate
Profile
Dow
is a diversified chemical company that combines the power of science and
technology with the “Human Element” to constantly improve what is essential to
human progress. The Company delivers a broad range of products and services to
customers in approximately 160 countries, connecting chemistry and innovation
with the principles of sustainability to help provide everything from fresh
water, food and pharmaceuticals to paints, packaging and personal care products.
In 2008, Dow had annual sales of $57.5 billion and employed approximately
46,000 people worldwide. The Company has 150 manufacturing sites in
35 countries and produces approximately 3,300 products. The following
descriptions of the Company’s operating segments include a representative
listing of products for each business.
PERFORMANCE
PLASTICS
Applications: automotive
interiors, exteriors, under-the-hood and body engineered systems • building and
construction, thermal and acoustic insulation, roofing • communications
technology, telecommunication cables, electrical and electronic connectors •
footwear • home and office furnishings: kitchen appliances, power
tools, floor care products, mattresses, carpeting, flooring, furniture padding,
office furniture • information technology equipment and consumer electronics •
packaging, food and beverage containers, protective packaging • sports and
recreation equipment • wire and cable insulation and jacketing materials for
power utility and telecommunications
Dow Automotive is a leading
global provider of technology-driven solutions that meet consumer demands for
vehicles that are safer, stronger, quieter, lighter, cleaner, more comfortable
and stylish. The business provides plastics, adhesives, glass bonding systems,
emissions control technology, films, fluids, structural enhancement and
acoustical management solutions to original equipment manufacturers, tier,
aftermarket and commercial transportation customers. With
offices and application development centers around the world, Dow Automotive
provides materials science expertise and comprehensive technical capabilities to
its customers worldwide.
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·
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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
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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.
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·
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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)
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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.
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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
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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.
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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
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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.
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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
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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.
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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
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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.
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Products and Services:
Acrolein derivatives; Basic nitroparaffins and nitroparaffin-based
specialty chemicals; CANGUARD™ BIT preservatives; CELLOSIZE™ hydroxyethyl
cellulose; Chiral compounds and biocatalysts; CLEAR+STABLE™ carboxymethyl
cellulose; CYCLOTENE™ advanced electronics resins; DOW™
electrodeionization; DOW™ latex powders; DOW™ ultrafiltration; DOWEX™ ion
exchange resins; DOWICIDE™ antimicrobial bactericides and fungicides;
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
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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.
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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
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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.
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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
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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.
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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
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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.
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·
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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
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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.
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·
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Products: DOW™
homopolymer polypropylene resins; DOW™ impact copolymer polypropylene
resins; DOW™ random copolymer polypropylene resins; INSPIRE™ performance
polymers
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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.
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·
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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
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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.
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·
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Products: Ethylene
glycol (EG); Ethylene oxide (EO)
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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.
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·
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Products: Benzene;
Butadiene; Butylene; Cumene; Ethylene; Propylene; Styrene; Power, steam
and other utilities
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The
Hydrocarbons and Energy segment also includes the results of Compañía Mega S.A.
and a portion of the results of the SCG-Dow Group, both joint ventures of the
Company.
Unallocated and Other includes
the results of New Ventures (which includes new business incubation platforms
focused on identifying and pursuing new commercial opportunities); Venture
Capital; the Company’s insurance operations and environmental operations; and
certain overhead and other cost recovery variances not allocated to the
operating segments.
Industry
Segments and Geographic Area Results
See
Note T to the Consolidated Financial Statements for information by
operating segment and geographic area.
Number
of Products
Dow
manufactures and supplies approximately 3,300 products. No single product
accounted for more than 5 percent of the Company’s consolidated net sales
in 2008.
Competition
Historically,
the chemical industry has operated in a competitive environment, and that
environment is expected to continue. The Company experiences substantial
competition in each of its operating segments and in each of the geographic
areas in which it operates. In addition to other chemical companies, the
chemical divisions of major international oil companies provide substantial
competition in the United States and abroad. Dow competes worldwide on the basis
of quality, price and customer service, and for 2008, continued to be
the largest U.S. producer of chemicals and plastics, in terms of
sales.
Raw
Materials
The
Company operates in an integrated manufacturing environment. Basic raw materials
are processed through many stages to produce a number of products that are sold
as finished goods at various points in those processes.
The
two major raw material streams that feed the integrated production of the
Company’s finished goods are chlorine-based and hydrocarbon-based raw
materials.
Salt,
limestone and natural brine are the base raw materials used in the production of
chlor-alkali products and derivatives. The Company owns salt deposits in
Louisiana, Michigan and Texas; Alberta, Canada; Brazil; and Germany. The Company
also owns natural brine deposits in Michigan and limestone deposits in
Texas.
The
Company purchases hydrocarbon raw materials including liquefied petroleum gases,
crude oil, naphtha, natural gas and condensate. These raw materials are used in
the production of both saleable products and energy. The Company also purchases
electric power, benzene, ethylene, propylene and styrene to supplement internal
production. Expenditures for hydrocarbon feedstocks and energy accounted for
48 percent of the Company’s production costs and operating expenses for the
year ended December 31, 2008. The Company purchases these raw materials on
both short- and long-term contracts.
Other
significant raw materials include acrylonitrile, aniline, bisphenol, co-monomers
(for linear low density polyethylene), methanol, rubber, carbon black, ammonia,
formaldehyde and toluene diamine. The Company purchases these raw materials on
both short- and long-term contracts.
The
Company had adequate supplies of raw materials during 2008, and expects to
continue to have adequate supplies of raw materials in 2009.
Method
of Distribution
All
products and services are marketed primarily through the Company’s sales force,
although in some instances more emphasis is placed on sales through
distributors.
Twenty
percent of the sales of the Basic Chemicals segment in 2008 were to one
customer, with which the Company has an ongoing supply contract. In addition,
sales to MEGlobal, a 50:50 joint venture with Petrochemical Industries Company
(K.S.C.) of Kuwait, represented approximately 11 percent of the sales in
the Basic Chemicals segment. Excess ethylene glycol produced in Dow’s plants in
the United States and Europe is sold to MEGlobal. Other than the sales to these
customers, no significant portion of the business of any operating segment is
dependent upon a single customer.
Research
and Development
The
Company is engaged in a continuous program of basic and applied research to
develop new products and processes, to improve and refine existing products and
processes, and to develop new applications for existing products. Research and
development expenses were $1,310 million in 2008, $1,305 million in
2007 and $1,164 million in 2006. At December 31, 2008, the Company
employed approximately 6,000 people in various research and development
activities.
Patents,
Licenses and Trademarks
The
Company continually applies for and obtains U.S. and foreign patents. At
December 31, 2008, the Company owned 2,266 active U.S. patents and 9,478
active foreign patents as follows:
|
Patents
Owned at December 31, 2008
|
||
|
U.S.
|
Foreign
|
|
|
Performance
Plastics
|
1,029
|
5,286
|
|
Performance
Chemicals
|
349
|
1,406
|
|
Agricultural
Sciences
|
508
|
1,604
|
|
Basic
Plastics
|
247
|
757
|
|
Basic
Chemicals
|
38
|
78
|
|
Hydrocarbons
and Energy
|
27
|
185
|
|
Unallocated
and Other
|
68
|
162
|
|
Total
|
2,266
|
9,478
|
Dow’s
primary purpose in obtaining patents is to protect the results of its research
for use in operations and licensing. Dow is also party to a substantial number
of patent licenses and other technology agreements. The Company had revenue
related to patent and technology royalties totaling $307 million in 2008,
$247 million in 2007 and $512 million in 2006. Revenue related to
licensing was higher in 2006 due to lump sum licensing revenue that was earned
in the first quarter of 2006. The Company incurred royalties to others of
$60 million in 2008, $57 million in 2007 and $64 million in 2006. Dow
also has a substantial number of trademarks and trademark registrations in the
United States and in other countries, including the “Dow in Diamond” trademark.
Although the Company considers that its patents, licenses and trademarks in the
aggregate constitute a valuable asset, it does not regard its business as being
materially dependent upon any single patent, license or trademark.
Principal
Partly Owned Companies
Dow’s
principal nonconsolidated affiliates at December 31, 2008, including direct
or indirect ownership interest for each, are listed below:
|
|
·
|
Americas
Styrenics LLC – 50 percent – a U.S. limited liability company that
manufactures polystyrene and styrene monomer.
|
|
|
·
|
Compañía
Mega S.A. – 28 percent – an Argentine company that owns a natural gas
separation and fractionation plant, which provides feedstocks to the
Company’s petrochemical plant located in Bahia Blanca,
Argentina.
|
|
|
·
|
Dow
Corning Corporation – 50 percent – a U.S. company that manufactures
silicone and silicone products. See Note K to the Consolidated
Financial Statements.
|
|
|
·
|
EQUATE
Petrochemical Company K.S.C. – 42.5 percent – a Kuwait-based company that
manufactures ethylene, polyethylene and ethylene glycol.
|
|
|
·
|
Equipolymers
– 50 percent – a company, headquartered in Horgen, Switzerland, that
manufactures purified terephthalic acid, and manufactures and markets
polyethylene terephthalate resins.
|
|
|
·
|
MEGlobal
– 50 percent – a company, headquartered in Dubai, United Arab Emirates,
that manufactures and markets monoethylene glycol and diethylene
glycol.
|
|
|
·
|
The
OPTIMAL Group of Companies [consisting of OPTIMAL Olefins (Malaysia) Sdn.
Bhd. – 23.75 percent; OPTIMAL Glycols (Malaysia) Sdn. Bhd. –
50 percent; OPTIMAL Chemicals (Malaysia) Sdn. Bhd. – 50 percent]
– Malaysian companies that operate an ethane/propane cracker, an ethylene
glycol facility and a production facility for ethylene and propylene
derivatives within a world-scale, integrated chemical complex located in
Kertih, Terengganu, Malaysia.
|
|
|
·
|
The
SCG-Dow Group [consisting of Siam Polyethylene Company Limited –
49 percent; Siam Polystyrene Company Limited – 50 percent; Siam
Styrene Monomer Co., Ltd. – 50 percent; Siam Synthetic Latex Company
Limited – 50 percent] – Thailand-based companies that manufacture
polyurethanes, polyethylene, polystyrene, styrene and latex.
|
|
|
·
|
Univation
Technologies, LLC – 50 percent – a U.S. limited liability company
that develops, markets and licenses polyethylene process technology and
related catalysts.
|
See
Note F to the Consolidated Financial Statements for additional
information.
Financial
Information About Foreign and Domestic Operations and Export Sales
In
2008, the Company derived 68 percent of its sales and had 47 percent
of its property investment outside the United States. While the Company’s
international operations may be subject to a number of additional risks, such as
changes in currency exchange rates, the Company does not regard its foreign
operations, on the whole, as carrying any greater risk than its operations in
the United States. Information on sales and long-lived assets by geographic area
for each of the last three years appears in Note T to the Consolidated
Financial Statements, and discussions of the Company’s risk management program
for foreign exchange and interest rate risk management appear in Item 1A. Risk
Factors, Item 7A. Quantitative and Qualitative Disclosures About Market Risk,
and Note H to the Consolidated Financial Statements.
Protection
of the Environment
Matters
pertaining to the environment are discussed in Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations, and Notes A and K
to the Consolidated Financial Statements.
Employees
Personnel
count was 46,102 at December 31, 2008; 45,856 at December 31, 2007;
and 42,578 at December 31, 2006. Headcount increased in 2008 from year-end
2007 primarily due to recent acquisitions. Headcount is expected to decline due
to actions announced in the fourth quarter of 2008 to eliminate approximately
5,000 jobs (including planned divestitures). During 2007, headcount was
impacted by the addition of research and development employees in India and
China in support of the Company’s growth initiatives; the addition of
approximately 110 employees with the second quarter acquisition of
Hyperlast Limited; and the addition of approximately 1,700 employees with the
second quarter acquisition of Wolff Walsrode AG.
Other
Activities
Dow
engages in the property and casualty insurance and reinsurance business
primarily through its Liana Limited subsidiaries.
The
Dow Chemical Company and Subsidiaries
The
factors described below represent the Company’s principal risks. Except as
otherwise indicated, these factors may or may not occur and the Company is not
in a position to express a view on the likelihood of any such factor occurring.
Other factors may exist that the Company does not consider significant based on
information that is currently available or that the Company is not currently
able to anticipate.
Volatility
in purchased feedstock and energy costs impacts Dow’s operating costs and adds
variability to earnings.
During
2008, purchased feedstock and energy costs were higher overall than in 2007,
adding an additional $5.9 billion of costs compared with 2007 and
accounting for 48 percent of the Company’s total production costs and
operating expenses in 2008, down from 49 percent in 2007 and 2006.
Purchased feedstock and energy costs are expected to remain volatile throughout
2009. The Company uses its feedstock flexibility and financial and physical
hedging programs to lower overall feedstock costs. However, when these costs
increase, the Company is not always able to immediately raise selling prices
and, ultimately, its ability to pass on underlying cost increases is greatly
dependent on market conditions. As a result, increases in these costs could
negatively impact the Company’s results of operations.
The Company is party to a number of
claims and lawsuits arising out of the normal course of business with respect to
commercial matters, including product liability, governmental regulation and
other actions.
Certain
of the claims and lawsuits facing the Company purport to be class actions and
seek damages in very large amounts. All such claims are being contested. With
the exception of the possible effect of the asbestos-related liability of Union
Carbide Corporation (“Union Carbide”) and the ongoing litigation with Rohm and
Haas Company (“Rohm and Haas”), described below, it is the opinion of the
Company’s management that the possibility is remote that the aggregate of all
such claims and lawsuits will have a material adverse impact on the Company’s
consolidated financial statements.
Union
Carbide is and has been involved in a large number of asbestos-related suits
filed primarily in state courts during the past three decades. At
December 31, 2008, Union Carbide’s asbestos-related liability for pending
and future claims was $934 million and its receivable for insurance
recoveries related to its asbestos liability was $403 million. At
December 31, 2008, Union Carbide also had receivables of $272 million
for insurance recoveries for defense and resolution costs. It is the opinion of
the Company’s management that it is reasonably possible that the cost of Union
Carbide disposing of its asbestos-related claims, including future defense
costs, could have a material adverse impact on the Company’s results of
operations and cash flows for a particular period and on the consolidated
financial position of the Company.
The
Company is involved in a lawsuit, filed in the Court of Chancery of the State of
Delaware by Rohm and Haas for specific performance related to the July 10,
2008 agreement to acquire Rohm and Haas for $78 per share. The lawsuit was
filed on January 26, 2009 following notification to Rohm and Haas that the
Company would not close the proposed acquisition on or before January 27,
2009. It is the opinion of the Company’s management that it is reasonably
possible that the ultimate resolution of the litigation could have a material
adverse impact on the Company’s consolidated financial statements.
A
downgrade of the Company’s credit rating could have a negative impact on the
Company’s ability to access credit markets.
The
Company’s credit rating is investment grade. The Company’s long-term credit
ratings were downgraded on December 29, 2008 by Moody’s from A3 to Baa1
with outlook under review for possible downgrade and by Standard & Poor’s
from A- to BBB with credit watch negative. The Company’s short-term credit
rating is A2/P2 negative/negative. If the Company’s credit rating is further
downgraded, it could have a negative impact on the Company’s ability to access
credit markets and could increase borrowing costs.
Volatility
and disruption of financial markets could affect access to credit.
The
current difficult economic market environment is causing contraction in the
availability of credit in the marketplace. This could potentially reduce the
sources of liquidity for the Company.
The
value of investments are influenced by economic and market
conditions.
The
current economic environment is negatively impacting the fair value of pension
and insurance assets, which could trigger increased future funding requirements
of the pension trusts and could result in additional other-than-temporary
impairment losses for certain insurance assets.
Adverse
conditions in the global economy and disruption of financial markets could
continue to negatively impact Dow’s customers and therefore Dow’s results of
operations.
An
economic downturn in the businesses or geographic areas in which Dow sells its
products could further reduce demand for these products and result in a decrease
in sales volume that could have a negative impact on Dow’s results of
operations. Volatility and disruption of financial markets could limit
customers’ ability to obtain adequate financing to maintain operations and could
result in a decrease in sales volume that could have a negative impact on Dow’s
results of operations.
The
earnings generated by the Company’s basic chemical and basic plastic products
will vary from period to period based in part on the balance of supply relative
to demand within the industry.
The
balance of supply relative to demand within the industry may be significantly
impacted by the addition of new capacity. For basic commodities, capacity is
generally added in large increments as world-scale facilities are built. This
may disrupt industry balances and result in downward pressure on prices due to
the increase in supply, which could negatively impact the Company’s results of
operations.
If
key suppliers are unable to provide the raw materials required for production,
Dow may not be able to obtain the raw materials from other sources on as
favorable terms.
The
Company purchases hydrocarbon raw materials including liquefied petroleum gases,
crude oil, naphtha, natural gas and condensate. The Company also purchases
electric power, benzene, ethylene, propylene and styrene to supplement internal
production, and other raw materials. If the Company’s key suppliers are unable
to provide the raw materials required for production, it could have a negative
impact on Dow’s results of operations. For example, during 2005 and again in the
third quarter of 2008, the Company experienced temporary supply disruptions
related to major hurricanes on the U.S. Gulf Coast. In addition, volatility and
disruption of financial markets could limit suppliers’ ability to obtain
adequate financing to maintain operations, which could have a negative impact on
Dow’s results of operations.
The
Company experiences substantial competition in each of the operating segments
and geographic areas in which it operates.
Historically,
the chemical industry has operated in a competitive environment, and that
environment is expected to continue. In addition to other chemical companies,
the chemical divisions of major international oil companies provide substantial
competition. Dow competes worldwide on the basis of quality, price and customer
service. Increased levels of competition could result in lower prices or lower
sales volume, which would have a negative impact on the Company’s results of
operations.
Actual
or alleged violations of environmental laws or permit requirements could result
in restrictions or prohibitions on plant operations, substantial civil or
criminal sanctions, as well as the assessment of strict liability and/or joint
and several liability.
The
Company is subject to extensive federal, state, local and foreign laws,
regulations, rules and ordinances relating to pollution, protection of the
environment and the generation, storage, handling, transportation, treatment,
disposal and remediation of hazardous substances and waste materials. At
December 31, 2008, the Company had accrued obligations of $312 million
for environmental remediation and restoration costs, including $22 million
for the remediation of Superfund sites. This is management’s best estimate of
the costs for remediation and restoration with respect to environmental matters
for which the Company has accrued liabilities, although the ultimate cost with
respect to these particular matters could range up to approximately twice that
amount. Costs and capital expenditures relating to environmental, health or
safety matters are subject to evolving regulatory requirements and will depend
on the timing of the promulgation and enforcement of specific standards which
impose the requirements. Moreover, changes in environmental regulations could
inhibit or interrupt the Company’s operations, or require modifications to its
facilities. Accordingly, environmental, health or safety regulatory matters may
result in significant unanticipated costs or liabilities.
Local,
state and federal governments have begun a regulatory process that could lead to
new regulations impacting the security of chemical plant locations and the
transportation of hazardous chemicals.
Growing
public and political attention has been placed on protecting critical
infrastructure, including the chemical industry, from security threats.
Terrorist attacks and natural disasters have increased concern regarding the
security of chemical production and distribution. In addition, local, state and
federal governments have begun a regulatory process that could lead to new
regulations impacting the security of chemical plant locations and the
transportation of hazardous chemicals, which could result in higher operating
costs and interruptions in normal business operations.
Failure
to develop new products could make the Company less competitive.
The
Company is engaged in a continuous program of basic and applied research to
develop new products and processes, to improve and refine existing products and
processes, and to develop new applications for existing products. Failure to
develop new products could make the Company less competitive.
Failure
to protect the Company’s intellectual property could negatively affect its
future performance and growth.
The
Company continually applies for and obtains U.S. and foreign patents to protect
the results of its research for use in operations and licensing. Dow is also
party to a substantial number of patent licenses and other technology
agreements. The Company relies on patents, confidentiality agreements and
internal security measures to protect its intellectual property. Failure to
protect this intellectual property could negatively affect the Company’s future
performance and growth.
Weather-related
matters could impact the Company’s results of operations.
In
2005 and again in the third quarter of 2008, major hurricanes caused significant
disruption in Dow’s operations on the U.S. Gulf Coast, logistics across the
region and the supply of certain raw materials, which had an adverse impact on
volume and cost for some of Dow’s products. If similar weather-related matters
occur in the future, it could negatively affect Dow’s results of operations, due
to the Company’s substantial presence on the U.S. Gulf Coast.
The Company’s global business
operations give rise to market risk exposure.
The
Company’s global business operations give rise to market risk exposure related
to changes in foreign exchange rates, interest rates, commodity prices and other
market factors such as equity prices. To manage such risks, Dow enters into
hedging transactions, pursuant to established guidelines and policies. If Dow
fails to effectively manage such risks, it could have a negative impact on the
Company’s consolidated financial statements.
The
Dow Chemical Company and Subsidiaries
PART I, Item 1B. Unresolved Staff Comments.
UNRESOLVED
STAFF COMMENTS
None.
The
Dow Chemical Company and Subsidiaries
PART I, Item 2. Properties.
PROPERTIES
The
Company operates 150 manufacturing sites in 35 countries. Properties of Dow
include facilities which, in the opinion of management, are suitable and
adequate for the manufacture and distribution of Dow’s products. During 2008,
the Company’s chemicals and plastics production facilities and plants operated
at approximately 77 percent of capacity. The Company’s major production
sites are as follows:
|
United
States:
|
Plaquemine
and Hahnville, Louisiana; Midland, Michigan; Freeport, Seadrift and Texas
City, Texas; South Charleston, West Virginia.
|
|
Canada:
|
Fort
Saskatchewan and Prentiss, Alberta.
|
|
Germany:
|
Boehlen;
Leuna; Rheinmuenster; Schkopau; Stade.
|
|
France:
|
Drusenheim.
|
|
The
Netherlands:
|
Terneuzen.
|
|
Spain:
|
Tarragona.
|
|
Argentina:
|
Bahia
Blanca.
|
|
Brazil:
|
Aratu.
|
Including
the major production sites, the Company has plants and holdings in the following
geographic areas:
|
United
States:
|
42
manufacturing locations in 16 states.
|
|
Canada:
|
6
manufacturing locations in 3 provinces.
|
|
Europe:
|
48
manufacturing locations in 16 countries.
|
|
Latin
America:
|
26
manufacturing locations in 5 countries.
|
|
Asia
Pacific:
|
23
manufacturing locations in 8 countries.
|
|
India,
Middle East and Africa:
|
5
manufacturing locations in 4
countries.
|
All
of Dow’s plants are owned or leased, subject to certain easements of other
persons which, in the opinion of management, do not substantially interfere with
the continued use of such properties or materially affect their value. Dow
leases ethylene plants in Fort Saskatchewan, Alberta, Canada, and Terneuzen, The
Netherlands.
A
summary of properties, classified by type, is provided in Note E to the
Consolidated Financial Statements. Additional information regarding leased
properties can be found in Note N to the Consolidated Financial
Statements.
The
Dow Chemical Company and Subsidiaries
LEGAL
PROCEEDINGS
Asbestos-Related
Matters of Union Carbide Corporation
Introduction
Union
Carbide Corporation (“Union Carbide”), a wholly owned subsidiary of the Company,
is and has been involved in a large number of asbestos-related suits filed
primarily in state courts during the past three decades. These suits principally
allege personal injury resulting from exposure to asbestos-containing products
and frequently seek both actual and punitive damages. The alleged claims
primarily relate to products that Union Carbide sold in the past, alleged
exposure to asbestos-containing products located on Union Carbide’s premises,
and Union Carbide’s responsibility for asbestos suits filed against a former
Union Carbide subsidiary, Amchem Products, Inc. (“Amchem”). In many cases,
plaintiffs are unable to demonstrate that they have suffered any compensable
loss as a result of such exposure, or that injuries incurred in fact resulted
from exposure to Union Carbide’s products.
Influenced
by the bankruptcy filings of numerous defendants in asbestos-related litigation
and the prospects of various forms of state and national legislative reform, the
rate at which plaintiffs filed asbestos-related suits against various companies,
including Union Carbide and Amchem, increased in 2001, 2002 and the first half
of 2003. Since then, the rate of filing has significantly abated. Union Carbide
expects more asbestos-related suits to be filed against Union Carbide and Amchem
in the future, and will aggressively defend or reasonably resolve, as
appropriate, both pending and future claims.
The
table below provides information regarding asbestos-related claims filed against
Union Carbide and Amchem:
|
2008
|
2007
|
2006
|
||||||||||
|
Claims
unresolved at January 1
|
90,322 | 111,887 | 146,325 | |||||||||
|
Claims
filed
|
10,922 | 10,157 | 16,386 | |||||||||
|
Claims
settled, dismissed or otherwise resolved
|
(25,538 | ) | (31,722 | ) | (50,824 | ) | ||||||
|
Claims
unresolved at December 31
|
75,706 | 90,322 | 111,887 | |||||||||
|
Claimants
with claims against both UCC and Amchem
|
24,213 | 28,937 | 38,529 | |||||||||
|
Individual
claimants at December 31
|
51,493 | 61,385 | 73,358 | |||||||||
Plaintiffs’
lawyers often sue dozens or even hundreds of defendants in individual lawsuits
on behalf of hundreds or even thousands of claimants. As a result, the damages
alleged are not expressly identified as to Union Carbide, Amchem or any other
particular defendant, even when specific damages are alleged with respect to a
specific disease or injury. In fact, there are no personal injury cases in which
only Union Carbide and/or Amchem are the sole named defendants. For these
reasons and based upon Union Carbide’s litigation and settlement experience,
Union Carbide does not consider the damages alleged against Union Carbide and
Amchem to be a meaningful factor in its determination of any potential
asbestos-related liability.
Estimating
the Liability
Based
on a study completed by Analysis, Research & Planning Corporation (“ARPC”)
in January 2003, Union Carbide increased its December 31, 2002
asbestos-related liability for pending and future claims for the 15-year period
ending in 2017 to $2.2 billion, excluding future defense and processing
costs. Since then, Union Carbide has compared current asbestos claim and
resolution activity to the results of the most recent ARPC study at each balance
sheet date to determine whether the accrual continues to be appropriate. In
addition, Union Carbide has requested ARPC to review Union Carbide’s historical
asbestos claim and resolution activity each November since 2004 to determine the
appropriateness of updating the most recent ARPC study.
In
November 2006, Union Carbide requested ARPC to review Union Carbide’s historical
asbestos claim and resolution activity and determine the appropriateness of
updating its January 2005 study. In response to that request, ARPC reviewed and
analyzed data through October 31, 2006 and concluded that the experience
from 2004 through 2006 was sufficient for the purpose of forecasting future
filings and values of asbestos claims filed against Union Carbide and Amchem,
and could be used in place of previous assumptions to update the January 2005
study. The resulting study, completed by ARPC in December 2006, stated that the
undiscounted cost of resolving pending and future asbestos-related claims
against Union Carbide and Amchem, excluding future defense and processing costs,
through 2021 was estimated to be between approximately $1.2 billion and
$1.5 billion. As in its January 2003 and January 2005 studies, ARPC
provided estimates for a longer period of time in its December 2006 study, but
also reaffirmed its prior advice that forecasts for shorter periods of time are
more accurate than those for longer periods of time.
Based
on ARPC’s December 2006 study and Union Carbide’s own review of the asbestos
claim and resolution activity, Union Carbide decreased its asbestos-related
liability for pending and future claims to $1.2 billion at
December 31, 2006 which covered the 15-year period ending in 2021,
excluding future defense and processing costs. The reduction was
$177 million and was shown as “Asbestos-related credit” in the consolidated
statements of income.
In
November 2007, Union Carbide requested ARPC to review Union Carbide’s 2007
asbestos claim and resolution activity and determine the appropriateness of
updating its December 2006 study. In response to that request, ARPC reviewed and
analyzed data through October 31, 2007. In December 2007, ARPC stated that
an update of its study would not provide a more likely estimate of future events
than the estimate reflected in its study of the previous year and, therefore,
the estimate in that study remained applicable. Based on Union Carbide’s own
review of the asbestos claim and resolution activity and ARPC’s response, Union
Carbide determined that no change to the accrual was required. At
December 31, 2007, Union Carbide’s asbestos-related liability for pending
and future claims was $1.1 billion.
In
November 2008, Union Carbide requested ARPC to review Union Carbide’s historical
asbestos claim and resolution activity and determine the appropriateness of
updating its December 2006 study. In response to that request, ARPC reviewed and
analyzed data through October 31, 2008. The resulting study, completed by
ARPC in December 2008, stated that the undiscounted cost of resolving pending
and future asbestos-related claims against UCC and Amchem, excluding future
defense and processing costs, through 2023 was estimated to be between
$952 million and $1.2 billion. As in its earlier studies, ARPC
provided estimates for a longer period of time in its December 2008 study, but
also reaffirmed its prior advice that forecasts for shorter periods of time are
more accurate than those for longer periods of time.
In
December 2008, based on ARPC’s December 2008 study and Union Carbide’s own
review of the asbestos claim and resolution activity, Union Carbide decreased
its asbestos-related liability for pending and future claims to
$952 million, which covered the 15-year period ending 2023, excluding
future defense and processing costs. The reduction was $54 million and was
shown as “Asbestos-related credit” in the consolidated statements of income. At
December 31, 2008, the asbestos-related liability for pending and future claims
was $934 million.
At
December 31, 2008, approximately 21 percent of the recorded liability
related to pending claims and approximately 79 percent related to future
claims. At December 31, 2007, approximately 31 percent of the recorded
liability related to pending claims and approximately 69 percent related to
future claims.
Defense
and Resolution Costs
The
following table provides information regarding defense and resolution costs
related to asbestos-related claims filed against Union Carbide and
Amchem:
|
Defense
and Resolution Costs
|
Aggregate
Costs
|
||||
|
In
millions
|
2008
|
2007
|
2006
|
to
Date as of
Dec.
31, 2008
|
|
|
Defense
costs
|
$60
|
$84
|
$62
|
$625
|
|
|
Resolution
costs
|
$116
|
$88
|
$117
|
$1,386
|
|
The
average resolution payment per asbestos claimant and the rate of new claim
filings has fluctuated both up and down since the beginning of 2001. Union
Carbide’s management expects such fluctuations to continue in the future based
upon a number of factors, including the number and type of
claims settled in a particular period, the jurisdictions in which such claims
arose, and the extent to which any proposed legislative reform related to
asbestos litigation is being considered.
Union
Carbide expenses defense costs as incurred. The pretax impact for defense and
resolution costs, net of insurance, was $53 million in 2008,
$84 million in 2007 and $45 million in 2006, and was reflected in
“Cost of sales” in the consolidated statements of income.
Insurance
Receivables
At
December 31, 2002, Union Carbide increased the receivable for insurance
recoveries related to its asbestos liability to $1.35 billion,
substantially exhausting its asbestos product liability coverage. The insurance
receivable related to the asbestos liability was determined by Union Carbide
after a thorough review of applicable insurance policies and the 1985 Wellington
Agreement, to which Union Carbide and many of its liability insurers are
signatory parties, as well as other insurance settlements, with due
consideration given to applicable deductibles, retentions and policy limits, and
taking into account the solvency and historical payment experience of various
insurance carriers. The Wellington Agreement and other agreements with insurers
are designed to facilitate an orderly resolution and collection of Union
Carbide’s insurance policies and to resolve issues that the insurance carriers
may raise.
In
September 2003, Union Carbide filed a comprehensive insurance coverage case, now
proceeding in the Supreme Court of the State of New York, County of New York,
seeking to confirm its rights to insurance for various asbestos claims and to
facilitate an orderly and timely collection of insurance proceeds. This lawsuit
was filed against insurers that are not signatories to the Wellington Agreement
and/or do not otherwise have agreements in place with Union Carbide regarding
their asbestos-related insurance coverage, in order to facilitate an orderly
resolution and collection of such insurance policies and to resolve issues that
the insurance carriers may raise. Although the lawsuit is continuing, through
the end of 2008, Union Carbide had reached settlements with several of the
carriers involved in this litigation.
Union
Carbide’s receivable for insurance recoveries related to its asbestos liability
was $403 million at December 31, 2008 and $467 million at
December 31, 2007. At December 31, 2008 and December 31, 2007,
all of the receivable for insurance recoveries was related to insurers that are
not signatories to the Wellington Agreement and/or do not otherwise have
agreements in place regarding their asbestos-related insurance
coverage.
In
addition to the receivable for insurance recoveries related to its asbestos
liability, Union Carbide had receivables for defense and resolution costs
submitted to insurance carriers for reimbursement as follows:
|
Receivables
for Costs Submitted to Insurance Carriers
at
December 31
|
||||||||
|
In
millions
|
2008
|
2007
|
||||||
|
Receivables
for defense costs
|
$ | 28 | $ | 18 | ||||
|
Receivables
for resolution costs
|
244 | 253 | ||||||
|
Total
|
$ | 272 | $ | 271 | ||||
After
a review of its insurance policies, with due consideration given to applicable
deductibles, retentions and policy limits, after taking into account the
solvency and historical payment experience of various insurance carriers;
existing insurance settlements; and the advice of outside counsel with respect
to the applicable insurance coverage law relating to the terms and conditions of
its insurance policies, Union Carbide continues to believe that its recorded
receivable for insurance recoveries from all insurance carriers is probable of
collection.
Summary
The
amounts recorded by Union Carbide for the asbestos-related liability and related
insurance receivable described above were based upon current, known facts.
However, future events, such as the number of new claims to be filed and/or
received each year, the average cost of disposing of each such claim, coverage
issues among insurers, and the continuing solvency of various insurance
companies, as well as the numerous uncertainties surrounding asbestos litigation
in the United States, could cause the actual costs and insurance recoveries for
Union Carbide to be higher or lower than those projected or those
recorded.
Because
of the uncertainties described above, Union Carbide’s management cannot estimate
the full range of the cost of resolving pending and future asbestos-related
claims facing Union Carbide and Amchem. Union Carbide’s management believes that
it is reasonably possible that the cost of disposing of Union Carbide’s
asbestos-related claims, including future defense costs, could have a material
adverse impact on Union Carbide’s results of operations and cash flows for a
particular period and on the consolidated financial position of Union
Carbide.
It
is the opinion of Dow’s management that it is reasonably possible that the cost
of Union Carbide disposing of its asbestos-related claims, including future
defense costs, could have a material adverse impact on the Company’s results of
operations and cash flows for a particular period and on the consolidated
financial position of the Company.
Environmental
Matters
On
October 1, 2007, the Company received a Notice of Enforcement (“NOE”) from
the Texas Commission on Environmental Quality (“TCEQ”) related to alleged air
emission events at the Company’s Freeport, Texas site. The NOE seeks a total
civil penalty of $354,000. While the Company expects that the penalty will
ultimately be reduced, resolution of the NOE may result in a civil penalty in
excess of $100,000.
On
various dates, the Company received additional NOEs from the TCEQ for alleged
violations of air regulations related to nine independent air emission events
that occurred between May 2007 and April 2008 at eight different plants at the
Company’s Freeport, Texas site. During the fourth quarter of 2008, these nine
independent events were officially combined by the TCEQ into a single
enforcement matter seeking an initial combined civil penalty of $312,325. The
TCEQ Staff and the Company have tentatively agreed to settle this single
enforcement matter for $202,325, half of which will be paid to the TCEQ, with
the balance to be used to purchase low emission school buses for use near the
Company's Freeport, Texas site. This settlement remains subject to final
approval by the TCEQ Commissioners.
The Company received an Administrative Complaint dated September 26, 2008
from the United States Environmental Protection Agency (“EPA”) - Region 1 office
notifying the Company of the EPA’s intent to assess civil penalties in the
proposed amount of $330,112 for seven alleged violations of the Company’s
Allyn’s Point, Connecticut manufacturing facilities’ Title V Clean Air Act
Operating Permit and Title V regulations. The seven alleged violations relate
primarily to environmental recordkeeping infractions, failure to follow required
work practices and one alleged violation of volatile organic compound (“VOC”)
emission requirements. The Company has requested an informal settlement
conference and intends to request a formal administrative hearing to contest the
allegations and the proposed penalty, if necessary. While the Company expects
that the penalty will be reduced, resolution may result in a civil penalty in
excess of $100,000.
Matters
Involving the Acquisition of Rohm and Haas Company
Introduction
On
July 10, 2008, the Company and Rohm and Haas Company (“Rohm and Haas”)
entered into an Agreement and Plan of Merger (the “Merger Agreement”) for the
acquisition of Rohm and Haas for $78 in cash per share of Rohm and Haas common
stock (the “Merger”). The Merger did not close in January 2009, as originally
anticipated, in light of the Company’s determination that recent material
developments had created unacceptable uncertainties with respect to the funding
and economics of the combined Dow and Rohm and Haas enterprise. This assessment
was based on several macro-economic factors such as the continued crisis in
global financial and credit markets and unprecedented demand destruction,
combined with the failure of PIC to fulfill its obligation to close the K-Dow
joint venture transaction and fund the initial purchase price on January 2,
2009.
Litigation
On
January 26, 2009, Rohm and Haas commenced an action in the Court of
Chancery of the State of Delaware to compel the Company to acquire Rohm and Haas
for $78 in cash per share of Rohm and Haas common stock (plus a “ticking fee”
commencing on January 10, 2009). The complaint (the “Complaint”) in the
action alleges that all conditions to the Company’s obligation to close the
Merger were met on January 23, 2009 and that the Company, pursuant to the
terms of the Merger Agreement, was required to close the Merger within two
business days thereafter, i.e., by January 27,
2009. The Complaint further alleges that the Company advised Rohm and Haas on
January 25, 2009 that it would not close the Merger on or by
January 27, 2009, and that the Company knowingly and intentionally breached
the Merger Agreement.
On
January 27, 2009, the Court determined to expedite proceedings in the case
and ordered that the trial commence on March 9, 2009. The trial will relate
to the issue of whether the Court should order specific performance and thus
require the Company to close the Merger. The Court also stated that it strongly
encouraged the parties to focus on a business solution to the
dispute.
On
February 3, 2009, the Company filed its answer (the “Answer”) to the
Complaint. The Answer denied that all conditions to closing had been met as of
January 23, 2009, noting that the United States Federal Trade Commission
(“FTC”) action on January 23, 2009 was only a provisional acceptance of the
proposed consent order and not final approval, and that the FTC reserves
discretion to reject the proposed consent order after the close of the public
comment period. The Answer denied that Rohm and Haas is entitled to a decree of
specific performance, and asserted affirmative defenses of frustration of
purpose, commercial impracticability, impossibility of performance and undue
hardship – all arising from the sudden and rapid economic and financial
downturn, the dramatic falloff in the Company’s earnings in the fourth quarter
of 2008 and continuing into the first quarter of 2009, the risk of the Company’s
inability to comply with financial covenants contained in the bridge loan
expected to provide temporary financing for the Merger, the risk of the Company
losing access to the capital markets due to potential loss of its investment
grade rating, and the collapse of the K-Dow joint venture. The Company also
asserted that specific performance is not appropriate because Rohm and Haas has
adequate remedies at law for any breach of the Merger Agreement.
Summary
Because
of the uncertainties associated with the litigation described above, management
cannot estimate the impact of the ultimate resolution of the litigation. It is
the opinion of the Company’s management that it is reasonably possible that the
ultimate resolution could have a material adverse impact on the
consolidated financial statements of the Company.
Derivative
Litigation
On
February 9, 2009, Michael D. Blum, in the name of and on behalf of the
Company, commenced an action in the Court of Chancery of the State of Delaware
against certain officers and directors of the Company (“Defendants”) alleging,
among other things, that Defendants breached their fiduciary duty by causing the
Company to enter into the Merger Agreement without any contingencies for failure
of financing or to receive the proceeds of the K-Dow transaction. The relief
sought includes the implementation of certain corporate governance reforms by
the Company as well as monetary damages and attorneys’ fees. The Defendants have
not yet answered or otherwise responded to the Complaint.
The
Company believes the complaint in the action to be entirely without merit and
intends to oppose it vigorously.
The
Dow Chemical Company and Subsidiaries
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matter was submitted to a vote of security holders during the fourth quarter of
2008.
EXECUTIVE
OFFICERS OF THE REGISTRANT
Set
forth below is information related to the Company’s executive officers as of
February 18, 2009.
WILLIAM
F. BANHOLZER, 52. DOW EXECUTIVE VICE PRESIDENT AND CHIEF TECHNOLOGY
OFFICER. Employee of Dow since 2005. General Electric Company, Chemical Engineer
1983-1989. Laboratory Manager and Leader R&D Center 1989-1992. Engineering
Manager of Superabrasives Business 1992-1997. Vice President of Global
Engineering, GE Lighting 1997-1999. Vice President of Global Technology, GE
Advanced Materials 1999-2005. Dow Corporate Vice President and Chief Technology
Officer 2005-February 2009. Executive Vice President and Chief Technology
Officer February 2009 to date. Director of Dow Corning Corporation* and Mycogen
Corporation*. Member of Dow Corning Corporation Corporate Responsibility
Committee. Elected to the U.S. National Academy of Engineering (“NAE”) in 2002.
Elected NAE Councilor 2005. Member of American Chemical Society and American
Institute of Chemical Engineers. Advisory Board member for chemistry and
chemical engineering at Massachusetts Institute of Technology and University of
California, Berkeley.
CAROL
A. DUDLEY, 50. DOW SENIOR VICE PRESIDENT, BASIC CHEMICALS DIVISION.
Employee of Dow since 1980. Director of Analytical Science Lab 1993-1995. Global
R&D Director Epoxy Products and Intermediates Business 1995-1999. North
America Chlor-Alkali Assets Business Operations Leader, Site Leader 1999-2000.
Business Vice President Chlor-Alkali Assets 2000-2003. Vice President Global
Purchasing 2003-2004. R&D Vice President Hydrocarbons & Energy,
Chemicals & Intermediates and Corporate R&D 2004-2005. Vice President
Business Development Market Facing Businesses 2005-2006. Vice President R&D,
Performance Plastics & Chemicals Portfolio 2006-2007. Corporate Vice
President Market Facing, Business Development and Licensing 2007-2008. Senior
Vice President Basic Chemicals Division December 2008 to date. Advisory Board
member Engineering Department at Carnegie Mellon University. Member of Society
of Women Engineers. Member of American Institute of Chemical
Engineers.
GREGORY
M. FREIWALD, 55. DOW EXECUTIVE VICE PRESIDENT, HUMAN RESOURCES,
CORPORATE AFFAIRS AND AVIATION. Employee of Dow since 1979. Human Resources
Manager, Chemical & Performance Business-U.S. Region 1992-1993. Human
Resources Director for Executive, Finance, Law and Corporate 1993-1994. Latin
America Human Resources and Quality Performance Director 1994-1996. Latin
America Human Resources Leader and PBBPolisur S.A.* Human Resources Integration
Leader 1996-1997. Global Human Resources, Resources Center Director 1997-2001.
Senior Human Resources Director for Global Human Resources, Resource Center and
Human Resources Director for Geographic Council 2001-2004. Human Resources Vice
President, Operations 2004-2005. Human Resources Vice President 2005-2006. Vice
President, Corporate Affairs, Aviation and Executive Compensation 2006-2007.
Senior Vice President, Human Resources, Corporate Affairs and Aviation 2008 to
February 2009. Executive Vice President, Human Resources, Corporate Affairs and
Aviation February 2009 to date.
MICHAEL
R. GAMBRELL, 55. DOW EXECUTIVE VICE PRESIDENT, MANUFACTURING AND
ENGINEERING OPERATIONS. Employee of Dow since 1976. Business Director for the
North America Chlor-Alkali Assets Business 1989-1992. General Manager for the
Plastic Lined Pipe Business 1992-1994. Vice President of Operations for Latin
America 1994-1996. Corporate Director, Technology Centers and Global Process
Engineering 1996-1998. Global Business Director, Chlor-Alkali Assets Business
1998-2000. Business Vice President, EDC/VCM & ECU Management 2000-2003.
Business Vice President, Chlor-Vinyl Business 2003. Senior Vice President,
Chemicals and Intermediates 2003-2005. Executive Vice President, Basic Plastics
and Chemicals Portfolio 2005-2007. Executive Vice President, Basic Plastics and
Chemicals, and Manufacturing and Engineering 2007 to February 2009. Executive
Vice President, Manufacturing and Engineering Operations February 2009 to date.
Ex-officio member of the Dow Board of Director’s Environment, Health and Safety
Committee. Board member of Oman Petrochemical Industries Company LLC*. Director
of TRW Automotive Holdings Corporation. Director of the National Association of
Manufacturers. Member of U.S.-India Business Council. Recipient of the
President’s Distinguished Alumnus Award from Rose-Hulman Institute of Technology
1996.
HEINZ
HALLER, 53. DOW EXECUTIVE VICE PRESIDENT, HEALTH, AGRICULTURE AND
INFRASTRUCTURE GROUP. Employee of Dow 1980-1994 and since 2006. Sales
representative 1980-1983. Marketing manager, Chlorinated Solvents 1984-1985.
Frankfurt Sales office manager and Regional manager, Emulsion Polymers and
Specialty Chemicals 1986-1989. Dow business operations manager, Emulsion
Polymers, New Ventures and Plastic Lined Pipe 1989-1992. Global business
director, Emulsion Polymers 1993-1994. Managing Director in Horgen,
Plüss-Staufer AG 1994-1999. Chief Executive Officer, Red Bull Sauber AG and
Sauber Petronas Engineering AG 2000-2002. Managing Director, Allianz Capital
Partners GmbH 2002-2006. Dow Corporate Vice President, Strategic Development and
New Ventures 2006-2007. Executive Vice President, Performance Plastics and
Chemicals 2007 to February 2009. Executive Vice President, Health, Agriculture
and Infrastructure Group February 2009 to date. Director of Mycogen Corporation*
and Dow Corning Corporation*. Member of the Dow AgroSciences LLC* Members
Committee. Director of the Michigan Molecular Institute.
CHARLES
J. KALIL, 57. DOW EXECUTIVE VICE PRESIDENT, LAW AND GOVERNMENT
AFFAIRS, GENERAL COUNSEL AND CORPORATE SECRETARY. Employee of Dow since 1980.
U.S. Department of Justice – Assistant U.S. Attorney, Eastern District of
Michigan 1977-1980. General Counsel of Petrokemya (a former 50:50 joint venture
of the Company) 1982-1983. Regional Counsel to Middle East/Africa 1983-1986.
Senior Environmental Attorney 1986-1987. Litigation Staff Counsel and Group
Leader 1987-1990. Senior Financial Law Counsel, Mergers and Acquisitions
1990-1992. General Counsel and Area Director of Government and Public Affairs
for Dow Latin America 1992-1997. Special Counsel and Manager of INSITE™ legal
issues 1997-2000. Assistant General Counsel for Corporate and Financial Law
2000-2003. Associate General Counsel for Corporate Legal Affairs 2003-2004. Dow
Corporate Vice President and General Counsel 2004-2007. Senior Vice President
and General Counsel 2007-2008. Executive Vice President and General Counsel
March 2008 to date. Corporate Secretary 2005 to date. Board member of Dow
Corning Corporation*, Dorinco Reinsurance Company*, Liana Limited* and Oman
Petrochemical Industries Company LLC*. Member of the Conference Board’s Council
of Chief Legal Officers. Member of the American Bar Association, District of
Columbia Bar and the State Bar of Michigan.
DAVID
E. KEPLER, 56. DOW EXECUTIVE VICE PRESIDENT, BUSINESS SERVICES, CHIEF
SUSTAINABILITY OFFICER AND CHIEF INFORMATION OFFICER. Employee of Dow since
1975. Computer Services Manager of Dow U.S.A. Eastern Division 1984-1988.
Commercial Director of Dow Canada Performance Products 1989-1991. Director of
Pacific Area Information Systems 1991-1993. Manager of Information Technology
for Chemicals and Plastics 1993-1994. Director of Global Information Systems
Services 1994-1995. Director of Global Information Application 1995-1998. Vice
President 1998-2000. Chief Information Officer 1998 to date. Corporate Vice
President with responsibility for eBusiness 2000 to date. Responsibility for
Advanced Electronic Materials 2002-2003. Responsibility for Shared Services –
Customer Service, Information Systems, Purchasing, Six Sigma, Supply Chain, and
Work Process Improvement 2004 to date. Senior Vice President with responsibility
for EH&S 2006-2008. Responsibility as Chief Sustainability Officer 2007 to
date. Executive Vice President March 2008 to date. Director of Dorinco
Reinsurance Company* and Liana Limited*. Director of Teradata Corporation.
Chairman of the MidMichigan Innovation Center Board of Directors. Member of U.S.
Chamber of Commerce Board of Directors and Vice Chairman of the Great Lakes
Region. Member of the American Chemical Society and the American Institute of
Chemical Engineers.
ANDREW
N. LIVERIS, 54. DOW PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN.
DIRECTOR SINCE 2004. Employee of Dow since 1976. General manager of Dow's
Thailand operations 1989-1992. Group business director for Emulsion Polymers and
New Ventures 1992-1993. General manager of Dow's start-up businesses in
Environmental Services 1993-1994. Vice President of Dow's start-up businesses in
Environmental Services 1994-1995. President of Dow Chemical Pacific Limited*
1995-1998. Vice President of Specialty Chemicals 1998-2000. Business Group
President for Performance Chemicals 2000-2003. President and Chief Operating
Officer 2003-2004. President and Chief Executive Officer 2004 to date and
Chairman 2006 to date. Director of Citigroup, Inc. Chairman of the U.S.-China
Business Council; Vice Chairman of the U.S. Business Council; Past Chairman of
the American Chemistry Council and the International Council of Chemical
Associations. Member of the United States Climate Action Partnership, the
American Australian Association, the Business Roundtable, the Detroit Economic
Club, the National Petroleum Council and the Société de Chimie Industrielle.
Member of the Board of Trustees of Tufts University.
JUAN
R. LUCIANO, 47. DOW SENIOR VICE PRESIDENT, HYDROCARBONS AND BASIC
PLASTICS DIVISION. Employee of Dow since 1985. Sales & Marketing Manager
Specialty Chemicals 1994-1996. Senior Marketing Manager for the Americas,
Polyglycols within Specialty Chemicals Portfolio 1996-1999. Business Director
Chelants, Specialty Chemicals 1999-2000. Global Business Director
LDPE/PRIMACOR™/SARAN™/Slurry PE 2000-2001. Global Business Director
Polypropylene 2001-2004. Business Vice President Engineering Polymers 2004-2006.
Global Business Vice President Olefins and Aromatics 2006-2007. Business Group
President Hydrocarbons and Energy 2007-2008. Senior Vice President Hydrocarbons
and Basic Plastics Division December 2008 to date.
JAMES
D. MCILVENNY, 51. DOW SENIOR VICE PRESIDENT, PERFORMANCE PRODUCTS
DIVISION. Employee of Dow since 1982. Business Manager Separation Systems
1989-1994. Director of Marketing, Sales and Service Liquid Separations
1994-1995. Global Business Director Liquid Separations 1995-1998. President and
Chief Executive Officer FilmTec Corporation* 1995-1998. President and Chief
Executive Officer Hampshire Chemical Corp.* 1998-2001. Business Vice President
Specialty Polymers 2001-2004. President Greater China 2004-2006. President Dow
Asia Pacific and Greater China 2006-2008. Senior Vice President Performance
Products Division December 2008 to date.
GEOFFERY
E. MERSZEI, 57. DOW EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER.
DIRECTOR SINCE 2005. Employee of Dow 1977-2001 and since 2005. Dow Middle
East/Africa Credit Manager 1977-1980. Dow Asia Pacific Credit Manager 1980-1982.
Dow Asia Pacific Finance and Credit Manager 1982-1983. Dow Germany and Eastern
Europe Treasurer 1983-1986. Dow Foreign Exchange Manager 1986-1988. Director of
Finance for Dow Asia Pacific 1988-1991. Director of Finance/Treasurer for Dow
Europe 1991-1996. Dow Vice President and Treasurer 1996-2001. Alcan, Inc.,
Executive Vice President and Chief Financial Officer 2001-2005. Dow Executive
Vice President and Chief Financial Officer 2005 to date. Board member of Dow
Corning Corporation*, Dow Credit Corporation*, Dow Financial Services Inc.*,
Mycogen Corporation*, and Oman Petrochemical Industries Company LLC*. Chairman
of Dorinco Reinsurance Company*, Dow International Holdings, S.A.* and Liana
Limited*. Board member of Chemical Financial Corporation. Chairman of the
Conference Board’s Council of Financial Executives. Trustee and Executive
Committee Member of the United States Council for International
Business.
FERNANDO
RUIZ, 53. DOW CORPORATE VICE PRESIDENT AND TREASURER. Employee of Dow
since 1980. Treasurer, Ecuador Region 1982-1984. Treasurer, Mexico Region
1984-1988. Financial Operations Manager, Corporate Treasury 1988-1991. Assistant
Treasurer, USA Area 1991-1992. Senior Finance Manager, Corporate Treasury
1992-1996. Assistant Treasurer 1996-2001. Corporate Director of Insurance and
Risk Management 2001. Corporate Vice President and Treasurer 2001 to date.
President and Chief Executive Officer, Liana Limited* and Dorinco Reinsurance
Company* 2001 to date. President of Dow Credit Corporation* 2001 to date.
Director of Dow Financial Services Inc.* Member of Financial Executives
International and Michigan State University (Eli Broad College of Business)
Advisory Board. Member of DeVry, Inc. Board of Directors.
WILLIAM
H. WEIDEMAN, 54. DOW VICE PRESIDENT AND CONTROLLER. Employee of Dow
since 1976. Controller of Texas Operations 1994-1996. Global Business Controller
for Specialty Chemicals 1996-1998. Global Finance Director for Specialty
Chemicals 1998-2000. Global Finance Director for Performance Chemicals
2000-2004. Finance Vice President, Chemicals and Intermediates and Dow Ventures
2004-2006. Group Finance Vice President for Basic Chemicals and Plastics
Portfolio 2006. Vice President and Controller 2006 to date. Director of Diamond
Capital Management, Inc.*, Dorinco Reinsurance Company* and Liana Limited*.
Director of the Dow Chemical Employees’ Credit Union and Family and Children’s
Services of Midland. Board and finance committee member of Mid Michigan Medical
Center. Member of Financial Executives International Committee on Corporate
Reporting, Member of Central Michigan University Accounting Advisory Committee
and Central Michigan University Development Board.
* A
number of Company entities are referenced in the biographies and are defined as
follows. Some of these entities have had various names over the
years. The names and relationships to the Company, unless otherwise
indicated, are stated in this footnote as they existed as of February 13,
2009. Dow Corning Corporation and Oman Petrochemical Industries
Company LLC – companies ultimately 50 percent owned by
Dow. Diamond Capital Management, Inc.; Dorinco Reinsurance Company;
Dow AgroSciences LLC; Dow Chemical Pacific Limited; Dow Credit Corporation; Dow
Financial Services Inc.; Dow International Holdings, S.A.; FilmTec Corporation,
Hampshire Chemical Corp., Liana Limited; Mycogen Corporation and PBBPolisur S.A.
– all ultimately wholly owned subsidiaries of Dow. Ownership by Dow
described above may be either direct or indirect.
The
Dow Chemical Company and Subsidiaries
Related
Stockholder Matters and Issuer Purchases of Equity Securities.
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
The
principal market for the Company’s common stock is the New York Stock Exchange,
traded under the symbol “DOW.”
Quarterly
market and dividend information can be found in Quarterly Statistics at the end
of Part II, Item 8. Financial Statements and Supplementary Data, following the
Notes to the Consolidated Financial Statements.
At
December 31, 2008, there were 94,605 registered common stockholders. The
Company estimates that there were an additional 587,000 stockholders whose
shares were held in nominee names at December 31, 2008. At January 30,
2009, there were 94,558 registered common stockholders.
On
February 12, 2009, the Board of Directors announced a quarterly dividend of
$0.15 per share, payable April 30, 2009, to stockholders of record on
March 31, 2009. Since 1912, the Company has paid a cash dividend every
quarter and, in each instance prior to this dividend, has maintained or
increased the amount of the dividend, adjusted for stock splits. During this
97-year period, Dow has increased the amount of the quarterly dividend 47 times
(approximately 12 percent of the time), and maintained the amount of the
quarterly dividend approximately 88 percent of the time. The dividend was
reduced in February 2009, for the first time in the 97-year period, due to
uncertainty in the credit markets, unprecedented lower demand for chemical
products, the ongoing global recession and pending business issues. The Company
declared dividends of $1.68 per share in 2008, $1.635 per share in 2007 and
$1.50 per share in 2006.
See
Part III, Item 11. Executive Compensation for information relating to the
Company’s equity compensation plans.
The
following table provides information regarding purchases of the Company’s common
stock by the Company during the three months ended December 31,
2008:
|
Issuer
Purchases of Equity Securities
|
Total number of shares
purchased as part of the
Company’s publicly
announced share
repurchase program
(2)
|
Approximate dollar value
of shares that may yet be
purchased under the
Company’s publicly
announced share
repurchase program
(2)
|
||
|
Period
|
Total number of
shares purchased (1)
|
Average
price
paid
per share
|
||
|
October
2008
|
67
|
$25.59
|
-
|
-
|
|
November
2008
|
-
|
-
|
-
|
-
|
|
December
2008
|
3,463
|
$20.11
|
-
|
-
|
|
Fourth
quarter 2008
|
3,530
|
$20.21
|
-
|
-
|
|
(1)
|
Shares
received from employees and non-employee directors to pay taxes owed to
the Company as a result of the exercise of stock options or the delivery
of deferred stock. For information regarding the Company’s stock option
plans, see Note O to the Consolidated Financial
Statements.
|
|
(2)
|
On
October 26, 2006, the Company announced that the Board of Directors
had approved a share buy-back program, authorizing up to $2 billion
to be spent on the repurchase of the Company’s common stock. Purchases
under this program began in March 2007 and were completed in the third
quarter of 2008.
|
|
The
Dow Chemical Company and Subsidiaries
|
||||||||||||||||||||
|
In
millions, except as noted (Unaudited)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Summary
of Operations
|
||||||||||||||||||||
|
Net sales
(1)
|
$ | 57,514 | $ | 53,513 | $ | 49,124 | $ | 46,307 | $ | 40,161 | ||||||||||
|
Cost of sales
(1)
|
52,019 | 46,400 | 41,526 | 38,276 | 34,244 | |||||||||||||||
|
Research
and development expenses
|
1,310 | 1,305 | 1,164 | 1,073 | 1,022 | |||||||||||||||
|
Selling,
general and administrative expenses
|
1,969 | 1,864 | 1,663 | 1,545 | 1,436 | |||||||||||||||
|
Amortization
of intangibles
|
92 | 72 | 50 | 55 | 81 | |||||||||||||||
|
Purchased
in-process research and development charges
|
44 | 57 | - | - | - | |||||||||||||||
|
Special
charges, merger-related expenses, and restructuring
charges
|
1,127 | 578 | 591 | 114 | 543 | |||||||||||||||
|
Asbestos-related
charge (credit)
|
(54 | ) | - | (177 | ) | - | - | |||||||||||||
|
Equity
in earnings of nonconsolidated affiliates
|
787 | 1,122 | 959 | 964 | 923 | |||||||||||||||
|
Other
income
|
89 | 324 | 137 | 755 | 699 | |||||||||||||||
|
Interest
expense - net
|
562 | 454 | 431 | 564 | 661 | |||||||||||||||
|
Income
(Loss) before income taxes and minority interests
|
1,321 | 4,229 | 4,972 | 6,399 | 3,796 | |||||||||||||||
|
Provision
(Credit) for income taxes
|
667 | 1,244 | 1,155 | 1,782 | 877 | |||||||||||||||
|
Minority
interests' share in income
|
75 | 98 | 93 | 82 | 122 | |||||||||||||||
|
Preferred
stock dividends
|
- | - | - | - | - | |||||||||||||||
|
Income
(Loss) before cumulative effect of changes in
|
||||||||||||||||||||
|
accounting
principles
|
579 | 2,887 | 3,724 | 4,535 | 2,797 | |||||||||||||||
|
Cumulative
effect of changes in accounting principles
|
- | - | - | (20 | ) | - | ||||||||||||||
|
Net
income (loss) available for common stockholders
|
$ | 579 | $ | 2,887 | $ | 3,724 | $ | 4,515 | $ | 2,797 | ||||||||||
|
Per share of common stock (in
dollars): (2)
|
||||||||||||||||||||
|
Earnings
(Loss) before cumulative effect of changes in
|
||||||||||||||||||||
|
accounting
principles per common share - basic
|
$ | 0.62 | $ | 3.03 | $ | 3.87 | $ | 4.71 | $ | 2.98 | ||||||||||
|
Earnings
(Loss) per common share - basic
|
0.62 | 3.03 | 3.87 | 4.69 | 2.98 | |||||||||||||||
|
Earnings
(Loss) before cumulative effect of changes in
|
||||||||||||||||||||
|
accounting
principles per common share - diluted
|
0.62 | 2.99 | 3.82 | 4.64 | 2.93 | |||||||||||||||
|
Earnings
(Loss) per common share - diluted
|
0.62 | 2.99 | 3.82 | 4.62 | 2.93 | |||||||||||||||
|
Cash
dividends declared per share of common stock
|
1.68 | 1.635 | 1.50 | 1.34 | 1.34 | |||||||||||||||
|
Cash
dividends paid per share of common stock
|
1.68 | 1.59 | 1.46 | 1.34 | 1.34 | |||||||||||||||
|
Book
value per share of common stock
|
14.62 | 20.62 | 17.81 | 15.84 | 12.88 | |||||||||||||||
|
Weighted-average common shares
outstanding - basic (2)
|
930.4 | 953.1 | 962.3 | 963.2 | 940.1 | |||||||||||||||
|
Weighted-average common shares
outstanding - diluted (2)
|
939.0 | 965.6 | 974.4 | 976.8 | 953.8 | |||||||||||||||
|
Convertible
preferred shares outstanding
|
- | - | - | - | - | |||||||||||||||
|
Year-end
Financial Position
|
||||||||||||||||||||
|
Total
assets
|
$ | 45,474 | $ | 48,801 | $ | 45,581 | $ | 45,934 | $ | 45,885 | ||||||||||
|
Working
capital
|
2,952 | 6,209 | 6,608 | 6,741 | 5,384 | |||||||||||||||
|
Property
- gross
|
48,391 | 47,708 | 44,381 | 41,934 | 41,898 | |||||||||||||||
|
Property
- net
|
14,294 | 14,388 | 13,722 | 13,537 | 13,828 | |||||||||||||||
|
Long-term
debt and redeemable preferred stock
|
8,042 | 7,581 | 8,036 | 9,186 | 11,629 | |||||||||||||||
|
Total
debt
|
11,856 | 9,715 | 9,546 | 10,706 | 12,594 | |||||||||||||||
|
Net
stockholders' equity
|
13,511 | 19,389 | 17,065 | 15,324 | 12,270 | |||||||||||||||
|
Financial
Ratios
|
||||||||||||||||||||
|
Research and development expenses
as percent of net sales (1)
|
2.3 | % | 2.4 | % | 2.4 | % | 2.3 | % | 2.5 | % | ||||||||||
|
Income
(Loss) before income taxes and minority interests
|
||||||||||||||||||||
|
as percent of
net sales (1)
|
2.3 | % | 7.9 | % | 10.1 | % | 13.8 | % | 9.5 | % | ||||||||||
|
Return on stockholders' equity
(3)
|
4.3 | % | 14.9 | % | 21.8 | % | 29.5 | % | 22.8 | % | ||||||||||
|
Debt
as a percent of total capitalization
|
45.7 | % | 31.8 | % | 34.1 | % | 39.1 | % | 47.9 | % | ||||||||||
|
General
|
||||||||||||||||||||
|
Capital
expenditures
|
$ | 2,276 | $ | 2,075 | $ | 1,775 | $ | 1,597 | $ | 1,333 | ||||||||||
|
Depreciation
|
2,016 | 1,959 | 1,904 | 1,904 | 1,904 | |||||||||||||||
|
Salaries
and wages paid
|
4,681 | 4,404 | 3,935 | 4,309 | 3,993 | |||||||||||||||
|
Cost
of employee benefits
|
981 | 1,130 | 1,125 | 988 | 885 | |||||||||||||||
|
Number
of employees at year-end (thousands)
|
46.1 | 45.9 | 42.6 | 42.4 | 43.2 | |||||||||||||||
|
Number of Dow stockholders of
record at year-end (thousands) (4)
|
94.6 | 98.7 | 103.1 | 105.6 | 108.3 | |||||||||||||||
|
(1)
Adjusted for reclassification of freight on sales in 2000 and
reclassification
|
(4)
Stockholders of record as reported by the transfer agent.
The
|
|||||
|
of
insurance operations in 2002.
|
Company
estimates that there were an additional 587,000
|
|||||
|
(2)
Adjusted for 3-for-1 stock split in 2000.
|
stockholders
whose shares were held in nominee names at
|
|||||
|
(3)
Included Temporary Equity in 1997-1999.
|
December
31, 2008.
|
|||||
|
The
Dow Chemical Company and Subsidiaries
|
||||||||||||||||||||||||
|
PART
II, Item 6. Selected Financial Data.
|
||||||||||||||||||||||||
|
In
millions, except as noted (Unaudited)
|
2003
|
2002
|
2001
|
2000
|
1999
|
1998
|
||||||||||||||||||
|
Summary
of Operations
|
||||||||||||||||||||||||
|
Net sales
(1)
|
$ | 32,632 | $ | 27,609 | $ | 28,075 | $ | 29,798 | $ | 26,131 | $ | 25,396 | ||||||||||||
|
Cost of sales
(1)
|
28,177 | 23,780 | 23,892 | 24,310 | 20,422 | 19,566 | ||||||||||||||||||
|
Research
and development expenses
|
981 | 1,066 | 1,072 | 1,119 | 1,075 | 1,026 | ||||||||||||||||||
|
Selling,
general and administrative expenses
|
1,392 | 1,598 | 1,765 | 1,825 | 1,776 | 1,964 | ||||||||||||||||||
|
Amortization
of intangibles
|
63 | 65 | 178 | 139 | 160 | 106 | ||||||||||||||||||
|
Purchased
in-process research and development charges
|
- | - | 69 | 6 | 6 | 349 | ||||||||||||||||||
|
Special
charges, merger-related expenses, and restructuring
charges
|
- | 280 | 1,487 | - | 94 | 458 | ||||||||||||||||||
|
Asbestos-related
charge (credit)
|
- | 828 | - | - | - | - | ||||||||||||||||||
|
Equity
in earnings of nonconsolidated affiliates
|
322 | 40 | 29 | 354 | 95 | 31 | ||||||||||||||||||
|
Other
income
|
146 | 54 | 394 | 352 | 329 | 1,135 | ||||||||||||||||||
|
Interest
expense - net
|
736 | 708 | 648 | 519 | 432 | 458 | ||||||||||||||||||
|
Income
(Loss) before income taxes and minority interests
|
1,751 | (622 | ) | (613 | ) | 2,586 | 2,590 | 2,635 | ||||||||||||||||
|
Provision
(Credit) for income taxes
|
(82 | ) | (280 | ) | (228 | ) | 839 | 874 | 902 | |||||||||||||||
|
Minority
interests' share in income
|
94 | 63 | 32 | 72 | 74 | 20 | ||||||||||||||||||
|
Preferred
stock dividends
|
- | - | - | - | 5 | 6 | ||||||||||||||||||
|
Income
(Loss) before cumulative effect of changes in
|
||||||||||||||||||||||||
|
accounting
principles
|
1,739 | (405 | ) | (417 | ) | 1,675 | 1,637 | 1,707 | ||||||||||||||||
|
Cumulative
effect of changes in accounting principles
|
(9 | ) | 67 | 32 | - | (20 | ) | - | ||||||||||||||||
|
Net
income (loss) available for common stockholders
|
$ | 1,730 | $ | (338 | ) | $ | (385 | ) | $ | 1,675 | $ | 1,617 | $ | 1,707 | ||||||||||
|
Per share of common stock (in
dollars): (2)
|
||||||||||||||||||||||||
|
Earnings
(Loss) before cumulative effect of changes in
|
||||||||||||||||||||||||
|
accounting
principles per common share - basic
|
$ | 1.89 | $ | (0.44 | ) | $ | (0.46 | ) | $ | 1.88 | $ | 1.87 | $ | 1.92 | ||||||||||
|
Earnings
(Loss) per common share - basic
|
1.88 | (0.37 | ) | (0.43 | ) | 1.88 | 1.85 | 1.92 | ||||||||||||||||
|
Earnings
(Loss) before cumulative effect of changes in
|
||||||||||||||||||||||||
|
accounting
principles per common share - diluted
|
1.88 | (0.44 | ) | (0.46 | ) | 1.85 | 1.84 | 1.89 | ||||||||||||||||
|
Earnings
(Loss) per common share - diluted
|
1.87 | (0.37 | ) | (0.43 | ) | 1.85 | 1.82 | 1.89 | ||||||||||||||||
|
Cash
dividends declared per share of common stock
|
1.34 | 1.34 | 1.295 | 1.16 | 1.16 | 1.16 | ||||||||||||||||||
|
Cash
dividends paid per share of common stock
|
1.34 | 1.34 | 1.25 | 1.16 | 1.16 | 1.16 | ||||||||||||||||||
|
Book
value per share of common stock
|
9.89 | 8.36 | 11.04 | 13.22 | 12.40 | 11.34 | ||||||||||||||||||
|
Weighted-average common shares
outstanding - basic (2)
|
918.8 | 910.5 | 901.8 | 893.2 | 874.9 | 888.1 | ||||||||||||||||||
|
Weighted-average common shares
outstanding - diluted (2)
|
926.1 | 910.5 | 901.8 | 904.5 | 893.5 | 904.8 | ||||||||||||||||||
|
Convertible
preferred shares outstanding
|
- | - | - | - | 1.3 | 1.4 | ||||||||||||||||||
|
Year-end
Financial Position
|
||||||||||||||||||||||||
|
Total
assets
|
$ | 41,891 | $ | 39,562 | $ | 35,515 | $ | 35,991 | $ | 33,456 | $ | 31,121 | ||||||||||||
|
Working
capital
|
3,578 | 2,519 | 2,183 | 1,150 | 2,848 | 1,570 | ||||||||||||||||||
|
Property
- gross
|
40,812 | 37,934 | 35,890 | 34,852 | 33,333 | 32,844 | ||||||||||||||||||
|
Property
- net
|
14,217 | 13,797 | 13,579 | 13,711 | 13,011 | 12,628 | ||||||||||||||||||
|
Long-term
debt and redeemable preferred stock
|
11,763 | 11,659 | 9,266 | 6,613 | 6,941 | 5,890 | ||||||||||||||||||
|
Total
debt
|
13,109 | 13,036 | 10,883 | 9,450 | 8,708 | 8,099 | ||||||||||||||||||
|
Net
stockholders' equity
|
9,175 | 7,626 | 9,993 | 11,840 | 10,940 | 9,878 | ||||||||||||||||||
|
Financial
Ratios
|
||||||||||||||||||||||||
|
Research and development expenses
as percent of net sales (1)
|
3.0 | % | 3.9 | % | 3.8 | % | 3.8 | % | 4.1 | % | 4.0 | % | ||||||||||||
|
Income
(Loss) before income taxes and minority interests
|
||||||||||||||||||||||||
|
as percent of
net sales (1)
|
5.4 | % | (2.3 | )% | (2.2 | )% | 8.7 | % | 9.9 | % | 10.4 | % | ||||||||||||
|
Return on stockholders' equity
(3)
|
18.9 | % | (4.4 | )% | (3.9 | )% | 14.1 | % | 14.7 | % | 17.2 | % | ||||||||||||
|
Debt
as a percent of total capitalization
|
55.4 | % | 59.2 | % | 48.9 | % | 42.5 | % | 42.2 | % | 43.6 | % | ||||||||||||
|
General
|
||||||||||||||||||||||||
|
Capital
expenditures
|
$ | 1,100 | $ | 1,623 | $ | 1,587 | $ | 1,808 | $ | 2,176 | $ | 2,328 | ||||||||||||
|
Depreciation
|
1,753 | 1,680 | 1,595 | 1,554 | 1,516 | 1,559 | ||||||||||||||||||
|
Salaries
and wages paid
|
3,608 | 3,202 | 3,215 | 3,395 | 3,536 | 3,579 | ||||||||||||||||||
|
Cost
of employee benefits
|
783 | 611 | 540 | 486 | 653 | 798 | ||||||||||||||||||
|
Number
of employees at year-end (thousands)
|
46.4 | 50.0 | 52.7 | 53.3 | 51.0 | 50.7 | ||||||||||||||||||
|
Number of Dow stockholders of
record at year-end (thousands) (4)
|
113.1 | 122.5 | 125.1 | 87.9 | 87.7 | 93.0 | ||||||||||||||||||
|
(1)
Adjusted for reclassification of freight on sales in 2000 and
reclassification
|
(4)
Stockholders of record as reported by the transfer agent.
The
|
|||||
|
of
insurance operations in 2002.
|
Company
estimates that there were an additional 587,000
|
|||||
|
(2)
Adjusted for 3-for-1 stock split in 2000.
|
stockholders
whose shares were held in nominee names at
|
|||||
|
(3)
Included Temporary Equity in 1997-1999.
|
December
31, 2008.
|
|||||
The
Dow Chemical Company and Subsidiaries
Condition
and Results of Operations.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Page
|
|
2008
Overview
|
27
|
|
Results
of Operations
|
29
|
|
Segment
Results
|
34
|
|
Performance
Plastics
|
34
|
|
Performance
Chemicals
|
37
|
|
Agricultural
Sciences
|
38
|
|
Basic
Plastics
|
39
|
|
Basic
Chemicals
|
41
|
|
Hydrocarbons
and Energy
|
42
|
|
Sales
Price and Volume Chart (Percent change from prior year)
|
44
|
|
Liquidity
and Capital Resources
|
44
|
|
Cash
Flow
|
44
|
|
Working
Capital
|
45
|
|
Debt
|
45
|
|
Capital
Expenditures
|
47
|
|
Contractual
Obligations
|
48
|
|
Off-Balance
Sheet Arrangements
|
48
|
|
Fair
Value Measurements
|
48
|
|
Dividends
|
49
|
|
Outlook
for 2009
|
49
|
|
Critical
Accounting Policies
|
50
|
|
Environmental
Matters
|
53
|
|
Asbestos-Related
Matters of Union Carbide Corporation
|
57
|
|
Matters
Involving the Formation of K-Dow Petrochemicals
|
60
|
|
Matters
Involving the Acquisition of Rohm and Haas Company
|
61
|
FORWARD-LOOKING
INFORMATION
The
Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
forward-looking statements made by or on behalf of The Dow Chemical Company and
its subsidiaries (“Dow” or the “Company”). This section covers the current
performance and outlook of the Company and each of its operating segments. The
forward-looking statements contained in this section and in other parts of this
document involve risks and uncertainties that may affect the Company’s
operations, markets, products, services, prices and other factors as more fully
discussed elsewhere and in filings with the U.S. Securities and Exchange
Commission (“SEC”). These risks and uncertainties include, but are not limited
to, economic, competitive, legal, governmental and technological factors.
Accordingly, there is no assurance that the Company’s expectations will be
realized. The Company assumes no obligation to provide revisions to any
forward-looking statements should circumstances change, except as otherwise
required by securities and other applicable laws.
ABOUT
DOW
Dow
is a diversified chemical company that combines the power of science and
technology with the “Human Element” to constantly improve what is essential to
human progress. The Company offers a broad range of products and services,
connecting chemistry and innovation with the principles of sustainability to
help provide everything from fresh water, food, and pharmaceuticals to paints,
packaging and personal care products. Dow is the largest U.S. producer of
chemicals and plastics, in terms of sales, with total sales of
$57.5 billion in 2008. The Company conducts its worldwide operations
through global businesses, which are reported in six operating segments:
Performance Plastics, Performance Chemicals, Agricultural Sciences, Basic
Plastics, Basic Chemicals, and Hydrocarbons and Energy.
In
2008, the Company sold its approximately 3,300 products and its services to
customers in approximately 160 countries throughout the world. Thirty-six
percent of the Company’s sales were to customers in North America;
38 percent were in Europe; while the remaining 26 percent were to
customers in Asia Pacific and Latin America. The Company employs approximately
46,000 people and has a broad, global reach with 150 manufacturing sites in 35
countries.
Significant
challenges were presented to Dow and the chemical industry as a whole in 2008.
The first half of the year was characterized by rising feedstock and energy
costs, coupled with continued economic weakness in the United States,
particularly in the automotive and residential construction sectors. The latter
half of the year was marked by the escalation of a global financial crisis, the
landfall of two major hurricanes along the U.S. Gulf Coast, and the sharp
deterioration of the global economic environment. Consequently, in the fourth
quarter of the year, the industry saw substantially lower end-market demand and
steep inventory de-stocking across most value chains. In response, Dow shut down
or idled capacity and took measures to manage costs and preserve cash,
consistent with its commitment to financial discipline.
Dow’s
sales increased 7 percent to $57.5 billion, setting a new sales record
for the Company, as a 12 percent increase in prices outweighed a
5 percent decline in volume. Volatile feedstock and energy costs presented
a significant challenge during the year, which the Company reacted to with
responsive price and volume management, including the implementation of two
broad-based pricing initiatives in the middle of the year. The Company’s
purchased feedstock and energy costs increased $5.9 billion
(28 percent) compared with 2007, making this the sixth consecutive year of
double-digit percentage increases in feedstock and energy costs.
The
combined Performance segments (Performance Plastics, Performance Chemicals and
Agricultural Sciences) mitigated rising raw material costs with higher prices
across all operating segments, offsetting a slight decline in volume that was
predominantly driven by weakness in the fourth quarter. The Agricultural
Sciences segment had an exceptional year, setting new records for both sales and
earnings. Dow’s combined Basics segments (Basic Plastics, Basic Chemicals, and
Hydrocarbons and Energy) swiftly enacted measures in the face of volatile
feedstock and energy costs. These actions led to double-digit percent price
increases, which helped mitigate declining volumes. In addition, the benefit of
Dow’s strategic decision to invest for growth through joint ventures was again
reflected in this year’s results, with Dow’s equity in earnings of
nonconsolidated affiliates totaling $787 million.
Overall,
Dow’s focus on price and volume management, control of discretionary spending
and capital expenditures, and active portfolio management helped to partially
offset deteriorating results in a challenging economic environment. Capital
expenditures were $2.3 billion, above the level of depreciation but in line
with the target for the year. Working capital fell $3.3 billion compared
with year-end 2007 due in part to a decline in fourth quarter sales and
inventories as the Company reduced operating rates in the fourth quarter of
2008. The Company ended the year with $2.8 billion of cash and cash
equivalents and reported strong cash flow from operating activities of
$4.7 billion. Despite the difficult economic conditions in the latter part
of the year, the Company had sufficient liquidity and financial flexibility to
meet all of its business obligations.
In
2008, the Company continued its effort to implement its strategy, which is
designed to reduce earnings cyclicality and improve earnings growth by
increasing investment in the Performance businesses, maintaining integration
with the Basics businesses, and growing the Basics businesses through
cost-advantaged joint ventures. Actions taken during 2008
included:
|
|
·
|
Dow
announced plans to invest in a state-of-the-art membrane chlor-alkali
production facility at its Freeport, Texas site. The new facility will
replace several facilities that are nearing the end of their economic
life.
|
|
|
·
|
Dow
Agrosciences broadened its product portfolio and geographic reach with the
announcements of six bolt-on acquisitions: Triumph Seed Co., Inc.;
Dairyland Seed Co., Inc.; Bio-Plant Research Ltd.; assets of Renze Hybrids
Inc.; assets of Südwestsaat GbR; and assets of Brodbeck Seed
Inc.
|
|
|
·
|
Dow
Polyurethanes broke ground on a major capacity expansion at its polyols
plant in Terneuzen, The
Netherlands.
|
|
|
·
|
Dow
Epoxy Systems introduced AIRSTONE™ epoxy systems, a family of products
with performance characteristics that are well-suited for use in the
fabrication of wind blades.
|
|
·
|
Americas
Styrenics LLC, a joint venture between Dow and Chevron Phillips Chemical
Company LP, began operations.
|
|
·
|
The
Company announced two broad-based pricing initiatives to combat surging
feedstock and energy costs. The first announcement, in May, called for an
increase of up to 20 percent on all products. The second initiative,
announced in June, called for an additional price increase of up to
25 percent as well as freight
surcharges.
|
|
·
|
The
SCG-Dow Group, a joint venture between Dow and The Siam Cement Group,
broke ground on a world-scale propylene oxide facility in Thailand that
will use innovative hydrogen peroxide to propylene oxide technology
jointly developed by Dow and BASF. In 2008, the SCG-Dow Group announced a
50:50 joint venture to construct a specialty elastomers train, also in
Thailand.
|
|
·
|
Dow
Water Solutions announced plans to expand its Edina, Minnesota
manufacturing facility to produce additional products for advanced water
solutions. It will be the third expansion at this location in the past
eight years.
|
· Dow
Building Solutions completed its acquisition of STEVENS ROOFING SYSTEMS™ and
Geomembrane Systems.
|
·
|
Dow
Izolan, a joint venture between Dow and Russia-based Scientific
Manufacturing Company Izolan Ltd., broke ground on a state-of-the-art
polyurethane systems manufacturing facility in Vladimir,
Russia.
|
|
·
|
The
Kuwait Olefins Company, a joint venture between Dow and Petrochemical
Industries Company (K.S.C.) (“PIC”), announced the launch of commercial
operations of its Olefins II Kuwait Program Ethylene Unit and its Ethylene
Glycol Unit.
|
|
·
|
On
November 28, 2008, the Company and PIC signed a Joint Venture
Formation Agreement (“JVFA”) to form a 50:50 global petrochemicals joint
venture, K-Dow Petrochemicals (“K-Dow”). However, PIC failed to close the
K-Dow transaction on January 2, 2009, as required by the JVFA. As a
result, the Company is pursuing all legal options available to it relating
to PIC’s failure to close the proposed K-Dow joint venture. In addition,
the Company is in the process of seeking an alternative joint venture
partner. See Matters Involving the Formation of K-Dow Petrochemicals at
the end of Management’s Discussion and Analysis of Financial Condition and
Results of Operations for additional information regarding these
matters.
|
|
·
|
As
economic conditions worsened toward the end of the year, Dow announced a
restructuring plan as part of a series of actions to advance the Company’s
strategy and respond to the recent, severe economic downturn. The
restructuring plan included the elimination of approximately 5,000 jobs
(including planned divestitures) and the closure of facilities in
high-cost locations. Related to this plan, the Company recorded a pretax
restructuring charge of $785 million in the fourth quarter. In
addition, the Company announced the temporary idling of nearly 200
plants.
|
|
·
|
On
July 10, 2008, the Company and Rohm and Haas Company (“Rohm and
Haas”) announced a definitive agreement, under which the Company would
acquire all outstanding shares of Rohm and Haas common stock for
$78 per share in cash. The acquisition of Rohm and Haas would make
the Company the world’s leading specialty chemicals and advanced materials
company, combining the two organizations’ best-in-class technologies,
broad geographic reach and strong industry channels to create a business
portfolio with significant growth opportunities. The Rohm and Haas
transaction did not close in January 2009 in light of the Company’s
determination that recent material developments created unacceptable
uncertainties related to the funding and economics of the combined Dow and
Rohm and Haas enterprise. This assessment was based on several
macro-economic factors such as the continued crisis in global financial
and credit markets, combined with the failure of PIC to fulfill its
obligation to complete the formation of the proposed K-Dow joint venture.
See Matters Involving the Acquisition of Rohm and Haas Company at the end
of Management’s Discussion and Analysis of Financial Condition and Results
of Operations and Part I, Item 3. Legal Proceedings for additional
information regarding these
matters.
|
Looking
to 2009, there are growing signs of a prolonged global economic slowdown, with
growth rates in developed economies in North America and Europe projected to
remain weak well into the first half of the year and possibly continuing for the
entire year. With approximately two-thirds of its sales outside the United
States, Dow’s global reach is expected to enable it to continue to capture
opportunities in developing regions, such as Brazil, India and China, where
growth rates are projected to be more positive than in the developed world,
although not nearly as strong as in 2008. As the Company continues to implement
its strategy in a volatile global economic environment, its focus will remain on
financial discipline, with an emphasis on cash preservation measures to ensure
financial flexibility.
Dow’s
results of operations and financial condition for the year ended
December 31, 2008 are described in further detail in the following
discussion and analysis.
Dow
reported record sales of $57.5 billion in 2008, up 7 percent from
$53.5 billion in 2007 and up 17 percent from $49.1 billion in
2006. Compared with last year, prices rose 12 percent (with currency
accounting for approximately 3 percent of the increase), with increases in all
operating segments and in all geographic areas. In 2008, double-digit price
increases were reported in all operating segments except Performance Plastics
(which was up 8 percent), driven by continuing increases in feedstock and
energy costs. In 2008, volume declined 5 percent from last year, decreasing in
all segments except Agricultural Sciences (up 8 percent) and Hydrocarbons and
Energy (up 5 percent). Through the first half of the year, volume improved 3
percent overall despite a 5 percent decline in the United States, but fell
in the second half and most notably in the fourth quarter as global demand
collapsed. From a geographic standpoint, 2008 volume was down in all geographic
areas, except India, Middle East and Africa (“IMEA”), which was up 3 percent
from 2007. The most significant volume decline was in the United States, which
ended the year down 11 percent from 2007.
In
2007, sales rose 9 percent, as prices rose 7 percent, with increases in all
operating segments and in all geographic areas. In 2007, the most significant
price increases were reported in Basic Plastics and Hydrocarbons and Energy,
driven by continuing increases in feedstock and energy costs. Volume improved 2
percent in 2007, with growth in all segments with the exception of a slight
decline in Basic Chemicals. From a geographic standpoint, 2007 volume in the
United States was down slightly from 2006, due in part to weakness in the
housing and automotive industries, while Europe and the rest of the world
reported significant volume growth. Growth was strong in Asia Pacific, up
8 percent from 2006, and in Latin America, up 7 percent.
Sales
in the United States accounted for 32 percent of total sales in 2008,
compared with 34 percent in 2007 and 37 percent in 2006. See the Sales
Price and Volume table at the end of the section titled “Segment Results” for
details regarding the change in sales by operating segment and geographic area.
In addition, sales and other information by operating segment and geographic
area are provided in Note T to the Consolidated Financial
Statements.
Gross
margin for 2008 was $5.5 billion, compared with $7.1 billion in 2007
and $7.6 billion in 2006. Despite the $6.8 billion impact of higher
selling prices, gross margin declined compared with 2007, due to an increase of
$5.9 billion in feedstock and energy costs, lower sales volume, higher
costs of other raw materials, significantly reduced operating rates and the
unfavorable impact of currency on costs. Gross margin was also impacted by
Hurricanes Gustav and Ike, which hit the U.S. Gulf Coast, resulting in temporary
outages for several of the Company’s Gulf Coast production facilities and
resulting in $181 million in additional manufacturing expenses including
the repair of property damage, clean-up costs, unabsorbed fixed costs and
inventory write-offs. In addition, gross margin was reduced by legal expenses
and other costs of $69 million in the fourth quarter of 2008 related to the
K-Dow transaction; these costs were expensed (to “Cost of sales”) upon PIC’s
refusal to close the K-Dow transaction (reflected in Unallocated and Other). In
2007, gross margin declined compared with 2006, due to an increase of
$2.5 billion in feedstock and energy costs, higher costs of other raw
materials, the unfavorable impact of currency on costs and increased freight
costs.
Dow’s
global plant operating rate (for its chemicals and plastics businesses) was
77 percent of capacity in 2008, down from 87 percent of capacity in
2007 and 85 percent of capacity in 2006. Operating rates declined across
the businesses in 2008, particularly in the second half of the year, impacted by
actions taken by management in response to lower demand resulting from the
slowing global economy, as well as by Hurricanes Gustav and Ike which hit the
U.S. Gulf Coast in the third quarter of 2008. In 2007, operating rates improved
compared with 2006 for most of the Company’s businesses, reflecting a higher
level of demand and the closure of some of the Company’s manufacturing
facilities. Depreciation expense was $2,016 million in 2008,
$1,959 million in 2007 and $1,904 million in 2006.
Personnel
count was 46,102 at December 31, 2008, 45,856 at December 31, 2007 and
42,578 at December 31, 2006. Headcount increased slightly in 2008 from
year-end 2007 primarily due to recent acquisitions. Headcount is expected to
decline due to actions announced in the fourth quarter of 2008 to eliminate
approximately 5,000 jobs (including planned divestitures). During 2007,
headcount was impacted by the addition of research and development employees in
India and China in support of the Company’s growth initiatives; the addition of
approximately 110 employees with the second quarter acquisition of
Hyperlast Limited; and the addition of approximately 1,700 employees with the
second quarter acquisition of Wolff Walsrode.
Operating
expenses (research and development, and selling, general and administrative
expenses) totaled $3,279 million in 2008, up 3 percent from
$3,169 million in 2007. Operating expenses were $2,827 million in
2006. Research and development (“R&D”) expenses were $1,310 million in
2008, compared with $1,305 million in 2007 and $1,164 million in 2006.
Selling, general and administrative expenses were $1,969 million in 2008,
compared with $1,864 million in 2007 and $1,663 million in 2006. In
2008, the increase in operating expenses was primarily related to planned
spending for growth initiatives in the Performance businesses and operating
expenses for new acquisitions. In 2007, consistent with the Company’s strategy,
approximately 75 percent of the increase in operating expenses was related
to spending for growth initiatives and product development in the Performance
businesses, including expenses related to the 2007 acquisition of Wolff Walsrode
and Hyperlast Limited, and for early stage research into new growth
opportunities. The balance of the increase in 2007 was related to the global
expansion of the Company’s corporate branding campaign and other corporate
expenses. Operating expenses were 5.7 percent of sales in 2008,
5.9 percent of sales in 2007 and 5.8 percent of sales in
2006.
The
following table illustrates the relative size of the primary components of total
production costs and operating expenses of Dow. More information about each of
these components can be found in other sections of Management’s Discussion and
Analysis of Financial Condition and Results of Operations, Notes to the
Consolidated Financial Statements, and Part II, Item 6. Selected Financial
Data.
|
Production
Costs and Operating Expenses
|
||||||||||||
|
Cost
components as a percent of total
|
2008
|
2007
|
2006
|
|||||||||
|
Hydrocarbon
feedstocks and energy
|
48 | % | 49 | % | 49 | % | ||||||
|
Salaries,
wages and employee benefits
|
10 | 11 | 11 | |||||||||
|
Maintenance
|
3 | 3 | 3 | |||||||||
|
Depreciation
|
4 | 4 | 4 | |||||||||
|
Restructuring
charges
|
1 | 1 | 1 | |||||||||
|
Supplies,
services and other raw materials
|
34 | 32 | 32 | |||||||||
|
Total
|
100 | % | 100 | % | 100 | % | ||||||
Amortization
of intangibles was $92 million in 2008, $72 million in 2007 and
$50 million in 2006. Amortization of intangibles was up in 2008 due to
several small acquisitions in 2007. During the fourth quarter of 2008, the
Company performed its annual impairment tests for goodwill. As a result of this
review, it was determined that goodwill associated with the Dow Automotive and
Polypropylene reporting units was impaired. The impairment was based on a review
performed by management in which discounted cash flows did not support the
carrying value of the goodwill. The Company recorded pretax charges totaling
$239 million for goodwill impairment losses including $209 million for
the Dow Automotive reporting unit (impacting the Performance Plastics segment)
and $30 million for the Polypropylene reporting unit (impacting the Basic
Plastics segment). See Note G to the Consolidated Financial Statements for
additional information regarding goodwill and other intangible
assets.
On
December 5, 2008, the Company’s Board of Directors approved a restructuring
plan as part of a series of actions to advance the Company’s strategy and
respond to the recent, severe economic downturn. The restructuring plan includes
the shutdown of a number of facilities and a global workforce reduction, which
are targeted for completion by the end of 2010. As a result of the shutdowns and
global workforce reduction, the Company recorded pretax restructuring charges of
$785 million in the fourth quarter of 2008. The charges consisted of asset
write-downs and write-offs of $336 million, costs associated with exit or
disposal activities of $128 million and severance costs of
$321 million. The impact of the charges is shown as “Restructuring charges”
in the consolidated statements of income and was reflected in the Company’s
segment results as follows: $109 million in Performance Plastics,
$24 million in Performance Chemicals, $98 million in Basic Plastics,
$106 million in Basic Chemicals, $18 million in Hydrocarbons and
Energy, and $430 million in Unallocated and Other. In addition to the
charges related to the 2008 restructuring plan, the Company also recorded
additional pretax charges of $60 million related to the 2007 restructuring
plan, primarily impacting the Basic Plastics segment, and a reduction of
$6 million related to the 2006 restructuring plan. When the 2008
restructuring plan has been fully implemented, the Company expects to realize
ongoing annual savings of approximately $700 million. See Note B to
the Consolidated Financial Statements for details on the restructuring
charges.
On
December 3, 2007, the Company’s Board of Directors approved a restructuring plan
that included the shutdown of a number of assets and organizational changes
within targeted support functions to improve the efficiency and cost
effectiveness of the Company’s global operations. As a result of these shutdowns
and organizational changes, which are scheduled to be completed by the end of
2009, the Company recorded pretax restructuring charges totaling
$590 million in 2007. The charges consisted of asset write-downs and
write-offs of $422 million, costs associated with exit or disposal
activities of $82 million and severance costs of $86 million. The
charges were reflected in the Company’s segment results as follows:
$184 million in Performance Plastics, $85 million in Performance
Chemicals, $77 million in Agricultural Sciences, $88 million in Basic
Plastics, $7 million in Basic Chemicals, $44 million in Hydrocarbons
and Energy, and $105 million in Unallocated and Other. In 2007, the Company
also recorded a $12 million reduction of the 2006 restructuring charges,
which included an $8 million reduction of the estimated severance costs
(included in Unallocated and Other) and a $4 million reduction of the
reserve for contract termination fees (included in Performance Plastics). When
the 2007 restructuring plan has been fully implemented, the Company expects to
realize ongoing annual savings of approximately $180 million. See
Note B to the Consolidated Financial Statements for details on the
restructuring charges.
On August 29, 2006, the Company’s Board of Directors approved a plan to
shut down a number of assets around the world as the Company continued its drive
to improve the competitiveness of its global operations. As a consequence of
these shutdowns, which are scheduled to be completed at the end of the first
quarter of 2009, and other optimization activities, the Company recorded pretax
restructuring charges totaling $591 million in 2006. The charges included
asset write-downs and write-offs of $346 million, costs associated with
exit or disposal activities of $172 million and severance costs of
$73 million. The charges were shown as “Restructuring charges” in the
consolidated statements of income and were reflected in the Company’s segment
results as follows: $242 million in Performance Plastics, $12 million
in Performance Chemicals, $16 million in Basic Plastics, $184 million
in Basic Chemicals, and $137 million in Unallocated and Other. When the
2006 restructuring plan has been fully implemented, the Company expects to
realize ongoing annual savings of approximately $160 million. See
Note B to the Consolidated Financial Statements for details on the
restructuring charges.
During
2008, pretax charges totaling $44 million were recorded for purchased
in-process research and development (“IPR&D”) impacting the Agricultural
Sciences segment. Purchased IPR&D in 2007 amounted to $57 million in
pretax charges; $50 million was related to acquisitions within the
Agricultural Sciences segment and $7 million was related to the acquisition
of Wolff Walsrode on June 30, 2007 and impacted the results of the
Performance Chemicals segment. Future costs required to bring the purchased
IPR&D projects to technological feasibility are expected to be immaterial.
See Note C to the Consolidated Financial Statements for information
regarding these charges.
During
2008, pretax charges totaling $49 million were recorded for legal expenses
and other transaction costs related to the pending acquisition of Rohm and Haas
Company; these charges are reflected in Unallocated and Other. These charges
were expensed in anticipation of a 2009 closing of the acquisition and the
application of revised Statement of Financial Accounting Standards (“SFAS”)
No. 141, “Business
Combinations.”
Following
the December 2008 completion of a study to review Union Carbide’s asbestos claim
and resolution activity, Union Carbide decreased its asbestos-related liability
for pending and future claims (excluding future defense and processing costs) by
$54 million. The reduction was shown as “Asbestos-related credit” in the
consolidated statements of income and was reflected in the results of
Unallocated and Other. In 2006, following the December 2006 completion of a
study to review Union Carbide’s asbestos claim and resolution activity, Union
Carbide decreased its asbestos-related liability for pending and future claims
(excluding future defense and processing costs) by $177 million. See
Note K to the Consolidated Financial Statements for additional information
regarding asbestos-related matters of Union Carbide.
Dow’s
share of the earnings of nonconsolidated affiliates in 2008 was
$787 million, compared with $1,122 million in 2007 and
$959 million in 2006. Equity earnings declined compared with 2007,
reflecting volatile feedstock and energy costs in 2008 and the collapse in
global demand that took place in the fourth quarter of 2008. Equity earnings for
2008 reflected decreased earnings from MEGlobal, EQUATE Petrochemical Company
K.S.C. (“EQUATE”), Equipolymers and Siam Polyethylene Company Limited (“Siam
Polyethylene”); partially offset by increased earnings from Dow Corning
Corporation and the OPTIMAL Group of Companies (“OPTIMAL”). Equity earnings in
2007 exceeded $1 billion for the first time in the Company’s history,
reflecting increased earnings from EQUATE, MEGlobal and OPTIMAL. See Note F
to the Consolidated Financial Statements for additional information on
nonconsolidated affiliates.
Sundry
income - net includes a variety of income and expense items such as the gain or
loss on foreign currency exchange, dividends from investments, and gains and
losses on sales of investments and assets. Sundry income for 2008 was
$89 million, down from $324 million in 2007 and $137 million in
2006. In 2008, net sundry income reflected unfavorable foreign exchange hedging
results and a decrease in net gains on the sale of assets. In 2007, net sundry
income reflected the impact of favorable foreign exchange hedging results and
gains on the sale of miscellaneous assets. In 2006, sundry income was reduced by
the recognition of a loss contingency of $85 million (reflected in the
Performance Plastics segment) related to a fine imposed by the European
Commission (“EC”) associated with synthetic rubber industry matters (see
Note K to the Consolidated Financial Statements for additional
information).
Net
interest expense (interest expense less capitalized interest and interest
income) was $562 million in 2008, up from $454 million in 2007 and
$431 million in 2006. Interest income was $86 million in 2008, down
from $130 million in 2007 and $185 million in 2006 principally due to
lower interest rates on investments. Interest expense (net of capitalized
interest) and amortization of debt discount totaled $648 million in 2008,
$584 million in 2007 and $616 million in 2006. Interest expense
increased due to an increased level of debt, throughout 2008 compared with
2007.
The
provision for income taxes was $667 million in 2008, compared with
$1,244 million in 2007 and $1,155 million in 2006. The Company’s
effective tax rate fluctuates based on, among other factors, where income is
earned and the level of income relative to tax credits available. For example,
as the percentage of foreign sourced income increases, the Company’s effective
tax rate declines. The Company’s tax rate is also influenced by the level of
equity earnings, since most of the earnings from the Company’s equity companies
are taxed at the joint venture level. In 2008, the effective tax rate was
50.5 percent compared with 29.4 percent in 2007 and 23.2 percent
in 2006. In addition to the above factors, the tax rate for 2008 was negatively
impacted by goodwill impairment losses that are not deductible for tax purposes.
The tax rate for 2007 was negatively impacted by a change in German tax law that
was enacted in August 2007 and included a reduction in the German income tax
rate. As a result of the change, the Company adjusted the value of its net
deferred tax assets in Germany (using the lower tax rate) and recorded a charge
of $362 million against the “Provision for income taxes” in the third
quarter of 2007. Also in 2007, the Company changed the legal ownership structure
of its investment in EQUATE, resulting in a favorable impact to the “Provision
for income taxes” of $113 million in the fourth quarter of 2007. Excluding
these items, the effective tax rate was 23.5 percent in 2007.
Based
on tax strategies developed in Brazil during 2006, as well as projections of
future earnings, it was determined that it was more likely than not that tax
loss carryforwards would be utilized, resulting in a reversal of existing
valuation allowances of $63 million. This impact, combined with strong
financial results in jurisdictions with lower tax rates than the United States,
enacted reductions in the tax rates in Canada and The Netherlands, and improved
earnings from a number of the Company’s joint ventures, resulted in an effective
tax rate for 2006 that was lower than the U.S. statutory rate. Excluding the
reversal of the valuation allowances in 2006, the effective tax rate for 2006
was 24.5 percent. The underlying factors affecting Dow’s overall effective
tax rates are summarized in Note S to the Consolidated Financial
Statements.
Minority
interests’ share in income was $75 million in 2008, $98 million in
2007 and $93 million in 2006. The decline in 2008 was related to the third
quarter 2008 redemption by the outside partner of its ownership interest in
Hobbes Capital S.A. (see Note Q to the Consolidated Financial
Statements).
Net
income available for common stockholders was $579 million in 2008 ($0.62
per share) compared with $2,887 million in 2007 ($2.99 per share) and
$3,724 million in 2006 ($3.82 per share).
The following table summarizes the impact of certain items recorded in 2008,
2007 and 2006:
|
Pretax
Impact (1)
|
Impact
on
Net Income (2)
|
Impact
on
EPS (3)
|
||||||||||||||||||||||||||||||||||
|
In
millions, except per share amounts
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|||||||||||||||||||||||||||
|
Cost
of sales:
|
||||||||||||||||||||||||||||||||||||
|
Impact
of Hurricanes Gustav and Ike
|
$ | (181 | ) | - | - | $ | (115 | ) | - | - | $ | (0.12 | ) | - | - | |||||||||||||||||||||
|
K-Dow
related expenses
|
(69 | ) | - | - | (44 | ) | - | - | (0.05 | ) | - | - | ||||||||||||||||||||||||
|
Goodwill
impairment losses
|
(239 | ) | - | - | (230 | ) | - | - | (0.25 | ) | - | - | ||||||||||||||||||||||||
|
Restructuring
charges
|
(839 | ) | $ | (578 | ) | $ | (591 | ) | (628 | ) | $ | (436 | ) | $ | (445 | ) | (0.68 | ) | $ | (0.46 | ) | $ | (0.46 | ) | ||||||||||||
|
Purchased
in-process research and development charges
|
(44 | ) | (57 | ) | - | (44 | ) | (50 | ) | - | (0.05 | ) | (0.05 | ) | - | |||||||||||||||||||||
|
Acquisition-related
expenses
|
(49 | ) | - | - | (43 | ) | - | - | (0.05 | ) | - | - | ||||||||||||||||||||||||
|
Asbestos-related
credit
|
- | - | 177 | - | - | 112 | - | - | 0.12 | |||||||||||||||||||||||||||
|
Sundry
income - net:
|
||||||||||||||||||||||||||||||||||||
|
Loss
contingency related to EC fine
|
- | - | (85 | ) | - | - | (84 | ) | - | - | (0.09 | ) | ||||||||||||||||||||||||
|
Provision
for income taxes:
|
||||||||||||||||||||||||||||||||||||
|
German
tax law change
|
- | - | - | - | (362 | ) | - | - | (0.38 | ) | - | |||||||||||||||||||||||||
|
Change
in EQUATE legal ownership structure
|
- | - | - | - | 113 | - | - | 0.12 | - | |||||||||||||||||||||||||||
|
Total
|
$ | (1,421 | ) | $ | (635 | ) | $ | (499 | ) | $ | (1,104 | ) | $ | (735 | ) | $ | (417 | ) | $ | (1.20 | ) | $ | (0.77 | ) | $ | (0.43 | ) | |||||||||
|
(1)
|
Impact
on “Income before Income Taxes and Minority
Interests”
|
|
(2)
|
Impact
on “Net Income Available for Common
Stockholders”
|
|
(3)
|
Impact
on “Earnings per common share -
diluted”
|
The
Company uses EBIT (which Dow defines as earnings before interest, income taxes
and minority interests) as its measure of profit/loss for segment reporting
purposes. EBIT includes all operating items relating to the businesses and
excludes items that principally apply to the Company as a whole. Additional
information regarding
the Company’s operating segments and a reconciliation of EBIT to “Net
Income Available for Common Stockholders” can be found in Note T to the
Consolidated Financial Statements.
Performance
Plastics sales were $15,793 million in 2008, up from $15,116 million
in 2007 and $13,944 million in 2006. Compared with 2007, sales increased
4 percent as prices rose 8 percent, including a 3 percent
favorable impact of currency, and volume declined 4 percent. The
improvement in prices was broad-based with increases in all geographic areas, as
well as across all businesses with the exception of Dow Building Solutions,
which was flat versus last year. Volume declined in 2008 due to the significant
downturn in the global economy in the fourth quarter of 2008. In 2007, prices
increased 6 percent over 2006 and volume improved
2 percent.
EBIT
for 2008 was $264 million, compared with $1,390 million in 2007 and
$1,629 million in 2006. Results for 2008 were negatively impacted by a
goodwill impairment loss of $209 million, costs of $48 million related
to the U.S. Gulf Coast hurricanes, and restructuring charges of
$111 million related to the closure or impairment of several manufacturing
facilities announced in the fourth quarter. Despite the improvement in prices,
EBIT for 2008 declined from 2007 primarily due to the slowing global economy,
which resulted in lower sales volumes and reduced operating rates across the
Company’s
manufacturing
facilities, lower equity earnings, significant increases in feedstock and raw
material costs, and the unfavorable impact of currency on costs.
Results
for 2007 were negatively impacted by net restructuring charges of
$180 million related to the fourth quarter of 2007 announced closure or
impairment of a number of manufacturing facilities. EBIT for 2007 declined from
2006 primarily due to lump sum technology licensing revenue realized in 2006
that did not recur in 2007 and an increase in operating expenses related to the
Company’s effort to expand geographic markets and develop new technologies and
product applications within the Performance Plastics segment. EBIT for 2006
included a fine of $85 million imposed by the European Commission
associated with the synthetic rubber industry matter and $242 million in
asset restructuring costs as part of the plan announced by the Company in the
third quarter of 2006, which included the permanent shutdown of the Company’s
toluene diisocyanate (“TDI”) plant in Porto Marghera, Italy. See Note B to the
Consolidated Financial Statements for information on restructuring
charges.
Dow
Automotive sales for 2008 declined 1 percent from 2007, as a
10 percent improvement in price was more than offset by an 11 percent
decline in volume, driven by a severe downturn in the global automotive
industry. During 2008, the business worked to restore margins compressed by
higher raw material costs and was successful in raising prices across all
geographic areas. The decline in volume was most significant in North America
where a weak economy and a drop in consumer confidence, coupled with tight
credit markets, limited demand. Automotive manufacturers took action in the
fourth quarter to reduce inventories and preserve cash, driving demand further
downward for the year. Due to the significant downturn across the industry, when
the Company performed its annual review of goodwill in the fourth quarter, it
was determined that the goodwill associated with the Dow Automotive reporting
unit was impaired, resulting in a charge of $209 million. In addition, the
Company announced a restructuring plan in the fourth quarter of 2008 that
included a charge of $27 million for impairment of the automotive sealants
business in Europe, which will be divested in the first quarter of 2009. EBIT
declined in 2008 as a result of these charges and the downturn in the automotive
industry, which resulted in lower sales volumes and reduced operating rates.
EBIT for 2007 was reduced by a $64 million charge primarily associated with
the Company’s decision in the fourth quarter of 2007 to exit the automotive
sealants business in North America, Latin America and Asia Pacific.
Dow
Building Solutions sales for 2008 were up slightly versus the prior year due to
a 1 percent improvement in volume. Prices were flat versus 2007 as a
4 percent decline in prices was offset by a 4 percent favorable
currency impact. Results for the business were heavily impacted by the financial
crisis in North America, resulting in a decline in demand for building and
construction materials in 2008. EBIT in 2008 was negatively impacted by
restructuring charges of $13 million associated with the closure of three
manufacturing plants. Compared with 2007, EBIT for 2008 was down due to sharply
higher hydrocarbon and raw material costs in the first half of the year and the
significant economic downturn in the second half of the year. EBIT for 2007 was
reduced by $21 million of restructuring charges related to the closure of
five small manufacturing plants.
Dow
Epoxy sales in 2008 declined 7 percent compared with last year, as an
11 percent drop in volume more than offset a 4 percent improvement in
price, including a 2 percent favorable impact of currency. Demand declined
in all geographic areas and key market segments as a result of the financial
crisis and global economic downturn. The decline in volume was most noticeable
in Asia Pacific where demand for electrical laminate applications in consumer
electronics trended sharply lower in the second half of the year. The
improvement in price was largely due to a more favorable overall sales mix, with
particular strength in the business’ specialty product offerings. Results for
2008 included a restructuring charge of $28 million related to the
Company’s fourth quarter decision to exit the solution vinyl resin business and
shut down its manufacturing plant located in Texas City, Texas. In addition, the
business incurred costs of $15 million due to the U.S. Gulf Coast
hurricanes in the second half of 2008. Compared with 2007, EBIT declined in 2008
due to the slowdown in the global economy, which resulted in lower sales volume
and reduced operating rates, significantly higher hydrocarbon and raw material
costs and increased operating expenses. In 2007, EBIT was negatively impacted by
a $2 million charge related to the Company’s decision to exit the
hydroxyalkyl acrylate business.
Polyurethanes
and Polyurethane Systems sales for 2008 increased 3 percent versus the
prior year with a 10 percent increase in price offset by a 7 percent
decline in volume. The improvement in price was reported in all geographic areas
and product lines, supported by significantly higher hydrocarbon and raw
material prices during most of the year. The decline in volume was driven by a
sharp drop in demand late in the year due to the weakened global economy and
efforts by customers to preserve cash and reduce inventory levels. EBIT for 2008
was negatively impacted by $25 million of costs related to the third
quarter hurricanes, and $1 million of restructuring charges. Compared with
last year, EBIT declined significantly due to the global economic slowdown,
which resulted in a significant decline in sales volume and reduced operating
rates, and significantly higher raw material costs.
Specialty
Plastics and Elastomers established a new sales record in 2008, up
14 percent from 2007 due to a 12 percent improvement in price and a
2 percent increase in volume. Double-digit price improvement was reported
in all geographic areas except Asia Pacific where prices improved
9 percent. The gain in volume was largely due to a new marketing agreement
between the Company and Nippon Unicar Company Limited (“NUC”), a nonconsolidated
affiliate, which became effective in
the
first quarter of 2008. Excluding the impact of the new marketing agreement with
NUC, volume was flat with 2007. EBIT for 2008 was reduced by restructuring
charges of $42 million, which included $40 million for the Company’s
fourth quarter decision to shut down facilities that manufacture NORDEL™
hydrocarbon rubber in Seadrift, Texas, and TYRIN™ chlorinated polyethylene in
Plaquemine, Louisiana, and a $2 million adjustment to the 2007
restructuring charge related to contract cancellation penalties associated with
the decision to shut down the rubber plant located in Berre, France. In
addition, EBIT was reduced $7 million due to the impact of the hurricanes
in the second half of 2008. Compared with 2007, EBIT for the business declined
due to lower operating rates, lower equity earnings and higher raw material
costs. Results for 2007 included restructuring charges of $97 million which
included impairment charges related to the rubber plant in Berre, France and a
fiber solutions plant in Tarragona, Spain.
Technology
Licensing and Catalyst sales and EBIT were up significantly in 2008 due to
increased licensing of polyethylene technology in Europe and increased licensing
of polypropylene technology and catalyst sales in IMEA.
Performance
Plastics Outlook for 2009
Due
to an expectation of continued softness in the global economy, Performance
Plastics sales are expected to decline in 2009, with particular weakness in the
first half of the year. Expectations are for a recovery to begin late in 2009 as
demand begins to improve and spending related to announced economic stimulus
plans increases. A number of the businesses within the Performance Plastics
segment stand to benefit from increased spending on infrastructure projects. In
addition to lower sales volume in 2009, hydrocarbon and raw material costs are
expected to be lower, creating downward pressure on selling prices.
Dow
Automotive expects sales to be down for the year, in line with global automotive
industry trends, driven by a lack of consumer confidence and tight credit
markets. North America and Europe are expected to experience the most
significant declines. Prices are expected to be in line with 2008 as competitive
pressure associated with the downturn in the automotive industry will make price
increases difficult to implement. Dow Automotive will continue to take action in
2009 to exit low margin business.
Dow
Building Solutions expects sales volume to decline in 2009 due to the expanding
effects of the global economic crisis. The construction industry in general is
not expected to improve before late in 2009. North American producers of
extruded polystyrene foam are required by the Montreal Protocol to have new
foaming agent formulations implemented by year end 2009. This will result in
manufacturers incurring additional costs and capital spending in 2009. The
process of converting the various manufacturing plants is expected to reduce
North American production capacity. Further, it is expected that some capacity
will be permanently shut down as manufacturers decide not to invest in the
foaming agent conversion. Dow Building Solutions has previously announced its
decision to shut down three extruded polystyrene plants by the end of
2009.
Dow
Epoxy volume is expected to be down in 2009 due to the fourth quarter of 2008
decision to exit the solution vinyl resin business and the expectation that
overall industry demand will remain low in the first half of 2009, although some
improvement is expected late in the year. Sales of epoxy systems into wind
energy applications are expected to continue growing despite the downturn in the
global economy. Excess capacity across the industry will create a very
competitive market place in 2009.
Polyurethanes
and Polyurethane Systems expect volume to be soft in the first half of 2009 with
some recovery in the second half of the year linked to overall improvement in
global economic conditions. Prices are expected to be lower in 2009 consistent
with lower hydrocarbon and other raw material costs. Recent capacity additions
are expected to keep industry operating rates depressed.
Specialty
Plastics and Elastomers expect sales volume in 2009 to be well below 2008 levels
with particular weakness in the first half of the year. Prices are projected to
be lower in 2009 due to declining hydrocarbon and other raw material costs and
increased competitive pressure as market participants aggressively pursue sales
volume in a weak market. Medical and food packaging applications are proving to
be somewhat less impacted by the global downturn, and governmental economic
stimulus plans that target increased spending on infrastructure projects could
help fuel growth in some niche applications like wire and cable.
Technology
Licensing and Catalyst revenue for certain products is expected to grow in 2009
due to increased catalyst demand associated with new plants starting up in 2009.
However, demand from existing plants is expected to be down due to lower
operating rates.
Performance
Chemicals sales increased 11 percent to $9,229 million in 2008,
compared with $8,351 million in 2007; sales were $7,867 million in
2006. Compared with 2007, prices increased 14 percent; volume fell
3 percent as demand dropped in the second half of the year. The increase in
prices in 2008 was driven by higher raw material costs. In 2007, volume
increased 2 percent from 2006 due in large part to the acquisition of Wolff
Walsrode, while prices rose 4 percent.
EBIT
for 2008 was $1,010 million, compared with $949 million in 2007 and
$1,242 million in 2006. EBIT increased in 2008 as higher prices and
increased equity earnings from OPTIMAL and Dow Corning were partially offset by
higher raw material costs and reduced operating rates. In addition, EBIT for
2008 was reduced by restructuring charges totaling $24 million and
$15 million of costs related to the U.S. Gulf Coast hurricanes. The
restructuring charges included the write-down of manufacturing assets (due to
plant closures in Xiaolan, China; Varennes, Quebec, Canada; King’s Lynn, United
Kingdom; Pittsburg, California; Plaquemine, Louisiana; and Midland, Michigan).
In 2007, EBIT declined as higher raw material and energy costs and higher
operating expenses related to product development and growth initiatives more
than offset higher selling prices. In addition, EBIT in 2007 was reduced by
restructuring charges totaling $85 million and a $7 million charge for
IPR&D related to the acquisition of Wolff Walsrode. In 2006, EBIT was
reduced by restructuring charges totaling $12 million. See Notes B and C to
the Consolidated Financial Statements for additional information regarding
restructuring charges and IPR&D.
Designed
Polymers sales increased 20 percent versus 2007, with volume growth of
13 percent and price increases of 7 percent including a 3 percent
favorable impact of currency. The improvement in volume was driven by the
full-year impact of the 2007 acquisition of Wolff Walsrode and strong sales of
methyl cellulosics used in pharmaceutical and food applications. Benefiting from
the membrane production capacity start-up in Edina, Minnesota, volume improved
in Dow Water Solutions, particularly in the reverse osmosis and ion exchange
water applications. Compared with 2007, EBIT improved as higher sales more than
offset higher raw material costs and higher operating expenses. EBIT for 2008
was reduced by restructuring charges totaling $10 million related to the
permanent closure of a pharmaceutical plant in Midland, Michigan and a
manufacturing plant in Plaquemine, Louisiana, and $2 million for
hurricane-related costs. EBIT for 2007 was reduced by restructuring charges
totaling $27 million related to the permanent closure of the cellulosics
plant in Aratu, Brazil, and the shutdown of a second small pharmaceutical plant
in Midland, Michigan, as well as a $7 million IPR&D
charge.
Dow
Latex sales increased 5 percent versus 2007, with a 16 percent
increase in price and an 11 percent decrease in volume. Compared with 2007,
paper and carpet latex prices were higher in all geographic areas, while volume
declined due to economic conditions in both industries. Carpet latex volume was
down due to the slow housing industry. Paper latex continued to be impacted by
changes in the advertising industry, as spending moves toward alternative media
versus print and coated paper, as well as excess capacity in both North America
and Europe. Significantly higher prices for specialty latex were negated by
volume declines due to weak demand for architectural coatings. EBIT for 2008
increased compared with 2007 as higher selling prices were partially offset by
higher raw material costs and lower volumes. In addition, EBIT in 2008 was
reduced by restructuring charges of $14 million related to the permanent
closure of four manufacturing facilities located in Varennes, Canada; Pittsburg,
California; King’s Lynn, United Kingdom; and Xiaolan, China. EBIT for 2007
included a charge of $42 million related to the write-down of the Company’s
indirect 50 percent interest in Dow Reichhold Specialty Latex
LLC.
Specialty
Chemicals sales were up 9 percent versus 2007, with a 16 percent
increase in price and a 7 percent decrease in volume. Compared with 2007,
prices were up across all geographic areas principally driven by higher raw
material costs. Volume declined versus 2007 primarily due to lower demand across
all major products as customers depleted inventory levels. Despite improvements
in prices and equity earnings from OPTIMAL, EBIT declined in 2008 due to higher
raw material and energy costs, lower sales volume and lower operating rates. In
addition, EBIT in 2008 was reduced by hurricane-related costs of
$13 million. EBIT for 2007 included restructuring charges of
$16 million related to the write-down of two manufacturing
facilities.
Performance
Chemicals Outlook for 2009
Performance
Chemicals sales for 2009 are expected to decrease due to lower demand for paper
and carpet and continued weakness in the housing industry. Lower demand and
declining raw material costs will put downward pressure on selling
prices.
Designed
Polymers sales are expected to decrease slightly. An anticipated increase in
sales of METHOCEL™ cellulose ethers used in food, pharmaceuticals and
personal care products is expected to be partially offset by a decrease in sales
of methyl cellulosics used in the construction industry. Sales of specialty
polymers, biocides, and the specialty chemical products of ANGUS Chemical
Company are expected to decrease, while Dow Water Solutions sales are expected
to be flat versus 2008.
Dow
Latex sales are expected to decrease due to the continued slowdown in the
housing industry, impacting demand for both carpet and specialty latexes.
Significant pressure on pricing is expected as raw material costs decline and
demand further weakens.
Specialty
Chemicals sales are expected to decline. Volume is expected to remain at low
levels in the first half of 2009; however, inventory restocking should offset
slower demand in the second half of 2009. Prices are expected to decrease due to
declining monoethylene glycol prices, putting pricing pressure on ethylene oxide
derivative products, including amines and glycol ethers.
Sales
for Agricultural Sciences were a record $4,535 million in 2008, compared
with $3,779 million in 2007 and $3,399 million in 2006. Volume
increased 8 percent compared with 2007, while prices increased
12 percent. Sales were up significantly across the segment due to favorable
economic conditions within the agricultural industry and strong demand for
agricultural products in 2008. Compared with last year, prices increased in
response to strong demand, escalating raw material costs and tight global supply
of certain products. Volume for seeds, traits and oils grew 33 percent year
over year; corn grew 29 percent and sunflower grew 74 percent. Six new
acquisitions were completed in 2008, as Dow AgroSciences continued to increase
scale and reach in the seeds industry. Volumes for new agricultural chemicals
products, penoxsulam rice herbicide and aminopyralid range and pasture
herbicide, continued to show strong growth, almost doubling year-over-year
sales. High commodity prices and excellent growing conditions across Europe and
North America drove strong sales of proprietary herbicides. New cereal herbicide
pyroxsulam also benefited, having a strong and successful launch, and together
with spinetoram insecticide received excellent customer support in their first
full year of launch. Commodity products, glyphosate and acetochlor herbicides,
as well as chlorpyrifos insecticides, also experienced solid year-over-year
growth.
In
2007, volume increased 9 percent over 2006, while prices increased
2 percent. Volume increased as demand for cereal and corn applications
grew, while spinosad and chlorpyrifos insecticides benefited from a mild winter
and early spring in Europe. The increase in price was primarily driven by the
favorable impact of currency which offset local currency price decreases
associated with generic competition.
EBIT
in 2008 was $761 million, a new annual record, versus $467 million in
2007 and $415 million in 2006. Despite an increase in raw material costs
and operating expense (in support of growth initiatives), EBIT for 2008 improved
significantly due to the increase in sales, the result of the buoyant
agricultural market and new product launches. EBIT in 2008 was negatively
impacted by $44 million of IPR&D costs related to seed acquisitions,
$3 million in restructuring charges, as well as a $2 million impact
related to the 2008 hurricanes. In 2007 EBIT increased from 2006 on strong
demand related to high farm commodity prices and increased acres planted,
economic stability across Latin America and marked improvement in the seeds
business. EBIT in 2007 was negatively impacted by $77 million of
restructuring charges primarily related to the impairment of the Company’s
manufacturing site in Lauterbourg, France, and by $50 million of IPR&D
charges related to acquisitions.
Agricultural
Sciences Outlook for 2009
Agricultural
Sciences sales for 2009 are expected to grow above the levels achieved in 2008.
Volume is anticipated to increase in key regions; however growth may be dampened
by current economic conditions and as lower farm commodity prices impact global
demand and grower confidence. New products sales of pyroxsulam, spinetoram,
penoxsulam and aminopyralid are expected to ramp up in 2009, and HERCULEX™
insect protection is expanding into Brazil. Investments in technology, scale and
reach in the seeds, traits and oils business remain a priority.
Sales
for the Basic Plastics segment were $12,974 million in 2008, up
1 percent from $12,878 million in 2007. Sales were
$11,833 million in 2006. Prices increased 13 percent in 2008, while
volume decreased 12 percent. While strong price increases were reported in
all geographic areas, there was considerable decline in prices in the fourth
quarter. During the first nine months of 2008, prices moved significantly higher
in response to rapidly escalating feedstock and energy costs. In the fourth
quarter, an unprecedented drop in feedstock costs and the global economic crisis
resulted in significant price declines across all geographic areas and product
lines. While volume improved in IMEA, high prices, wide fluctuations in
feedstock and energy costs, and growing weakness in the global economy resulted
in volume declines in all other geographic areas. North America volumes were
reduced by the May 2008 formation of Americas Styrenics LLC; the December
2007 closure of the polypropylene manufacturing facility at St. Charles
Operations in Hahnville, Louisiana; and the impact of the U.S. Gulf Coast
hurricanes. In 2007, prices increased 8 percent over 2006, while volume
increased 1 percent. Price increases were reported in all geographic areas,
reflecting significantly higher feedstock and energy costs. While 2007 volume
was higher in Asia Pacific and Europe, higher prices, a competitive industry,
and concerns about the strength of the U.S. economy resulted in lower volume in
North America, which was also impacted by the shutdown of two production
facilities at the end of 2006.
EBIT
for 2008 was $981 million, down from $2,006 million in 2007 and
$2,022 million in 2006. EBIT declined in 2008 as price increases were not
sufficient to offset the significant increases in feedstock and other raw
material costs, lower equity earnings, and reduced operating rates. While equity
earnings from EQUATE were slightly higher than 2007, EBIT was negatively
impacted by significantly lower earnings from Siam Polyethylene and
Equipolymers, and a loss from Americas Styrenics LLC. EBIT in 2008 was reduced
by restructuring charges totaling $148 million. The restructuring charges
reflect the write-down of the Company’s investment in a project to form a joint
venture in Oman with the Oman Petrochemicals Industries Company LLC; costs
related to the shutdown of production facilities (Terneuzen, The Netherlands;
Freeport, Texas; and Riverside, Missouri); as well as costs associated with the
permanent shutdown of the operations of the Pétromont and Company, Limited
Partnership (“Pétromont”) joint venture in Varennes, Canada. EBIT also included
a goodwill impairment loss of $30 million associated with the polypropylene
reporting unit (see Note G to the Consolidated Financial Statements), as
well as costs of $14 million related to the U.S. Gulf Coast hurricanes.
EBIT declined in 2007 as price increases were not sufficient to offset the
significant increase in feedstock and other raw material costs. Equity earnings
increased over 2006 due to significantly higher earnings from EQUATE (due to
planned maintenance turnarounds in 2006), partially offset by lower equity
earnings from Siam Polyethylene and Equipolymers. EBIT in 2007 reflected
restructuring charges totaling $88 million related to the announced
shutdown of the polypropylene production facility at St. Charles Operations in
Hahnville, Louisiana; the write-down of the Company’s 50 percent interest
in Pétromont; and the write-off of abandoned engineering costs. In addition,
EBIT in 2006 was negatively impacted by restructuring charges totaling
$16 million related to the shutdown of the polystyrene and polyethylene
production facilities in Sarnia, Ontario, Canada.
Polyethylene
sales increased 11 percent in 2008 as prices increased 16 percent and
volume declined 5 percent. During the first nine months of 2008,
double-digit price increases were seen in all geographic areas in response to
significantly higher feedstock and energy costs. Prices fell sharply in the
fourth quarter as the result of an unprecedented drop in crude oil prices.
Volume declines occurred as the growing global economic crisis and rapidly
declining oil and natural gas prices resulted in customers
significantly reducing purchases. Volume in Asia Pacific was lower during the
second half of the year as customers
were
slow to return to the market following the Olympic Games. Despite the
improvement in selling prices, EBIT declined in 2008
due to higher raw material costs, the decline in volume, lower operating rates
and lower equity earnings from Siam Polyethylene. EBIT in 2008 reflected
restructuring charges of $142 million including the write-down of costs
associated with the Oman Petrochemicals Industries Company LLC joint
venture; and costs associated with the permanent closure of the Pétromont joint
venture. EBIT for 2008 also reflected costs of $12 million related to the
U.S. Gulf Coast hurricanes. EBIT in 2007 reflected a restructuring charge of
$46 million related to the impairment write-down of the Company’s
50 percent interest in Pétromont and the write-down of abandoned
engineering costs of $16 million. EBIT in 2007 was favorably impacted by a
gain on the sale of the Company’s low-density polyethylene plant in Cubatão,
Brazil, in the second quarter of 2007.
Polypropylene
sales decreased 10 percent in 2008 as prices improved 10 percent and
volume declined 20 percent. Polypropylene prices increased during the
first nine months of 2008 in response to significantly higher propylene costs;
however prices fell sharply in the fourth quarter due to declining feedstock
costs. Volume declined significantly in Europe and North America during 2008.
Volume in Europe was lower due to new industry capacity and lower demand. Volume
in North America was lower due to the December 2007 shutdown of the Company’s
polypropylene manufacturing facility at St. Charles Operations in
Hahnville, Louisiana, reduced customer demand, and lower exports. EBIT was
significantly lower in 2008 due to higher propylene costs, lower volume, reduced
operating rates, the $30 million goodwill impairment loss associated with
the polypropylene reporting unit (see Note G to the Consolidated Financial
Statements) and $2 million of costs related to the U.S. Gulf Coast
hurricanes. EBIT for 2007 was negatively impacted by a restructuring charge of
$26 million related to the shutdown of the Company’s polypropylene
manufacturing facility at St. Charles Operations.
Polystyrene
sales declined 28 percent in 2008 as prices improved 3 percent and
volume decreased 31 percent. Prices improved in all geographic areas,
reflecting significantly higher feedstock and energy costs. Volume declined
significantly in North America and Latin America due to the formation of
Americas Styrenics LLC in May 2008. Volume also declined in Europe and Asia
Pacific as the growing economic crisis and high prices resulted in lower demand.
In 2008, EBIT was significantly lower than 2007 due to higher feedstock and raw
material costs, lower volume, reduced operating rates, equity losses from
Americas Styrenics LLC, and restructuring charges of $6 million related to
the shutdown of the Company’s production facilities in Terneuzen, The
Netherlands; and Riverside, Missouri.
Basic
Plastics Outlook for 2009
Feedstock
and energy costs are expected to increase from year-end 2008 levels during 2009,
but on average remain lower overall than in 2008. The global economy is expected
to remain weak during 2009, limiting the ability to increase prices and grow
volume. New global polyethylene and polypropylene capacity will be coming
on-line during 2009 further increasing competition and limiting the ability to
increase prices and improve volumes.
With
feedstock costs expected to be lower on average in 2009, polyethylene margins
are expected to be lower as well. Significant new Middle East industry
production capacity will be coming on stream during 2009 and, given that these
will have cost-advantaged feedstocks, exports from the Middle East to Europe and
North America are expected to increase. EQUATE will start up a new polyethylene
train in mid-2009, however equity earnings are expected to be significantly
lower due to depressed polyethylene prices and lower demand.
Polypropylene
prices and demand are both expected to remain low during 2009. The business will
be impacted by lower feedstock costs, the global economic slowdown, and new
industry capacity in the Middle East that will come on-line during the year.
With the shutdown of the St. Charles Operations production facility in 2007, the
focus in North America will continue to be on targeted, higher margin products,
and the business expects to achieve margins similar to 2008. In Europe, new
industry capacity in the Middle East and weak industry fundamentals will
negatively impact margins.
Polystyrene
prices and volume are both expected to decline in 2009. Volume will be lower,
reflecting the full-year impact of the formation of Americas Styrenics LLC. The
shutdown of polystyrene production facilities in The Netherlands and
United States will also negatively impact volume. Prices are expected to decline
in 2009 as a result of lower feedstock costs. Despite these challenges, the
business expects to achieve margins similar to 2008. Equity earnings from
Americas Styrenics LLC will be lower due to poor industry dynamics and planned
maintenance turnaround activities.
On
November 28, 2008, the Company and PIC signed a Joint Venture Formation
Agreement (“JVFA”) to form a 50:50 global petrochemicals joint venture, K-Dow
Petrochemicals (“K-Dow”). However, PIC failed to close the K-Dow transaction on
January 2, 2009, as required by the JVFA. See Matters Involving the
Formation of K-Dow Petrochemicals at the end of Management’s Discussion and
Analysis of Financial Condition and Results of Operations for additional
information.
Sales
for Basic Chemicals were $5,693 million in 2008, compared with
$5,863 million in 2007 and $5,560 million in 2006. Overall, sales
decreased 3 percent as prices rose 13 percent and volume decreased
16 percent. Price increases were reported in all geographic areas with
particular strength in Latin America and North America, driven by significant
increases in feedstock and energy costs through the third quarter of 2008 and
tight industry supply/demand balances in the caustic soda market that drove
prices higher. Volume decreased across all business and geographic areas, with
the largest decline in ethylene oxide/ethylene glycol (“EO/EG”), mainly driven
by weak economic conditions, poor industry fundamentals and planned and
unplanned outages. In 2007, volume was down 1 percent from 2006, due to
declines in EG and ethylene dichloride (“EDC”) driven by the shutdown of the
Company’s EDC production facility in Fort Saskatchewan, Alberta, Canada in the
fourth quarter of 2006. Prices rose 6 percent in 2007 versus 2006 due to
price improvements in EO/EG and solvents and intermediates, mainly driven by
increases in feedstock and energy costs.
Caustic
soda sales improved 20 percent in 2008 as a 39 percent increase in
price was offset by a 19 percent decline in volume. Volume declined due to
the impact of the U.S. Gulf Coast hurricanes that forced a temporary outage of
the Company’s U.S. Gulf Coast manufacturing facilities and reduced chlorine
derivative demand, prompting the declaration of force majeure in Europe, Latin
America and North America. This led to a tight supply of caustic soda in the
market and as demand remained strong across all market segments, prices rose
significantly. The sale of the Company’s caustic soda distribution business in
Western Canada in the fourth quarter of 2007 also contributed to the decline in
volume.
Vinyl
chloride monomer (“VCM”) sales were down slightly, as price increases were more
than offset by a decline in volume. Volume declined primarily due to the impacts
of the U.S. Gulf Coast hurricanes which forced a temporary outage of the
Company’s U.S. Gulf Coast manufacturing facilities, unplanned maintenance
outages and a large inventory correction by downstream polyvinyl chloride
(“PVC”) fabricators as industry conditions declined.
EO/EG
sales decreased 21 percent in 2008. Volume declined 24 percent driven
by weak industry fundamentals, additional capacity in the Middle East, planned
and unplanned outages, and a significant decline in textile demand in Europe and
North America, which reduced the demand for polyester fiber in Asia Pacific.
Price was up 3 percent due to the favorable impact of currency. In the
first half of the year prices increased due to high feedstock and energy costs;
however, significant price erosion occurred in the fourth quarter as feedstock
and energy prices declined.
Solvents
and intermediates sales were flat in 2008 with a 15 percent increase in
prices offset by a 15 percent decline in volume. The increase in prices,
particularly in North America, was driven by high feedstock and energy costs.
Volume declined due to the weak economic conditions, production outages
experienced at various manufacturing facilities and lower butanol sales in Asia
Pacific.
EBIT
for Basic Chemicals was $15 million in 2008, compared with
$813 million in 2007 and $689 million in 2006. Results for the segment
in 2008 were reduced by hurricane-related costs of $41 million and
restructuring charges of $103 million related to the impairment of the
EO/EG plant at Wilton, England; the closure of the chlorinated organics plant in
Aratu, Brazil; and the closure of the chlor-alkali plant in Oyster Creek, Texas
(see Note B to the Consolidated Financial Statements). EBIT in 2008 declined
sharply from 2007 due to higher feedstock and energy costs which compressed
margins, and lower equity earnings from EQUATE and MEGlobal. In 2007, results
were reduced by restructuring charges of $7 million related to the
write-off of capital project spending. Results for 2006 included restructuring
charges of $184 million related to the closure of the chlor-alkali plant at
Fort Saskatchewan, Canada, as well as a number of other small manufacturing
facilities. Excluding restructuring charges, EBIT for 2007 declined from 2006 as
sharply higher feedstock and energy costs and increases in other raw material
costs more than offset the improvement in sales and increase in equity earnings
from EQUATE and MEGlobal.
Basic
Chemicals Outlook for 2009
Caustic
soda demand is expected to soften during 2009 due to depressed global economic
conditions. Prices are expected to remain at record levels in early 2009 due to
favorable supply/demand balances the first half of the year; a correction,
however, is expected to occur in the latter part of 2009. Volume is expected to
decline in 2009 due to continuing low demand for chlorine derivatives and the
closure of the chlor-alkali plant in Oyster Creek, Texas.
VCM
sales are expected to decline in 2009 as prices sharply decrease, despite
anticipated volume increases. Prices are expected to decline due to weak
supply/demand fundamentals and lower feedstock and energy prices. Volume is
expected to increase as downstream PVC inventories are critically low and
restocking is expected to occur. Expected improvements in the global economy in
the later part of 2009 will increase the demand for end-use applications of
PVC.
Supply
of EG is expected to increase in an already oversupplied market facing declining
customer demand as significant additional production capacity is expected to
come on-line in the Middle East in 2009.
Solvents
and intermediates volume and margins are expected to be flat in early 2009;
while demand is expected to recover modestly in the second half of 2009,
additional margin compression is expected as the competitive environment
strengthens.
Significant
deterioration of equity income from EQUATE, MEGlobal and OPTIMAL is expected due
to price deterioration.
Hydrocarbons
and Energy sales were $8,968 million in 2008 compared with
$7,105 million in 2007 and $6,205 million in 2006. In 2008, prices
were up 21 percent and volume increased 5 percent from 2007. The
increase in selling prices in 2008 was driven by significantly higher overall
feedstock, monomer and energy costs. Sales of monomers increased compared with
last year due to a styrene supply contract with Americas Styrenics LLC. In 2007,
prices were up 12 percent and volume increased 3 percent from 2006.
Prices improved in 2007 following the continued rise in crude oil and feedstock
costs, and tight supply/demand balance for certain hydrocarbon products. Volume
in 2007 increased primarily due to additional U.S. power sales resulting from
the fourth quarter 2006 acquisition of the Plaquemine Cogeneration Facility in
Louisiana.
The
Hydrocarbons and Energy business transfers materials to Dow’s derivative
businesses at net cost, which results in EBIT that is at or near breakeven. EBIT
in 2008 was a loss of $70 million due to hurricane-related costs of
$52 million and restructuring charges of $18 million. In 2007, EBIT
was a loss of $45 million due to restructuring charges of $44 million
principally due to the shutdown of the Company’s styrene monomer plant in
Camaçari, Brazil, and the closure of storage wells in Fort Saskatchewan, Canada.
EBIT for the segment was at breakeven in 2006. See Note B to the Consolidated
Financial Statements for information on restructuring charges.
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 feedstock and energy rose $5.9 billion (28 percent) in 2008.
Crude oil prices increased for much of the year, and on average, 2008 prices
were $24 per barrel higher than 2007 levels. North American natural gas
prices continued the upward trend, and were approximately $1.89 per million
Btu higher than in 2007, an increase of approximately
27 percent.
Hydrocarbons
and Energy Outlook for 2009
Crude
oil and natural gas prices are expected to remain volatile and sensitive to
external factors such as weather, economic activity and geopolitical tensions.
The Company expects crude oil prices, on average, to be significantly lower than
2008. Ethylene margins are expected to be lower in 2009 due to global capacity
growth, particularly in the Middle East, exceeding global demand growth.
Ethylene margins could improve somewhat compared with these expectations, in the
event of stronger than anticipated demand and a delay of new capacity within the
industry. The economic outlook is uncertain and the faltering economy and/or
major spikes in crude oil prices could contribute to a decline in margins and
volume.
Sales
for Unallocated and Other, which primarily relate to the Company’s insurance
operations, were $322 million in 2008 compared with $421 million in
2007 and $316 million in 2006. 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
was a loss of $1,078 million in 2008 compared with a loss of
$897 million in 2007 and a loss of $594 million in 2006. EBIT for 2008
was reduced by 2008 restructuring charges totaling $430 million, including
employee-related severance expenses of $321 million, pension curtailment
costs and termination benefits of $88 million, asset write-offs and
environmental obligations of $21 million; net unfavorable adjustments to
prior year restructuring plans of $2 million; increased spending related to
acquisitions and joint venture formation activity, including legal expenses and
other costs related to the K-Dow transaction ($69 million) and the pending
acquisition of Rohm and Haas Company ($49 million); and costs associated
with the U.S. Gulf Coast hurricanes of $9 million. EBIT in 2008 was also
impacted by lower foreign exchange hedging results, lower earnings from
insurance company operations, a reduction in performance-based compensation
(including stock-based compensation) of $295 million compared with 2007,
and a $54 million reduction in the asbestos-related liability.
EBIT
for 2007 was reduced by 2007 restructuring charges totaling $105 million,
including employee-related severance expenses of $86 million, pension
curtailment costs and termination benefits of $15 million and asset
write-offs of $4 million; franchise taxes of approximately
$80 million; and higher performance-based compensation expenses (including
stock-based compensation) of approximately $230 million. EBIT for 2007 was
favorably impacted by improved results from insurance company operations,
foreign exchange hedging results, and an $8 million favorable adjustment to
the restructuring charge for employee-related expenses recorded in the third
quarter of 2006.
See
Note B to the Consolidated Financial Statements for information regarding
restructuring charges.
|
Sales
Price and Volume
|
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| 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||
|
Percent
change from prior year
|
Volume
|
Price
|
Total
|
Volume
|
Price
|
Total
|
Volume
|
Price
|
Total
|
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Operating
Segments:
|
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Performance
Plastics
|
(4 | )% | 8 | % | 4 | % | 2 | % | 6 | % | 8 | % | 7 | % | 5 | % | 12 | % | ||||||||||||||||||
|
Performance
Chemicals
|
(3 | ) | 14 | 11 | 2 | 4 | 6 | 4 | 1 | 5 | ||||||||||||||||||||||||||
|
Agricultural
Sciences
|
8 | 12 | 20 | 9 | 2 | 11 | 3 | (2 | ) | 1 | ||||||||||||||||||||||||||
|
Basic
Plastics
|
(12 | ) | 13 | 1 | 1 | 8 | 9 | 1 | 7 | 8 | ||||||||||||||||||||||||||
|
Basic
Chemicals
|
(16 | ) | 13 | (3 | ) | (1 | ) | 6 | 5 | (2 | ) | 1 | (1 | ) | ||||||||||||||||||||||
|
Hydrocarbons
and Energy
|
5 | 21 | 26 | 3 | 12 | 15 | (9 | ) | 11 | 2 | ||||||||||||||||||||||||||
|
Total
|
(5 | )% | 12 | % | 7 | % | 2 | % | 7 | % | 9 | % | 1 | % | 5 | % | 6 | % | ||||||||||||||||||
|
Geographic
Areas:
|
||||||||||||||||||||||||||||||||||||
|
United
States
|
(11 | )% | 12 | % | 1 | % | (1 | )% | 2 | % | 1 | % | - | 4 | % | 4 | % | |||||||||||||||||||
|
Europe
|
(3 | ) | 14 | 11 | 5 | 12 | 17 | 1 | % | 6 | 7 | |||||||||||||||||||||||||
|
Rest
of World
|
(2 | ) | 12 | 10 | 5 | 5 | 10 | 5 | 3 | 8 | ||||||||||||||||||||||||||
|
Total
|
(5 | )% | 12 | % | 7 | % | 2 | % | 7 | % | 9 | % | 1 | % | 5 | % | 6 | % | ||||||||||||||||||
|
Price
includes the impact of currency. Volume includes the impact of
acquisitions and divestitures.
|
||||||||||||||||||||||||||||||||||||
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
In
millions
|
2008
|
2007
|
2006
|
|||||||||
|
Cash
provided by (used in):
|
||||||||||||
|
Operating
activities
|
$ | 4,711 | $ | 4,484 | $ | 4,154 | ||||||
|
Investing
activities
|
(2,737 | ) | (2,858 | ) | (1,907 | ) | ||||||
|
Financing
activities
|
(978 | ) | (2,728 | ) | (3,302 | ) | ||||||
|
Effect
of exchange rate changes on cash
|
68 | 81 | 6 | |||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
$ | 1,064 | $ | (1,021 | ) | $ | (1,049 | ) | ||||
Despite
significantly lower earnings in 2008, cash provided by operating activities
improved compared with 2007 due to a reduction in working capital requirements,
largely the result of the Company’s intense focus on cost control and cash
generation in the fourth quarter of 2008 in response to the global economic
downturn. Despite lower earnings in 2007, cash provided by operating activities
increased versus 2006, principally due to a reduction in cash contributed to the
Company’s pension plans.
Cash
used in investing activities in 2008 was down slightly compared with 2007, as an
increase in capital expenditures of $201 million and an increase in
investments in nonconsolidated affiliates (including $69 million for
Americas Styrenics LLC and $161 million additional investment in two
Kuwaiti joint ventures), was more than offset by a lower level of investing in
consolidated companies, despite acquisitions of several small agricultural seed
companies totaling $100 million in 2008. Cash used in investing activities
in 2007 increased significantly compared with 2006 due to investments in
consolidated companies (including $603 million for Wolff Walsrode and
$151 million for Hyperlast Limited; see Notes C and G to the Consolidated
Financial Statements), a $300 million increase in capital expenditures,
several acquisitions of agricultural businesses, partially offset by a lower
usage of cash to purchase previously leased assets.
Cash
used in financing activities in 2008 was down significantly compared with 2007,
as cash generated by proceeds from issuances of long-term debt in excess of
payments on long-term debt and a decrease in purchases of treasury stock, more
than offset a reduction in the change in proceeds from the issuance of
promissory notes under the Company’s U.S. commercial paper program and lower
proceeds from the sales of common stock (related to the exercise of stock
options and the Employees’ Stock Purchase Plan). Cash used in financing
activities in 2007 decreased compared with 2006 as the issuance of commercial
paper and higher proceeds from the sales of common stock, more than offset
increases in purchases of treasury stock and dividends paid to shareholders. In
May 2007, the quarterly dividend was increased
12 percent.
On
August 29, 2006, the Board of Directors approved a plan (the “2006 Plan”)
to shut down a number of the Company’s manufacturing facilities. These shutdowns
are scheduled to be completed by the end of the first quarter of 2009. On
December 3, 2007, the Board of Directors approved a restructuring plan (the
“2007 Plan”) that included the shutdown of a number of assets and organizational
changes within targeted functions. These restructuring activities are expected
to be completed by the end of 2009. On December 5, 2008, the Board of
Directors approved a restructuring plan (the “2008 Plan”) as part of a series of
actions to advance the Company’s strategy and respond to the recent, severe
economic downturn, including the shutdown of a number of facilities and a
workforce reduction. The 2008 Plan is expected to be completed by the end of
2010. The activities related to the three plans are expected to result in
additional cash expenditures of approximately $683 million over the next
few years related to severance costs, contract termination fees, asbestos
abatement and environmental remediation (see Note B to the Consolidated
Financial Statements). Dow expects to incur future costs related to its
restructuring activities, as the Company continually looks for ways to enhance
the efficiency and cost effectiveness of its operations, to ensure
competitiveness across its businesses and across geographic areas. Future costs
are expected to include demolition costs related to the closed facilities, which
will be recognized as incurred. The Company also expects to incur additional
employee-related costs, including involuntary termination benefits, related to
its other optimization activities, and pension plan settlement costs. These
costs cannot be reasonably estimated at this time.
|
Working
Capital at December 31
In
millions
|
2008
|
2007
|
||||||
|
Current
assets
|
$ | 16,060 | $ | 18,654 | ||||
|
Current
liabilities
|
13,108 | 12,445 | ||||||
|
Working
capital
|
$ | 2,952 | $ | 6,209 | ||||
|
Current
ratio
|
1.23:1
|
1.50:1
|
||||||
At December 31, 2008, trade receivables were
$3.8 billion, down from $5.9 billion at December 31, 2007,
consistent with the significant drop in sales (23 percent) in the fourth
quarter of 2008 compared with the fourth quarter of 2007.
Days-sales-outstanding-in-receivables (excluding the impact of sales of
receivables) was 42 days at December 31, 2008 compared with
38 days at December 31, 2007. At December 31, 2008, total
inventories were $6.0 billion, down from $6.9 billion at
December 31, 2007, due to lower feedstock and energy costs at year end 2008
and significantly lower plant operating rates. Days-sales-in-inventory at
December 31, 2008 was 58 days versus 61 days at December 31,
2007.
|
Total
Debt at December 31
In
millions
|
2008
|
2007
|
||||||
|
Notes
payable
|
$ | 2,360 | $ | 1,548 | ||||
|
Long-term
debt due within one year
|
1,454 | 586 | ||||||
|
Long-term
debt
|
8,042 | 7,581 | ||||||
|
Total
debt
|
$ | 11,856 | $ | 9,715 | ||||
|
Debt
as a percent of total capitalization
|
45.7 | % | 31.8 | % | ||||
Debt
as a percent of total capitalization increased from 31.8 percent in 2007 to
45.7 percent in 2008, with almost two-thirds of the increase due to a
decline in equity, principally the result of lower earnings and a significant
increase in “Accumulated other comprehensive loss” largely driven by a decline
in the value of pension plan assets.
As
part of its ongoing financing activities, Dow has the ability to issue
promissory notes under its U.S. and Euromarket commercial paper programs. At
December 31, 2008, there was $1.6 billion of commercial paper
outstanding. Through January 2009, the Company maintained access to the
commercial paper market at competitive rates. In the event Dow has short-term
liquidity needs and is unable to access these short-term markets for any reason,
Dow has the ability to access liquidity through its committed and available
$3 billion 5-year revolving credit facility with various U.S. and foreign
banks. This credit facility matures in April 2011; at December 31, 2008 and
thru January 2009, the Company had not utilized this facility.
At
December 31, 2008, 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 5.0 billion (approximately $7.0 billion)
available for issuance under the Company’s Euro Medium Term Note Program, as
well as Japanese yen 50 billion (approximately $554 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.
On
May 1, 2008, the Company issued $800 million in unsecured notes with a
coupon rate of 5.70 percent, semi-annual interest payments due every May
and November, and the principal amount due at maturity on May 15, 2018.
Between May and December 2008, the Company issued $579 million in retail
medium-term notes with varying maturities in 2013, 2015 and 2018 and at various
interest rates averaging 6.15 percent. Net proceeds from the notes were
primarily used to refinance maturing debt. On September 29, 2008, Calvin
Capital LLC (“Calvin”), a newly formed wholly owned subsidiary of the Company,
issued a three-year $674 million note payable (“Note”) with a floating rate
based on London Interbank Offered Rate (LIBOR). The Note was issued in exchange
for the redemption of the other partner’s ownership in Hobbes Capital S.A. and
was a non-cash transaction (see Note Q of the Consolidated Financial
Statements for further information on this transaction). The Note is recorded in
“Long-term debt due within one year” in the consolidated balance sheets since
the Note holder has the annual option to require the Company to prepay the
outstanding principal.
The
Note was issued under a note purchase agreement which contains, among other
provisions, covenants with which Calvin must comply while the Note is
outstanding. Such covenants include compliance with Calvin’s Limited Liability
Company Agreement, the obligation to not merge or consolidate with any other
corporation or sell or convey all or substantially all of Calvin’s assets, and
limitations on making distributions and incurring other debt. Failure of Calvin
to comply with any of these covenants could result in a default under the
agreement, which would allow the Note holder to accelerate the due date of the
outstanding principal and accrued interest on the Note. Although a consolidated
subsidiary, Calvin is a separate and distinct legal entity with separate assets
of $1,342 million consisting of a $1,317 million note receivable from
the Company with a three-year term and optional prepayment at the end of each
fiscal quarter, and cash and cash equivalents of $25 million; separate
liabilities consisting of the $674 million Note; and separate business and
operations.
Dow’s
public debt instruments and documents for its private funding transactions
contain, among other provisions, certain covenants and default provisions. At
December 31, 2008, management believes the Company was in compliance with
all of these covenants and default provisions. For information on Dow’s
covenants and default provisions, see Note L to the Consolidated Financial
Statements.
The
Company’s credit rating is investment grade. The Company’s long-term credit
ratings were downgraded on December 29, 2008 by Moody’s from A3 to Baa1
with outlook under review for possible downgrade and by Standard & Poor’s
from A- to BBB with credit watch negative. The Company’s short-term credit
rating is A2/P2 negative/negative. If the Company’s credit rating is further
downgraded, it could have a negative impact on the Company’s ability to access
credit markets and could increase borrowing costs.
On
July 14, 2005, the Board of Directors authorized the repurchase of up to
25 million shares of Dow common stock over the period ended on
December 31, 2007 (the “2005 Program”). The Company purchased 714,200
shares in 2005 and 18,084,207 shares in 2006 under the 2005 Program. During
2007, the Company purchased the remaining 6,201,593 shares under the 2005
Program, bringing the program to a close.
On
October 26, 2006, the Company announced that its Board of Directors had approved
a new share buy-back program, authorizing up to $2 billion to be spent on
the repurchase of the Company’s common stock (the “2006 Program”). Purchases
under the 2006 Program began in March 2007, following completion of the 2005
Program. In 2007, the Company purchased 26,225,207
shares under the 2006 Program. In 2008, the Company purchased 21,867,831 shares
under the 2006 Program, bringing the total number of shares purchased under this
program to 48,093,038 and bringing the program to a close.
Capital
spending for the year was $2,276 million, up from $2,075 million in
2007 and $1,775 million in 2006. In 2008, approximately 40 percent of
the Company’s capital expenditures were directed toward additional capacity for
new and existing products, compared with 31 percent in 2007 and
33 percent in 2006. In 2008, approximately 18 percent was committed to
projects related to environmental protection, safety, loss prevention and
industrial hygiene compared with 23 percent in 2007 and 24 percent in
2006. The remaining capital was utilized to maintain the Company’s existing
asset base, including projects related to productivity improvements, energy
conservation and facilities support.
Major
projects underway during 2008 included: the design and construction of a new
chlor-alkali production facility to replace existing facilities, and the
replacement of furnaces used in the production of ethylene in Freeport, Texas;
construction of a regional headquarters facility in Shanghai, China;
construction of a train for the production of synthetic rubber and a Dow
Automotive production facility for glass bonding and primer products in
Schkopau, Germany; expansion of methyl cellulosics capacity at Dow Wolff
Cellulosics in Bitterfeld, Germany; construction of a new polyols plant in
Terneuzen, The Netherlands; and projects to expand the capacity of the
ethanolamines and ethyleneamines production facilities in Hahnville, Louisiana.
Additional major projects included upgrades to isopropanol production facilities
in Texas City, Texas; construction of a facility to produce diesel particulate
filters in Midland, Michigan; and the construction of a facility to produce
DOWANOL™ glycol ethers in Zhangjiagang, China. Because the Company designs and
builds most of its capital projects in-house, it had no material capital
commitments other than for the purchase of materials from fabricators and
construction labor. The Company expects to lower its capital spending in 2009 to
$1.1 billion; this reduction in capital spending may result in placing
current capital projects on hold.
The
following tables summarize the Company’s contractual obligations, commercial
commitments and expected cash requirements for interest at December 31,
2008. Additional information related to these obligations can be found in Notes
K, L, M, N and S 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 | ||||||||||||||
|
Deferred
income tax liabilities – noncurrent (1)
|
- | - | - | - | - | 746 | 746 | |||||||||||||||||||||
|
Pension
and other postretirement benefits
|
487 | 521 | 796 | 723 | 788 | 2,151 | 5,466 | |||||||||||||||||||||
|
Other
noncurrent obligations (2)
|
253 | 306 | 168 | 90 | 63 | 3,152 | 4,032 | |||||||||||||||||||||
|
FIN
No. 48 obligations, including interest and penalties (3)
|
254 | - | - | - | - | 573 | 827 | |||||||||||||||||||||
|
Other
contractual obligations:
|
||||||||||||||||||||||||||||
|
Minimum
operating lease commitments
|
204 | 157 | 103 | 75 | 64 | 340 | 943 | |||||||||||||||||||||
|
Purchase
commitments – take-or-pay and throughput obligations
|
2,023 | 1,708 | 1,798 | 1,392 | 895 | 5,969 | 13,785 | |||||||||||||||||||||
|
Purchase
commitments – other (4)
|
178 | 136 | 5 | 3 | - | 5 | 327 | |||||||||||||||||||||
|
Expected
cash requirements for interest
|
552 | 501 | 438 | 356 | 298 | 4,096 | 6,241 | |||||||||||||||||||||
|
Total
|
$ | 5,405 | $ | 4,389 | $ | 4,831 | $ | 3,643 | $ | 2,709 | $ | 20,886 | $ | 41,863 | ||||||||||||||
|
(1)
Deferred income tax liabilities may vary according to changes in tax laws,
tax rates and the operating results of the Company. As a result, it is
impractical to determine whether there will be a cash impact to an
individual year. All noncurrent deferred income tax liabilities have
been reflected in “2014 and beyond.”
|
||||||||||||||||||||||||||||
|
(2)
Annual payments to resolve asbestos litigation will vary based on changes
in defense strategies, changes in state and national law, and claims
filing and resolution rates. As a result, it is impractical to determine
the anticipated payments in any given year. Therefore, the majority of the
noncurrent asbestos-related liability of $824 million has been reflected
in “2014 and beyond.”
|
||||||||||||||||||||||||||||
|
(3)
Due to uncertainties in the timing of the effective settlement of tax
positions with the respective taxing authorities, the Company is unable to
determine the timing of payments related to its FIN No. 48 noncurrent
obligations, including interest and penalties. These amounts are therefore
reflected in “2014 and beyond.”
|
||||||||||||||||||||||||||||
|
(4)
Includes outstanding purchase orders and other commitments greater than $1
million, obtained through a survey of the Company.
|
||||||||||||||||||||||||||||
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 if specific triggering events occur.
Information regarding the Company's outstanding guarantees at December 31,
2008 is disclosed in Note K to the Consolidated Financial
Statements.
The
Company leases an ethylene facility in The Netherlands from an owner trust that
is a variable interest entity (“VIE”). Dow is not the primary beneficiary of the
owner trust and, therefore, is not required to consolidate the owner trust.
Additional information regarding this VIE can be found in Note N to the
Consolidated Financial Statements.
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 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 I 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 2008, other-than-temporary impairment write-downs
were $42 million.
On
February 12, 2009, the Board of Directors announced a quarterly dividend of
$0.15 per share, payable April 30, 2009, to stockholders of record on
March 31, 2009. Since 1912, the Company has paid a cash dividend every
quarter and, in each instance prior to this dividend, has maintained or
increased the amount of the dividend, adjusted for stock splits. During this
97-year period, Dow has increased the amount of the quarterly dividend 47 times
(approximately 12 percent of the time), and maintained the amount of the
quarterly dividend approximately 88 percent of the time. The dividend was
reduced in February 2009, for the first time in the 97-year period, due to
uncertainty in the credit markets, unprecedented lower demand for chemical
products, the ongoing global recession and pending business issues. The Company
declared dividends of $1.68 per share in 2008, $1.635 per share in 2007 and
$1.50 per share in 2006.
In
2008, the Company maintained its strong financial position in the face of
several significant challenges, including the sixth consecutive year of
double-digit percentage increases in feedstock and energy costs, the escalation
of a global financial crisis, the landfall of two major hurricanes along the
U.S. Gulf Coast, and a sharp deterioration in the global economic environment.
In the face of these challenges, Dow’s actions supported its commitment to
financial discipline. Despite the difficult economic conditions in the latter
part of the year, the Company had sufficient liquidity and financial flexibility
to meet all of its business obligations.
Looking
to 2009, the Company is assuming that the weak demand levels seen in late 2008
will continue for several quarters, with growth rates in developed economies in
North America and Europe projected to remain weak well into the first half of
the year and possibly for the entire year. Growth rates in developing regions,
such as Brazil, India, and China, are projected to be more positive than in the
developed world, although not nearly as strong as in 2008. At this early stage
in the year, product inventories across value chains remain low and substantial
capacity is still off-line. Many end-market producers, including those in
emerging geographies, are favoring a make-to-order philosophy until clear demand
signs emerge. Historically low inventory levels in North America, coupled with
stabilizing commodity prices, are expected to provide some demand lift in the
first part of 2009, although it is still unclear if these buying patterns will
be short-lived. Government stimuli in the latter half of the year could bring
greater speed to economic recovery, but it is too early to speculate on the
impact of these incentives. Volatility in feedstock and energy costs is expected
to continue, adding uncertainty to the Company’s outlook. Ethylene chain supply
fundamentals are expected to be impacted by significant capacity additions
projected to start up in 2009.
As
the Company continues to implement its strategy in a volatile global economic
environment, its focus will remain on financial discipline, with an emphasis on
cash preservation measures to ensure financial flexibility. The Company expects
to generate positive cash flow from operations in 2009. The Company will
continue to optimize its investment decisions while supporting its key growth
initiatives, principally in its Performance businesses and in emerging
geographies. The Company expects to lower its capital spending in 2009 to
$1.1 billion, well below the expected level of depreciation but sufficient
to maintain the safety and reliability of the Company’s facilities and invest
for growth. Approximately $3.8 billion of debt will become due in 2009,
including approximately $1.6 billion of commercial paper and
$0.8 billion of notes payable. The Company intends to meet its scheduled
maturing debt obligations with the issuance of new debt. These actions, along
with equity earnings from Dow’s joint ventures, will help the Company to
partially offset the challenging economic environment ahead.
In
addition, the Company will continue to strive to implement its strategic
transformation. See Matters Involving the Formation of K-Dow Petrochemicals and
Matters Involving the Acquisition of Rohm and Haas Company at the end of
Management’s Discussion and analysis of Financial Condition and Results of
Operations for more information regarding these matters.
OTHER
MATTERS
Recent
Accounting Pronouncements
See
Note A to the Consolidated Financial Statements for a summary of
significant accounting policies and recent accounting
pronouncements.
The
preparation of financial statements and related disclosures in accordance with
accounting principles generally accepted in the United States of America (“U.S.
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
describes the significant accounting policies and methods used in the
preparation of the Consolidated Financial Statements. Following are the
Company’s critical accounting policies impacted by judgments, assumptions and
estimates:
Litigation
The
Company is subject to legal proceedings and claims arising out of the normal
course of business. The Company routinely assesses the likelihood of any adverse
judgments or outcomes to these matters, as well as ranges of probable losses. A
determination of the amount of the reserves required, if any, for these
contingencies is made after thoughtful analysis of each known issue and an
actuarial analysis of historical claims experience for incurred but not reported
matters. Dow has an active risk management program consisting of numerous
insurance policies secured from many carriers. These policies provide coverage
that is utilized to minimize the impact, if any, of the legal proceedings. The
required reserves may change in the future due to new developments in each
matter. For further discussion, see Note K to the Consolidated Financial
Statements.
Asbestos-Related
Matters of Union Carbide Corporation
Union
Carbide Corporation (“Union Carbide”), a wholly owned subsidiary of the Company,
and a former Union Carbide subsidiary, Amchem Products, Inc. (“Amchem”), are and
have been involved in a large number of asbestos-related suits filed primarily
in state courts during the past three decades. 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. Union Carbide
also increased the receivable for insurance recoveries related to its asbestos
liability to $1.35 billion at December 31, 2002. Since then, Union
Carbide has compared current asbestos claim and resolution activity to the
results of the most recent ARPC study at each balance sheet date to determine
whether the accrual continues to be appropriate. In addition, Union Carbide has
requested ARPC to review Union Carbide’s historical asbestos claim and
resolution activity each November since 2004 to determine the appropriateness of
updating the most recent ARPC study.
In
November 2006, Union Carbide requested ARPC to review Union Carbide’s historical
asbestos claim and resolution activity and determine the appropriateness of
updating its January 2005 study. In response to that request, ARPC reviewed and
analyzed data through October 31, 2006 and concluded that the experience
from 2004 through 2006 was sufficient for the purpose of forecasting future
filings and values of asbestos claims filed against UCC and Amchem, and could be
used in place of previous assumptions to update the January 2005 study. The
resulting study, completed by ARPC in December 2006, stated that the
undiscounted cost of resolving pending and future asbestos-related claims
against UCC and Amchem, excluding future defense and processing costs, through
2021 was estimated to be between approximately $1.2 billion and
$1.5 billion. As in its January 2003 and January 2005 studies, ARPC
provided estimates for a longer period of time in its December 2006 study, but
also reaffirmed its prior advice that forecasts for shorter periods of time are
more accurate than those for longer periods of time.
Based
on ARPC’s December 2006 study and Union Carbide’s own review of the asbestos
claim and resolution activity, Union Carbide decreased its asbestos-related
liability for pending and future claims $177 million to $1.2 billion
at December 31, 2006 which covered the 15-year period ending in 2021,
excluding future defense and processing costs.
Following
the completion of the review by ARPC in December 2007, as well as Union
Carbide’s own review of the asbestos claim and resolution activity, Union
Carbide determined that no change to the asbestos-related liability for pending
and future claims was required. At December 31, 2007, Union Carbide’s
asbestos-related liability for pending and future claims was
$1.1 billion.
In
November 2008, Union Carbide requested ARPC to review Union Carbide’s historical
asbestos claim and resolution activity and determine the appropriateness of
updating its December 2006 study. In response to that request, ARPC reviewed and
analyzed data through October 31, 2008. The resulting study, completed by ARPC
in December 2008, stated that the undiscounted cost of resolving pending and
future asbestos-related claims against UCC and Amchem, excluding future defense
and processing costs, through 2023 was estimated to be between $952 million
and $1.2 billion. As in its earlier studies, ARPC provided estimates for a
longer period of time in its December 2008 study, but also reaffirmed its prior
advice that forecasts for shorter periods of time are more accurate than those
for longer periods of time.
In
December 2008, based on ARPC’s December 2008 study and Union Carbide’s own
review of the asbestos claim and resolution activity, Union Carbide decreased
its asbestos-related liability for pending and future claims to
$952 million, which covered the 15-year period ending 2023, excluding
future defense and processing costs. The reduction was $54 million and was
shown as “Asbestos-related credit” in the consolidated statements of income. At
December 31, 2008, the asbestos-related liability for pending and future claims
was $934 million.
Union
Carbide’s receivable for insurance recoveries related to its asbestos liability
was $403 million at December 31, 2008 and $467 million at
December 31, 2007. In addition, Union Carbide had receivables of
$272 million at December 31, 2008 and $271 million at
December 31, 2007 for insurance recoveries for defense and resolution
costs.
The
amounts recorded by Union Carbide for the asbestos-related liability and related
insurance receivable 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.
For
additional information, see Legal Proceedings, Asbestos-Related Matters of Union
Carbide Corporation in Management’s Discussion and Analysis of Financial
Condition and Results of Operations, and Note K to the Consolidated
Financial Statements.
Environmental
Matters
The
Company determines the costs of environmental remediation of its facilities and
formerly owned facilities based on evaluations of current law and existing
technologies. Inherent uncertainties exist in such evaluations primarily due to
unknown environmental conditions, changing governmental regulations and legal
standards regarding liability, and emerging remediation technologies. The
recorded liabilities are adjusted periodically as remediation efforts progress,
or as additional technical or legal information becomes available. In the case
of landfills and other active waste management facilities, Dow recognizes the
costs over the useful life of the facility. At December 31, 2008, the
Company had accrued obligations of $312 million for environmental
remediation and restoration costs, including $22 million for the
remediation of Superfund sites. This is management’s best estimate of the costs
for remediation and restoration with respect to environmental matters for which
the Company has accrued liabilities, although the ultimate cost with respect to
these particular matters could range up to approximately twice that amount. The
Company had accrued obligations of $322 million at December 31, 2007
for environmental remediation and restoration costs, including $28 million
for the remediation of Superfund sites. For further discussion, see
Environmental Matters in Management’s Discussion and Analysis of Financial
Condition and Results of Operations and Notes A and K to the Consolidated
Financial Statements.
Pension
and Other Postretirement Benefits
The
amounts recognized in the consolidated financial statements related to pension
and other postretirement benefits are determined from actuarial valuations.
Inherent in these valuations are assumptions including expected return on plan
assets, discount rates at which the liabilities could be settled at
December 31, 2008, rate of increase in future compensation levels,
mortality rates and health care cost trend rates. These assumptions are updated
annually and are disclosed in Note M to the Consolidated Financial
Statements. In accordance with U.S. GAAP, actual results that differ from the
assumptions are accumulated and amortized over future periods and, therefore,
affect expense recognized and obligations recorded in future periods. The U.S.
pension plans represent approximately 73 percent of the Company’s pension
plan assets and 71 percent of the pension obligations.
The
following information relates to the U.S. plans only; a similar approach is used
for the Company’s non-U.S. plans.
The
Company determined the expected long-term rate of return on assets by performing
a detailed analysis of historical and expected returns based on the strategic
asset allocation approved by the Board of Directors and the underlying return
fundamentals of each asset class. The Company’s historical experience with the
pension fund asset performance was also considered. The expected return of each
asset class is derived from a forecasted future return confirmed by historical
experience. The expected long-term rate of return is an assumption and not what
is expected to be earned in any one particular year. The weighted-average
long-term rate of return assumption used for determining net periodic pension
expense for 2008 was 8.44 percent. This assumption remained unchanged for
determining 2009 net periodic pension expense. Future actual pension expense
will depend on future investment performance, changes in future discount rates
and various other factors related to the population of participants in the
Company’s pension plans.
The
discount rates utilized to measure the pension and other postretirement
obligations of the U.S. qualified plans are based on the yield on high-quality
fixed income investments at the measurement date. Future expected actuarially
determined cash flows of Dow’s major U.S. plans are matched against the
Citigroup Pension Discount Curve (Above Median) to arrive at a single discount
rate by plan. The resulting discount rate decreased from 6.75 percent at
December 31, 2007 to 6.61 percent at December 31,
2008.
The
value of the U.S. qualified plan assets decreased from $11.9 billion at
December 31, 2007 to $8.4 billion at December 31, 2008. The
Company did not make any contributions to the U.S. qualified plans in 2008. The
unfavorable impact of asset returns combined with a decrease in the assumed
discount rate, resulted in a $3.9 billion reduction in the funded status
from December 31, 2007 to December 31, 2008. At December 31,
2008, the U.S. qualified plans were underfunded on a projected benefit
obligation basis by $2.3 billion.
The
assumption for the long-term rate of increase in compensation levels for the
principal U.S. qualified plans is zero percent for 2009, 4.25 percent for
2010 and 4.50 percent thereafter. Since 2002, the Company has used a
generational mortality table to determine the duration of its pension and other
postretirement obligations.
The
following discussion relates to all of the Company’s pension plans.
The
Company bases the determination of pension expense or income on a market-related
valuation of plan assets, which reduces year-to-year volatility. This
market-related valuation recognizes investment gains or losses over a five-year
period from the year in which they occur. Investment gains or losses for this
purpose represent the difference between the expected return calculated using
the market-related value of plan assets and the actual return based on the
market value of plan assets. Since the market-related value of plan assets
recognizes gains or losses over a five-year period, the future value of plan
assets will be impacted when previously deferred gains or losses are recorded.
Over the life of the plan, both gains and losses have been recognized and
amortized. At December 31, 2008, net losses of $3,184 million remain
to be recognized in the calculation of the market-related value of plan assets.
These net losses will result in increases in future pension expense as they are
recognized in the market-related value of assets and are a component of the
total net loss of $5,691 million shown under “Pretax amounts recognized in
AOCI at December 31” in the table entitled “Change in Projected Benefit
Obligations, Plan Assets and Funded Status of all Significant Plans” included in
Note M to the Consolidated Financial Statements. The other
$2,507 million of net losses represents cumulative changes in plan
experience and actuarial assumptions. The net decrease in the market-related
value of assets due to the recognition of prior gains and losses is presented in
the following table:
|
Net
Decrease in Market-Related Asset Value Due to Recognition of Prior Asset
Gains and Losses
In
millions
|
||||
|
2009
|
$ | 728 | ||
|
2010
|
738 | |||
|
2011
|
827 | |||
|
2012
|
891 | |||
|
Total
|
$ | 3,184 | ||
Based
on the 2009 pension assumptions, a reduction in curtailment costs and changes in
the market-related value of assets due to the recognition of prior asset losses,
the Company expects net periodic benefit costs to increase by approximately
$25 million for all pension and other postretirement benefits in 2009
compared with 2008.
A
25 basis point increase or decrease in the long-term return on assets
assumption would change the Company’s total pension expense for 2009 by
approximately $36 million. A 25 basis point increase in the discount rate
assumption would lower the Company’s total pension expense for 2009 by
approximately $33 million. A 25 basis point decrease in the discount rate
would increase pension expense by approximately $41 million. A 25 basis
point change in the long-term return and discount rate assumptions would have an
immaterial impact on the other postretirement benefit expense for
2009.
Income
Taxes
Deferred
tax assets and liabilities are determined based on temporary differences between
the financial reporting and tax bases of assets and liabilities, applying
enacted tax rates expected to be in effect for the year in which the differences
are expected to reverse. Based on the evaluation of available evidence, both
positive and negative, the Company recognizes future tax benefits, such as net
operating loss carryforwards and tax credit carryforwards, to the extent that
realizing these benefits is considered to be more likely than not.
At
December 31, 2008, the Company had a net deferred tax asset balance of
$3.4 billion, after valuation allowances of $487 million.
In
evaluating the ability to realize the deferred tax assets, the Company relies
principally on forecasted taxable income using historical and projected future
operating results, the reversal of existing temporary differences and the
availability of tax planning strategies.
At
December 31, 2008, the Company had deferred tax assets for tax loss and tax
credit carryforwards of $2.2 billion, $43 million of which is subject
to expiration in the years 2009-2013. In order to realize these deferred tax
assets for tax loss and tax credit carryforwards, the Company needs taxable
income of approximately $6.9 billion across multiple jurisdictions. The
taxable income needed to realize the deferred tax assets for tax loss and tax
credit carryforwards that are subject to expiration between 2009-2013 is
approximately $222 million.
The
Company recognizes the financial statement effects of an uncertain income tax
position when it is more likely than not, based on the technical merits, that
the position will be sustained upon examination. At December 31, 2008, the
Company had uncertain tax positions for both domestic and foreign issues of
$736 million.
The
Company accrues for other tax contingencies when it is probable that a liability
to a taxing authority has been incurred and the amount of the contingency can be
reasonably estimated. At December 31, 2008, the Company had a non-income
tax contingency reserve for both domestic and foreign issues of
$163 million.
For
additional information, see Notes A and S to the Consolidated Financial
Statements.
Environmental
Policies
Dow
is committed to world-class environmental, health and safety (“EH&S”)
performance, as demonstrated by industry-leading performance, a long-standing
commitment to Responsible Care®, and a strong commitment to achieve the
Company’s 2015 Sustainability Goals – goals that set the standard for
sustainability in the chemical industry by focusing on improvements in Dow’s
local corporate citizenship and product stewardship, and by actively pursuing
methods to reduce the Company’s environmental impact.
To
meet the Company’s public commitments, as well as the stringent laws and
government regulations related to environmental protection and remediation to
which its global operations are subject, Dow has well-defined policies,
requirements and management systems. Dow’s EH&S Management System (“EMS”)
defines the “who, what, when and how” needed for the businesses to achieve the
Company’s policies, requirements, performance objectives, leadership
expectations and public commitments. To ensure effective utilization, the EMS is
integrated into a company-wide management system for EH&S, Operations,
Quality and Human Resources.
It
is Dow’s policy to adhere to a waste management hierarchy that minimizes the
impact of wastes and emissions on the environment. First, Dow works to eliminate
or minimize the generation of waste and emissions at the source through
research, process design, plant operations and maintenance. Second, Dow finds
ways to reuse and recycle materials. Finally, unusable or non-recyclable
hazardous waste is treated before disposal to eliminate or reduce the hazardous
nature and volume of the waste. Treatment may include destruction by chemical,
physical, biological or thermal means. Disposal of waste materials in landfills
is considered only after all other options have been thoroughly evaluated. Dow
has specific requirements for waste that is transferred to non-Dow facilities,
including the periodic auditing of these facilities.
Dow
believes third-party verification and transparent public reporting are
cornerstones of world-class EH&S performance and building public trust. As
such, numerous Dow sites in Europe, Latin America, Australia and North America
have received third-party verification of Dow’s compliance with Responsible
Care® and with outside specifications such as ISO-14001. During 2008, the
Company’s corporate headquarters in Midland, Michigan was audited by Lloyd’s
Register Quality Assurance, and found to be in conformance with Responsible
Care® Management System requirements.
Dow’s
EH&S policies helped the Company achieve excellent safety performance in
2008. Dow’s 2008 recordable injury/illness frequency rate and its injury/illness
severity rate, while slightly increased from 2007 record-low levels, were both
consistent with the path necessary to achieve the 2015 goals. Dow’s 2008 leaks,
breaks and spills performance was the best ever and is consistent with the path
necessary to achieve the 2015 goals. Improvement in process safety and
environmental compliance remains a top management priority, with initiatives
underway to further improve performance and compliance in 2009.
Detailed
information on Dow’s performance regarding environmental matters and goals can
be found online on Dow’s Environment, Health and Safety webpage at www.dow.com.
Chemical
Security
Public
and political attention continues to be placed on the protection of critical
infrastructure, including the chemical industry, from security threats.
Terrorist attacks and natural disasters have increased concern about the
security of chemical production and distribution. Many, including Dow and the
American Chemistry Council, have called for uniform risk-based and
performance-based national standards for securing the U.S. chemical
industry. The Maritime Transportation Security Act (“MTSA”) of 2002 and its
regulations further set forth risk-based and performance-based standards that
must be met at U.S. Coast Guard-regulated facilities. U.S. Chemical Plant
Security legislation was passed in 2006 and the Department of Homeland Security
(“DHS”) is now implementing the regulations known as the Chemical Facility
Anti-Terrorism Standards. The U.S. Transportation Security Administration
(“TSA”) and the U.S. Department of Transportation finalized regulations covering
the rail transportation of chemicals as required by the 9/11 Commission Act of
2007. Dow continues to support uniform risk-based national standards for
securing the chemical industry.
The
focus on security is not new to Dow. A comprehensive, multi-level security plan
for the Company has been maintained since 1988. This plan, which has been
activated in response to significant world and national events since then, is
reviewed on an annual basis. Dow continues to improve its security plans,
placing emphasis on the safety of Dow communities and people by being prepared
to meet risks at any level and to address both internal and external
identifiable risks. Dow’s security plans also are developed to avert
interruptions of normal business work operations that could materially and
adversely affect the Company’s results of operations, liquidity and financial
condition.
Dow
played a key role in the development and implementation of the American
Chemistry Council’s Responsible Care® Security Code that requires that all
aspects of security – including facility, transportation and cyberspace – be
assessed and gaps addressed. Through the Company’s global implementation of the
Security Code, Dow has permanently heightened the level of security – not just
in the United States, but worldwide. Dow employs several hundred employees and
contractors in its Emergency Services and Security department worldwide. In
addition, Dow has committed approximately $200 million in capital over a
ten-year period for plant security, supply chain and cyberspace security
enhancements, regulatory compliance and response capabilities as well as other
components of Dow’s security program. These costs are not considered material to
the Company’s consolidated financial statements.
Through
the implementation of the Security Code, including voluntary security
enhancements and upgrades made since 2002, Dow is well-positioned to comply with
the new U.S. chemical facility regulations and other regulatory security
frameworks. In addition, Dow was the first chemical company to receive Support
Anti-terrorism by Fostering Effective Technologies Act (“SAFETY Act”) coverage
in 2007 from the DHS for the Company’s MTSA regulated-sites and to receive
SAFETY Act coverage in 2008 for the Company’s Rail Transportation Security
Services. This unprecedented certification helps validate Dow’s efforts and
provides additional liability coverage in the event of a terrorist
attack.
Dow
continues to work collaboratively across the supply chain on Responsible Care®,
Supply Chain Design, Emergency Preparedness, Shipment Visibility and
transportation of hazardous materials. Dow is cooperating with public and
private entities to lead the implementation of advanced tank car design and
track and trace technologies. Further, Dow’s Distribution Risk Review process
that has been in place for decades was expanded to address potential threats in
all modes of transportation across the Company’s supply chain. To reduce
vulnerabilities, Dow maintains security measures that meet or exceed regulatory
and industry security standards in all areas in which the Company
operates.
Dow
continually works to strengthen partnerships with local responders, law
enforcement, and security agencies, and to enhance confidence in the integrity
of the Company’s security and risk management program, as well as strengthen its
preparedness and response capabilities. Dow also works closely with its supply
chain partners and strives to educate lawmakers, regulators and communities
about the Company’s resolve and actions to date which are mitigating security
and crisis threats.
Climate
Change
There
is a growing political and scientific consensus that emissions of greenhouse
gases (“GHG”) due to human activities continue to alter the composition of the
global atmosphere in ways that are affecting the climate. Dow is committed to
reducing its GHG intensity (pounds of GHG per pound of product), developing
climate-friendly products and processes and, over the longer term, implementing
technology solutions to achieve even greater climate change improvements. Since
1990, Dow has reduced its absolute GHG emissions by more than 20 percent, a
more rapid reduction than required by Kyoto Protocol targets; and has achieved a
22 percent improvement in energy intensity (the amount of energy required
to produce one pound of product) since 1994. In doing so, it has avoided
consuming more than 1,600 trillion Btus, a savings that when converted to
electricity would be more than sufficient to supply the electricity consumed by
residential users in the State of California for one year. Through its energy
savings, Dow has prevented more than 86 million metric tons of carbon
dioxide from entering the atmosphere. This trend could change, however,
depending on business growth, capacity utilization and the pace of new
technology development.
Dow
also contributes to the climate change solution by producing products that help
others reduce GHG emissions, such as lightweight plastics for automobiles and
insulation for energy efficient homes and appliances. Dow has demonstrated its
commitment to technological innovation and conservation. For example, a
third-party verified life cycle assessment confirmed that the net reduction in
GHG emissions resulting from the use of Dow thermal insulation in residential
and commercial buildings and industrial pipe applications, avoided the emission
of GHG to the atmosphere by approximately seven times the total GHG emissions of
the Company itself. Dow Building Solutions built a 210 kilowatt solar farm at
the Company’s Pittsburg, California site. This project is the largest solar
installation in Dow and the first commercial pilot for the Company, providing
the energy equivalent to power 175 homes. At Dow’s carpet latex plant in Dalton,
Georgia, the Company will use approximately 160 billion Btus of methane gas
annually, supplied by a local landfill, to fuel the plant; equivalent to the
energy required to heat 2,000 U.S. homes annually. By utilizing landfill gas,
Dow will reduce carbon dioxide emissions by approximately 17 million pounds
annually, which is equivalent to keeping 13,500 cars off the road each
year.
Gains
made toward Dow’s Energy Efficiency goal will directly impact progress in
meeting its 2015 Climate Change goal to reduce GHG intensity by 2.5 percent
a year per pound of product, from a 2005 baseline. Dow is studying the life
cycle impact of its products on climate change and additional global projects
that could offset the Company’s overall GHG emissions through carbon dioxide
reduction.
Dow’s
Energy & Climate Change Policy and Issue Management Team, formed in 2007, is
tasked with developing and implementing a comprehensive climate change strategy
and is advocating an international framework that establishes clear pathways to
help slow, stop and reverse the rate of GHG emissions. In 2008, Dow announced
its Energy Plan for America, which calls for a bold, comprehensive, bipartisan
national energy policy that will help strengthen the economy, increase security,
clean the environment through the reduction of GHG emissions, and revitalize
U.S. manufacturing.
Environmental
Remediation
Dow
accrues the costs of remediation of its facilities and formerly owned facilities
based on current law and existing technologies. The nature of such remediation
includes, for example, the management of soil and groundwater contamination and
the closure of contaminated landfills and other waste management facilities. In
the case of landfills and other active waste management facilities, Dow
recognizes the costs over the useful life of the facility. The accounting
policies adopted to properly reflect the monetary impacts of environmental
matters are discussed in Note A to the Consolidated Financial Statements.
To assess the impact on the financial statements, environmental experts review
currently available facts to evaluate the probability and scope of potential
liabilities. Inherent uncertainties exist in such evaluations primarily due to
unknown environmental conditions, changing governmental regulations and legal
standards regarding liability, and emerging remediation technologies. These
liabilities are adjusted periodically as remediation efforts progress or as
additional technical or legal information becomes available. Dow had an accrued
liability of $290 million at December 31, 2008, related to the
remediation of current or former Dow-owned sites. The liability related to
remediation at December 31, 2007 was $294 million.
In
addition to current and former Dow-owned sites, under the Federal Comprehensive
Environmental Response, Compensation and Liability Act and equivalent state laws
(hereafter referred to collectively as “Superfund Law”), Dow is liable for
remediation of other hazardous waste sites where Dow allegedly disposed of, or
arranged for the treatment or disposal of, hazardous substances. Because
Superfund Law imposes joint and several liability upon each party at a site, Dow
has evaluated its potential liability in light of the number of other companies
that also have been named potentially responsible parties (“PRPs”) at each site,
the estimated apportionment of costs among all PRPs, and the financial ability
and commitment of each to pay its expected share. The Company’s remaining
liability for the remediation of Superfund sites at December 31, 2008 was
$22 million ($28 million at December 31, 2007). The Company has
not recorded any third-party recovery related to these sites as a
receivable.
Information
regarding environmental sites is provided below:
|
Environmental
Sites
|
Dow-owned Sites (1)
|
Superfund Sites (2)
|
||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Number
of sites at January 1
|
251 | 251 | 94 | 64 | ||||||||||||
|
Sites
added during year
|
3 | 3 | 9 | 31 | ||||||||||||
|
Sites
closed during year
|
(2 | ) | (3 | ) | (18 | ) | (1 | ) | ||||||||
|
Number
of sites at December 31
|
252 | 251 | 85 | 94 | ||||||||||||
|
(1)
Dow-owned sites are sites currently or formerly owned by Dow, where
remediation obligations are imposed (in the United States) by the
Resource Conservation Recovery Act or analogous state law. 153 of these
sites were formerly owned by Dowell Schlumberger, Inc., a group of
companies in which the Company previously owned a 50 percent interest. Dow
sold its interest in Dowell Schlumberger in 1992.
|
||||||||||||||||
|
(2)
Superfund sites are sites, including sites not owned by Dow, where
remediation obligations are imposed by Superfund Law.
|
||||||||||||||||
The
Company’s manufacturing sites in Freeport, Texas, and Midland, Michigan, are the
sites for which the Company has the largest environmental remediation accruals.
From the start of operations at the Freeport site in the 1940s until the
mid-1970s, manufacturing wastes were typically placed in on-site pits and
landfills. The resulting soil and groundwater contamination is being assessed
and remediated under the provisions of the Resource Conservation Recovery Act
(“RCRA”), in concert with the state of Texas. At December 31, 2008, the
Company had an accrual of $25 million ($37 million at
December 31, 2007) related to environmental remediation at the Freeport
manufacturing site. In 2008, $5 million ($6 million in 2007) was spent
on environmental remediation at the Freeport site.
Similar
to the Freeport site, in the early days of operations at the Midland site,
manufacturing wastes were usually disposed of on-site, resulting in soil and
groundwater contamination, which has been contained and managed on-site under a
series of RCRA permits and regulatory agreements. The most recent Hazardous
Waste Operating License for the Midland site, issued in 2003, also included
provisions for the Company to conduct an investigation to determine the nature
and extent of off-site contamination from historic Midland site operations. The
scope of the investigation includes Midland area soils; Tittabawassee and
Saginaw River sediment and floodplain soils; and Saginaw Bay, and requires the
Company to conduct interim response actions. See Note K to the Consolidated
Financial Statements for additional information. At December 31, 2008, the
Company had an accrual of $35 million ($36 million at
December 31, 2007) for environmental remediation and investigation
associated with the Midland site. In 2008, the Company spent $36 million
($52 million in 2007) on environmental remediation at the Midland
site.
In
total, the Company’s accrued liability for probable environmental remediation
and restoration costs was $312 million at December 31, 2008, compared
with $322 million at the end of 2007. 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. 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.
The
amounts charged to income on a pretax basis related to environmental remediation
totaled $140 million in 2008, $92 million in 2007 and
$125 million in 2006. Capital expenditures for environmental protection
were $193 million in 2008, $189 million in 2007 and $193 million
in 2006.
Introduction
Union
Carbide Corporation (“Union Carbide”), a wholly owned subsidiary of the Company,
is and has been involved in a large number of asbestos-related suits filed
primarily in state courts during the past three decades. These suits principally
allege personal injury resulting from exposure to asbestos-containing products
and frequently seek both actual and punitive damages. The alleged claims
primarily relate to products that Union Carbide sold in the past, alleged
exposure to asbestos-containing products located on Union Carbide’s premises,
and Union Carbide’s responsibility for asbestos suits filed against a former
Union Carbide subsidiary, Amchem Products, Inc. (“Amchem”). In many cases,
plaintiffs are unable to demonstrate that they have suffered any compensable
loss as a result of such exposure, or that injuries incurred in fact resulted
from exposure to Union Carbide’s products.
Influenced
by the bankruptcy filings of numerous defendants in asbestos-related litigation
and the prospects of various forms of state and national legislative reform, the
rate at which plaintiffs filed asbestos-related suits against various companies,
including Union Carbide and Amchem, increased in 2001, 2002 and the first half
of 2003. Since then, the rate of filing has significantly abated. Union Carbide
expects more asbestos-related suits to be filed against Union Carbide and Amchem
in the future, and will aggressively defend or reasonably resolve, as
appropriate, both pending and future claims.
The
table below provides information regarding asbestos-related claims filed against
Union Carbide and Amchem:
|
2008
|
2007
|
2006
|
||||||||||
|
Claims
unresolved at January 1
|
90,322 | 111,887 | 146,325 | |||||||||
|
Claims
filed
|
10,922 | 10,157 | 16,386 | |||||||||
|
Claims
settled, dismissed or otherwise resolved
|
(25,538 | ) | (31,722 | ) | (50,824 | ) | ||||||
|
Claims
unresolved at December 31
|
75,706 | 90,322 | 111,887 | |||||||||
|
Claimants
with claims against both UCC and Amchem
|
24,213 | 28,937 | 38,529 | |||||||||
|
Individual
claimants at December 31
|
51,493 | 61,385 | 73,358 | |||||||||
Plaintiffs’
lawyers often sue dozens or even hundreds of defendants in individual lawsuits
on behalf of hundreds or even thousands of claimants. As a result, the damages
alleged are not expressly identified as to Union Carbide, Amchem or any other
particular defendant, even when specific damages are alleged with respect to a
specific disease or injury. In fact, there are no personal injury cases in which
only Union Carbide and/or Amchem are the sole named defendants. For these
reasons and based upon Union Carbide’s litigation and settlement experience,
Union Carbide does not consider the damages alleged against Union Carbide and
Amchem to be a meaningful factor in its determination of any potential
asbestos-related liability.
Estimating
the Liability
Based
on a study completed by Analysis, Research & Planning Corporation (“ARPC”)
in January 2003, Union Carbide increased its December 31, 2002
asbestos-related liability for pending and future claims for the 15-year period
ending in 2017 to $2.2 billion, excluding future defense and processing
costs. Since then, Union Carbide has compared current asbestos claim and
resolution activity to the results of the most recent ARPC study at each balance
sheet date to determine whether the accrual continues to be appropriate. In
addition, Union Carbide has requested ARPC to review Union Carbide’s historical
asbestos claim and resolution activity each November since 2004 to determine the
appropriateness of updating the most recent ARPC study.
In
November 2006, Union Carbide requested ARPC to review Union Carbide’s historical
asbestos claim and resolution activity and determine the appropriateness of
updating its January 2005 study. In response to that request, ARPC reviewed and
analyzed data through October 31, 2006 and concluded that the experience
from 2004 through 2006 was sufficient for the purpose of forecasting future
filings and values of asbestos claims filed against Union Carbide and Amchem,
and could be used in place of previous assumptions to update the January 2005
study. The resulting study, completed by ARPC in December 2006, stated that the
undiscounted cost of resolving pending and future asbestos-related claims
against Union Carbide and Amchem, excluding future defense and processing costs,
through 2021 was estimated to be between approximately $1.2 billion and
$1.5 billion. As in its January 2003 and January 2005 studies, ARPC
provided estimates for a longer period of time in its December 2006 study, but
also reaffirmed its prior advice that forecasts for shorter periods of time are
more accurate than those for longer periods of time.
Based
on ARPC’s December 2006 study and Union Carbide’s own review of the asbestos
claim and resolution activity, Union Carbide decreased its asbestos-related
liability for pending and future claims to $1.2 billion at
December 31, 2006 which covered the 15-year period ending in 2021
(excluding future defense and processing costs). The reduction was
$177 million and was shown as “Asbestos-related credit” in the consolidated
statements of income.
In November 2007, Union Carbide requested ARPC to review Union Carbide’s 2007
asbestos claim and resolution activity and determine the appropriateness of
updating its December 2006 study. In response to that request, ARPC reviewed and
analyzed data through October 31, 2007. In December 2007, ARPC stated that
an update of its study would not provide a more likely estimate of future events
than the estimate reflected in its study of the previous year and, therefore,
the estimate in that study remained applicable. Based on Union Carbide’s own
review of the asbestos claim and resolution activity and ARPC’s response, Union
Carbide determined that no change to the accrual was required. At
December 31, 2007, Union Carbide’s asbestos-related liability for pending
and future claims was $1.1 billion.
In
November 2008, Union Carbide requested ARPC to review Union Carbide’s historical
asbestos claim and resolution activity and determine the appropriateness of
updating its December 2006 study. In response to that request, ARPC reviewed and
analyzed data through October 31, 2008. The resulting study, completed by
ARPC in December 2008, stated that the undiscounted cost of resolving pending
and future asbestos-related claims against UCC and Amchem, excluding future
defense and processing costs, through 2023 was estimated to be between
$952 million and $1.2 billion. As in its earlier studies, ARPC
provided estimates for a longer period of time in its December 2008 study,
but also reaffirmed its prior advice that forecasts for shorter periods of time
are more accurate than those for longer periods of time.
In
December 2008, based on ARPC’s December 2008 study and Union Carbide’s own
review of the asbestos claim and resolution activity, Union Carbide decreased
its asbestos-related liability for pending and future claims to
$952 million, which covered the 15-year period ending 2023, excluding
future defense and processing costs. The reduction was $54 million and was
shown as “Asbestos-related credit” in the consolidated statements of income. At
December 31, 2008, the asbestos-related liability for pending and future
claims was $934 million.
At
December 31, 2008, approximately 21 percent of the recorded liability
related to pending claims and approximately 79 percent related to future
claims. At December 31, 2007, approximately 31 percent of the recorded
liability related to pending claims and approximately 69 percent related to
future claims.
Defense
and Resolution Costs
The
following table provides information regarding defense and resolution costs
related to asbestos-related claims filed against Union Carbide and
Amchem:
|
Defense
and Resolution Costs
|
Aggregate
Costs
|
||||
|
In
millions
|
2008
|
2007
|
2006
|
to
Date as of
Dec.
31, 2008
|
|
|
Defense
costs
|
$60
|
$84
|
$62
|
$625
|
|
|
Resolution
costs
|
$116
|
$88
|
$117
|
$1,386
|
|
The
average resolution payment per asbestos claimant and the rate of new claim
filings has fluctuated both up and down since the beginning of 2001. Union
Carbide’s management expects such fluctuations to continue in the future based
upon a number of factors, including the
number and type of claims settled in a particular period, the jurisdictions in
which such claims arose, and the extent to which any proposed legislative reform
related to asbestos litigation is being considered.
Union
Carbide expenses defense costs as incurred. The pretax impact for defense and
resolution costs, net of insurance, was $53 million in 2008,
$84 million in 2007 and $45 million in 2006, and was reflected in
“Cost of sales” in the consolidated statements of income.
Insurance
Receivables
At
December 31, 2002, Union Carbide increased the receivable for insurance
recoveries related to its asbestos liability to $1.35 billion, substantially
exhausting its asbestos product liability coverage. The insurance receivable
related to the asbestos liability was determined by Union Carbide after a
thorough review of applicable insurance policies and the 1985 Wellington
Agreement, to which Union Carbide and many of its liability insurers are
signatory parties, as well as other insurance settlements, with due
consideration given to applicable deductibles, retentions and policy limits, and
taking into account the solvency and historical payment experience of various
insurance carriers. The Wellington Agreement and other agreements with insurers
are designed to facilitate an orderly resolution and collection of Union
Carbide’s insurance policies and to resolve issues that the insurance carriers
may raise.
In
September 2003, Union Carbide filed a comprehensive insurance coverage case, now
proceeding in the Supreme Court of the State of New York, County of New York,
seeking to confirm its rights to insurance for various asbestos claims and to
facilitate an orderly and timely collection of insurance proceeds. This lawsuit
was filed against insurers that are not signatories to the Wellington Agreement
and/or do not otherwise have agreements in place with Union Carbide regarding
their asbestos-related insurance coverage, in order to facilitate an orderly
resolution and collection of such insurance policies and to resolve issues that
the insurance carriers may raise. Although the lawsuit is continuing, through
the end of 2008, Union Carbide had reached settlements with several of the
carriers involved in this litigation.
Union
Carbide’s receivable for insurance recoveries related to its asbestos liability
was $403 million at December 31, 2008 and $467 million at
December 31, 2007. At December 31, 2008 and December 31, 2007,
all of the receivable for insurance recoveries was related to insurers that are
not signatories to the Wellington Agreement and/or do not otherwise have
agreements in place regarding their asbestos-related insurance
coverage.
In
addition to the receivable for insurance recoveries related to its asbestos
liability, Union Carbide had receivables for defense and resolution costs
submitted to insurance carriers for reimbursement as follows:
|
Receivables
for Costs Submitted to Insurance Carriers
at
December 31
|
||||||||
|
In
millions
|
2008
|
2007
|
||||||
|
Receivables
for defense costs
|
$ | 28 | $ | 18 | ||||
|
Receivables
for resolution costs
|
244 | 253 | ||||||
|
Total
|
$ | 272 | $ | 271 | ||||
After
a review of its insurance policies, with due consideration given to applicable
deductibles, retentions and policy limits, after taking into account the
solvency and historical payment experience of various insurance carriers;
existing insurance settlements; and the advice of outside counsel with respect
to the applicable insurance coverage law relating to the terms and conditions of
its insurance policies, Union Carbide continues to believe that its recorded
receivable for insurance recoveries from all insurance carriers is probable of
collection.
Summary
The
amounts recorded by Union Carbide for the asbestos-related liability and related
insurance receivable described above were based upon current, known facts.
However, future events, such as the number of new claims to be filed and/or
received each year, the average cost of disposing of each such claim, coverage
issues among insurers, and the continuing solvency of various insurance
companies, as well as the numerous uncertainties surrounding asbestos litigation
in the United States, could cause the actual costs and insurance recoveries for
Union Carbide to be higher or lower than those projected or those
recorded.
Because
of the uncertainties described above, Union Carbide’s management cannot estimate
the full range of the cost of resolving pending and future asbestos-related
claims facing Union Carbide and Amchem. Union Carbide’s management believes that
it is reasonably possible that the cost of disposing of Union Carbide’s
asbestos-related claims, including future defense costs, could have a material
adverse impact on Union Carbide’s results of operations and cash flows for a
particular period and on the consolidated financial position of Union
Carbide.
It
is the opinion of Dow’s management that it is reasonably possible that the cost
of Union Carbide disposing of its asbestos-related claims, including future
defense costs, could have a material adverse impact on the Company’s results of
operations and cash flows for a particular period and on the consolidated
financial position of the Company.
Introduction
On
December 13, 2007, the Company and Petrochemical Industries Company
(K.S.C.) (“PIC”) of Kuwait, a wholly owned subsidiary of Kuwait Petroleum
Corporation (“KPC”), announced plans to form a 50:50 global petrochemicals joint
venture. The proposed joint venture, K-Dow Petrochemicals (“K-Dow”), was
expected to have revenues of more than $11 billion and employ more than
5,000 people worldwide.
On
November 28, 2008, the Company entered into a Joint Venture Formation
Agreement (the “JVFA”) with PIC that provided for the establishment of K-Dow. To
form the joint venture, the Company would transfer by way of contribution and
sale to K-Dow, assets used in the research, development, manufacture,
distribution, marketing and sale of polyethylene, polypropylene, polycarbonate,
polycarbonate compounds and blends, ethyleneamines, ethanolamines, and related
licensing and catalyst technologies; and K-Dow would assume certain related
liabilities. PIC would receive a 50 percent equity interest in K-Dow in
exchange for the payment by PIC of the initial purchase price, estimated to be
$7.5 billion. The purchase price was subject to certain post-closing
adjustments.
Failure
to Close
On
December 31, 2008, the Company received a written notice from PIC with
respect to the JVFA advising the Company of PIC’s position that certain
conditions to closing were not satisfied and, therefore, PIC was not obligated
to close the transaction. On January 2, 2009, PIC refused to close the
K-Dow transaction in accordance with the JVFA. The Company disagrees with the
characterizations and conclusions expressed by PIC in the written notice and the
Company has informed PIC that it breached the JVFA. On January 6, 2009, the
Company announced that it would seek to fully enforce its rights under the terms
of the JVFA and various related agreements.
Although
the Company currently is prepared to close the K-Dow transaction immediately
despite PIC’s breach, the Company has been approached by other interested
parties about joint venturing with the Company for the businesses originally
intended to be part of K-Dow. The Company is in the process of seeking an
alternative joint venture partner for these businesses.
Arbitration
The
Company’s claims against PIC are subject to an arbitration agreement between the
parties, which provides for arbitration under the Rules of Arbitration of the
International Chamber of Commerce. Pursuant to the arbitration agreement, the
Company delivered a Dispute Notice to PIC on January 8, 2009, which
commenced a 30-day period for negotiations to resolve the dispute informally.
That period expired on February 11, 2009. On February 18, 2009, the
Company initiated arbitration proceedings against PIC alleging that PIC breached
the JVFA by failing to close the transaction on January 2, 2009. The
Company is seeking damages in excess of $2.5 billion in the arbitration
proceeding.
Introduction
On
July 10, 2008, the Company and Rohm and Haas Company (“Rohm and Haas”)
entered into an Agreement and Plan of Merger (the “Merger Agreement”) for the
acquisition of Rohm and Haas for $78 in cash per share of Rohm and Haas common
stock (the “Merger”). The Merger did not close in January 2009, as originally
anticipated, in light of the Company’s determination that recent material
developments had created unacceptable uncertainties with respect to the funding
and economics of the combined Dow and Rohm and Haas enterprise. This assessment
was based on several macro-economic factors such as the continued crisis in
global financial and credit markets and unprecedented demand destruction,
combined with the failure of PIC to fulfill its obligation to close the K-Dow
joint venture transaction and fund the initial purchase price on January 2,
2009.
Litigation
On
January 26, 2009, Rohm and Haas commenced an action in the Court of
Chancery of the State of Delaware to compel the Company to acquire Rohm and Haas
for $78 in cash per share of Rohm and Haas common stock (plus a “ticking fee”
commencing on January 10, 2009). The complaint (the “Complaint”) in the
action alleges that all conditions to the Company’s obligation to close the
Merger were met on January 23, 2009 and that the Company, pursuant to the
terms of the Merger Agreement, was required to close the Merger within two
business days thereafter, i.e., by January 27,
2009. The Complaint further alleges that the Company advised Rohm and Haas on
January 25, 2009 that it would not close the Merger on or by
January 27, 2009, and that the Company knowingly and intentionally breached
the Merger Agreement.
On
January 27, 2009, the Court determined to expedite proceedings in the case
and ordered that the trial commence on March 9, 2009. The trial will relate
to the issue of whether the Court should order specific performance and thus
require the Company to close the Merger. The Court also stated that it strongly
encouraged the parties to focus on a business solution to the
dispute.
On February 3, 2009, the Company filed its answer (the “Answer”) to the
Complaint. The Answer denied that all conditions to closing had been met as of
January 23, 2009, noting that the United States Federal Trade Commission
(“FTC”) action on January 23, 2009 was only a provisional acceptance of the
proposed consent order and not final approval, and that the FTC reserves
discretion to reject the proposed consent order after the close of the public
comment period. The Answer denied that Rohm and Haas is entitled to a decree of
specific performance, and asserted affirmative defenses of frustration of
purpose, commercial impracticability, impossibility of performance and undue
hardship – all arising from the sudden and rapid economic and financial
downturn, the dramatic falloff in the Company’s earnings in the fourth quarter
of 2008 and continuing into the first quarter of 2009, the risk of the Company’s
inability to comply with financial covenants contained in the bridge loan
expected to provide temporary financing for the Merger, the risk of the Company
losing access to the capital markets due to potential loss of its investment
grade rating, and the collapse of the K-Dow joint venture. The Company also
asserted that specific performance is not appropriate because Rohm and Haas has
adequate remedies at law for any breach of the Merger Agreement.
Summary
Because
of the uncertainties associated with the litigation described above, management
cannot estimate the impact of the ultimate resolution of the litigation. It is
the opinion of the Company’s management that it is reasonably possible that the
ultimate resolution could have a material adverse impact on the
consolidated financial statements of the Company.
The
Dow Chemical Company and Subsidiaries
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,” where appropriate. A secondary objective is
to add value by creating additional non-specific exposure within established
limits and policies; derivatives used for this purpose are not designated as
hedges per SFAS No. 133. The potential impact of creating such additional
exposures is not material to the Company’s results.
The
global nature of Dow’s business requires active participation in the foreign
exchange markets. As a result of investments, production facilities and other
operations on a global basis, the Company has assets, liabilities and cash flows
in currencies other than the U.S. dollar. The primary objective of the Company’s
foreign exchange risk management is to optimize the U.S. dollar value of net
assets and cash flows, keeping the adverse impact of currency movements to a
minimum. To achieve this objective, the Company hedges on a net exposure basis
using foreign currency forward contracts, over-the-counter option contracts,
cross-currency swaps, and nonderivative instruments in foreign currencies. Main
exposures are related to assets and liabilities denominated in the currencies of
Europe, Asia Pacific and Canada; bonds denominated in foreign currencies –
mainly the euro; and economic exposure derived from the risk that currency
fluctuations could affect the U.S. dollar value of future cash flows. The
majority of the foreign exchange exposure is related to European currencies and
the Japanese yen.
The
main objective of interest rate risk management is to reduce the total funding
cost to the Company and to alter the interest rate exposure to the desired risk
profile. Dow uses interest rate swaps, “swaptions,” and exchange-traded
instruments to accomplish this objective. The Company’s primary exposure is to
the U.S. dollar yield curve.
Dow
has a portfolio of equity securities derived 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 potential gain or loss in
fair market values, given a certain move in prices over a certain period of
time, using specified confidence levels. Through the end of 2007, the VAR
methodology used by the Company was based primarily on a variance/covariance
statistical model. The year-end VAR and average daily VAR for the aggregate of
non-trading and trading positions for 2008 and 2007 are shown below. These
amounts are immaterial relative to the total equity of the Company:
|
Total Daily VAR at December
31 (1)
|
2008
|
2007
|
||
|
In
millions
|
Year-end
|
Average
|
Year-end
|
Average
|
|
Foreign
exchange
|
$1
|
$4
|
$7
|
$5
|
|
Interest
rate
|
$121
|
$93
|
$57
|
$44
|
|
Equity
exposures, net of hedges
|
$24
|
$17
|
$15
|
$16
|
|
Commodities
|
$8
|
$17
|
$17
|
$11
|
|
(1)
Using a 95 percent confidence level
|
||||
The
Company’s daily VAR for the aggregate of trading and non-trading positions using
the variance/covariance statistical model increased from a total VAR of
$96 million at December 31, 2007 to a total of $154 million at
December 31, 2008. The increase related primarily to an increase in the
interest rate VAR from $57 million to $121 million, principally due to
an increase in interest rate volatility.
In
the first quarter of 2008, the Company changed its primary VAR methodology from
a variance/covariance statistical model to a historical simulation model to more
effectively capture co-movements in market rates across different instruments
and market risk exposure categories. In the new historical simulation model, a
97.5 percent confidence level is used and the historical scenario period
includes at least six months of historical data. The new historical simulation
model resulted in a composite daily VAR of $158 million at
December 31, 2008; the VAR calculated for the individual exposure
categories was $1 million for foreign exchange exposure, $161 million
for interest rate exposure, $24 million for equities exposure and
$6 million for commodities exposure.
See
Note H to the Consolidated Financial Statements for further disclosure regarding
market risk.
The
Dow Chemical Company and Subsidiaries
Management’s
Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. The Company’s internal control framework and processes are
designed to provide reasonable assurance to management and the Board of
Directors regarding the reliability of financial reporting and the preparation
of the Company’s consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America.
The
Company’s internal control over financial reporting includes those policies and
procedures that:
|
|
·
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
|
·
|
provide
reasonable assurance that transactions are recorded properly to allow for
the preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and Directors of the Company;
|
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on the consolidated financial statements;
and
|
|
|
·
|
provide
reasonable assurance as to the detection of
fraud.
|
Because
of its inherent limitations, any system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting and concluded that, as of December 31, 2008, such internal control is
effective. In making this assessment, management used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control—Integrated
Framework.
The
Company’s independent auditors, Deloitte & Touche LLP, with direct access to the
Company’s Board of Directors through its Audit Committee, have audited the
consolidated financial statements prepared by the Company. Their report on the
consolidated financial statements is included herein. Deloitte & Touche
LLP’s report on the
Company’s internal control over financial reporting is included in Part II, Item
9A. Controls and Procedures.
|
/s/
ANDREW N. LIVERIS
|
/s/
GEOFFERY E. MERSZEI
|
|
|
Andrew
N. Liveris
President,
Chief Executive Officer and
Chairman
of the Board
|
Geoffery
E. Merszei
Executive
Vice President and Chief Financial Officer
|
|
|
/s/
WILLIAM H. WEIDEMAN
|
||
|
William
H. Weideman
Vice
President and Controller
|
||
|
February
11, 2009
|
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors and Stockholders of
The
Dow Chemical Company:
We
have audited the accompanying consolidated balance sheets of The Dow Chemical
Company and subsidiaries (the "Company") as of December 31, 2008 and 2007, and
the related consolidated statements of income, stockholders' equity,
comprehensive income and cash flows for each of the three years in the period
ended December 31, 2008. Our audits also included the financial statement
schedule listed in the Index at Item 15 (a) 2. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of The Dow Chemical Company and
subsidiaries at December 31, 2008 and 2007, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2008, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As
discussed in Note U to the consolidated financial statements, the Company
is involved in litigation related to an agreement to acquire Rohm and Haas
Company. The Company has disclosed that it is reasonably possible that the
ultimate resolution of the litigation could have a material adverse impact on
the Company’s consolidated financial statements.
As
discussed in Note A to the consolidated financial statements, effective
December 31, 2006, the Company changed its method of accounting for defined
benefit pension and other postretirement plans to conform to Statement of
Financial Accounting Standards No. 158.
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company's internal control over
financial reporting as of December 31, 2008, based on the criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 17, 2009 expressed an
unqualified opinion on the Company's internal control over financial
reporting.
/s/
DELOITTE &
TOUCHE LLP
Deloitte
& Touche LLP
Midland,
Michigan
February
17, 2009
|
The
Dow Chemical Company and Subsidiaries
|
||||||||||||
|
Consolidated
Statements of Income
|
||||||||||||
|
(In
millions, except per share amounts) For the years ended
December 31
|
2008
|
2007
|
2006
|
|||||||||
|
Net
Sales
|
$ | 57,514 | $ | 53,513 | $ | 49,124 | ||||||
|
Cost
of sales
|
52,019 | 46,400 | 41,526 | |||||||||
|
Research
and development expenses
|
1,310 | 1,305 | 1,164 | |||||||||
|
Selling,
general and administrative expenses
|
1,969 | 1,864 | 1,663 | |||||||||
|
Amortization
of intangibles
|
92 | 72 | 50 | |||||||||
|
Goodwill
impairment losses
|
239 | - | - | |||||||||
|
Restructuring
charges
|
839 | 578 | 591 | |||||||||
|
Purchased
in-process research and development charges
|
44 | 57 | - | |||||||||
|
Acquisition-related
expenses
|
49 | - | - | |||||||||
|
Asbestos-related
credit
|
54 | - | 177 | |||||||||
|
Equity
in earnings of nonconsolidated affiliates
|
787 | 1,122 | 959 | |||||||||
|
Sundry
income - net
|
89 | 324 | 137 | |||||||||
|
Interest
income
|
86 | 130 | 185 | |||||||||
|
Interest
expense and amortization of debt discount
|
648 | 584 | 616 | |||||||||
|
Income
before Income Taxes and Minority Interests
|
1,321 | 4,229 | 4,972 | |||||||||
|
Provision
for income taxes
|
667 | 1,244 | 1,155 | |||||||||
|
Minority
interests' share in income
|
75 | 98 | 93 | |||||||||
|
Net
Income Available for Common Stockholders
|
$ | 579 | $ | 2,887 | $ | 3,724 | ||||||
|
Share
Data
|
||||||||||||
|
Earnings
per common share - basic
|
$ | 0.62 | $ | 3.03 | $ | 3.87 | ||||||
|
Earnings
per common share - diluted
|
$ | 0.62 | $ | 2.99 | $ | 3.82 | ||||||
|
Common
stock dividends declared per share of common stock
|
$ | 1.68 | $ | 1.635 | $ | 1.50 | ||||||
|
Weighted-average
common shares outstanding - basic
|
930.4 | 953.1 | 962.3 | |||||||||
|
Weighted-average
common shares outstanding - diluted
|
939.0 | 965.6 | 974.4 | |||||||||
|
See
Notes to the Consolidated Financial Statements.
|
||||||||||||
|
The
Dow Chemical Company and Subsidiaries
|
||||||||
|
Consolidated
Balance Sheets
|
||||||||
|
(In
millions, except share amounts) At December 31
|
2008
|
2007
|
||||||
|
Assets
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 2,800 | $ | 1,736 | ||||
|
Marketable
securities and interest-bearing deposits
|
- | 1 | ||||||
|
Accounts
and notes receivable:
|
||||||||
|
Trade
(net of allowance for doubtful receivables - 2008: $124; 2007:
$118)
|
3,782 | 5,944 | ||||||
|
Other
|
3,074 | 3,740 | ||||||
|
Inventories
|
6,036 | 6,885 | ||||||
|
Deferred
income tax assets - current
|
368 | 348 | ||||||
|
Total
current assets
|
16,060 | 18,654 | ||||||
|
Investments
|
||||||||
|
Investment
in nonconsolidated affiliates
|
3,204 | 3,089 | ||||||
|
Other
investments
|
2,245 | 2,489 | ||||||
|
Noncurrent
receivables
|
276 | 385 | ||||||
|
Total
investments
|
5,725 | 5,963 | ||||||
|
Property
|
||||||||
|
Property
|
48,391 | 47,708 | ||||||
|
Less
accumulated depreciation
|
34,097 | 33,320 | ||||||
|
Net
property
|
14,294 | 14,388 | ||||||
|
Other
Assets
|
||||||||
|
Goodwill
|
3,394 | 3,572 | ||||||
|
Other
intangible assets (net of accumulated amortization - 2008: $825; 2007:
$721)
|
829 | 781 | ||||||
|
Deferred
income tax assets - noncurrent
|
3,900 | 2,126 | ||||||
|
Asbestos-related
insurance receivables - noncurrent
|
658 | 696 | ||||||
|
Deferred
charges and other assets
|
614 | 2,621 | ||||||
|
Total
other assets
|
9,395 | 9,796 | ||||||
|
Total
Assets
|
$ | 45,474 | $ | 48,801 | ||||
|
Liabilities
and Stockholders' Equity
|
||||||||
|
Current
Liabilities
|
||||||||
|
Notes
payable
|
$ | 2,360 | $ | 1,548 | ||||
|
Long-term
debt due within one year
|
1,454 | 586 | ||||||
|
Accounts
payable:
|
||||||||
|
Trade
|
3,306 | 4,555 | ||||||
|
Other
|
2,227 | 1,981 | ||||||
|
Income
taxes payable
|
637 | 728 | ||||||
|
Deferred
income tax liabilities - current
|
88 | 117 | ||||||
|
Dividends
payable
|
411 | 418 | ||||||
|
Accrued
and other current liabilities
|
2,625 | 2,512 | ||||||
|
Total
current liabilities
|
13,108 | 12,445 | ||||||
|
Long-Term
Debt
|
8,042 | 7,581 | ||||||
|
Other
Noncurrent Liabilities
|
||||||||
|
Deferred
income tax liabilities - noncurrent
|
746 | 854 | ||||||
|
Pension
and other postretirement benefits - noncurrent
|
5,466 | 3,014 | ||||||
|
Asbestos-related
liabilities - noncurrent
|
824 | 1,001 | ||||||
|
Other
noncurrent obligations
|
3,208 | 3,103 | ||||||
|
Total
other noncurrent liabilities
|
10,244 | 7,972 | ||||||
|
Minority
Interest in Subsidiaries
|
69 | 414 | ||||||
|
Preferred
Securities of Subsidiaries
|
500 | 1,000 | ||||||
|
Stockholders'
Equity
|
||||||||
|
Common
stock (authorized 1,500,000,000 shares of $2.50 par value
each;
|
||||||||
|
issued
981,377,562 shares)
|
2,453 | 2,453 | ||||||
|
Additional
paid-in capital
|
872 | 902 | ||||||
|
Retained
earnings
|
17,013 | 18,004 | ||||||
|
Accumulated
other comprehensive loss
|
(4,389 | ) | (170 | ) | ||||
|
Treasury
stock at cost (2008: 57,031,291 shares; 2007: 41,011,018
shares)
|
(2,438 | ) | (1,800 | ) | ||||
|
Net
stockholders' equity
|
13,511 | 19,389 | ||||||
|
Total
Liabilities and Stockholders' Equity
|
$ | 45,474 | $ | 48,801 | ||||
|
See
Notes to the Consolidated Financial Statements.
|
||||||||
|
The
Dow Chemical Company and Subsidiaries
|
||||||||||||
|
Consolidated
Statements of Cash Flows
|
||||||||||||
|
(In
millions) For the years ended December 31
|
2008
|
2007
|
2006
|
|||||||||
|
Operating
Activities
|
||||||||||||
|
Net
Income Available for Common Stockholders
|
$ | 579 | $ | 2,887 | $ | 3,724 | ||||||
|
Adjustments
to reconcile net income to net cash provided by
|
||||||||||||
|
operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
2,236 | 2,190 | 2,074 | |||||||||
|
Purchased
in-process research and development charges
|
44 | 57 | - | |||||||||
|
Provision
(Credit) for deferred income tax
|
(260 | ) | 494 | 104 | ||||||||
|
Earnings
of nonconsolidated affiliates less than (in excess of)
dividends
received
|
49 | (348 | ) | (343 | ) | |||||||
|
Minority
interests' share in income
|
75 | 98 | 93 | |||||||||
|
Pension
contributions
|
(185 | ) | (183 | ) | (575 | ) | ||||||
|
Net
loss (gain) on sales of investments
|
1 | (143 | ) | (19 | ) | |||||||
|
Net
gain on sales of property, businesses and consolidated
companies
|
(127 | ) | (108 | ) | (130 | ) | ||||||
|
Other
net loss (gain)
|
15 | (75 | ) | (12 | ) | |||||||
|
Goodwill
impairment losses
|
239 | - | - | |||||||||
|
Restructuring
charges
|
837 | 577 | 586 | |||||||||
|
Asbestos-related
credit
|
(54 | ) | - | (177 | ) | |||||||
|
Excess
tax benefits from share-based payment arrangements
|
(8 | ) | (31 | ) | (11 | ) | ||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Accounts
and notes receivable
|
2,853 | (1,002 | ) | 242 | ||||||||
|
Inventories
|
812 | (712 | ) | (758 | ) | |||||||
|
Accounts
payable
|
(1,062 | ) | 799 | (129 | ) | |||||||
|
Other
assets and liabilities
|
(1,333 | ) | (16 | ) | (515 | ) | ||||||
|
Cash
provided by operating activities
|
4,711 | 4,484 | 4,154 | |||||||||
|
Investing
Activities
|
||||||||||||
|
Capital
expenditures
|
(2,276 | ) | (2,075 | ) | (1,775 | ) | ||||||
|
Proceeds
from sales of property, businesses and consolidated
companies
|
318 | 211 | 296 | |||||||||
|
Acquisitions
of businesses
|
- | (143 | ) | - | ||||||||
|
Purchases
of previously leased assets
|
(63 | ) | (30 | ) | (208 | ) | ||||||
|
Investments
in consolidated companies
|
(336 | ) | (867 | ) | (111 | ) | ||||||
|
Investments
in nonconsolidated affiliates
|
(331 | ) | (78 | ) | (103 | ) | ||||||
|
Distributions
from nonconsolidated affiliates
|
6 | 63 | 6 | |||||||||
|
Proceeds
from sales of ownership interests in nonconsolidated
affiliates
|
- | 30 | 10 | |||||||||
|
Purchases
of investments
|
(855 | ) | (1,952 | ) | (1,405 | ) | ||||||
|
Proceeds
from sales and maturities of investments
|
800 | 1,983 | 1,383 | |||||||||
|
Cash
used in investing activities
|
(2,737 | ) | (2,858 | ) | (1,907 | ) | ||||||
|
Financing
Activities
|
||||||||||||
|
Changes
in short-term notes payable
|
825 | 1,220 | 23 | |||||||||
|
Payments
on long-term debt
|
(760 | ) | (1,354 | ) | (1,359 | ) | ||||||
|
Proceeds
from issuance of long-term debt
|
1,453 | 21 | - | |||||||||
|
Purchases
of treasury stock
|
(898 | ) | (1,462 | ) | (739 | ) | ||||||
|
Proceeds
from sales of common stock
|
72 | 379 | 223 | |||||||||
|
Payment
of deferred financing costs
|
(70 | ) | - | - | ||||||||
|
Excess
tax benefits from share-based payment arrangements
|
8 | 31 | 11 | |||||||||
|
Distributions
to minority interests
|
(45 | ) | (51 | ) | (57 | ) | ||||||
|
Dividends
paid to stockholders
|
(1,563 | ) | (1,512 | ) | (1,404 | ) | ||||||
|
Cash
used in financing activities
|
(978 | ) | (2,728 | ) | (3,302 | ) | ||||||
|
Effect
of Exchange Rate Changes on Cash
|
68 | 81 | 6 | |||||||||
|
Summary
|
||||||||||||
|
Increase
(Decrease) in cash and cash equivalents
|
1,064 | (1,021 | ) | (1,049 | ) | |||||||
|
Cash
and cash equivalents at beginning of year
|
1,736 | 2,757 | 3,806 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 2,800 | $ | 1,736 | $ | 2,757 | ||||||
|
See
Notes to the Consolidated Financial Statements.
|
||||||||||||
|
The
Dow Chemical Company and Subsidiaries
|
||||||||||||
|
Consolidated
Statements of Stockholders' Equity
|
||||||||||||
|
(In
millions) For the years ended December 31
|
2008
|
2007
|
2006
|
|||||||||
|
Common
Stock
|
||||||||||||
|
Balance
at beginning and end of year
|
$ | 2,453 | $ | 2,453 | $ | 2,453 | ||||||
|
Additional
Paid-in Capital
|
||||||||||||
|
Balance
at beginning of year
|
902 | 830 | 661 | |||||||||
|
Stock-based
compensation
|
(30 | ) | 72 | 169 | ||||||||
|
Balance
at end of year
|
872 | 902 | 830 | |||||||||
|
Unearned
ESOP Shares
|
||||||||||||
|
Balance
at beginning of year
|
- | - | (1 | ) | ||||||||
|
Shares
allocated to ESOP participants
|
- | - | 1 | |||||||||
|
Balance
at end of year
|
- | - | - | |||||||||
|
Retained
Earnings
|
||||||||||||
|
Balance
at beginning of year
|
18,004 | 16,987 | 14,719 | |||||||||
|
Net
income
|
579 | 2,887 | 3,724 | |||||||||
|
Dividends
declared on common stock (Per share: $1.68 in 2008,
$1.635
in 2007 and $1.50 in 2006)
|
(1,556 | ) | (1,548 | ) | (1,438 | ) | ||||||
|
Other
|
(14 | ) | (32 | ) | (18 | ) | ||||||
|
Impact
of the adoption of FIN No. 48
|
- | (290 | ) | - | ||||||||
|
Balance
at end of year
|
17,013 | 18,004 | 16,987 | |||||||||
|
Accumulated
Other Comprehensive Loss
|
||||||||||||
|
Unrealized
Gains on Investments at beginning of year
|
71 | 42 | 11 | |||||||||
|
Unrealized
gains (losses)
|
(182 | ) | 29 | 31 | ||||||||
|
Balance
at end of year
|
(111 | ) | 71 | 42 | ||||||||
|
Cumulative
Translation Adjustments at beginning of year
|
723 | (12 | ) | (663 | ) | |||||||
|
Translation
adjustments
|
(502 | ) | 735 | 651 | ||||||||
|
Balance
at end of year
|
221 | 723 | (12 | ) | ||||||||
|
Minimum
Pension Liability at beginning of year
|
- | - | (1,312 | ) | ||||||||
|
Adjustments
|
- | - | 1,147 | |||||||||
|
Balance
at end of year, prior to Dec. 31, 2006 adoption of SFAS No.
158
|
- | - | (165 | ) | ||||||||
|
Reversal
of Minimum Pension Liability under SFAS No. 158
|
- | - | 165 | |||||||||
|
Recognition
of prior service cost and net loss under SFAS No. 158
|
- | - | (2,192 | ) | ||||||||
|
Pension
and Other Postretirement Benefit Plans at beginning of
year
|
(989 | ) | (2,192 | ) | - | |||||||
|
Net
prior service (cost) credit
|
16 | (74 | ) | - | ||||||||
|
Net
gain (loss)
|
(3,278 | ) | 1,277 | - | ||||||||
|
Pension
and Other Postretirement Benefit Plans at end of year
|
(4,251 | ) | (989 | ) | (2,192 | ) | ||||||
|
Accumulated
Derivative Gain (Loss) at beginning of year
|
25 | (73 | ) | 15 | ||||||||
|
Net
hedging results
|
(452 | ) | 20 | (127 | ) | |||||||
|
Reclassification
to earnings
|
179 | 78 | 39 | |||||||||
|
Balance
at end of year
|
(248 | ) | 25 | (73 | ) | |||||||
|
Total
accumulated other comprehensive loss
|
(4,389 | ) | (170 | ) | (2,235 | ) | ||||||
|
Treasury
Stock
|
||||||||||||
|
Balance
at beginning of year
|
(1,800 | ) | (970 | ) | (559 | ) | ||||||
|
Purchases
|
(898 | ) | (1,455 | ) | (746 | ) | ||||||
|
Issuance
to employees and employee plans
|
260 | 625 | 335 | |||||||||
|
Balance
at end of year
|
(2,438 | ) | (1,800 | ) | (970 | ) | ||||||
|
Net
Stockholders' Equity
|
$ | 13,511 | $ | 19,389 | $ | 17,065 | ||||||
|
See
Notes to the Consolidated Financial Statements.
|
||||||||||||
|
The
Dow Chemical Company and Subsidiaries
|
||||||||||||
|
Consolidated
Statements of Comprehensive Income
|
||||||||||||
|
(In
millions) For the years ended December 31
|
2008
|
2007
|
2006
|
|||||||||
|
Net
Income Available for Common Stockholders
|
$ | 579 | $ | 2,887 | $ | 3,724 | ||||||
|
Other
Comprehensive Income (Loss), Net of Tax (tax amounts shown
below
|
||||||||||||
|
for
2008, 2007, 2006)
|
||||||||||||
|
Unrealized
gains (losses) on investments:
|
||||||||||||
|
Unrealized
holding gains (losses) during the period
|
||||||||||||
|
(net
of tax of $(70), $42, $30)
|
(158 | ) | 70 | 61 | ||||||||
|
Less: Reclassification
adjustments for net amounts included in
|
||||||||||||
|
net
income (net of tax of $(13), $(22), $(16))
|
(24 | ) | (41 | ) | (30 | ) | ||||||
|
Cumulative
translation adjustments (net of tax of $(22), $5, $(39))
|
(502 | ) | 735 | 651 | ||||||||
|
Minimum
pension liability adjustments (net of tax of $ -, $ -,
$657)
|
- | - | 1,147 | |||||||||
|
Defined
benefit pension plans:
|
||||||||||||
|
Prior
service cost arising during period (net of tax of $ -,
$(53))
|
(4 | ) | (88 | ) | - | |||||||
|
Net
gain (loss) arising during period (net of tax of $(1,561),
$630)
|
(3,307 | ) | 1,150 | - | ||||||||
|
Less: Amortization
of prior service cost included in net periodic
|
||||||||||||
|
pension
costs (net of tax of $8, $5)
|
20 | 14 | - | |||||||||
|
Less: Amortization
of net loss included in net periodic pension
|
||||||||||||
|
costs
(net of tax of $13, $67)
|
29 | 127 | - | |||||||||
|
Net
gains (losses) on cash flow hedging derivative instruments
|
||||||||||||
|
(net
of tax of $(49), $14, $(39))
|
(273 | ) | 98 | (88 | ) | |||||||
|
Total
other comprehensive income (loss)
|
(4,219 | ) | 2,065 | 1,741 | ||||||||
|
Comprehensive
Income (Loss)
|
$ | (3,640 | ) | $ | 4,952 | $ | 5,465 | |||||
|
See
Notes to the Consolidated Financial Statements.
|
||||||||||||
The
Dow Chemical Company and Subsidiaries
Notes
to the Consolidated Financial Statements
Table
of Contents
|
Note
|
Page
|
||
|
A
|
Summary
of Significant Accounting Policies and Recent Accounting
Pronouncements
|
70
|
|
|
B
|
Restructuring
|
75
|
|
|
C
|
Acquisitions
|
82
|
|
|
D
|
Inventories
|
83
|
|
|
E
|
Property
|
83
|
|
|
F
|
Nonconsolidated
Affiliates and Related Company Transactions
|
84
|
|
|
G
|
Goodwill
and Other Intangible Assets
|
86
|
|
|
H
|
Financial
Instruments
|
88
|
|
|
I
|
Fair
Value Measurements
|
94
|
|
|
J
|
Supplementary
Information
|
95
|
|
|
K
|
Commitments
and Contingent Liabilities
|
96
|
|
|
L
|
Notes
Payable, Long-Term Debt and Available Credit Facilities
|
103
|
|
|
M
|
Pension
Plans and Other Postretirement Benefits
|
105
|
|
|
N
|
Leased
Property and Variable Interest Entities
|
109
|
|
|
O
|
Stock-Based
Compensation
|
109
|
|
|
P
|
Limited
Partnership
|
113
|
|
|
Q
|
Preferred
Securities of Subsidiaries
|
113
|
|
|
R
|
Stockholders’
Equity
|
114
|
|
|
S
|
Income
Taxes
|
114
|
|
|
T
|
Operating
Segments and Geographic Areas
|
117
|
|
|
U
|
Subsequent
Events
|
124
|
|
NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT
ACCOUNTING PRONOUNCEMENTS
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation and Basis of Presentation
The
accompanying 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 (“U.S.
GAAP”) and include the assets, liabilities, revenues and expenses of all
majority-owned subsidiaries over which the Company exercises control and, when
applicable, entities for which the Company has a controlling financial interest
or is the primary beneficiary. Intercompany transactions and balances are
eliminated in consolidation. Investments in nonconsolidated affiliates
(20-50 percent owned companies, joint ventures and partnerships) are
accounted for on the equity basis.
Use
of Estimates in Financial Statement Preparation
The
preparation of financial statements in accordance with U.S. GAAP requires the
use of estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. The Company’s consolidated financial statements
include amounts that are based on management’s best estimates and judgments.
Actual results could differ from those estimates.
Foreign
Currency Translation
The
local currency has been primarily used as the functional currency throughout the
world. Translation gains and losses of those operations that use local currency
as the functional currency are included in the consolidated balance sheets in
“Accumulated other comprehensive income (loss)” (“AOCI”). Where the U.S. dollar
is used as the functional currency, foreign currency gains and losses are
reflected in income.
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. These accruals are adjusted
periodically as assessment and remediation efforts progress or as additional
technical or legal information becomes available. Accruals for environmental
liabilities are included in the consolidated balance sheets in “Other noncurrent
obligations” at undiscounted amounts. Accruals for related insurance or other
third-party recoveries for environmental liabilities are recorded when it is
probable that a recovery will be realized and are included in the consolidated
balance sheets as “Accounts and notes receivable - Other.”
Environmental
costs are capitalized if the costs extend the life of the property, increase its
capacity, and/or mitigate or prevent contamination from future operations.
Environmental costs are also capitalized in recognition of legal asset
retirement obligations resulting from the acquisition, construction and/or
normal operation of a long-lived asset. Costs related to environmental
contamination treatment and cleanup are charged to expense. Estimated future
incremental operations, maintenance and management costs directly related to
remediation are accrued when such costs are probable and reasonably
estimable.
Cash
and Cash Equivalents
Cash
and cash equivalents include time deposits and readily marketable securities
with original maturities of three months or less.
Financial
Instruments
The
Company calculates the fair value of financial instruments using quoted market
prices whenever available. When quoted market prices are not available for
various types of financial instruments (such as forwards, options and swaps),
the Company uses standard pricing models with market-based inputs, which take
into account the present value of estimated future cash flows.
The
Company utilizes derivative instruments to manage exposures to currency exchange
rates, commodity prices and interest rate risk. The fair values of all
derivative instruments are recognized as assets or liabilities at the balance
sheet date. Changes in the fair value of these instruments are reported in
income or AOCI, depending on the use of the derivative and whether it qualifies
for hedge accounting treatment under the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments
and Hedging Activities,” as amended and interpreted.
Gains
and losses on derivative instruments that qualify as cash flow hedges are
recorded in AOCI, to the extent the hedges are effective, until the underlying
transactions are recognized in income. To the extent effective, gains and losses
on derivative and nonderivative instruments used as hedges of the Company’s net
investment in foreign operations are recorded in AOCI as part of the cumulative
translation adjustment. The ineffective portions of cash flow hedges and hedges
of net investment in foreign operations, if any, are recognized in income
immediately.
Gains
and losses on derivative instruments designated and qualifying as fair value
hedging instruments, as well as the offsetting losses and gains on the hedged
items, are reported in income in the same accounting period. Derivative
instruments not designated as hedges are marked-to-market at the end of each
accounting period with the results included in income.
Inventories
Inventories
are stated at the lower of cost or market. The method of determining cost for
each subsidiary varies among last-in, first-out (“LIFO”); first-in, first-out
(“FIFO”); and average cost, and is used consistently from year to
year.
Property
Land,
buildings and equipment, including property under capital lease agreements, are
carried at cost less accumulated depreciation. Depreciation is based on the
estimated service lives of depreciable assets and is calculated using the
straight-line method. For most assets capitalized through 1996, the declining
balance method was used. Fully depreciated assets are retained in property and
accumulated depreciation accounts until they are removed from service. In the
case of disposals, assets and related accumulated depreciation are removed from
the accounts, and the net amounts, less proceeds from disposal, are included in
income.
Impairment
and Disposal of Long-Lived Assets
The
Company evaluates long-lived assets and certain identifiable intangible assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When undiscounted future
cash flows are not expected to be sufficient to recover an asset’s carrying
amount, the asset is written down to its fair value. Long-lived assets to be
disposed of other than by sale are classified as held and used until they are
disposed of. Long-lived assets to be disposed of by sale are classified as held
for sale and are reported at the lower of carrying amount or fair value less
cost to sell, and depreciation is ceased.
Asset
Retirement Obligations
The
Company records asset retirement obligations as incurred and reasonably
estimable, including obligations for which the timing and/or method of
settlement are conditional on a future event that may or may not be within the
control of the Company. The fair values of obligations are recorded as
liabilities on a discounted basis and are accreted over time for the change in
present value. Costs associated with the liabilities are capitalized and
amortized over the estimated remaining useful life of the asset, generally for
periods of 10 years or less.
Investments
Investments
in debt and marketable equity securities, including warrants, are classified as
trading, available-for-sale, or held-to-maturity. Investments classified as
trading are reported at fair value with unrealized gains and losses included in
income. Those classified as available-for-sale are reported at fair value with
unrealized gains and losses recorded in AOCI. Those classified as
held-to-maturity are recorded at amortized cost. The cost of investments sold is
determined by specific identification. The Company routinely reviews
available-for-sale securities for other-than-temporary declines in fair value
below the cost basis, and when events or changes in circumstances indicate the
carrying value of an asset may not be recoverable, the security is written down
to fair value.
The
excess of the cost of investments in subsidiaries over the values assigned to
assets and liabilities is shown as goodwill and is subject to the impairment
provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” Absent any
impairment indicators, recorded goodwill is tested annually for impairment by
comparing the fair value of each reporting unit, determined using a discounted
cash flow method, with its carrying value.
Revenue
Sales
are recognized when the revenue is realized or realizable, and has been earned.
Approximately 98 percent of the Company’s sales are related to sales of
product. The remaining 2 percent are related to the Company’s service
offerings, insurance operations, and licensing of patents and technology.
Revenue for product sales is recognized as risk and title to the product
transfer to the customer, which usually occurs at the time shipment is made.
Substantially all of the Company’s products are sold FOB (free on board)
shipping point or, with respect to countries other than the United States, an
equivalent basis. As such, title to the product passes when the product is
delivered to the freight carrier. Dow’s standard terms of delivery are included
in its contracts of sale, order confirmation documents and invoices. Freight
costs and any directly related associated costs of transporting finished product
to customers are recorded as “Cost of sales.”
The
Company’s primary service offerings are in the form of contract manufacturing
services and services associated with Dow AgroSciences’ termite solution,
SENTRICON™ Termite Colony Elimination System. Revenue associated with these
service offerings is recognized when services are rendered, according to
contractual agreements.
Revenue
related to the Company’s insurance operations includes third-party insurance
premiums, which are earned over the terms of the related insurance policies and
reinsurance contracts. Revenue related to the initial licensing of patents and
technology is recognized when earned; revenue related to running royalties is
recognized according to licensee production levels.
Legal
Costs
The
Company expenses legal costs, including those legal costs expected to be
incurred in connection with a loss contingency, as incurred.
Severance
Costs
The
Company routinely reviews its operations around the world in an effort to ensure
competitiveness across its businesses and geographic areas. When the reviews
result in a workforce reduction related to the shutdown of facilities or other
optimization activities, severance benefits are provided to employees primarily
under Dow’s ongoing benefit arrangements. These severance costs are accrued
(under SFAS No. 112, “Employers’ Accounting for Postemployment Benefits – an
amendment of FASB Statements No. 5 and 43”) once management commits to a plan of
termination including the number of employees to be terminated, their job
classifications or functions, their locations and the expected completion
date.
Income
Taxes
The
Company accounts for income taxes using the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences of temporary differences between the carrying amounts and tax
bases of assets and liabilities using enacted rates.
Annual
tax provisions include amounts considered sufficient to pay assessments that may
result from examinations of prior year tax returns; however, the amount
ultimately paid upon resolution of issues raised may differ from the amounts
accrued.
The
Company recognizes the financial statement effects of an uncertain income tax
position when it is more likely than not, based on the technical merits, that
the position will be sustained upon examination. The Company accrues for other
tax contingencies when it is probable that a liability to a taxing authority has
been incurred and the amount of the contingency can be reasonably estimated. The
current portion of uncertain income tax positions is included in “Income taxes
payable” and the long-term portion is included in “Other noncurrent obligations”
in the consolidated balance sheets.
Provision
is made for taxes on undistributed earnings of foreign subsidiaries and related
companies to the extent that such earnings are not deemed to be permanently
invested.
Earnings
per Common Share
The
calculation of earnings per common share is based on the weighted-average number
of the Company’s common shares outstanding for the applicable period. The
calculation of diluted earnings per common share reflects the effect of all
potential dilutive common shares that were outstanding during the respective
periods, unless the effect of doing so is antidilutive.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes,”
which clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, “Accounting
for Income Taxes.” The interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The interpretation
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN No. 48 was
effective for fiscal years beginning after December 15, 2006. On January 1,
2007, the Company adopted the provisions of FIN No. 48. The cumulative
effect of adoption was a $290 million reduction of retained earnings. See
Note S for further information on income taxes.
In September 2006,
the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87,
88, 106, and 132(R).” The Statement, which was effective December 31, 2006
for the Company, requires employers to recognize the funded status of defined
benefit postretirement plans as an asset or liability on the balance sheet and
to recognize changes in that funded status through comprehensive income. See
Note M for further information on pension plans and other postretirement
benefits.
In September 2006,
the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines
fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. The Statement applies under other
accounting pronouncements that require or permit fair value measurements and was
effective for fiscal years beginning after November 15, 2007. In
February 2008, the FASB issued FASB Staff Position (“FSP”) FAS
No. 157-2, which delayed the effective date of SFAS No. 157 for
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis, to fiscal years beginning after November 15, 2008. On
January 1, 2008, the Company adopted the portion of SFAS No. 157 that
was not delayed, and since the Company’s existing fair value measurements are
consistent with the guidance of the Statement, the partial adoption of the
Statement did not have a material impact on the Company’s consolidated financial
statements. Since the Company’s existing fair value measurements for pension
assets are also consistent with the guidance of the Statement, the adoption of
the Statement for pension and postretirement plans at the December 31, 2008
measurement date did not have a material impact on the Company’s consolidated
financial statements. In accordance with FSP FAS No. 157-2, the provisions
of SFAS No. 157 were not applied to the long-lived asset impairments
described in Note B or to the goodwill impairments described in
Note G. The Company does not expect the adoption of the Statement for
nonfinancial assets and nonfinancial liabilities on January 1, 2009 to have
a material impact on the Company’s consolidated financial statements. See
Note I for expanded disclosures about fair value measurements.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities, an amendment of SFAS
No. 133.” The Statement requires enhanced disclosures about an entity’s
derivative and hedging activities. The Statement is effective for fiscal years
and interim periods beginning after November 15, 2008, which is
January 1, 2009 for the Company; early adoption is encouraged. The
Company’s enhanced disclosures are included in Note H.
In
September 2008, the FASB issued FSP FAS No. 133-1 and
FIN No. 45-4, “Disclosures About Credit Derivatives and Certain
Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation
No. 45; and Clarification of the Effective Date of FASB Statement
No. 161.” The FSP amends and enhances the disclosure requirements for
sellers of credit derivatives (including hybrid instruments that have embedded
credit derivatives) and financial guarantees. The FSP was effective for
reporting periods ending after November 15, 2008. The Company currently
does not hold any of these instruments, thus the FSP did not have an impact on
the disclosures in the Company’s consolidated financial statements at
December 31, 2008.
In
October 2008, the FASB issued FSP FAS No. 157-3, “Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active.” The
FSP clarifies the application of SFAS No. 157, “Fair Value Measurements,”
when the market for a financial asset is not active. The FSP was effective upon
issuance, including reporting for prior periods for which financial statements
had not been issued. The adoption of the FSP did not have a material impact on
the Company’s consolidated financial statements. See Note I for further
information on fair value measurements.
In December 2008,
the FASB issued FSP FAS No. 140-4 and FIN No. 46R-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities.” The FSP, which is effective in the first
reporting period ending after December 15, 2008, requires additional disclosures
concerning transfers of financial assets. The FSP also requires additional
disclosures concerning an enterprise’s involvement with variable interest
entities and qualifying special purpose entities under certain conditions, none
of which apply to the Company. The Company’s
required disclosures concerning transfers of financial assets are included in
Note J.
In
January 2009, the FASB issued FSP Emerging Issues Task
Force (“EITF”) Issue No. 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20.” The FSP provides clarification on
other-than-temporary impairment assessments for securitized assets within the
scope of EITF Issue No. 99-20, “Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets.” The FSP is
effective in the first reporting period ending after December 15, 2008. The
implementation of the EITF did not have a material impact on the Company’s
consolidated financial statements.
Accounting
Standards Issued But Not Yet Adopted
In
December 2007, the FASB revised SFAS No. 141, “Business
Combinations” (“SFAS No. 141R”), to establish revised principles and
requirements for how entities will recognize and measure assets and liabilities
acquired in a business combination. The Statement is effective for business
combinations completed on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company will apply the
guidance of the Statement to business combinations completed on or after
January 1, 2009.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB
No. 51.” The Statement establishes accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The Statement is effective for annual reporting periods beginning on
or after December 15, 2008. The Company does not expect the adoption of the
Statement on January 1, 2009 to have a material impact on the Company’s
consolidated financial statements. The Company will incorporate presentation and
disclosure requirements outlined by SFAS No. 160 in the Company’s Quarterly
Report on Form 10-Q for the period ending March 31, 2009.
In
April 2008, the FASB issued FSP FAS No. 142-3, “Determination of the Useful
Life of Intangible Assets.” The FSP amends the factors an entity should consider
in developing renewal or extension assumptions used in determining the useful
life of recognized intangible assets under SFAS No. 142, “Goodwill and
Other Intangible Assets.” The FSP must be applied prospectively to intangible
assets acquired in fiscal years beginning after December 15, 2008. The
Company will apply the guidance of the FSP to intangible assets acquired on or
after January 1, 2009.
In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) Opinion
No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled
in Cash upon Conversion (Including Partial Cash Settlement).” The FSP applies to
convertible debt securities that, upon conversion, may be settled by the issuer
fully or partially in cash. The FSP, which is effective January 1, 2009 for
the Company, is to be applied retrospectively to all past periods presented. The
Company has not issued convertible debt securities; therefore, the FSP is not
anticipated to have an impact on the Company’s consolidated financial
statements.
In June
2008, the FASB issued FSP EITF Issue No. 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities.” The FSP addresses whether instruments granted in share-based
payment transactions are participating securities prior to vesting and,
therefore, need to be included in the earnings allocation in computing earnings
per share under the two-class method. The FSP affects entities that accrue
dividends on share-based payment awards during the awards’ service period when
the dividends do not need to be returned if the employees forfeit the award.
This FSP is effective for fiscal years beginning after December 15, 2008,
which is January 1, 2009 for the Company. The Company does not have
share-based payment awards that contain rights to nonforfeitable dividends, thus
this FSP is not anticipated to have an impact on the Company’s consolidated
financial statements.
In
September 2008, the FASB ratified the consensus reached by the EITF with respect
to EITF Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at
Fair Value With a Third-Party Credit Enhancement.” The Issue, which is effective
in the first reporting period beginning on or after December 15, 2008,
instructs issuers of a liability with a third-party credit enhancement that is
inseparable from the liability to treat the liability and the credit enhancement
as two units of accounting, and provide related disclosures. The Company does
not carry any liabilities with inseparable third-party credit enhancements, thus
the Issue is not anticipated to have an impact on the Company’s consolidated
financial statements.
In
November 2008, the FASB ratified the consensus reached by the EITF with respect
to EITF Issue No. 08-6, “Equity Method Investment Considerations.” The
Issue is effective in the first reporting period beginning on or after December
15, 2008, which is January 1, 2009 for the Company. The Issue addresses
accounting for certain transactions and impairment considerations involving
equity method investments, in light of SFAS No. 141R and SFAS No. 160.
The Company will apply the guidance of the Issue to equity method investments
acquired on or after January 1, 2009.
In November 2008, the
FASB ratified the consensus reached by the EITF with respect to EITF Issue
No. 08-7, “Accounting For Defensive Intangible Assets.” The Issue, which is
effective in the first annual reporting period beginning on or after
December 15, 2008, which is January 1, 2009 for the
Company, applies
to acquired intangible assets, except for intangible assets
used in research and development activities, that are not intended for
active use, but rather will be held to prevent others from obtaining access to
the asset. The Issue requires such assets to be treated as separate units of
accounting and provides guidance on determining the useful life of such assets.
The Company will apply the guidance of the Issue to defensive intangible assets
acquired on or after January 1, 2009.
In
November 2008, the FASB ratified the consensus reached by the EITF with respect
to EITF Issue No. 08-8, “Accounting for an Instrument (or an Embedded
Feature) With a Settlement Amount That Is Based on the Stock of an Entity’s
Consolidated Subsidiary.” The Issue is effective in the first reporting period
beginning on or after December 15, 2008, which is January 1, 2009 for the
Company. The Company does not have instruments of this nature, thus the Issue is
not anticipated to have an impact on the Company’s consolidated financial
statements.
In
December 2008, the FASB issued FSP FAS No. 132R-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 provisions of the FSP are not required for earlier
periods that are presented for comparative purposes.
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 is shown as “Restructuring
charges” in the consolidated statements of income and was reflected in the
Company’s segment results as shown in the following table, which also reflects
adjustments made in 2008 to the 2007 and 2006 restructuring charges, as
discussed in the sections titled “2007 Restructuring” and “2006
Restructuring:”
|
2008
Restructuring Charges by Operating Segment
|
||||||||||||||||
|
In
millions
|
Impairment
of
Long-Lived
Assets
and
Other Assets
|
Costs
associated with Exit or Disposal Activities
|
Severance
Costs
|
Total
|
||||||||||||
|
Performance
Plastics
|
$ | 108 | $ | 1 | - | $ | 109 | |||||||||
|
Performance
Chemicals
|
23 | 1 | - | 24 | ||||||||||||
|
Basic
Plastics
|
96 | 2 | - | 98 | ||||||||||||
|
Basic
Chemicals
|
86 | 20 | - | 106 | ||||||||||||
|
Hydrocarbons
and Energy
|
15 | 3 | - | 18 | ||||||||||||
|
Unallocated
and Other
|
8 | 101 | $ | 321 | 430 | |||||||||||
|
Total
2008 restructuring charges
|
$ | 336 | $ | 128 | $ | 321 | $ | 785 | ||||||||
|
Adjustments
to 2007 restructuring:
|
||||||||||||||||
|
Performance
Plastics
|
- | 2 | - | 2 | ||||||||||||
|
Agricultural
Sciences
|
- | 3 | - | 3 | ||||||||||||
|
Basic
Plastics
|
30 | 20 | - | 50 | ||||||||||||
|
Unallocated
and Other
|
- | 5 | - | 5 | ||||||||||||
|
Adjustments
to 2006 restructuring:
|
||||||||||||||||
|
Basic
Chemicals
|
- | (3 | ) | - | (3 | ) | ||||||||||
|
Unallocated
and Other
|
- | - | (3 | ) | (3 | ) | ||||||||||
|
Net
2008 restructuring charges
|
$ | 366 | $ | 155 | $ | 318 | $ | 839 | ||||||||
Details
regarding the components of the 2008 restructuring charges are discussed
below:
Impairment
of Long-Lived Assets and Other Assets
The
restructuring charges related to the write-down or write-off of assets in 2008
totaled $336 million and included the impact of plant closures and
impairments of $288 million. The most significant write-downs were related
to Dow’s facilities located in Oyster Creek, Freeport, Seadrift and Texas City,
Texas; Pittsburg, California; Terneuzen, The Netherlands; Varennes, Quebec,
Canada; Plaquemine, Louisiana; Aratu, Brazil; King’s Lynn and Wilton, England;
assets related to the pending sale of the automotive sealants business in
Europe; and project investment costs related to a potential joint venture in
Oman. Details regarding these write-downs or write-offs are as
follows:
|
|
·
|
Due
to the recent, severe economic downturn, the Company decided in the fourth
quarter of 2008 to shut down a number of facilities, including the
following:
|
|
|
·
|
Chlor-alkali
manufacturing facility in Oyster Creek, Texas. A $31 million
write-off of the net book value of the related buildings, machinery and
equipment against the Basic Chemicals segment was recorded in the fourth
quarter of 2008. This facility will be shut down in the first quarter of
2009.
|
|
|
·
|
Styrene
and styrene derivatives manufacturing facilities principally in Freeport,
Texas; Pittsburg, California; Terneuzen, The Netherlands; King’s Lynn,
England, and Varennes, Canada. A $37 million write-off of the net
book value of the related buildings, machinery and equipment against the
Hydrocarbons and Energy ($14 million), Basic Plastics
($6 million), Performance Chemicals ($10 million) and
Performance Plastics ($2 million) segments, as well as Unallocated
and Other ($5 million) was recorded in the fourth quarter of 2008.
The facilities will be shut down by the end of 2009.
|
|
|
·
|
Facilities
that manufacture NORDEL™ hydrocarbon rubber in Seadrift, Texas, and TYRIN™
chlorinated polyethylene in Plaquemine, Louisiana. A $36 million
write-down of the net book value of the related buildings, machinery and
equipment against the Performance Plastics segment was recorded in the
fourth quarter of 2008. Both facilities will close in the first quarter of
2009.
|
|
|
·
|
Solution
vinyl resin manufacturing facilities in Texas City, Texas. A
$26 million write-down of the net book value of the related
buildings, machinery and equipment against the Performance Plastics
segment was recorded in the fourth quarter of 2008. This plant will be
shut down in the third quarter of 2009.
|
|
|
·
|
Perchloroethylene/carbon
tetrachloride manufacturing facility in Aratu, Brazil. An $11 million
write-off of the net book value of the related buildings, machinery and
equipment against the Basic Chemicals segment was recorded in the fourth
quarter of 2008. This facility will be shut down by the end of
2009.
|
|
|
·
|
In
addition to the locations described above, the restructuring charges for
plant closures included $26 million related to the shutdown of
several small production facilities.
|
|
|
·
|
The
Company decided in the fourth quarter to pursue strategic alternatives
regarding its Wilton, England, ethylene oxide/ethylene glycol (“EO/EG”)
plant. Based on the results of asset impairment testing, an impairment
charge of $30 million against the Basic Chemicals segment was
recorded in the fourth quarter of 2008.
|
|
|
·
|
Due
to an expected loss on the pending sale of the automotive sealants
business in Europe, an impairment charge of $8 million against the
Performance Plastics segment was recorded in the fourth quarter of
2008.
|
|
|
·
|
Due
to a change in scope, the Company’s investment (primarily engineering
costs) in a project to form a joint venture to design, build and operate a
petrochemical complex in Oman was written down. An $83 million
write-down of the project-related spending against the Basic Plastics
segment was recorded in the fourth quarter of 2008.
|
The
restructuring charges in the fourth quarter of 2008 also included the write-off
of capital project spending ($13 million); spare parts ($9 million);
catalysts ($6 million) associated with plant closures; other assets
($5 million); as well as a loss on the sale of inventory ($15 million)
associated with the divestiture of the automotive sealants business in Europe.
These write-offs were related to the businesses involved in the shutdown of
assets and were therefore reflected in the results of various operating
segments.
Costs
Associated with Exit or Disposal Activities
The
restructuring charges for costs associated with exit or disposal activities
totaled $128 million in 2008 and included pension curtailment costs and
termination benefits of $88 million reflected in Unallocated and Other; and
environmental remediation and asbestos abatement of $40 million primarily
impacting Basic Chemicals and Unallocated and Other.
Severance
Costs
As
a result of the Company’s decision to shut down assets around the world and
implement a global workforce reduction, the restructuring charges included
severance of $321 million for the separation of approximately
3,000 employees under the terms of Dow’s ongoing benefit arrangements,
primarily over the next two years. These costs were charged against Unallocated
and Other. At December 31, 2008, severance of approximately $2 million
had been paid to 35 employees and a liability of $319 million remained
for approximately 2,965 employees.
The
following table summarizes the activities related to the Company’s restructuring
reserve:
|
2008
Restructuring Activities
In
millions
|
Impairment
of
Long-Lived
Assets and Other Assets
|
Costs
associated with Exit or Disposal Activities
|
Severance
Costs
|
Total
|
||||||||||||
|
Restructuring
charges recognized in the fourth quarter of 2008
|
$ | 336 | $ | 128 | $ | 321 | $ | 785 | ||||||||
|
Cash
payments
|
- | - | (2 | ) | (2 | ) | ||||||||||
|
Charges
against reserve
|
(336 | ) | - | - | (336 | ) | ||||||||||
|
Reserve
balance at December 31, 2008
|
- | $ | 128 | $ | 319 | $ | 447 | |||||||||
Dow
expects to incur future costs related to its restructuring activities, as the
Company continually looks for ways to enhance the efficiency and cost
effectiveness of its operations, and 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.
2007
Restructuring
On
December 3, 2007, the Company’s Board of Directors approved a restructuring plan
that included the shutdown of a number of assets and organizational changes
within targeted support functions to improve the efficiency and cost
effectiveness of the Company’s global operations. As a result of these shutdowns
and organizational changes, which are scheduled to be completed by the end of
2009, the Company recorded pretax restructuring charges totaling
$590 million in 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 is shown as “Restructuring charges” in the
consolidated statements of income and was reflected in the Company’s segment
results as shown in the following table, which also reflects adjustments made in
2007 to the 2006 restructuring charges, as discussed in the section titled “2006
Restructuring:”
|
2007
Restructuring Charges by Operating Segment
|
||||||||||||||||
|
In
millions
|
Impairment
of Long-Lived Assets, Other Intangible Assets and Equity
Investments
|
Costs
associated with Exit or Disposal Activities
|
Severance
Costs
|
Total
|
||||||||||||
|
Performance
Plastics
|
$ | 153 | $ | 31 | - | $ | 184 | |||||||||
|
Performance
Chemicals
|
81 | 4 | - | 85 | ||||||||||||
|
Agricultural
Sciences
|
58 | 19 | - | 77 | ||||||||||||
|
Basic
Plastics
|
88 | - | - | 88 | ||||||||||||
|
Basic
Chemicals
|
7 | - | - | 7 | ||||||||||||
|
Hydrocarbons
and Energy
|
31 | 13 | - | 44 | ||||||||||||
|
Unallocated
and Other
|
4 | 15 | $ | 86 | 105 | |||||||||||
|
Total
2007 restructuring charges
|
$ | 422 | $ | 82 | $ | 86 | $ | 590 | ||||||||
|
Adjustments
to 2006 restructuring:
|
||||||||||||||||
|
Performance
Plastics
|
- | (4 | ) | - | (4 | ) | ||||||||||
|
Unallocated
and Other
|
- | - | (8 | ) | (8 | ) | ||||||||||
|
Net
2007 restructuring charges
|
$ | 422 | $ | 78 | $ | 78 | $ | 578 | ||||||||
Details
regarding the components of the 2007 restructuring charges are discussed
below:
Impairment
of Long-Lived Assets, Other Intangible Assets and Equity
Investments
The
restructuring charges related to the write-down or write-off of assets and
equity investments in 2007 totaled $422 million and included the impact of
plant closures and impairments of $273 million. The most significant plant
write-downs affected Dow’s facilities located in Lauterbourg, France; Camaçari,
Brazil; Aratu, Brazil; Tarragona, Spain; Hahnville, Louisiana; and Berre,
France; and assets related to the exit of the automotive sealants business in
North America, Latin America and Asia Pacific. Details regarding these
write-downs are as follows:
|
|
·
|
Due
to overcapacity within the industry, a disadvantaged cost position, and
increasing pressure from generic suppliers, the Company launched an
information/consultation process with local employee representatives on a
closure project in the fourth quarter of 2007 and recorded an asset
impairment charge related to its agricultural products manufacturing site
located in Lauterbourg, France; upon completion of the
information/consultation process, the plant was shut down in the fourth
quarter of 2008. A $44 million write-down of the net book value of
the related buildings, machinery and equipment against the Agricultural
Sciences segment was recorded in the fourth quarter of 2007.
|
|
|
·
|
The
Company evaluated the economic and financial feasibility of its styrene
plant in Camaçari, Brazil, and due to raw material competitiveness, the
age of the facility, as well as the ready availability of styrene within
the global marketplace, the Company idled the facility in the fourth
quarter of 2007 and recorded a $14 million write-down of the net book
value of the related buildings, machinery and equipment against the
Hydrocarbons and Energy segment.
|
|
|
·
|
The
Company closed its hydroxyethyl cellulose manufacturing facility located
in Aratu, Brazil, in the first quarter of 2008, due to a number of
factors, including capacity limitations, high structural and raw material
costs, and older technology. A $12 million write-down of the net book
value of the related buildings, machinery and equipment was recorded
against the Performance Chemicals segment in the fourth quarter of
2007.
|
|
|
·
|
The
Company determined that the operating costs of its fiber solution
manufacturing plant in Tarragona, Spain, cannot be sustained. The Company
is evaluating more economically viable alternative manufacturing options.
As a result, the Company recorded a $29 million impairment write-down
of the net book value of the related buildings, machinery and equipment
against the Performance Plastics segment in the fourth quarter of
2007.
|
|
|
·
|
Due
to a number of factors, including the inability to secure an economically
sustainable source of propylene and the use of older technologies at the
plant, Union Carbide decided in the fourth quarter of 2007 to shut down
its polypropylene facility at St. Charles Operations in Hahnville,
Louisiana. As a result of the shutdown, a $23 million write-down of
the net book value of the related buildings, machinery and equipment was
recorded against the Basic Plastics segment in the fourth quarter of 2007.
The plant was shut down in the first quarter of 2008.
|
|
|
·
|
The
Company determined that it would not be possible to renegotiate an
economically viable contract manufacturing agreement to continue the
operations of the rubber plant located in Berre, France. A
$27 million impairment write-down of the net book value of the
related buildings, machinery and equipment was recorded against the
Performance Plastics segment in the fourth quarter of 2007. The plant was
shut down in the second quarter of 2008.
|
|
|
·
|
The
Company assessed the long-term profitability of its participation in the
automotive sealants business and determined that the projected results are
inconsistent with the financial performance expected of a market-facing
business. As a result, in the fourth quarter of 2007, the Company made the
decision to exit the automotive sealants business in North America, Asia
Pacific and Latin America by mid-2009; the business explored strategic
options within Europe and decided in the fourth quarter of 2008 to divest
the automotive sealants business within Europe. A $58 million
write-down of the net book value of the related buildings, machinery and
equipment against the Performance Plastics segment was recorded in the
fourth quarter of 2007.
|
In
addition to the write-downs described above, the restructuring charges for plant
closures included $66 million related to the shutdown of several small
production facilities and the closure of certain storage wells in
Canada.
The
restructuring charges in the fourth quarter of 2007 also included the write-down
of investments in nonconsolidated affiliates of $99 million. The most
significant write-downs were related to the Company’s investment in Pétromont
and Company, Limited Partnership (“Pétromont”) and Dow Reichhold Specialty Latex
LLC. Details regarding these write-downs are as follows:
|
|
·
|
Due
to an unfavorable financial outlook, reflecting significant long-term
economic challenges, the Company determined in the fourth quarter of 2007
that its equity investment in Pétromont, a 50 percent owned company,
was other-than-temporarily impaired and recorded a $46 million
write-down of its interest in Pétromont against the Basic Plastics
segment. In the fourth quarter of 2008, the joint venture announced the
permanent shutdown of its operations. As a result of this announcement,
the Company recorded an additional charge of $50 million in the
fourth quarter of 2008.
|
|
·
|
Due
to the loss of a significant portion of business and the lack of
replacement business opportunities, the Company determined its equity
investment in Dow Reichold Specialty Latex LLC, a 50:50 joint venture to
be other-than-temporarily impaired and recorded a $42 million
write-down of its interest in Dow Reichhold Specialty Latex LLC against
the Performance Chemicals segment in the fourth quarter of 2007. An
agreement was reached in the third quarter of 2008 to end the Company’s
involvement in the joint venture.
|
In
addition to the write-downs described above, the restructuring charges for
investments in nonconsolidated affiliates included $11 million related to
the dissolution of two smaller joint ventures.
The
restructuring charges in the fourth quarter of 2007 also included the write-off
of capital project spending ($37 million), and trademarks and patents
($2 million) which the Company determined to be of no further value; as
well as spare parts and catalysts ($11 million) associated with the plant
closures. These write-offs were principally related to the businesses involved
in the shutdown of assets and were therefore reflected in the results of various
operating segments.
Costs
Associated with Exit or Disposal Activities
The
restructuring charges for costs associated with exit or disposal activities
totaled $82 million in 2007 and included contract termination fees of
$53 million, pension curtailment costs and termination benefits of
$15 million, environmental remediation of $7 million and
$7 million of other related costs. In the fourth quarter of 2008, an
additional $5 million was recorded for environmental remediation and
reflected in Unallocated and Other.
Contract
termination fees of $53 million represented the Company’s best estimate of
the fair value to negotiate the settlement of the early cancellation of several
service and supply agreements principally related to the shutdown of
manufacturing assets within the Performance Plastics and Agricultural Sciences
segments. In the fourth quarter of 2008, based on negotiated settlements related
to contract termination fees, the contract termination fees associated with the
2007 restructuring charge were increased $5 million and reflected in the
Performance Plastics ($2 million) and Agricultural Sciences
($3 million) segments.
Severance
Costs
As
a result of the Company’s decision to shut down assets around the world, and
complete other workforce optimization activities, the restructuring charges
recorded in 2007 included severance of $86 million for the separation of
approximately 978 employees under the terms of Dow’s ongoing benefit
arrangements, primarily over two years. These costs were charged against
Unallocated and Other. At December 31, 2007, severance of approximately
$1 million had been paid to 12 employees and a liability of
$85 million remained for approximately 966 employees. During 2008,
severance of $47 million was paid to 439 employees, bringing the total
payments against the program to $48 million paid to 451 employees. At
December 31, 2008, a liability of $37 million (including foreign
currency impact) remained for approximately 527 employees.
The
following table summarizes the activities related to the Company’s restructuring
reserve:
|
2007
Restructuring Activities
In
millions
|
Impairment
of
Long-Lived
Assets, Other Intangible Assets and Equity Investments
|
Costs
associated with Exit or Disposal Activities
|
Severance
Costs
|
Total
|
||||||||||||
|
Restructuring
charges recognized in the fourth quarter of 2007
|
$ | 422 | $ | 82 | $ | 86 | $ | 590 | ||||||||
|
Cash
payments
|
- | - | (1 | ) | (1 | ) | ||||||||||
|
Charges
against reserve
|
(422 | ) | (3 | ) | - | (425 | ) | |||||||||
|
Reserve
balance at December 31, 2007
|
- | $ | 79 | $ | 85 | $ | 164 | |||||||||
|
Adjustments
to reserve
|
$ | 30 | 30 | - | 60 | |||||||||||
|
Cash
payments
|
- | (7 | ) | (47 | ) | (54 | ) | |||||||||
|
Charges
against reserve
|
(30 | ) | - | - | (30 | ) | ||||||||||
|
Foreign
currency impact
|
- | (9 | ) | (1 | ) | (10 | ) | |||||||||
|
Reserve
balance at December 31, 2008
|
- | $ | 93 | $ | 37 | $ | 130 | |||||||||
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 continued its drive to
improve the competitiveness of its global operations. As a consequence of these
shutdowns, which are scheduled to be completed by the end of the first quarter
of 2009, and other optimization activities, the Company recorded pretax
restructuring charges totaling $591 million in 2006. The charges 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 is shown as “Restructuring charges”
in the consolidated statements of income and was reflected in the Company’s
segment results as follows:
|
2006
Restructuring Charges by Operating Segment
|
||||||||||||||||
|
In
millions
|
Impairment
of
Long-Lived
Assets and Other
Intangible
Assets
|
Costs
associated with Exit or Disposal Activities
|
Severance
Costs
|
Total
|
||||||||||||
|
Performance
Plastics
|
$ | 174 | $ | 68 | - | $ | 242 | |||||||||
|
Performance
Chemicals
|
10 | 2 | - | 12 | ||||||||||||
|
Basic
Plastics
|
15 | 1 | - | 16 | ||||||||||||
|
Basic
Chemicals
|
129 | 55 | - | 184 | ||||||||||||
|
Unallocated
and Other
|
18 | 46 | $ | 73 | 137 | |||||||||||
|
Total
|
$ | 346 | $ | 172 | $ | 73 | $ | 591 | ||||||||
Details
regarding the components of the restructuring charges are discussed
below:
Impairment
of Long-Lived Assets and Other Intangible Assets
The
restructuring charges related to the write-down or write-off of assets in 2006
totaled $346 million and included the impact of plant closures of
$269 million. The most significant plant closures affected Dow’s facilities
in Porto Marghera, Italy, and Fort Saskatchewan, Alberta, and Sarnia, Ontario,
Canada. Details regarding these shutdowns are as follows:
|
|
·
|
In
Porto Marghera, Italy, the Company’s toluene diisocyanate (“TDI”) plant
was shut down for planned maintenance in early August 2006. Business
fundamentals in the TDI business were weak due to excess global capacity.
As a result, the Company decided to permanently close the facility at the
end of August, resulting in a $115 million write-down of the net book
value of the related buildings, machinery and equipment against the
Performance Plastics segment in the third quarter of 2006.
|
|
|
·
|
Substantial
capital costs would be required to address efficiency issues at the
Company’s chlor-alkali and direct chlorination ethylene dichloride plants
in Fort Saskatchewan, Canada. Based on an analysis of the discounted
future cash flows, management determined that an investment in these
facilities could not be justified. As a result, the Company shut down the
facilities at the end of October 2006, resulting in a $74 million
write-down of the net book value of the related buildings, machinery and
equipment against the Basic Chemicals segment in the third quarter of
2006.
|
|
|
·
|
Assessments
by the businesses located in Sarnia, Canada, were triggered by the
suspension of ethylene shipments through the Cochin Pipeline, a subsidiary
of BP Canada Energy Resources Company, due to safety concerns. The
assessments highlighted a variety of issues related to the effectiveness,
efficiency and long-term sustainability of the Sarnia-based assets. Based
on these assessments, the Company decided to cease all production activity
at the Sarnia site by the end of the first quarter of 2009 as
follows:
|
|
|
·
|
The
low density polyethylene plant was shut down in the third quarter of
2006.
|
|
|
·
|
The
polystyrene plant ceased production in December 2006.
|
|
|
·
|
Latex
production from the UCAR Emulsion Systems facility was shut down in the
fourth quarter of 2007.
|
|
|
·
|
The
polyols plant is expected to be shut down in the first quarter of
2009.
|
The
closure of manufacturing plants in 2006 resulted in a $24 million
write-down of the net book value of the machinery and equipment in the third
quarter of 2006 (with $11 million reflected in Performance Plastics,
$10 million in Basic Plastics, and $3 million in Unallocated and
Other).
In
addition to the larger shutdowns described above, the restructuring charges for
plant closures included $56 million related to the shutdown of several
small production facilities, a terminal, and a research and development
facility.
The
restructuring charges in the third quarter of 2006 also included the write-off
of capital project spending ($47 million) and technology assets
($18 million) which the Company determined to be of no further value, as
well as spare parts and catalysts ($12 million) associated with the plant
closures. These write-offs were principally related to the businesses involved
in the shutdown of assets and were therefore reflected in the results of various
operating segments.
Costs
Associated with Exit or Disposal Activities
The
restructuring charges for costs associated with exit or disposal activities
totaled $172 million in 2006 and included contract termination fees of
$65 million, environmental remediation of $60 million, pension
curtailment costs and termination benefits of $33 million, and asbestos
abatement of $14 million.
Contract
termination fees of $65 million represented the Company’s best estimate of
the fair value to negotiate the settlement of the early cancellation of several
supply agreements principally related to the shutdown of manufacturing assets
primarily within the Performance Plastics segment. In the second quarter of
2007, the Company reached agreements with certain suppliers regarding the early
cancellation of supply agreements, resulting in a $4 million reduction of
the restructuring reserve for contract termination fees. The adjustment was
credited against the Performance Plastics segment.
The
restructuring charges for environmental remediation of $60 million and
asbestos abatement of $14 million principally related to the shutdown of
the Company’s facilities in Canada. The charges were therefore reflected in
various operating segments. In the first quarter of 2008, a reduction of
$5 million was recorded against the reserve and included in “Cost of sales”
in the consolidated statements of income. In the fourth quarter of 2008, an
additional reduction of $3 million was recorded against the reserve for
environmental remediation.
According
to the restructuring plan for Canada, the chlor-alkali and direct chlorination
ethylene dichloride plants in Fort Saskatchewan were shut down at the end of
October 2006; the Sarnia site will cease all production by the end of the first
quarter of 2009. As such, for purposes of calculating the Company’s obligation
associated with Dow’s defined benefit plans in Canada, the expected years of
future service of active employees has been significantly reduced. In addition,
the Company is obligated to provide certain termination benefits. As a result,
the restructuring charge included pension curtailment costs and termination
benefits of $33 million in 2006. These costs were reflected in Unallocated
and Other.
Severance
Costs
As
a result of the Company’s plans to shut down assets around the world, and
conduct other optimization activities principally in Europe, the restructuring
charges recorded in 2006 included net charges for severance of $73 million
for the separation of approximately 810 employees under the terms of Dow’s
ongoing benefit arrangements, primarily over two years. These costs were charged
against Unallocated and Other. At December 31, 2006, severance of
$4 million had been paid to 115 employees and a liability of
$69 million remained for approximately 695 employees. In the fourth
quarter of 2007, a reduction of $8 million was recorded against the
estimated program costs. During 2007, severance of $25 million was paid to
245 employees; during 2008, severance of $17 million was paid to
195 employees, bringing the total payments against the program to
$46 million paid to 555 employees. In the fourth quarter of 2008, a
reduction of $3 million was recorded against the reserve. At
December 31, 2008, a liability of $14 million (including foreign
currency impact) remained for approximately 215 employees.
The
following table summarizes the activities related to the Company’s restructuring
reserve:
|
2006
Restructuring Activities
In
millions
|
Impairment
of
Long-Lived
Assets and Other
Intangible
Assets
|
Costs
associated with Exit or Disposal Activities
|
Severance
Costs
|
Total
|
||||||||||||
|
Restructuring
charges recognized in 2006
|
$ | 346 | $ | 172 | $ | 73 | $ | 591 | ||||||||
|
Cash
payments
|
- | (1 | ) | (4 | ) | (5 | ) | |||||||||
|
Charges
against reserve
|
(346 | ) | - | - | (346 | ) | ||||||||||
|
Reserve
balance at December 31, 2006
|
- | $ | 171 | $ | 69 | $ | 240 | |||||||||
|
Adjustments
to reserve
|
- | (4 | ) | (8 | ) | (12 | ) | |||||||||
|
Cash
payments
|
- | (53 | ) | (25 | ) | (78 | ) | |||||||||
|
Foreign
currency impact
|
- | 21 | 3 | 24 | ||||||||||||
|
Reserve
balance at December 31, 2007
|
- | $ | 135 | $ | 39 | $ | 174 | |||||||||
|
Adjustments
to reserve
|
- | (8 | ) | (3 | ) | (11 | ) | |||||||||
|
Cash
payments
|
- | (15 | ) | (17 | ) | (32 | ) | |||||||||
|
Foreign
currency impact
|
- | (20 | ) | (5 | ) | (25 | ) | |||||||||
|
Reserve
balance at December 31, 2008
|
- | $ | 92 | $ | 14 | $ | 106 | |||||||||
Acquisition-Related
Expenses
During
2008, pretax charges totaling $49 million were recorded for legal expenses
and other transaction costs related to the pending acquisition of Rohm and Haas
Company; these charges are reflected in Unallocated and Other. These charges
were expensed in anticipation of a 2009 closing of the acquisition and the
application of revised SFAS No. 141, “Business Combinations.”
Acquisition
of Wolff Walsrode
Consistent
with the Company’s strategy to invest in its Performance businesses, the Company
announced on December 18, 2006, that it had reached an agreement with the
Bayer Group to acquire Wolff Walsrode AG and certain related affiliates and
assets (“Wolff Walsrode”), subject to regulatory approval. Wolff Walsrode,
headquartered in Bomlitz, Germany, specializes in cellulose derivatives, food
casings and site services. Following approval from the European Commission on
June 20, 2007, Dow acquired Wolff Walsrode on June 30, 2007 for a cash
purchase price of approximately $603 million.
On
July 2, 2007, the Company announced the creation of a new specialty
business unit, Dow Wolff Cellulosics, which combined the newly acquired Wolff
Walsrode with Dow’s Water Soluble Polymers business. Dow Wolff Cellulosics
encompasses cellulosics and related chemistries, providing application
formulation expertise and other technical services to a broad range of strategic
industry sectors, including construction, paint, personal care, pharmaceuticals,
food and a number of specialty industrial applications.
The
following table summarizes the values of the assets acquired and liabilities
assumed at the date of the acquisition, as well as adjustments that have been
made primarily as a result of final valuations.
|
Assets
Acquired and Liabilities Assumed
In
millions
|
At
June 30,
2007
|
Purchase Price Adjustments
(1)
|
At
Dec. 31,
2007
|
Purchase
Price Adjustments
|
At
Dec. 31,
2008
|
|||||||||||||||
|
Current
assets
|
$ | 188 | $ | 15 | $ | 203 | - | $ | 203 | |||||||||||
|
Property
|
233 | 89 | 322 | $ | (3 | ) | 319 | |||||||||||||
|
Goodwill
(2)
|
364 | (163 | ) | 201 | 6 | 207 | ||||||||||||||
|
Other
intangible assets (2)
|
8 | 148 | 156 | - | 156 | |||||||||||||||
|
Other
assets
|
11 | (5 | ) | 6 | - | 6 | ||||||||||||||
|
Total
assets acquired
|
$ | 804 | $ | 84 | $ | 888 | $ | 3 | $ | 891 | ||||||||||
|
Accounts
payable
|
$ | 27 | - | $ | 27 | - | $ | 27 | ||||||||||||
|
Long-term
debt
|
10 | - | 10 | - | 10 | |||||||||||||||
|
Accrued
and other liabilities
|
47 | $ | (5 | ) | 42 | - | 42 | |||||||||||||
|
Pension
benefits
|
117 | (11 | ) | 106 | - | 106 | ||||||||||||||
|
Deferred
tax liabilities - noncurrent
|
- | 88 | 88 | - | 88 | |||||||||||||||
|
Total
liabilities assumed
|
$ | 201 | $ | 72 | $ | 273 | - | $ | 273 | |||||||||||
|
Net
assets acquired
|
$ | 603 | $ | 12 | $ | 615 | $ | 3 | $ | 618 | ||||||||||
|
(1)
Includes a $7 million write-off of purchased in-process research and
development, the addition of transaction costs of $7 million in the
second half of 2007 and $15 million of working capital
adjustments.
|
(2)
See Note G for additional information.
The
Company evaluated the materiality of assets acquired, liabilities assumed and
results of operations, individually and in the aggregate at June 30, 2007,
and concluded that such assets, liabilities and results of operations were not
material to the consolidated financial statements.
Beginning
in the third quarter of 2007, the results of Wolff Walsrode’s operations were
reflected in the Company’s consolidated income statement.
Purchased
In-Process Research and Development
Purchased
in-process research and development (“IPR&D”) represents the value assigned
in a business combination to acquired research and development projects that, as
of the date of the acquisition, had not established technological feasibility
and had no alternative future use. Amounts assigned to IPR&D meeting these
criteria must be charged to expense as part of the allocation of the purchase
price of the business combination.
The
Company recorded pretax charges totaling $44 million in 2008 and
$57 million in 2007 for IPR&D projects associated with several recent
acquisitions. The estimated values assigned to the IPR&D projects were
determined primarily based on a discounted cash flow model and are shown
below:
|
In-Process
Research and Development Projects Acquired
In
millions
|
Date
of Acquisition
|
Estimated
Value
Assigned
to
IPR&D
|
|||
|
2008
|
|||||
|
Germplasm
from Triumph Seed Co., Inc.
|
February
29, 2008
|
$ | 4 | ||
|
Germplasm
from Dairyland Seed Co., Inc. and Bio-Plant Research Ltd.
|
August
29, 2008
|
23 | |||
|
Germplasm
from Südwestsaat GbR
|
December 16,
2008
|
17 | |||
|
Total
2008 IPR&D
|
$ | 44 | |||
|
2007
|
|||||
|
Germplasm
from Maize Technologies International
|
May
1, 2007
|
$ | 2 | ||
|
Manufacturing
process R&D from Wolff Walsrode
|
June
30, 2007
|
7 | |||
|
Germplasm
from Agromen Tecnologia Ltda.
|
August
1, 2007
|
26 | |||
|
Germplasm
from Duo Maize
|
August
30, 2007
|
3 | |||
|
Intellectual
property for crop trait discovery from Exelixis Plant
Sciences
|
September
4, 2007
|
19 | |||
|
Total
2007 IPR&D
|
$ | 57 | |||
IPR&D
charges are shown as “Purchased in-process research and development charges” in
the consolidated statements of income. The 2008 IPR&D charges were related
to projects within the Agricultural Sciences segment. In 2007, IPR&D charges
of $50 million related to projects within the Agricultural Sciences
segment; $7 million related to IPR&D acquired from Wolff Walsrode and
impacted the results for the Performance Chemicals segment.
The
following table provides a breakdown of inventories:
|
Inventories
at December 31
In
millions
|
2008
|
2007
|
||||||
|
Finished
goods
|
$ | 3,351 | $ | 4,085 | ||||
|
Work
in process
|
1,217 | 1,595 | ||||||
|
Raw
materials
|
830 | 566 | ||||||
|
Supplies
|
638 | 639 | ||||||
|
Total
inventories
|
$ | 6,036 | $ | 6,885 | ||||
The
reserves reducing inventories from a FIFO basis to a LIFO basis amounted to
$627 million at December 31, 2008 and $1,511 million at
December 31, 2007. Inventories valued on a LIFO basis, principally
hydrocarbon and U.S. chemicals and plastics product inventories, represented
32 percent of the total inventories at December 31, 2008 and
34 percent of total inventories at December 31, 2007.
A
reduction of certain inventories resulted in the liquidation of some of the
Company’s LIFO inventory layers, decreasing pretax income $45 million in
2008 and increasing pretax income $321 million in 2007 and $97 million
in 2006.
|
Property
at December 31
|
Estimated
|
|||||||||||
|
In
millions
|
Useful
Lives
(Years)
|
2008
|
2007
|
|||||||||
|
Land
|
- | $ | 590 | $ | 602 | |||||||
|
Land
and waterway improvements
|
15-25 | 1,308 | 1,286 | |||||||||
|
Buildings
|
5-55 | 3,700 | 3,717 | |||||||||
|
Machinery
and equipment
|
3-20 | 36,285 | 36,266 | |||||||||
|
Utility
and supply lines
|
5-20 | 2,248 | 2,253 | |||||||||
|
Other
property
|
3-30 | 2,166 | 1,770 | |||||||||
|
Construction
in progress
|
- | 2,094 | 1,814 | |||||||||
|
Total
property
|
$ | 48,391 | $ | 47,708 | ||||||||
|
In
millions
|
2008
|
2007
|
2006
|
|||||||||
|
Depreciation
expense
|
$ | 2,016 | $ | 1,959 | $ | 1,904 | ||||||
|
Manufacturing
maintenance and repair costs
|
$ | 1,622 | $ | 1,482 | $ | 1,376 | ||||||
|
Capitalized
interest
|
$ | 97 | $ | 85 | $ | 73 | ||||||
NOTE F – NONCONSOLIDATED AFFILIATES AND RELATED COMPANY
TRANSACTIONS
The
Company’s investments in related companies accounted for by the equity method
(“nonconsolidated affiliates”) were $3,204 million at December 31,
2008 and $3,089 million at December 31, 2007. At December 31,
2008, the carrying amount of the Company’s investments in nonconsolidated
affiliates was $90 million more than its share of the investees’ net
assets, exclusive of additional differences for Dow Corning Corporation (“Dow
Corning”), MEGlobal, Equipolymers and Americas Styrenics LLC, which are
discussed separately below. This difference was $64 million at
December 31, 2007. Dividends received from the Company’s nonconsolidated
affiliates were $836 million in 2008, $774 million in 2007 and
$616 million in 2006.
On
May 15, 1995, Dow Corning, in which the Company is a 50 percent
shareholder, voluntarily filed for protection under Chapter 11 of the U.S.
Bankruptcy Code (see Note K). As a result, the Company fully reserved its
investment in Dow Corning and reserved its 50 percent share of equity
earnings from that time through the third quarter of 2000. In November 2000,
following affirmation of the Bankruptcy Court’s order confirming the Joint Plan
of Reorganization (the “Joint Plan”), the Company reviewed the value of its
investment in Dow Corning, revised its assessment of the recoverability of its
investment, and determined that it had adequately provided for the
other-than-temporary decline associated with the bankruptcy. On June 1,
2004, Dow Corning’s Joint Plan became effective and Dow Corning emerged from
bankruptcy. Since May 1995, a difference between the Company’s 50 percent
share of the underlying equity of Dow Corning and the carrying value of this
investment has existed. The Company considers the difference to be permanent.
The difference was $227 million at December 31, 2008 and
December 31, 2007.
At
December 31, 2008, the Company’s investment in MEGlobal was
$265 million less than the Company’s proportionate share of MEGlobal’s
underlying net assets ($274 million less at December 31, 2007). This
amount represents the difference between the value of certain assets of the
joint venture and the Company’s related valuation on a U.S. GAAP basis, of which
$75 million is being amortized over the remaining useful lives of the
assets and $190 million represents the Company’s share of the joint
venture’s goodwill.
At
December 31, 2008, the Company’s investment in Equipolymers was
$9 million less than the Company’s proportionate share of Equipolymers’
underlying net assets ($48 million less at December 31, 2007). This
amount represents the difference between the value of certain assets of the
joint venture and the Company’s related valuation on a U.S. GAAP basis, all of
which is being amortized over the remaining useful lives of the
assets.
At
December 31, 2008, the Company’s investment in Americas Styrenics LLC was
$150 million less than the Company’s proportionate share of Americas
Styrenics LLC’s underlying net assets. This amount represents the difference
between the book value of assets contributed to the joint venture by the Company
at the time of formation and the Company’s 50 percent share of the total
recorded value of the joint venture’s assets. This difference is being amortized
over the remaining useful lives of the assets.
All
of the nonconsolidated affiliates in which the Company has investments are
privately held companies; therefore, quoted market prices are not
available.
Principal
Nonconsolidated Affiliates
Dow’s
principal nonconsolidated affiliates and the Company’s direct or indirect
ownership interest for each at December 31, 2008, 2007 and 2006 are as
follows.
|
Principal
Nonconsolidated Affiliates at December 31
|
Ownership
Interest
|
|||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Americas
Styrenics LLC
|
50 | % | - | - | ||||||||
|
Compañía
Mega S.A.
|
28 | % | 28 | % | 28 | % | ||||||
|
Dow
Corning Corporation
|
50 | % | 50 | % | 50 | % | ||||||
|
EQUATE
Petrochemical Company K.S.C.
|
42.5 | % | 42.5 | % | 42.5 | % | ||||||
|
Equipolymers
|
50 | % | 50 | % | 50 | % | ||||||
|
MEGlobal
|
50 | % | 50 | % | 50 | % | ||||||
|
The
OPTIMAL Group of Companies:
|
||||||||||||
|
OPTIMAL
Chemicals (Malaysia) Sdn. Bhd.
|
50 | % | 50 | % | 50 | % | ||||||
|
OPTIMAL
Glycols (Malaysia) Sdn. Bhd.
|
50 | % | 50 | % | 50 | % | ||||||
|
OPTIMAL
Olefins (Malaysia) Sdn. Bhd.
|
23.75 | % | 23.75 | % | 23.75 | % | ||||||
|
The
SCG-Dow Group:
|
||||||||||||
|
Pacific
Plastics (Thailand) Limited
|
- | 49 | % | 49 | % | |||||||
|
Siam
Polyethylene Company Limited
|
49 | % | 49 | % | 49 | % | ||||||
|
Siam
Polystyrene Company Limited
|
50 | % | 49 | % | 49 | % | ||||||
|
Siam
Styrene Monomer Co., Ltd.
|
50 | % | 49 | % | 49 | % | ||||||
|
Siam
Synthetic Latex Company Limited
|
50 | % | 49 | % | 49 | % | ||||||
|
Univation
Technologies, LLC
|
50 | % | 50 | % | 50 | % | ||||||
The
Company’s investment in its principal nonconsolidated affiliates was
$2,439 million at December 31, 2008 and $2,488 million at
December 31, 2007. Equity earnings from these companies were
$824 million in 2008, $1,072 million in 2007 and $883 million in
2006. The summarized financial information presented below represents the
combined accounts (at 100 percent) of the principal nonconsolidated
affiliates.
|
Summarized
Balance Sheet Information at December 31
|
||||||||
|
In
millions
|
2008
|
2007
|
||||||
|
Current
assets
|
$ | 6,234 | $ | 6,943 | ||||
|
Noncurrent
assets
|
12,656 | 9,669 | ||||||
|
Total
assets
|
$ | 18,890 | $ | 16,612 | ||||
|
Current
liabilities
|
$ | 3,534 | $ | 3,165 | ||||
|
Noncurrent
liabilities
|
8,572 | 6,700 | ||||||
|
Total
liabilities
|
$ | 12,106 | $ | 9,865 | ||||
|
Summarized
Income Statement Information
|
||||||||||||
|
In
millions
|
2008 (1)
|
2007
|
2006
|
|||||||||
|
Sales
|
$ | 15,488 | $ | 13,884 | $ | 11,916 | ||||||
|
Gross
profit
|
$ | 4,066 | $ | 3,492 | $ | 3,168 | ||||||
|
Net
income
|
$ | 2,001 | $ | 2,464 | $ | 1,960 | ||||||
|
(1)
|
The
summarized income statement information for 2008 includes the
results
for Americas Styrenics LLC from May 1, 2008 through December 31,
2008.
|
The
Company has service agreements with some of these entities, including contracts
to manage the operations of manufacturing sites and the construction of new
facilities; licensing and technology agreements; and marketing, sales, purchase
and lease agreements.
Excess
ethylene glycol produced in Dow’s plants in the United States and Europe is sold
to MEGlobal and represented 2 percent of total net sales in 2008, 2007 and
2006. In addition, the Company sells ethylene to MEGlobal as a raw material for
its ethylene glycol plants in Canada. The impact of these sales to MEGlobal by
operating segment is summarized below:
|
Impact
of Sales to MEGlobal by Operating Segment
|
||||||||||||
|
Percent
of segment sales
|
2008
|
2007
|
2006
|
|||||||||
|
Basic
Chemicals
|
11 | % | 16 | % | 15 | % | ||||||
|
Hydrocarbons
and Energy
|
3 | % | 4 | % | 4 | % | ||||||
Overall,
transactions with other nonconsolidated affiliates and balances due to and due
from these entities were not material to the consolidated financial
statements.
The
following table shows changes in the carrying amount of goodwill for the year
ended December 31, 2008, by operating segment:
|
Goodwill
In
millions
|
Performance
Plastics
|
Performance
Chemicals
|
Agricultural
Sciences
|
Basic
Plastics
|
Hydrocarbons
and
Energy
|
Total
|
||||||||||||||||||
|
Balance
at January 1, 2008
|
$ | 1,034 | $ | 995 | $ | 1,380 | $ | 100 | $ | 63 | $ | 3,572 | ||||||||||||
|
2008
acquisitions:
|
||||||||||||||||||||||||
|
Additional
51% interest in Pacific Plastics (Thailand) Limited
|
7 | - | - | - | - | 7 | ||||||||||||||||||
|
Additional
18% interest in Nantong DAS Chemical Co., Ltd.
|
- | - | 4 | - | - | 4 | ||||||||||||||||||
|
Triumph
Seed Co., Inc.
|
- | - | 3 | - | - | 3 | ||||||||||||||||||
|
Dairyland
Seed Co., Inc.
|
- | - | 1 | - | - | 1 | ||||||||||||||||||
|
Brodbeck
Seed Inc. assets
|
- | - | 2 | - | - | 2 | ||||||||||||||||||
|
Südwestsaat
GbR assets
|
- | - | 1 | - | - | 1 | ||||||||||||||||||
|
STEVENS
ROOFING SYSTEMS™
|
32 | - | - | - | - | 32 | ||||||||||||||||||
|
Adjustment
related to formation of Americas Styrenics LLC
|
- | - | - | (5 | ) | - | (5 | ) | ||||||||||||||||
|
Adjustments
related to 2007 acquisitions of:
|
||||||||||||||||||||||||
|
Wolff
Walsrode
|
- | 6 | - | - | - | 6 | ||||||||||||||||||
|
Hyperlast
Limited
|
11 | - | - | - | - | 11 | ||||||||||||||||||
|
Poly-Carb,
Inc.
|
(6 | ) | - | - | - | - | (6 | ) | ||||||||||||||||
|
UPPC
AG
|
11 | - | - | - | - | 11 | ||||||||||||||||||
|
Edulan
A/S
|
(6 | ) | - | - | - | - | (6 | ) | ||||||||||||||||
|
Impairment
losses:
|
||||||||||||||||||||||||
|
Dow
Automotive
|
(209 | ) | - | - | - | - | (209 | ) | ||||||||||||||||
|
Polypropylene
|
- | - | - | (30 | ) | - | (30 | ) | ||||||||||||||||
|
Balance
at December 31, 2008
|
$ | 874 | $ | 1,001 | $ | 1,391 | $ | 65 | $ | 63 | $ | 3,394 | ||||||||||||
On
May 1, 2007, Dow Chemical Company Limited, a wholly owned subsidiary of the
Company, acquired Hyperlast Limited, British Vita’s polyurethane systems
business, for $151 million. The recording of the acquisition resulted in
goodwill of $71 million and intangible assets of $62 million as shown
below. None of the goodwill is expected to be deductible for tax
purposes.
|
Hyperlast
Limited Intangible Assets
In
millions
|
Gross
Carrying
Amount
|
Weighted-average
Amortization
Period
|
|||
|
Intangible
assets with finite lives:
|
|||||
|
Trademarks
|
$ | 10 |
15
years
|
||
|
Other
(customer-related)
|
52 |
14
years
|
|||
|
Total
|
$ | 62 |
14
years
|
||
On
June 30, 2007, the Company completed the acquisition of Wolff Walsrode. The
recording of the acquisition resulted in goodwill of $207 million and
intangible assets of $156 million as shown below. None of the goodwill is
expected to be deductible for tax purposes. See Note C for additional
information related to purchase price adjustments.
|
Wolff
Walsrode Intangible Assets
In
millions
|
Gross
Carrying
Amount
|
Weighted-average
Amortization Period
|
|||
|
Intangible
assets with finite lives:
|
|||||
|
Intellectual
property
|
$ | 46 |
10
years
|
||
|
Trademarks
|
6 |
10
years
|
|||
|
Software
|
7 |
5
years
|
|||
|
Other
(customer-related)
|
97 |
5
years
|
|||
|
Total
|
$ | 156 |
7
years
|
||
On
August 1, 2007, Dow AgroSciences acquired the corn seed business of Agromen
Tecnologia Ltda. for $116 million. The recording of the acquisition
resulted in goodwill of $59 million and intellectual property of
$14 million with a weighted-average amortization period of six years. All
of the goodwill is expected to be deductible for tax purposes.
Goodwill
Impairments
During
the fourth quarter of 2008, the Company performed its annual impairment tests
for goodwill. As a result of this review, it was determined that the goodwill
associated with the Dow Automotive reporting unit was impaired. The impairment
was based on a review of the Dow Automotive reporting unit performed by
management, in which discounted cash flows did not support the carrying value of
the goodwill due to the severe downturn in the automotive industry and the
future projections for the business. As a result, an estimated impairment loss
of $209 million was recognized in the fourth quarter of 2008 against the
Performance Plastics segment. Also as a result of the annual tests, it was
determined that the goodwill associated with the Polypropylene reporting unit
was impaired. The impairment was based on a review of the Polypropylene
reporting unit performed by management, in which discounted cash flows did not
support the carrying value of the goodwill due to demand decline in North
America and Western Europe, as well as significant new industry capacity which
came on-stream in 2008 and additional industry capacity which is expected in
2009. As a result, an impairment loss of $30 million was recognized in the
fourth quarter of 2008 against the Basic Plastics segment. The second step to
determine the implied fair value of goodwill for the Dow Automotive reporting
unit will be finalized in the first quarter of 2009 and any adjustment to the
estimated impairment loss based on completion of the allocation process will be
recognized at that time.
Other
Intangible Assets
The
following table provides information regarding the Company’s other intangible
assets:
|
Other
Intangible Assets at December 31
|
2008 | 2007 | ||||||||||||||||||||||
|
In
millions
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
|
||||||||||||||||||
|
Intangible
assets with finite lives:
|
||||||||||||||||||||||||
|
Licenses
and intellectual property
|
$ | 316 | $ | (192 | ) | $ | 124 | $ | 302 | $ | (165 | ) | $ | 137 | ||||||||||
|
Patents
|
139 | (100 | ) | 39 | 145 | (104 | ) | 41 | ||||||||||||||||
|
Software
|
700 | (363 | ) | 337 | 575 | (318 | ) | 257 | ||||||||||||||||
|
Trademarks
|
169 | (61 | ) | 108 | 173 | (51 | ) | 122 | ||||||||||||||||
|
Other
|
330 | (109 | ) | 221 | 307 | (83 | ) | 224 | ||||||||||||||||
|
Total
other intangible assets
|
$ | 1,654 | $ | (825 | ) | $ | 829 | $ | 1,502 | $ | (721 | ) | $ | 781 | ||||||||||
During
2008, the Company acquired software for $98 million. The weighted-average
amortization period for the acquired software is five years.
The
following table provides information regarding amortization
expense:
|
Amortization
Expense
In
millions
|
2008
|
2007
|
2006
|
|
Other
intangible assets, excluding software
|
$92
|
$72
|
$50
|
|
Software,
included in “Cost of sales”
|
$48
|
$47
|
$45
|
Total estimated amortization expense for the next five fiscal years is as
follows:
|
Estimated
Amortization Expense
for
Next Five Years
In
millions
|
|
|
2009
|
$147
|
|
2010
|
$151
|
|
2011
|
$140
|
|
2012
|
$118
|
|
2013
|
$98
|
Investments
The
Company’s investments in marketable securities are primarily classified as
available-for-sale.
|
Investing
Results
|
||||||||||||
|
In
millions
|
2008
|
2007
|
2006
|
|||||||||
|
Proceeds
from sales of available-for-sale securities
|
$ | 851 | $ | 1,994 | $ | 1,305 | ||||||
|
Gross
realized gains
|
$ | 56 | $ | 137 | $ | 55 | ||||||
|
Gross
realized losses
|
$ | (18 | ) | $ | (23 | ) | $ | (42 | ) | |||
The
following table summarizes the contractual maturities of the Company’s
investments in debt securities:
|
Contractual
Maturities of Debt Securities at December 31, 2008
|
||||||||
|
In
millions
|
Amortized
Cost
|
Fair
Value
|
||||||
|
Within
one year
|
$ | 49 | $ | 49 | ||||
|
One
to five years
|
557 | 555 | ||||||
|
Six
to ten years
|
582 | 627 | ||||||
|
After
ten years
|
255 | 264 | ||||||
|
Total
|
$ | 1,443 | $ | 1,495 | ||||
The
following tables provide the fair value and gross unrealized losses of the
Company’s investments that were deemed to be temporarily impaired at
December 31, 2008 and 2007, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position:
|
Temporarily
Impaired Securities at December 31, 2008
|
||||||||||||||||||||||||
|
Less
than 12 months
|
12
months or more
|
Total
|
||||||||||||||||||||||
|
In
millions
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||||||
|
Debt
securities:
|
||||||||||||||||||||||||
|
U.S.
Treasury obligations and direct obligations of U.S. government
agencies
|
$ | 14 | - | - | - | $ | 14 | - | ||||||||||||||||
|
Corporate
bonds
|
388 | $ | (35 | ) | $ | 8 | $ | (1 | ) | 396 | $ | (36 | ) | |||||||||||
|
Other
|
4 | - | 2 | - | 6 | - | ||||||||||||||||||
|
Total
debt securities
|
$ | 406 | $ | (35 | ) | $ | 10 | $ | (1 | ) | $ | 416 | $ | (36 | ) | |||||||||
|
Equity
securities
|
268 | (152 | ) | 37 | (25 | ) | 305 | (177 | ) | |||||||||||||||
|
Total
temporarily impaired securities
|
$ | 674 | $ | (187 | ) | $ | 47 | $ | (26 | ) | $ | 721 | $ | (213 | ) | |||||||||
|
Temporarily
Impaired Securities at December 31, 2007
|
||||||||||||||||||||||||
|
Less
than 12 months
|
12
months or more
|
Total
|
||||||||||||||||||||||
|
In
millions
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||||||
|
Debt
securities:
|
||||||||||||||||||||||||
|
U.S.
Treasury obligations and direct obligations of U.S. government
agencies
|
$ | 14 | - | $ | 6 | - | $ | 20 | - | |||||||||||||||
|
Federal
agency mortgage-backed securities
|
- | - | 4 | - | 4 | - | ||||||||||||||||||
|
Corporate
bonds
|
104 | $ | (3 | ) | 127 | $ | (3 | ) | 231 | $ | (6 | ) | ||||||||||||
|
Other
|
- | - | 6 | - | 6 | - | ||||||||||||||||||
|
Total
debt securities
|
$ | 118 | $ | (3 | ) | $ | 143 | $ | (3 | ) | $ | 261 | $ | (6 | ) | |||||||||
|
Equity
securities
|
220 | (9 | ) | 27 | (21 | ) | 247 | (30 | ) | |||||||||||||||
|
Total
temporarily impaired securities
|
$ | 338 | $ | (12 | ) | $ | 170 | $ | (24 | ) | $ | 508 | $ | (36 | ) | |||||||||
Portfolio
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,
the trends of the issuer’s overall sector and the length of time the security
has been in a loss position 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
additional investments in companies outside of the S&P 500. The
increase in temporarily impaired equity securities from December 31, 2007
to December 31, 2008 relates to the overall decline in the equity markets
in late 2008. The Company considers the volatility of the stock, the length of
time the security has been in a loss position, value and growth expectations,
and overall market and sector fundamentals, as well as technical analysis, in
determining impairment. In 2008, other-than-temporary impairment write-downs
were $42 million.
The
aggregate cost of the Company’s cost method investments totaled
$104 million at December 31, 2008 and $102 million at
December 31, 2007. Due to the nature of these investments, the fair market
value is not readily determinable. These investments are reviewed for impairment
indicators. There were no material impairment indicators or circumstances at
December 31, 2008 that would result in a material adjustment to the cost
basis of these investments. Of the $102 million cost method investments at
December 31, 2007, a $3 million impairment was recorded in 2008 based
on the review of the impairment indicators.
The
following table summarizes the fair value of financial instruments at December
31, 2008 and December 31, 2007:
|
Fair
Value of Financial Instruments at December 31
|
||||||||||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||||||||||
|
In
millions
|
Cost
|
Gain
|
Loss
|
Fair
Value
|
Cost
|
Gain
|
Loss
|
Fair
Value
|
||||||||||||||||||||||||
|
Marketable
securities (1):
|
||||||||||||||||||||||||||||||||
|
Debt
securities
|
$ | 1,443 | $ | 88 | $ | (36 | ) | $ | 1,495 | $ | 1,500 | $ | 59 | $ | (6 | ) | $ | 1,553 | ||||||||||||||
|
Equity
securities
|
518 | 17 | (177 | ) | 358 | 696 | 55 | (30 | ) | 721 | ||||||||||||||||||||||
|
Total
marketable securities
|
$ | 1,961 | $ | 105 | $ | (213 | ) | $ | 1,853 | $ | 2,196 | $ | 114 | $ | (36 | ) | $ | 2,274 | ||||||||||||||
|
Long-term
debt including debt due within one year (2)
|
$ | (9,496 | ) | $ | 551 | $ | (38 | ) | $ | (8,983 | ) | $ | (8,167 | ) | $ | 15 | $ | (346 | ) | $ | (8,498 | ) | ||||||||||
|
Derivatives
relating to:
|
||||||||||||||||||||||||||||||||
|
Foreign
currency
|
- | $ | 122 | $ | (163 | ) | $ | (41 | ) | - | $ | 97 | $ | (24 | ) | $ | 73 | |||||||||||||||
|
Interest
rates
|
- | - | - | - | - | $ | 2 | $ | (2 | ) | - | |||||||||||||||||||||
|
Commodities
|
- | $ | 65 | $ | (220 | ) | $ | (155 | ) | - | $ | 71 | $ | (21 | ) | $ | 50 | |||||||||||||||
|
(1)
Included in “Marketable securities and interest-bearing deposits” and
“Other investments” in the consolidated balance sheets.
|
||||||||||||||||||||||||||||||||
|
(2)
Cost includes fair value adjustments per SFAS No. 133 of $27 million
in 2008 and $26 million in 2007.
|
||||||||||||||||||||||||||||||||
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," 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 December 31, 2008.
The
Company reviews its overall financial strategies and the impacts from using
derivatives in its risk management program with the Company’s Office of the
Chief Executive and the Board of Directors’ Audit Committee 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 and 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 December 31, 2008, 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 first 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
December 31, 2008, 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 December 31, 2008 was $9 million after tax ($16 million
after tax at December 31, 2007). During 2008, 2007 and 2006, there was no
material impact on the consolidated financial statements due to interest rate
hedge ineffectiveness. Net losses related to cash flow hedge terminations
recorded in “Cost of sales” or “Interest expense and amortization of debt
discount” were $13 million in 2008 and 2007 and $11 million in 2006.
The Company had no open interest rate cash flow hedges at December 31,
2008.
At
December 31, 2008, the Company had open foreign currency forward contracts
in a net gain position of $9 million (net loss position of $4 million
at December 31, 2007) designated as cash flow hedges of underlying
forecasted purchases of feedstocks. Current open contracts hedge forecasted
transactions until September 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 December 31, 2008 was $15 million after tax (net
loss of $4 million after tax at December 31, 2007). During 2008, 2007
and 2006, there was no material impact on the consolidated financial statements
due to foreign currency hedge ineffectiveness. At December 31, 2008, the
Company had open forward contracts with various expiration dates to buy, sell or
exchange foreign currencies with a U.S. dollar equivalent of
$3,219 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 effect of the cash flow hedge
instrument 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 December 31, 2008 was
$239 million after tax (net gain of $48 million after tax at
December 31, 2007). During 2008, 2007 and 2006, there was no material
impact on the consolidated financial statements due to commodity hedge
ineffectiveness. At December 31, 2008, the Company had the following
aggregate notionals of outstanding commodity forward contracts to hedge
forecasted purchases:
|
Commodity
|
Notional
Volume
|
|
Crude
Oil
|
1.8
million barrels
|
|
Naphtha
|
33
kilotons
|
|
Natural
Gas
|
11,800
million British thermal
units
|
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 being 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 December 31, 2008 and December 31, 2007.
Net
losses of $2 million related to fair value hedge terminations were recorded
in interest expense in 2008; net gains were recorded of $10 million in 2007
and $16 million in 2006. Unamortized losses relating to terminated fair
value hedges were $27 million at December 31, 2008 and
$26 million at December 31, 2007.
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 $36 million after tax at
December 31, 2008 (net loss of $100 million after tax at
December 31, 2007). During 2008, 2007 and 2006 there was no material impact
on the consolidated financial statements due to hedge ineffectiveness. At
December 31, 2008, the Company had no open forward contracts or outstanding
options to buy, sell or exchange foreign currencies. At December 31, 2008,
the Company had outstanding foreign-currency denominated debt designated as a
hedge of net foreign investment of $1,267 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, “Accounting for Derivative Instruments
and Hedging Activities,” as amended and interpreted. At December 31, 2008,
the Company had derivative assets of $19 million and derivative liabilities
of $17 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, 2007, the Company had derivative
assets of $3 million and derivative liabilities of $6 million related
to these instruments. The Company had no outstanding commodity forward contracts
at December 31, 2008.
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. The Company had derivative
assets of $111 million and derivative liabilities of $160 million
related to these instruments at December 31, 2008. The Company had open
forward contracts with various expiration dates to buy, sell or exchange foreign
currencies with a U.S. dollar equivalent of $10,799 million at
December 31, 2008.
The
following table provides the fair value and balance sheet presentation of
derivative instruments at December 31:
|
Fair
Values of Derivative Instruments at December 31
|
|||||
|
In
millions
|
Balance
Sheet Classification
|
2008
|
|||
|
Asset
Derivatives
|
|||||
|
Derivatives
designated as hedges:
|
|||||
|
Foreign
currency
|
Accounts
and notes receivable – Other
|
$ | 77 | ||
|
Commodities
|
Accounts
and notes receivable – Other
|
68 | |||
|
Total
derivatives designated as hedges
|
$ | 145 | |||
|
Derivatives
not designated as hedges:
|
|||||
|
Foreign
currency
|
Accounts
and notes receivable – Other
|
$ | 235 | ||
|
Commodities
|
Accounts
and notes receivable – Other
|
63 | |||
|
Total
derivatives not designated as hedges
|
$ | 298 | |||
|
Total
asset derivatives
|
$ | 443 | |||
|
Liability
Derivatives
|
|||||
|
Derivatives
designated as hedges:
|
|||||
|
Foreign
currency
|
Accounts
payable – Other
|
$ | 69 | ||
|
Commodities
|
Accounts
payable – Other
|
262 | |||
|
Commodities
|
Other
noncurrent obligations
|
22 | |||
|
Total
derivatives designated as hedges
|
$ | 353 | |||
|
Derivatives
not designated as hedges:
|
|||||
|
Foreign
currency
|
Accounts
payable – Other
|
$ | 284 | ||
|
Commodities
|
Accounts
payable – Other
|
61 | |||
|
Total
derivatives not designated as hedges
|
$ | 345 | |||
|
Total
liability derivatives
|
$ | 698 | |||
|
Effect
of Derivative Instruments at December 31, 2008
In
millions
|
Change in
Unrealized
Gain (Loss)
in AOCI (1,2)
|
Income
Statement Classification
|
Loss
Reclassified
from AOCI to
Income (3)
|
Additional Loss Recognized in
Income (3,4)
|
||||||||||||
|
Derivatives
designated as hedges:
|
||||||||||||||||
|
Fair
value:
|
||||||||||||||||
|
Interest
rates
|
- |
Interest
expense (5)
|
- | $ | (2 | ) | ||||||||||
|
Cash
flow:
|
||||||||||||||||
|
Interest
rates
|
- |
Cost
of sales
|
$ | (12 | ) | - | ||||||||||
|
Interest
rates
|
- |
Interest
expense (5)
|
(1 | ) | - | |||||||||||
|
Commodities
|
$ | (353 | ) |
Cost
of sales
|
(154 | ) | (1 | ) | ||||||||
|
Foreign
currency
|
7 |
Cost
of sales
|
(12 | ) | - | |||||||||||
|
Net
foreign investment:
|
||||||||||||||||
|
Foreign
currency
|
1 |
n/a
|
- | - | ||||||||||||
|
Total
derivatives designated as hedges
|
$ | (345 | ) | $ | (179 | ) | $ | (3 | ) | |||||||
|
Derivatives
not designated as hedges:
|
||||||||||||||||
|
Foreign
currency (6)
|
- |
Sundry
income – net
|
- | $ | (167 | ) | ||||||||||
|
Commodities
|
- |
Cost
of sales
|
- | (34 | ) | |||||||||||
|
Total
derivatives not designated as hedges
|
- | - | $ | (201 | ) | |||||||||||
|
Total
derivatives
|
$ | (345 | ) | $ | (179 | ) | $ | (204 | ) | |||||||
|
(1)
|
Accumulated
other comprehensive income (loss)
(“AOCI”)
|
|
(2)
|
Net
unrealized gains/losses from hedges related to interest rates, commodities
and long-term debt are included in “Accumulated Derivative Gain (Loss) –
Net hedging results” in the consolidated statements of stockholders’
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 stockholders’
equity.
|
|
(3)
|
Pre-tax
amounts.
|
|
(4)
|
Amounts
impacting income not related to AOCI reclassification; also includes
immaterial amounts of hedge
ineffectiveness.
|
|
(5)
|
Interest
expense and amortization of debt
discount.
|
|
(6)
|
Foreign
currency derivatives not designated as hedges under SFAS No. 133 are
offset by foreign exchange gains of $150 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 $7 million loss for interest rate contracts, a
$213 million loss for commodity contracts and a $15 million gain for
foreign currency contracts.
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 December 31, 2008
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)
|
$ | 337 | $ | 21 | - | $ | 358 | |||||||||
|
Debt
securities (2)
|
- | 1,495 | - | 1,495 | ||||||||||||
|
Derivatives
relating to: (3)
|
||||||||||||||||
|
Foreign
currency
|
- | 312 | $ | (190 | ) | 122 | ||||||||||
|
Commodities
|
- | 131 | (66 | ) | 65 | |||||||||||
|
Total
assets at fair value
|
$ | 337 | $ | 1,959 | $ | (256 | ) | $ | 2,040 | |||||||
|
Liabilities
at fair value:
|
||||||||||||||||
|
Long-term
debt (4)
|
- | $ | 8,983 | - | $ | 8,983 | ||||||||||
|
Derivatives
relating to: (3)
|
||||||||||||||||
|
Foreign
currency
|
- | 353 | $ | (190 | ) | 163 | ||||||||||
|
Commodities
|
$ | 49 | 296 | (125 | ) | 220 | ||||||||||
|
Total
liabilities at fair value
|
$ | 49 | $ | 9,632 | $ | (315 | ) | $ | 9,366 | |||||||
|
|
(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 H for the classification of derivatives in the consolidated
balance sheets.
|
|
|
(4)See
Note H for information on fair value adjustments to long-term
debt.
|
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
assets and liabilities classified as Level 2 (measured using significant
other observable inputs), the Level 1 process is utilized where available
(primarily for some debt securities). For other 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 H 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, collateral accounts are netted with
corresponding assets and liabilities. The balance of cash collateral posted by
the Company was $64 million at December 31, 2008 ($6 million
after netting against derivative liabilities included in the fair value table),
and was classified as “Accounts and notes receivable – Other” in the
consolidated balance sheets.
Accrued
and Other Current Liabilities
“Accrued
and other current liabilities” were $2,625 million at December 31,
2008 and $2,512 million at December 31, 2007. Accrued payroll, which
is a component of “Accrued and other current liabilities,” was $732 million
at December 31, 2008 and $704 million at December 31, 2007. No
other component of accrued liabilities was more than 5 percent of total
current liabilities.
|
Sundry
Income – Net
|
||||||||||||
|
In
millions
|
2008
|
2007
|
2006
|
|||||||||
|
Gain
on sales of assets and securities
|
$ | 91 | $ | 171 | $ | 156 | ||||||
|
Foreign
exchange gain (loss)
|
(17 | ) | 73 | 21 | ||||||||
|
Dividend
income
|
3 | 9 | 6 | |||||||||
|
Other
– net (1)
|
12 | 71 | (46 | ) | ||||||||
|
Total
sundry income – net
|
$ | 89 | $ | 324 | $ | 137 | ||||||
|
(1)
2006 included the recognition of a loss contingency of $85 million
related to a fine imposed by the European Commission associated
with synthetic rubber industry matters (see Note K for additional
information).
|
||||||||||||
|
Other
Supplementary Information
|
||||||||||||
|
In
millions
|
2008
|
2007
|
2006
|
|||||||||
|
Cash
payments for interest
|
$ | 713 | $ | 671 | $ | 673 | ||||||
|
Cash
payments for income taxes
|
$ | 864 | $ | 966 | $ | 1,390 | ||||||
|
Provision
for doubtful receivables (1)
|
$ | 20 | $ | 2 | $ | (20 | ) | |||||
|
(1)
Included in “Selling, general and administrative expenses” in the
consolidated statements of income.
|
||||||||||||
|
Earnings
Per Share Calculations
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
In
millions, except per share amounts
|
Basic
|
Diluted
|
Basic
|
Diluted
|
Basic
|
Diluted
|
||||||||||||||||||
|
Net
income available for common stockholders
|
$ | 579 | $ | 579 | $ | 2,887 | $ | 2,887 | $ | 3,724 | $ | 3,724 | ||||||||||||
|
Weighted-average
common shares outstanding
|
930.4 | 930.4 | 953.1 | 953.1 | 962.3 | 962.3 | ||||||||||||||||||
|
Add
dilutive effect of stock options and awards
|
- | 8.6 | - | 12.5 | - | 12.1 | ||||||||||||||||||
|
Weighted-average
common shares for EPS calculations
|
930.4 | 939.0 | 953.1 | 965.6 | 962.3 | 974.4 | ||||||||||||||||||
|
Earnings
per common share
|
$ | 0.62 | $ | 0.62 | $ | 3.03 | $ | 2.99 | $ | 3.87 | $ | 3.82 | ||||||||||||
|
Stock
options and deferred stock awards excluded from EPS calculations (1)
|
- | 42.8 | - | 21.9 | - | 17.8 | ||||||||||||||||||
|
(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
antidilutive.
|
||||||||||||||||||||||||
Sales
of Accounts Receivable
Since
1997, the Company has routinely sold, without recourse, a participation in pools
of qualifying trade accounts receivable. According to the agreements of the
various programs, Dow maintains the servicing of these receivables. No servicing
liability is recorded as the related costs are insignificant. As receivables in
the pools are collected, new qualifying receivables are added. The maximum
amount of receivables available for sale in the pools was $1,874 million in
2008, $2,324 million in 2007 and $1,658 million in 2006. The average
monthly participation in the pools was $586 million in 2008,
$271 million in 2007 and $135 million in 2006.
The
net cash flow in any given period represents the discount on sales, which is
recorded as interest expense. The average monthly discount was not material in
2008, 2007 and 2006.
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 December 31, 2008, no
draws had been taken against the credit facility.
DBCP
Matters
Numerous
lawsuits have been brought against the Company and other chemical companies,
both inside and outside of the United States, alleging that the manufacture,
distribution or use of pesticides containing dibromochloropropane (“DBCP”) has
caused personal injury and property damage, including contamination of
groundwater. It is the opinion of the Company’s management that the possibility
is remote that the resolution of such lawsuits will have a material adverse
impact on the Company’s consolidated financial statements.
Environmental
Matters
Accruals
for environmental matters are recorded when it is probable that a liability has
been incurred and the amount of the liability can be reasonably estimated, based
on current law and existing technologies. At December 31, 2008, the Company
had accrued obligations of $312 million for environmental remediation and
restoration costs, including $22 million for the remediation of Superfund
sites. This is management’s best estimate of the costs for remediation and
restoration with respect to environmental matters for which the Company has
accrued liabilities, although the ultimate cost with respect to these particular
matters could range up to approximately twice that amount. Inherent
uncertainties exist in these estimates primarily due to unknown environmental
conditions, changing governmental regulations and legal standards regarding
liability, and emerging remediation technologies for handling site remediation
and restoration. At December 31, 2007, the Company had accrued obligations
of $322 million for environmental remediation and restoration costs,
including $28 million for the remediation of Superfund sites.
The
following table summarizes the activity in the Company’s accrued obligations for
environmental matters for the years ended December 31, 2008 and
2007:
|
Accrued
Obligations for Environmental Matters
|
||||||||
|
In
millions
|
2008
|
2007
|
||||||
|
Balance
at January 1
|
$ | 322 | $ | 347 | ||||
|
Additional
accruals
|
141 | 113 | ||||||
|
Charges
against reserve
|
(138 | ) | (152 | ) | ||||
|
Adjustments
to reserve
|
(13 | ) | 14 | |||||
|
Balance
at December 31
|
$ | 312 | $ | 322 | ||||
The
amounts charged to income on a pretax basis related to environmental remediation
totaled $140 million in 2008, $92 million in 2007 and
$125 million in 2006. Capital expenditures for environmental protection
were $193 million in 2008, $189 million in 2007 and $193 million
in 2006.
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.
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 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.
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 December 31, 2007, the accrual for off-site corrective action
was $5 million (included in the total accrued obligation of
$322 million at December 31, 2007).
Environmental
Matters Summary
It
is the opinion of the Company’s management that the possibility is remote that
costs in excess of those disclosed will have a material adverse impact on the
Company’s consolidated financial statements.
Asbestos-Related
Matters of Union Carbide Corporation
Union
Carbide Corporation (“Union Carbide”), a wholly owned subsidiary of the Company,
is and has been involved in a large number of asbestos-related suits filed
primarily in state courts during the past three decades. These suits principally
allege personal injury resulting from exposure to asbestos-containing products
and frequently seek both actual and punitive damages. The alleged claims
primarily relate to products that Union Carbide sold in the past, alleged
exposure to asbestos-containing products located on Union Carbide’s premises,
and Union Carbide’s responsibility for asbestos suits filed against a former
Union Carbide subsidiary, Amchem Products, Inc. (“Amchem”). In many cases,
plaintiffs are unable to demonstrate that they have suffered any compensable
loss as a result of such exposure, or that injuries incurred in fact resulted
from exposure to Union Carbide’s products.
Influenced
by the bankruptcy filings of numerous defendants in asbestos-related litigation
and the prospects of various forms of state and national legislative reform, the
rate at which plaintiffs filed asbestos-related suits against various companies,
including Union Carbide and Amchem, increased in 2001, 2002 and the first half
of 2003. Since then, the rate of filing has significantly abated. Union Carbide
expects more asbestos-related suits to be filed against Union Carbide and Amchem
in the future, and will aggressively defend or reasonably resolve, as
appropriate, both pending and future claims.
Based
on a study completed by Analysis, Research & Planning Corporation (“ARPC”)
in January 2003, Union Carbide increased its December 31, 2002
asbestos-related liability for pending and future claims for the 15-year period
ending in 2017 to $2.2 billion, excluding future defense and processing
costs. Since then, Union Carbide has compared current asbestos claim and
resolution activity to the results of the most recent ARPC study at each balance
sheet date to determine whether the accrual continues to be appropriate. In
addition, Union Carbide has requested ARPC to review Union Carbide’s historical
asbestos claim and resolution activity each November since 2004 to determine the
appropriateness of updating the most recent ARPC study.
In
November 2006, Union Carbide requested ARPC to review Union Carbide’s historical
asbestos claim and resolution activity and determine the appropriateness of
updating its January 2005 study. In response to that request, ARPC reviewed and
analyzed data through October 31, 2006 and concluded that the experience
from 2004 through 2006 was sufficient for the purpose of forecasting future
filings and values of asbestos claims filed against Union Carbide and Amchem,
and could be used in place of previous assumptions to update its January 2005
study. The resulting study, completed by ARPC in December 2006, stated that
the undiscounted cost of resolving pending and future asbestos-related claims
against Union Carbide and Amchem, excluding future defense and processing costs,
through 2021 was estimated to be between approximately $1.2 billion and
$1.5 billion. As in its January 2003 and January 2005 studies, ARPC
provided estimates for a longer period of time in its December 2006 study,
but also reaffirmed its prior advice that forecasts for shorter periods of time
are more accurate than those for longer periods of time.
Based
on ARPC’s December 2006 study and Union Carbide’s own review of the
asbestos claim and resolution activity, Union Carbide decreased its
asbestos-related liability for pending and future claims to $1.2 billion at
December 31, 2006 which covered the 15-year period ending in 2021,
excluding future defense and processing costs. The reduction was
$177 million and was shown as “Asbestos-related credit” in the consolidated
statements of income for 2006.
In
November 2007, Union Carbide requested ARPC to review Union Carbide’s 2007
asbestos claim and resolution activity and determine the appropriateness of
updating its December 2006 study. In response to that request, ARPC
reviewed and analyzed data through October 31, 2007. In December 2007, ARPC
stated that an update of its study would not provide a more likely estimate of
future events than the estimate reflected in its study of the previous year and,
therefore, the estimate in that study remained applicable. Based on Union
Carbide’s own review of the asbestos claim and resolution activity and ARPC’s
response, Union Carbide determined that no change to the accrual was required.
At December 31, 2007, Union Carbide’s asbestos-related liability for
pending and future claims was $1.1 billion.
In
November 2008, Union Carbide requested ARPC to review Union Carbide’s historical
asbestos claim and resolution activity and determine the appropriateness of
updating its December 2006 study. In response to that request, ARPC reviewed and
analyzed data through October 31, 2008. The resulting study, completed by
ARPC in December 2008, stated that the undiscounted cost of resolving pending
and future asbestos-related claims against UCC and Amchem, excluding future
defense and processing costs, through 2023 was estimated to be between
$952 million and $1.2 billion. As in its earlier studies, ARPC
provided estimates for a longer period of time in its December 2008 study, but
also reaffirmed its prior advice that forecasts for shorter periods of time are
more accurate than those for longer periods of time.
In
December 2008, based on ARPC’s December 2008 study and Union Carbide’s own
review of the asbestos claim and resolution activity, Union Carbide decreased
its asbestos-related liability for pending and future claims to
$952 million, which covered the 15-year period ending 2023, excluding
future defense and processing costs. The reduction was $54 million and was
shown as “Asbestos-related credit” in the consolidated statements of income. At
December 31, 2008, the asbestos-related liability for pending and future
claims was $934 million.
At December 31, 2008, approximately 21 percent of the recorded
liability related to pending claims and approximately 79 percent related to
future claims. At December 31, 2007, approximately 31 percent of the
recorded liability related to pending claims and approximately 69 percent
related to future claims.
At
December 31, 2002, Union Carbide increased the receivable for insurance
recoveries related to its asbestos liability to $1.35 billion,
substantially exhausting its asbestos product liability coverage. The insurance
receivable related to the asbestos liability was determined by Union Carbide
after a thorough review of applicable insurance policies and the 1985 Wellington
Agreement, to which Union Carbide and many of its liability insurers are
signatory parties, as well as other insurance settlements, with due
consideration given to applicable deductibles, retentions and policy limits, and
taking into account the solvency and historical payment experience of various
insurance carriers. The Wellington Agreement and other agreements with insurers
are designed to facilitate an orderly resolution and collection of Union
Carbide’s insurance policies and to resolve issues that the insurance carriers
may raise.
In
September 2003, Union Carbide filed a comprehensive insurance coverage case, now
proceeding in the Supreme Court of the State of New York, County of New York,
seeking to confirm its rights to insurance for various asbestos claims and to
facilitate an orderly and timely collection of insurance proceeds. This lawsuit
was filed against insurers that are not signatories to the Wellington Agreement
and/or do not otherwise have agreements in place with Union Carbide regarding
their asbestos-related insurance coverage, in order to facilitate an orderly
resolution and collection of such insurance policies and to resolve issues that
the insurance carriers may raise. Although the lawsuit is continuing, through
the end of 2008, Union Carbide had reached settlements with several of the
carriers involved in this litigation.
Union
Carbide’s receivable for insurance recoveries related to its asbestos liability
was $403 million at December 31, 2008 and $467 million at
December 31, 2007. At December 31, 2008 and December 31, 2007,
all of the receivable for insurance recoveries was related to insurers that are
not signatories to the Wellington Agreement and/or do not otherwise have
agreements in place regarding their asbestos-related insurance
coverage.
In
addition to the receivable for insurance recoveries related to its asbestos
liability, Union Carbide had receivables for defense and resolution costs
submitted to insurance carriers for reimbursement as follows:
|
Receivables
for Costs Submitted to Insurance Carriers
at
December 31
|
||||||||
|
In
millions
|
2008
|
2007
|
||||||
|
Receivables
for defense costs
|
$ | 28 | $ | 18 | ||||
|
Receivables
for resolution costs
|
244 | 253 | ||||||
|
Total
|
$ | 272 | $ | 271 | ||||
Union
Carbide expenses defense costs as incurred. The pretax impact for defense and
resolution costs, net of insurance, was $53 million in 2008,
$84 million in 2007 and $45 million in 2006, and was reflected in
“Cost of sales.”
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 and matters involving Rohm and Haas Company (see Note U), 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 commitments 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 relates 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 current expectation of
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 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 | |||||
|
Guarantees
at December 31, 2007
In
millions
|
Final
Expiration
|
Maximum
Future Payments
|
Recorded
Liability
|
||||||
|
Guarantees
|
2014
|
$ | 354 | $ | 22 | ||||
|
Residual
value guarantees
|
2015
|
1,035 | 5 | ||||||
|
Total
guarantees
|
$ | 1,389 | $ | 27 | |||||
Asset
Retirement Obligations
Dow
has 150 manufacturing sites in 35 countries. Most of these sites
contain numerous individual manufacturing operations, particularly at the
Company’s larger sites. Asset retirement obligations are recorded as incurred
and reasonably estimable, including obligations for which the timing and/or
method of settlement are conditional on a future event that may or may not be
within the control of the Company. Retirement of assets may involve such efforts
as remediation and treatment of asbestos, contractually required demolition, and
other related activities, depending on the nature and location of the assets,
and are typically realized only upon demolition of those facilities. In
identifying asset retirement obligations, the Company considers identification
of legally enforceable obligations, changes in existing law, estimates of
potential settlement dates and
the
calculation of an appropriate discount rate to be used in calculating the fair
value of the obligations. Dow has a well-established global process to identify,
approve and track the demolition of retired or to-be-retired facilities; no
assets are retired from service until this process has been followed. Dow
typically forecasts demolition projects based on the usefulness of the assets;
environmental, health and safety concerns; and other similar considerations.
Under this process, as demolition projects are identified and approved,
reasonable estimates may then be determined for the time frames during which any
related asset retirement obligations are expected to be settled. For those
assets where a range of potential settlement dates may be reasonably estimated,
obligations are recorded. Dow routinely reviews all changes to items under
consideration for demolition to determine if an adjustment to the value of the
asset retirement obligation is required.
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.
In
2008, the Company recognized asset retirement obligations of $4 million
related to the 2008 restructuring plan (see Note B).
The
following table shows changes in the aggregate carrying amount of the Company’s
asset retirement obligations:
|
Asset
Retirement Obligations
|
||||||||
|
In
millions
|
2008
|
2007
|
||||||
|
Balance
at January 1
|
$ | 116 | $ | 106 | ||||
|
Additional
accruals
|
7 | 25 | ||||||
|
Liabilities
settled
|
(14 | ) | (22 | ) | ||||
|
Accretion
expense
|
3 | 1 | ||||||
|
Revisions
in estimated cash flows
|
1 | - | ||||||
|
Other
|
(7 | ) | 6 | |||||
|
Balance
at December 31
|
$ | 106 | $ | 116 | ||||
In
accordance with FIN No. 47, the Company has recognized conditional asset
retirement obligations related to asbestos encapsulation as a result of planned
demolition and remediation activities at manufacturing and administrative sites
in the United States, Canada and Europe. At December 31, 2008, the
aggregate carrying amount of conditional asset retirement obligations recognized
by the Company was $41 million ($45 million at December 31,
2007).
The
discount rate used to calculate the Company’s asset retirement obligations at
December 31, 2008 was 7.13 percent (5.08 percent at
December 31, 2007). 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. Assets that have not been submitted/reviewed for potential
demolition activities are considered to have continued usefulness and are
generally still operating “normally.” Therefore, without a plan to demolish the
assets or the expectation of a plan, such as shortening the useful life of
assets for depreciation purposes under the requirements of SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” Dow is unable
to reasonably forecast a time frame to use for present value calculations. As
such, Dow has not recognized obligations for individual plants/buildings at its
150 manufacturing sites where estimates of potential settlement dates
cannot be reasonably made. In addition, the Company has not recognized
conditional asset retirement obligations for the capping of its approximately
45 underground storage wells at Dow-owned sites when there are no plans or
expectations of plans to exit the sites. 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.
|
Notes
Payable at December 31
|
||||||||
|
In
millions
|
2008
|
2007
|
||||||
|
Commercial
paper
|
$ | 1,597 | $ | 1,162 | ||||
|
Notes
payable to banks
|
661 | 321 | ||||||
|
Notes
payable to related companies
|
102 | 65 | ||||||
|
Total
notes payable
|
$ | 2,360 | $ | 1,548 | ||||
|
Year-end
average interest rates
|
4.04 | % | 5.27 | % | ||||
|
Long-Term
Debt at December 31
In
millions
|
2008
Average
Rate
|
2008
|
2007
Average
Rate
|
2007
|
||||||||||||
|
Promissory
notes and debentures:
|
||||||||||||||||
|
Final
maturity 2008
|
- | - | 5.75 | % | $ | 497 | ||||||||||
|
Final
maturity 2009
|
6.76 | % | $ | 682 | 6.76 | % | 686 | |||||||||
|
Final
maturity 2010
|
9.14 | % | 275 | 9.13 | % | 276 | ||||||||||
|
Final
maturity 2011
|
6.13 | % | 806 | 6.13 | % | 808 | ||||||||||
|
Final
maturity 2012
|
6.00 | % | 907 | 6.00 | % | 909 | ||||||||||
|
Final
maturity 2013
|
6.85 | % | 139 | 6.85 | % | 139 | ||||||||||
|
Final
maturity 2014 and thereafter
|
7.05 | % | 2,682 | 7.63 | % | 1,881 | ||||||||||
|
Other
facilities:
|
||||||||||||||||
|
U.S.
dollar loans, various rates and maturities
|
2.43 | % | 700 | 5.23 | % | 1 | ||||||||||
|
Foreign
currency loans, various rates and maturities
|
3.23 | % | 73 | 3.13 | % | 58 | ||||||||||
|
Medium-term
notes, varying maturities through 2022
|
6.25 | % | 1,072 | 6.17 | % | 576 | ||||||||||
|
Foreign
medium-term notes, various rates and maturities
|
4.13 | % | 1 | 4.13 | % | 1 | ||||||||||
|
Foreign
medium-term notes, final maturity 2010, Euro
|
4.37 | % | 561 | 4.37 | % | 587 | ||||||||||
|
Foreign
medium-term notes, final maturity 2011, Euro
|
4.63 | % | 690 | 4.63 | % | 718 | ||||||||||
|
Pollution
control/industrial revenue bonds, varying maturities through
2033
|
5.61 | % | 904 | 4.84 | % | 1,004 | ||||||||||
|
Capital
lease obligations
|
- | 46 | - | 50 | ||||||||||||
|
Unamortized
debt discount
|
- | (15 | ) | - | (24 | ) | ||||||||||
|
Unexpended
construction funds
|
- | (27 | ) | - | - | |||||||||||
|
Long-term
debt due within one year
|
- | (1,454 | ) | - | (586 | ) | ||||||||||
|
Total
long-term debt
|
- | $ | 8,042 | - | $ | 7,581 | ||||||||||
|
Annual
Installments on Long-Term Debt for Next Five Years
In
millions
|
|
|
2009
|
$1,454
|
|
2010
|
$1,060
|
|
2011
|
$1,523
|
|
2012
|
$1,004
|
|
2013
|
$601
|
At
December 31, 2008, the Company had an unused and committed $3 billion
5-year revolving credit facility with various U.S. and foreign banks, with a
maturity date of April 2011, in support of its commercial paper borrowings and
working capital requirements.
The
Company’s outstanding public debt of $9.5 billion has been issued under
indentures which contain, among other provisions, covenants with which the
Company must comply while the underlying notes are outstanding. Such covenants
include obligations to not allow liens on principal U.S. manufacturing
facilities, enter into sale and lease-back transactions with respect to
principal U.S. manufacturing facilities, or merge or consolidate with any other
corporation or sell or convey all or substantially all of the Company’s assets.
Failure of the Company to comply with any of these covenants could result in a
default under the applicable indenture which would allow the note holders to
accelerate the due date of the outstanding principal and accrued interest on the
subject notes.
The
Company’s primary credit agreements contain covenant and default provisions in
addition to the covenants set forth above with respect to the Company’s public
debt. Significant other covenants and defaults include:
|
(a)
|
the
obligation to maintain the ratio of the Company’s consolidated
indebtedness to consolidated capitalization at no greater than 0.65 to
1.00 at any time the aggregate outstanding amount of loans under the
primary credit agreements exceeds $500 million,
|
|
(b)
|
a
default if the Company or an applicable subsidiary fails to make any
payment on indebtedness of $50 million or more when due, or any other
default under the applicable agreement permits the acceleration of
$200 million or more of principal, or results in the acceleration of
$100 million or more of principal,
and
|
|
(c)
|
a
default if the Company or any applicable subsidiary fails to discharge or
stay within 30 days after the entry of a final judgment of more than
$200 million.
|
Failure
of the Company to comply with any of the covenants or default provisions could
result in a default under the applicable credit agreement which would allow the
lenders to not fund future loan requests and to accelerate the due date of the
outstanding principal and accrued interest on any outstanding
loans.
At
December 31, 2008, management believes the Company was in compliance with
all of the covenants and default provisions referred to above.
Pension
Plans
The
Company has defined benefit pension plans that cover employees in the United
States and a number of other countries. The U.S. qualified plan covering the
parent company is the largest plan. Benefits are based on length of service and
the employee’s three highest consecutive years of compensation. Employees hired
after January 1, 2008 earn benefits that are based on a set percentage of
annual pay, plus interest.
The
Company’s funding policy is to contribute to those plans when pension laws
and/or economics either require or encourage funding. In 2008, Dow contributed
$185 million to its pension plans, including contributions to fund benefit
payments for its non-qualified supplemental plans. Dow expects to contribute
$376 million to its pension plans in 2009.
The
weighted-average assumptions used to determine pension plan obligations and net
periodic benefit costs for the plans are provided in the two tables
below:
|
Weighted-Average
Assumptions
for
All Pension Plans
|
Benefit
Obligations
at
December 31
|
Net
Periodic Costs
for
the Year
|
||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Discount
rate
|
6.35 | % | 6.30 | % | 6.33 | % | 5.56 | % | ||||||||
|
Rate
of increase in future compensation levels
|
4.14 | % | 4.13 | % | 4.14 | % | 4.12 | % | ||||||||
|
Expected
long-term rate of return on plan assets
|
- | - | 8.12 | % | 8.30 | % | ||||||||||
|
Weighted-Average
Assumptions
for
U.S. Pension Plans
|
Benefit
Obligations
at
December 31
|
Net
Periodic Costs
for
the Year
|
||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Discount
rate
|
6.61 | % | 6.75 | % | 6.75 | % | 5.98 | % | ||||||||
|
Rate
of increase in future compensation levels
|
4.50 | % | 4.50 | % | 4.50 | % | 4.50 | % | ||||||||
|
Expected
long-term rate of return on plan assets
|
- | - | 8.44 | % | 8.79 | % | ||||||||||
The
Company determines the expected long-term rate of return on plan assets by
performing a detailed analysis of historical and expected returns based on the
strategic asset allocation approved by the Board of Directors and the underlying
return fundamentals of each asset class. The Company’s historical experience
with the pension fund asset performance is also considered. The discount rates
utilized to measure the pension and other postretirement obligations of
the U.S. qualified plans are based on the yield on high-quality fixed
income investments at the measurement date. Future expected actuarially
determined cash flows of Dow’s major U.S. plans are matched against the
Citigroup Pension Discount Curve (Above Median) to arrive at a single discount
rate by plan.
The
accumulated benefit obligation (“ABO”) for all defined benefit pension plans was
$14.9 billion at December 31, 2008 and $14.7 billion at
December 31, 2007.
|
Pension
Plans with Accumulated Benefit Obligations in Excess of Plan Assets at
December 31
|
||
|
In
millions
|
2008
|
2007
|
|
Projected
benefit obligations
|
$13,514
|
$1,843
|
|
Accumulated
benefit obligations
|
$13,027
|
$1,677
|
|
Fair
value of plan assets
|
$9,536
|
$314
|
In
addition to the U.S. qualified plan, U.S. employees are eligible to participate
in defined contribution plans (Employee Savings Plans) by contributing a portion
of their compensation, which is partially matched by the Company. Defined
contribution plans also cover employees in some subsidiaries in other countries,
including Australia, Brazil, Canada, Italy, Spain and the United Kingdom.
Expense recognized for all defined contribution plans was $49 million in
2008, $125 million in 2007 and $84 million in 2006.
Other
Postretirement Benefits
The
Company provides certain health care and life insurance benefits to retired
employees. The Company’s plans outside of the United States are not significant;
therefore, this discussion relates to the U.S. plans only. The plans provide
health care benefits, including hospital, physicians’ services, drug and major
medical expense coverage, and life insurance benefits. For employees hired
before January 1, 1993, the plans provide benefits supplemental to Medicare
when retirees are eligible for these benefits. The Company and the retiree share
the cost of these benefits, with the Company portion increasing as the retiree
has increased years of credited service, although there is a cap on the Company
portion. The Company has the ability to change these benefits at any time.
Employees hired after January 1, 2008 are not covered under the
plans.
The
Company funds most of the cost of these health care and life insurance benefits
as incurred. In 2008, Dow did not make any contributions to its other
postretirement benefit plan trusts. Likewise, Dow does not expect to contribute
assets to its other postretirement benefits plan trusts in 2009.
The
weighted-average assumptions used to determine other postretirement benefit
obligations and net periodic benefit costs for the U.S. plans are provided
below:
|
U.S.
Plan Assumptions for Other Postretirement Benefits
|
Benefit
Obligations
at
December 31
|
Net
Periodic Costs
for
the Year
|
||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Discount
rate
|
6.91 | % | 6.57 | % | 6.57 | % | 5.89 | % | ||||||||
|
Expected
long-term rate of return on plan assets
|
- | - | 6.75 | % | 9.00 | % | ||||||||||
|
Initial
health care cost trend rate
|
9.72 | % | 10.30 | % | 10.30 | % | 8.79 | % | ||||||||
|
Ultimate
health care cost trend rate
|
6.00 | % | 6.00 | % | 6.00 | % | 6.00 | % | ||||||||
|
Year
ultimate trend rate to be reached
|
2018
|
2014
|
2014
|
2011
|
||||||||||||
Increasing
the assumed medical cost trend rate by one percentage point in each year would
increase the accumulated postretirement benefit obligation at December 31,
2008 by $15 million and the net periodic postretirement benefit cost for
the year by $1 million. Decreasing the assumed medical cost trend rate by
one percentage point in each year would decrease the accumulated postretirement
benefit obligation at December 31, 2008 by $15 million and the net
periodic postretirement benefit cost for the year by
$1 million.
Impact
of Remeasurements
An
expense remeasurement of the Company’s pension and other postretirement benefit
plans was completed in the third quarter of 2006, due to curtailments as defined
in SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits,” related to
workforce reductions (see Note B), resulting in a $3 million increase
in net periodic pension cost for 2006.
|
Net
Periodic Benefit Cost for All Significant Plans
|
||||||||||||||||||||||||
|
Defined
Benefit Pension Plans
|
Other
Postretirement Benefits
|
|||||||||||||||||||||||
|
In
millions
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
||||||||||||||||||
|
Service
cost
|
$ | 264 | $ | 289 | $ | 288 | $ | 18 | $ | 21 | $ | 22 | ||||||||||||
|
Interest
cost
|
961 | 881 | 827 | 117 | 113 | 115 | ||||||||||||||||||
|
Expected
return on plan assets
|
(1,232 | ) | (1,179 | ) | (1,100 | ) | (29 | ) | (34 | ) | (27 | ) | ||||||||||||
|
Amortization
of prior service cost (credit)
|
32 | 23 | 22 | (4 | ) | (4 | ) | (4 | ) | |||||||||||||||
|
Amortization
of unrecognized loss (gain)
|
43 | 191 | 222 | (1 | ) | 3 | 7 | |||||||||||||||||
|
Termination
benefits/curtailment cost (1)
|
54 | 11 | 33 | 34 | 6 | - | ||||||||||||||||||
|
Net
periodic benefit cost
|
$ | 122 | $ | 216 | $ | 292 | $ | 135 | $ | 105 | $ | 113 | ||||||||||||
|
(1)
|
See
Note B for information regarding termination benefits/curtailment costs
recorded in 2008, 2007 and 2006.
|
|
Other
Changes in Plan Assets and Benefit Obligations Recognized in Other
Comprehensive Income for All Significant Plans
|
||||||||||||||||
|
Defined
Benefit Pension Plans
|
Other
Postretirement Benefits
|
|||||||||||||||
|
In
millions
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Net
loss (gain)
|
$ | 4,669 | $ | (1,593 | ) | $ | 23 | $ | (201 | ) | ||||||
|
Prior
service cost
|
4 | 140 | - | 2 | ||||||||||||
|
Amortization
of prior service (cost) credit
|
(32 | ) | (23 | ) | 4 | 4 | ||||||||||
|
Amortization
of unrecognized (loss) gain
|
(43 | ) | (191 | ) | 1 | (3 | ) | |||||||||
|
Total
recognized in other comprehensive loss (income)
|
$ | 4,598 | $ | (1,667 | ) | $ | 28 | $ | (198 | ) | ||||||
|
Total
recognized in net periodic benefit cost and other comprehensive loss
(income)
|
$ | 4,720 | $ | (1,451 | ) | $ | 163 | $ | (93 | ) | ||||||
|
Change
in Projected Benefit Obligations, Plan Assets and Funded Status of All
Significant Plans
|
||||||||||||||||
|
In
millions
|
Defined
Benefit
Pension Plans
|
Other
Postretirement
Benefits
|
||||||||||||||
|
Change
in projected benefit obligations
|
2008
|
2007
|
2008
|
2007
|
||||||||||||
|
Benefit
obligation at beginning of year
|
$ | 15,604 | $ | 15,850 | $ | 1,890 | $ | 2,057 | ||||||||
|
Service
cost
|
264 | 289 | 18 | 21 | ||||||||||||
|
Interest
cost
|
961 | 881 | 117 | 113 | ||||||||||||
|
Plan
participants’ contributions
|
21 | 23 | - | - | ||||||||||||
|
Amendments
|
15 | 143 | - | 1 | ||||||||||||
|
Actuarial
changes in assumptions and experience
|
72 | (1,354 | ) | (71 | ) | (186 | ) | |||||||||
|
Acquisition/divestiture/other
activity
|
(8 | ) | 140 | - | - | |||||||||||
|
Benefits
paid
|
(980 | ) | (918 | ) | (144 | ) | (146 | ) | ||||||||
|
Currency
impact
|
(420 | ) | 553 | (23 | ) | 23 | ||||||||||
|
Termination
benefits/curtailment cost (credit)
|
44 | (3 | ) | 34 | 7 | |||||||||||
|
Benefit
obligations at end of year
|
$ | 15,573 | $ | 15,604 | $ | 1,821 | $ | 1,890 | ||||||||
|
Change
in plan assets
|
||||||||||||||||
|
Fair
value of plan assets at beginning of year
|
$ | 16,130 | $ | 14,958 | $ | 432 | $ | 383 | ||||||||
|
Actual
return on plan assets
|
(3,442 | ) | 1,424 | (64 | ) | 49 | ||||||||||
|
Currency
impact
|
(341 | ) | 437 | - | - | |||||||||||
|
Employer
contributions
|
185 | 183 | - | - | ||||||||||||
|
Plan
participants’ contributions
|
21 | 19 | - | - | ||||||||||||
|
Acquisition/divestiture/other
activity
|
- | 27 | - | - | ||||||||||||
|
Benefits
paid
|
(980 | ) | (918 | ) | - | - | ||||||||||
|
Fair
value of plan assets at end of year
|
$ | 11,573 | $ | 16,130 | $ | 368 | $ | 432 | ||||||||
|
Funded
status at end of year
|
$ | (4,000 | ) | $ | 526 | $ | (1,453 | ) | $ | (1,458 | ) | |||||
|
Net
amounts recognized in the consolidated balance sheets at December
31:
|
||||||||||||||||
|
Noncurrent
assets
|
$ | 12 | $ | 2,080 | - | - | ||||||||||
|
Current
liabilities
|
(45 | ) | (43 | ) | $ | (54 | ) | $ | (58 | ) | ||||||
|
Noncurrent
liabilities
|
(3,967 | ) | (1,511 | ) | (1,399 | ) | (1,400 | ) | ||||||||
|
Net
amounts recognized in the consolidated balance sheets
|
$ | (4,000 | ) | $ | 526 | $ | (1,453 | ) | $ | (1,458 | ) | |||||
|
Pretax
amounts recognized in AOCI at December 31:
|
||||||||||||||||
|
Net
loss
|
$ | 5,691 | $ | 1,065 | $ | 27 | $ | 3 | ||||||||
|
Prior
service cost (credit)
|
245 | 273 | (16 | ) | (20 | ) | ||||||||||
|
Pretax
balance in AOCI at end of year
|
$ | 5,936 | $ | 1,338 | $ | 11 | $ | (17 | ) | |||||||
In
2009, an estimated net loss of $97 million and prior service cost of
$30 million for the defined benefit pension plans will be amortized from
AOCI to net periodic benefit cost. In 2009, an estimated net gain of
$1 million and a prior service credit of $4 million for other
postretirement benefit plans will be amortized from AOCI to net periodic benefit
cost.
The
Company uses a December 31 measurement date for all of its
plans.
Estimated
Future Benefit Payments
The
estimated future benefit payments, reflecting expected future service, as
appropriate, are presented in the following table:
|
Estimated
Future Benefit Payments at December 31, 2008
|
||||||||
|
In
millions
|
Defined
Benefit
Pension
Plans
|
Other
Postretirement
Benefits
|
||||||
|
2009
|
$ | 954 | $ | 168 | ||||
|
2010
|
1,089 | 165 | ||||||
|
2011
|
967 | 162 | ||||||
|
2012
|
986 | 156 | ||||||
|
2013
|
999 | 152 | ||||||
|
2014
through 2018
|
5,316 | 720 | ||||||
|
Total
|
$ | 10,311 | $ | 1,523 | ||||
Plan
Assets
Plan
assets consist mainly of equity and fixed income securities of U.S. and foreign
issuers, and may include alternative investments such as real estate, private
equity and other absolute return strategies. At December 31, 2008, plan
assets totaled $11.6 billion and included Company common stock with a value
of $7 million (less than 1 percent of total plan assets). At
December 31, 2007, plan assets totaled $16.1 billion and included
Company common stock with a value of $16 million (less than 1 percent
of total plan assets).
|
Weighted-Average
Allocation of All Plan Assets at December 31
|
||||||||
|
2008
|
2007
|
|||||||
|
Equity
securities
|
40 | % | 51 | % | ||||
|
Debt
securities
|
40 | % | 30 | % | ||||
|
Alternative
investments
|
20 | % | 19 | % | ||||
|
Total
|
100 | % | 100 | % | ||||
|
Weighted-Average
Allocation of U.S. Plan Assets at December 31
|
||||||||
|
2008
|
2007
|
|||||||
|
Equity
securities
|
41 | % | 53 | % | ||||
|
Debt
securities
|
37 | % | 26 | % | ||||
|
Alternative
investments
|
22 | % | 21 | % | ||||
|
Total
|
100 | % | 100 | % | ||||
Investment
Strategy and Risk Management for Plan Assets
The
Company’s investment strategy for the plan assets is to manage the assets in
order to pay retirement benefits to plan participants while minimizing cash
contributions from the Company over the life of the plans. This is accomplished
by diversifying investments in various asset classes and earning an acceptable
long-term rate of return consistent with an acceptable degree of risk, while
considering the liquidity needs of the plans.
The
plans are permitted to use derivative instruments for investment purposes, as
well as for hedging the underlying asset and liability exposure and rebalancing
the asset allocation. The plans use value at risk, stress testing, scenario
analysis, and Monte Carlo simulation to monitor and manage risk in the
portfolios.
|
Strategic
Weighted-Average Target Allocation of U.S. Plan Assets
|
||||||||
|
Asset
Category
|
Target
Allocation
|
Range
|
||||||
|
Equity
securities
|
50 | % | 34% - 60 | % | ||||
|
Debt
securities
|
33 | % | 23% - 49 | % | ||||
|
Alternative
investments
|
17 | % | 9% - 25 | % | ||||
|
Total
|
100 | % | ||||||
Leased
Property
The
Company routinely leases premises for use as sales and administrative offices,
warehouses and tanks for product storage, motor vehicles, railcars, computers,
office machines, and equipment under operating leases. In addition, the Company
leases a gas turbine and aircraft in the United States, and ethylene plants in
Canada and The Netherlands. At the termination of the leases, the Company has
the option to purchase these plants and certain other leased equipment and
buildings based on a fair market value determination.
Rental
expenses under operating leases, net of sublease rental income, were
$439 million in 2008, $445 million in 2007 and $441 million in
2006. Future minimum rental payments under operating leases with remaining
non-cancelable terms in excess of one year are as follows:
|
Minimum
Operating Lease Commitments at December 31, 2008
In
millions
|
||||
|
2009
|
$ | 204 | ||
|
2010
|
157 | |||
|
2011
|
103 | |||
|
2012
|
75 | |||
|
2013
|
64 | |||
|
2014
and thereafter
|
340 | |||
|
Total
|
$ | 943 | ||
Variable
Interest Entities
The
Company leases an ethylene facility in The Netherlands from an owner trust that
is a variable interest entity (“VIE”). Dow is not the primary beneficiary of the
owner trust and is, therefore, not required to consolidate the owner trust.
Based on a valuation completed in mid-2003 when Dow entered into the lease, the
facility was valued at $394 million. Upon expiration of the lease, which
matures in 2014, Dow may purchase the facility for an amount based upon a fair
market value determination. At December 31, 2008, Dow had provided to the
owner trust a residual value guarantee of $363 million, which represents
Dow’s maximum exposure to loss under the lease. Given the productive nature of
the facility, it is probable that the facility will have continuing value to Dow
or the owner trust in excess of the residual value guarantee.
In
September 2001, Hobbes Capital S.A. (“Hobbes”), a former consolidated foreign
subsidiary of the Company, issued $500 million of preferred securities in
the form of equity certificates. The certificates provided a floating rate of
return (which may be reinvested) based on London Interbank Offered Rate (LIBOR).
Under FIN No. 46R, Hobbes was a VIE and the Company was the primary
beneficiary. During the third quarter of 2008, the other partner of Hobbes
redeemed its $674 million ownership in Hobbes. Prior to redemption, the
equity certificates were classified as “Preferred Securities of Subsidiaries”
and the reinvested preferred returns were included in “Minority Interest in
Subsidiaries” in the consolidated balance sheets. The preferred return was
included in “Minority interests’ share in income” in the consolidated statements
of income.
The
Company grants stock-based compensation to employees and non-employee directors
in the form of the Employees’ Stock Purchase Plan and stock option plans, which
include deferred and restricted stock. Information regarding these plans is
provided below.
Accounting
for Stock-Based Compensation
In
December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”, which
replaced SFAS No. 123, “Accounting for Stock-Based Compensation,” and
superseded Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for
Stock Issued to Employees.” This statement, which requires that the cost of all
share-based payment transactions be recognized in the financial statements,
established fair value as the measurement objective and required entities to
apply a fair-value-based measurement method in accounting for share-based
payment transactions. As issued, the statement applied to all awards granted,
modified, repurchased or cancelled after July 1, 2005, and unvested
portions of previously issued and outstanding awards. On April 14, 2005,
the U.S. Securities and Exchange Commission announced the adoption of a new rule
that amended the compliance date for SFAS No. 123R, allowing companies to
implement the statement at the beginning of their next fiscal year that began
after June 15, 2005, which was January 1, 2006 for the Company. Effective
January 1, 2006, the Company began expensing stock-based compensation newly
issued in 2006 to employees in accordance with the fair-value-based measurement
method of accounting set forth in SFAS No. 123R, using the modified
prospective method.
The
Company grants stock-based compensation awards which vest over a specified
period or upon employees meeting certain performance and retirement eligibility
criteria. The Company has historically amortized these awards over the
specified vesting period and recognized any unrecognized compensation cost
at the date of retirement (the “nominal vesting period approach”). The Company
will continue applying the nominal vesting period approach to the portion of
outstanding awards that were unvested at December 31, 2005, until the
awards are fully vested. SFAS No. 123R specifies that an award is vested when
the employee’s right to the award is no longer contingent upon providing
additional service (the “non-substantive vesting period approach”). The Company
began applying this approach to all stock-based compensation awarded after
December 31, 2005. The fair value of equity instruments issued to employees
is measured on the date of grant and is recognized over the vesting period or
from the grant date to the date on which retirement eligibility provisions
have been met and additional service is no longer required.
The
Company uses a lattice-based option valuation model to estimate the fair value
of stock options and a Black-Scholes option valuation model for subscriptions to
purchase shares under the Employees’ Stock Purchase Plan (“ESPP”). The
weighted-average assumptions used to calculate total stock-based compensation
are included in the following table:
|
2008
|
2007
|
2006
|
||||||||||
|
Dividend
yield
|
4.4 | % | 3.5 | % | 3.3 | % | ||||||
|
Expected
volatility
|
29.57 | % | 23.33 | % | 25.67 | % | ||||||
|
Risk-free
interest rate
|
3.42 | % | 4.89 | % | 4.55 | % | ||||||
|
Expected
life of stock options granted during period
|
6
years
|
6
years
|
6
years
|
|||||||||
|
Life
of Employees’ Stock Purchase Plan
|
6.5
months
|
6.6
months
|
6.6
months
|
|||||||||
The
dividend yield assumption for all years was based on the Company’s current
declared dividend as a percentage of the stock price on the grant date. The
expected volatility assumption for all years was based on an equal weighting of
the historical daily volatility and current implied volatility from
exchange-traded options for the contractual term of the options. The risk-free
interest rate for all years was based on the weighted-average of U.S. Treasury
strip rates over the contractual term of the options. Based on an
analysis of historical exercise patterns, exercise rates were developed that
resulted in an average life of 6 years for all years.
EMPLOYEES’
STOCK PURCHASE PLANS
On
February 13, 2003, the Board of Directors authorized a 10-year ESPP, which
was approved by stockholders at the Company’s annual meeting on May 8,
2003. Under the 2008 annual offering, most employees were eligible to purchase
shares of common stock of the Company valued at up to 10 percent of their
annual base earnings. The value is determined using the plan price multiplied by
the number of shares subscribed to by the employee. The plan price of the stock
is set each year at no less than 85 percent of market price. Approximately
51 percent of the eligible employees enrolled in the annual plan for 2008;
approximately 59 percent of the eligible employees enrolled in 2007; and
approximately 52 percent enrolled in 2006.
|
Employees’
Stock Purchase Plans
|
2008
|
|||||||
|
Shares
in thousands
|
Shares
|
Exercise
Price (1)
|
||||||
|
Outstanding
at beginning of year
|
- | - | ||||||
|
Granted
|
4,582 | $ | 35.57 | |||||
|
Exercised
|
(1,082 | ) | $ | 29.92 | ||||
|
Forfeited/Expired
|
(3,500 | ) | $ | 35.57 | ||||
|
Outstanding
and exercisable at end of year
|
- | - | ||||||
|
(1)
Weighted-average per share
|
||||||||
|
Additional
Information about ESPPs
In
millions, except per share amounts
|
2008
|
2007
|
2006
|
|||||||||
|
Weighted-average
fair value per share of purchase rights granted
|
$ | 4.33 | $ | 10.62 | $ | 7.83 | ||||||
|
Total
compensation expense for ESPPs
|
$ | 20 | $ | 57 | $ | 34 | ||||||
|
Related
tax benefit
|
$ | 7 | $ | 21 | $ | 12 | ||||||
|
Total
amount of cash received from the exercise of purchase
rights
|
$ | 32 | $ | 145 | $ | 101 | ||||||
|
Total
intrinsic value of purchase rights exercised (1)
|
$ | 3 | $ | 65 | $ | 15 | ||||||
|
Related
tax benefit
|
$ | 1 | $ | 24 | $ | 6 | ||||||
|
(1)
Difference between the market price at exercise and the price paid by the
employee to exercise the purchase rights
|
||||||||||||
STOCK
OPTION PLANS
Under
the 1988 Award and Option Plan (the “1988 Plan”), a plan approved by
stockholders, the Company may grant options or shares of common stock to its
employees subject to certain annual and individual limits. The terms of the
grants are fixed at the grant date. At December 31, 2008, there were
30,609,222 shares available for grant under this plan.
No
additional grants will be made under the 1994 Non-Employee Directors’ Stock
Plan, which previously allowed the Company to grant up to 300,000 options to
non-employee directors. At December 31, 2008, there were 56,250 options
outstanding under this plan.
No
additional grants will be made under the 1998 Non-Employee Directors’ Stock
Plan, which previously allowed the Company to grant up to 600,000 options to
non-employee directors. At December 31, 2008, there were 135,700 options
outstanding under this plan.
The
exercise price of each stock option equals the market price of the Company’s
stock on the date of grant. Options vest from one to three years, and have a
maximum term of 10 years.
The
following table provides stock option activity for 2008:
|
Stock
Options
|
2008
|
|||||||
|
Shares
in thousands
|
Shares
|
Exercise
Price (1)
|
||||||
|
Outstanding
at beginning of year
|
48,002 | $ | 39.16 | |||||
|
Granted
|
9,176 | $ | 38.62 | |||||
|
Exercised
|
(1,364 | ) | $ | 30.30 | ||||
|
Forfeited/Expired
|
(2,037 | ) | $ | 36.47 | ||||
|
Outstanding
at end of year
|
53,777 | $ | 39.39 | |||||
|
Remaining
contractual life in years
|
5.31 | |||||||
|
Aggregate
intrinsic value in millions
|
- | |||||||
|
Exercisable
at end of year
|
37,459 | $ | 38.77 | |||||
|
Remaining
contractual life in years
|
3.95 | |||||||
|
Aggregate
intrinsic value in millions
|
- | |||||||
|
(1)
Weighted-average per share
|
||||||||
|
Additional
Information about Stock Options
In
millions, except per share amounts
|
2008
|
2007
|
2006
|
|||||||||
|
Weighted-average
fair value per share of options granted
|
$ | 8.88 | $ | 9.81 | $ | 10.31 | ||||||
|
Total
compensation expense for stock option plans
|
$ | 79 | $ | 86 | $ | 87 | ||||||
|
Related
tax benefit
|
$ | 29 | $ | 32 | $ | 32 | ||||||
|
Total
amount of cash received from the exercise of options
|
$ | 40 | $ | 235 | $ | 122 | ||||||
|
Total
intrinsic value of options exercised (1)
|
$ | 12 | $ | 103 | $ | 49 | ||||||
|
Related
tax benefit
|
$ | 4 | $ | 38 | $ | 18 | ||||||
|
(1)
Difference between the market price at exercise and the price paid
by the employee to exercise the options
|
||||||||||||
Total
unrecognized compensation cost related to unvested stock option awards was
$36 million at December 31, 2008 and is expected to be recognized over
a weighted-average period of 0.83 years.
Deferred
and Restricted Stock
Under
the 1988 Plan, the Company grants deferred stock to certain employees. The
grants vest after a designated period of time, generally two to five
years.
|
Deferred
Stock
|
2008
|
|||||||
|
Shares
in thousands
|
Shares
|
Grant Date
Fair Value (1)
|
||||||
|
Nonvested
at beginning of year
|
6,633 | $ | 45.49 | |||||
|
Granted
|
1,996 | $ | 38.38 | |||||
|
Vested
|
(267 | ) | $ | 45.85 | ||||
|
Canceled
|
(246 | ) | $ | 45.38 | ||||
|
Nonvested
at end of year
|
8,116 | $ | 43.73 | |||||
|
(1)
Weighted-average per share
|
||||||||
|
Additional
Information about Deferred Stock
|
||||||||||||
|
In
millions, except per share amounts
|
2008
|
2007
|
2006
|
|||||||||
|
Weighted-average
fair value per share of deferred stock granted
|
$ | 38.38 | $ | 43.61 | $ | 43.34 | ||||||
|
Total
fair value of deferred stock vested and delivered (1)
|
$ | 11 | $ | 24 | $ | 48 | ||||||
|
Related
tax benefit
|
$ | 4 | $ | 9 | $ | 18 | ||||||
|
Total
compensation expense for deferred stock awards
|
$ | 95 | $ | 76 | $ | 67 | ||||||
|
Related
tax benefit
|
$ | 35 | $ | 28 | $ | 25 | ||||||
|
(1)
|
Includes
the fair value of shares vested in prior years and delivered in the
reporting year.
|
Total
unrecognized compensation cost related to deferred stock awards was
$86 million at December 31, 2008 and is expected to be recognized over
a weighted-average period of 1.09 years. At December 31, 2008,
approximately 252,000 deferred shares with a grant date weighted-average fair
value per share of $42.80 had previously vested, but were not issued. These
shares are scheduled to be issued to employees within one to four years or upon
retirement.
Also
under the 1988 Plan, the Company has granted performance deferred stock awards
that vest when the Company attains specified performance targets over a
predetermined period, generally two to five years. Compensation expense related
to performance deferred stock awards is recognized over the lesser of the
service or performance period. The following table shows the performance
deferred stock awards granted:
|
Performance
Deferred Stock Awards
|
|||||||||
|
Shares
in millions
|
Performance
Period
|
Target Shares Granted
(1)
|
Weighted-average
Fair Value per Share
|
||||||
|
2008
|
January
1, 2008 – December 31, 2010
|
1.1 | $ | 38.62 | |||||
|
2007
|
January
1, 2007 – December 31, 2009
|
1.0 | $ | 43.59 | |||||
|
2006
|
January
1, 2006 – December 31, 2008
|
0.9 | $ | 36.78 | |||||
|
(1)
At the end of the performance period, the actual number of shares issued
can range from zero to 250 percent of the target
shares granted for the 2008 and 2007 performance periods and from zero to
200 percent of the target shares granted for
the 2006 performance period.
|
|||||||||
The
following table shows changes in nonvested performance deferred
stock:
|
Performance
Deferred Stock
|
2008
|
|||||||
|
Shares
in thousands
|
Shares
|
Grant Date
Fair Value (1)
|
||||||
|
Nonvested
at beginning of year
|
1,861 | $ | 40.32 | |||||
|
Granted
|
1,070 | $ | 38.62 | |||||
|
Vested
|
(865 | ) | $ | 36.78 | ||||
|
Canceled
|
(71 | ) | $ | 40.23 | ||||
|
Nonvested
at end of year
|
1,995 | $ | 40.95 | |||||
|
(1)
Weighted-average per share
|
||||||||
|
Additional
Information about Performance Deferred Stock
|
|||
|
In
millions
|
2008
|
2007
|
2006
|
|
Total
fair value of performance deferred stock vested and delivered (1)
|
$166
|
$127
|
$52
|
|
Related
tax benefit
|
$62
|
$47
|
$19
|
|
Total
compensation expense for performance deferred stock awards
|
$17
|
$69
|
$86
|
|
Related
tax benefit
|
$6
|
$26
|
$32
|
|
(1)
|
Includes
the fair value of shares vested in prior years and delivered in the
reporting year.
|
During
the second quarter of 2008, the Company settled 0.9 million shares of
performance deferred stock for $35 million in cash. Total unrecognized
compensation cost related to performance deferred stock awards was
$10 million at December 31, 2008 and is expected to be recognized over
a weighted-average period of 0.68 years. At December 31, 2008,
approximately 0.1 million performance deferred shares with a grant date
weighted-average fair value of $35.39 per share were vested, but not issued.
These shares are scheduled to be issued in April 2009.
In
addition, the Company is authorized to grant up to 300,000 deferred shares of
common stock to executive officers of the Company under the 1994 Executive
Performance Plan.
Under
the 2003 Non-Employee Directors’ Stock Incentive Plan, a plan approved by
stockholders, the Company may grant up to 1.5 million shares (including
options, restricted stock and deferred stock) to non-employee directors over the
10-year duration of the program, subject to an annual aggregate award limit of
25,000 shares for each individual director. In 2008, 28,200 shares of restricted
stock with a weighted-average fair value of $37.71 per share were issued under
this plan. The restricted stock issued under this plan cannot be sold, assigned,
pledged or otherwise transferred by the non-employee director, until the
director is no longer a member of the Board.
In
early 1998, a subsidiary of the Company purchased the 20 percent limited partner
interests of outside investors in a consolidated subsidiary, Chemtech Royalty
Associates L.P., for a fair value of $210 million in accordance with
wind-up provisions in the partnership agreement. The limited partnership was
renamed Chemtech II L.P. (“Chemtech II”). In June 1998, the Company contributed
assets with an aggregate fair value of $783 million (through a wholly owned
subsidiary) to Chemtech II and an outside investor acquired a limited partner
interest in Chemtech II totaling 20 percent in exchange for $200 million.
In September 2000, the Company contributed additional assets with an aggregate
fair value of $18 million (through a wholly owned subsidiary) to Chemtech
II. During the second quarter of 2008, the minority outside investor presented
the Company with a liquidation notice, resulting in Dow’s election to purchase
the outside investor’s share in the partnership for $200 million. The
transaction was completed in the second quarter of 2008.
Prior
to the sale of its interest, the outside investor in Chemtech II received a
cumulative annual priority return on its investment and participated in residual
earnings. For financial reporting purposes, the assets (other than intercompany
loans, which were eliminated), liabilities, results of operations and cash flows
of the partnership and subsidiaries were included in the Company’s consolidated
financial statements, and the outside investor’s limited partner interest was
included in “Minority Interest in Subsidiaries” in the consolidated balance
sheets.
NOTE
Q – PREFERRED SECURITIES OF SUBSIDIARIES
The
following transactions were entered into for the purpose of providing
diversified sources of funds to the Company.
In
July 1999, Tornado Finance V.O.F., a consolidated foreign subsidiary of the
Company, issued $500 million of preferred securities in the form of
preferred partnership units. The units provide a distribution of 7.965 percent,
may be redeemed in 2009 or thereafter, and may be called at any time by the
subsidiary. The preferred partnership units are classified as “Preferred
Securities of Subsidiaries” in the consolidated balance sheets. The
distributions are included in “Minority interests’ share in income” in the
consolidated statements of income.
In
September 2001, Hobbes Capital S.A. (“Hobbes”), a former consolidated foreign
subsidiary of the Company, issued $500 million of preferred securities in
the form of equity certificates. The certificates provided a floating rate of
return (which may be reinvested) based on the London Interbank Offered Rate
(“LIBOR”). During the third quarter of 2008, the other partner of Hobbes
redeemed its $674 million ownership in Hobbes. The minority ownership was
redeemed in a non-cash transaction in exchange for a three-year note payable
with a floating rate based on LIBOR. Prior to redemption, the equity
certificates of $500 million were classified as “Preferred Securities of
Subsidiaries” and the reinvested preferred returns were included in “Minority
Interest in Subsidiaries” in the consolidated balance sheets. The preferred
return was included in “Minority interests’ share in income” in the consolidated
statements of income.
There
are no significant restrictions limiting the Company’s ability to pay
dividends.
Undistributed
earnings of nonconsolidated affiliates included in retained earnings were
$2,089 million at December 31, 2008 and $1,962 million at
December 31, 2007.
On
July 14, 2005, the Board of Directors authorized the repurchase of up to
25 million shares of Dow common stock over the period ending on
December 31, 2007 (the “2005 Program”). Prior to that authorization (and
since August 3, 1999 when the Board of Directors terminated its 1997
authorization which allowed the Company to repurchase shares of Dow common
stock), the only shares purchased by the Company were those 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
Note O for information regarding the Company’s stock option plans). In 2005
and 2006, the Company purchased a total of 18,798,407 shares of the Company’s
common stock under the 2005 program. During the first quarter of 2007, the
Company purchased 6,201,593 shares of the Company’s common stock under the 2005
Program, bringing the program to a close.
On
October 26, 2006, the Company announced that its Board of Directors had approved
a share buy-back program, authorizing up to $2 billion to be spent on the
repurchase of the Company’s common stock (the “2006 Program”). Purchases under
the 2006 Program began in March 2007, following the completion of the 2005
Program. In 2007, the Company purchased 26,225,207 shares of the Company’s
common stock under the 2006 Program. In 2008, the Company purchased 21,867,831
shares under the 2006 Program, bringing the total number of shares purchased
under this program to 48,093,038 and bringing the program to a
close.
The
total number of treasury shares purchased by the Company, including 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, was 23,039,786 in 2008; 33,275,995 in 2007 and 18,694,453 in
2006.
The
Company issues shares for options exercised as well as for the release of
deferred and restricted stock out of treasury stock. The Company does not plan
to repurchase shares for this activity in 2009.
The
number of treasury shares issued to employees under the Company’s option and
purchase programs was 7.0 million in 2008, 15.6 million in 2007 and
9.6 million in 2006.
|
Reserved
Treasury Stock at December 31
|
|||
|
Shares
in millions
|
2008
|
2007
|
2006
|
|
Stock
option and deferred stock plans
|
57.0
|
41.0
|
23.3
|
Employee
Stock Ownership Plan
The
Company has the Dow Employee Stock Ownership Plan (the “ESOP”), which is an
integral part of The Dow Chemical Company Employees’ Savings Plan. A significant
majority of full-time employees in the United States are eligible to participate
in the ESOP through the allocation of shares of the Company’s common
stock.
At
December 31, 2008, 9 million common shares held by the ESOP were
outstanding, all of which have been allocated to participants’ accounts. Shares
held by the ESOP are treated as outstanding shares in the determination of basic
and diluted earnings per share.
Operating
loss carryforwards amounted to $4,087 million at December 31, 2008 and
$5,439 million at December 31, 2007. At December 31, 2008,
$216 million of the operating loss carryforwards were subject to expiration
in 2009 through 2013. The remaining operating loss carryforwards expire in years
beyond 2013 or have an indefinite carryforward period. Tax credit carryforwards
at December 31, 2008 amounted to $680 million ($681 million at
December 31, 2007), net of FIN No. 48 positions, of which
$2 million is subject to expiration in 2009 through 2013. The remaining tax
credit carryforwards expire in years beyond 2013.
Undistributed
earnings of foreign subsidiaries and related companies that are deemed to be
permanently invested amounted to $8,043 million at December 31, 2008,
$7,752 million at December 31, 2007 and $5,951 million at
December 31, 2006. It is not practicable to calculate the unrecognized
deferred tax liability on those earnings.
The
Company had valuation allowances, which were primarily related to the
realization of recorded tax benefits on tax loss carryforwards from operations
in the United States, Brazil, Asia Pacific and Switzerland, of $487 million
at December 31, 2008 and $323 million at December 31,
2007.
The
tax rate for 2008 was negatively impacted by increased foreign taxes, declining
financial results in jurisdictions with lower tax rates than the United States
and goodwill impairment losses that are not deductible for tax purposes (see
Note G). Additionally, during 2008, the Company determined that it was more
likely than not that certain tax loss carryforwards in the United States and
Asia Pacific would not be utilized due to deteriorating market conditions for
the Company’s products in these areas, which resulted in increases in valuation
allowances of $48 million in the United States and $24 million in Asia
Pacific. These events resulted in an effective tax rate for 2008 that was higher
than the U.S. statutory rate. The Company’s reported effective tax rate for 2008
was 50.5 percent.
The
tax rate for 2007 was negatively impacted by a change in German tax law that was
enacted in August and included a reduction in the German income tax rate, which
was effective January 1, 2008. As a result of the change, the Company
adjusted the value of its net deferred tax assets in Germany (using the lower
tax rate) and recorded a charge of $362 million against the “Provision for
income taxes” in the third quarter of 2007. Additionally, during 2007, the
Company determined that it was more likely than not that certain tax loss
carryforwards in the United States and Brazil would be utilized due to positive
financial performance, adherence to fiscal discipline and improved forecasted
earnings, which resulted in net reversals of valuation allowances of
$71 million related to the United States and $45 million related to
Brazil. In addition, the Company changed the legal ownership structure of its
investment in EQUATE, resulting in a favorable impact to the “Provision for
income taxes” of $113 million in the fourth quarter of 2007. These events,
combined with enacted changes in the tax rates in Canada and Italy, strong
financial results in jurisdictions with lower tax rates than the United States
and improved earnings from a number of the Company’s joint ventures, partially
offset by the impact of FIN No. 48, resulted in an effective tax rate for
2007 that was lower than the U.S. statutory rate. The Company’s reported
effective tax rate for 2007 was 29.4 percent.
During
2006, the Company developed tax planning strategies in Brazil and determined
that it was more likely than not that tax loss carryforwards would be utilized,
resulting in a reversal of valuation allowances of $63 million. This impact,
combined with strong financial results in jurisdictions with lower tax rates
than the United States, enacted reductions in the tax rates in Canada and The
Netherlands, and improved earnings from a number of the Company’s joint
ventures, resulted in an effective tax rate for 2006 that was lower than the
U.S. statutory rate. The Company’s reported effective tax rate for 2006 was
23.2 percent.
|
Domestic
and Foreign Components of Income
before
Income Taxes and Minority Interests
|
||||||||||||
|
In
millions
|
2008
|
2007
|
2006
|
|||||||||
|
Domestic
|
$ | (1,246 | ) | $ | 229 | $ | 2,244 | |||||
|
Foreign
|
2,567 | 4,000 | 2,728 | |||||||||
|
Total
|
$ | 1,321 | $ | 4,229 | $ | 4,972 | ||||||
|
Reconciliation
to U.S. Statutory Rate
|
||||||||||||
|
In
millions
|
2008
|
2007
|
2006
|
|||||||||
|
Taxes
at U.S. statutory rate
|
$ | 462 | $ | 1,480 | $ | 1,740 | ||||||
|
Equity
earnings effect
|
(309 | ) | (396 | ) | (331 | ) | ||||||
|
Change
in legal ownership structure of EQUATE
|
- | (113 | ) | - | ||||||||
|
Foreign
income taxed at rates other than 35% (1)
|
261 | (686 | ) | (456 | ) | |||||||
|
German
tax law change
|
- | 362 | - | |||||||||
|
U.S.
tax effect of foreign earnings and dividends
|
164 | 480 | 272 | |||||||||
|
Goodwill
impairment losses
|
75 | - | - | |||||||||
|
Change
in valuation allowances
|
60 | (124 | ) | (92 | ) | |||||||
|
Unrecognized
tax benefits
|
31 | 166 | - | |||||||||
|
Federal
tax accrual adjustments
|
29 | 5 | (40 | ) | ||||||||
|
Tax
contingency reserve adjustments
|
- | - | 177 | |||||||||
|
Other
– net
|
(106 | ) | 70 | (115 | ) | |||||||
|
Total
tax provision
|
$ | 667 | $ | 1,244 | $ | 1,155 | ||||||
|
Effective
tax rate
|
50.5 | % | 29.4 | % | 23.2 | % | ||||||
|
(1)
Includes the tax provision for statutory taxable income in foreign
jurisdictions for which there is no corresponding amount in “Income before
Income Taxes and Minority
Interests.”
|
||||||||||||
|
Provision
(Credit) for Income Taxes
|
||||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||||||||||||
|
In
millions
|
Current
|
Deferred
|
Total
|
Current
|
Deferred
|
Total
|
Current
|
Deferred
|
Total
|
|||||||||||||||||||||||||||
|
Federal
|
$ | 3 | $ | (526 | ) | $ | (523 | ) | $ | 77 | $ | 141 | $ | 218 | $ | 367 | $ | 401 | $ | 768 | ||||||||||||||||
|
State
and local
|
6 | (16 | ) | (10 | ) | 87 | 4 | 91 | 82 | (99 | ) | (17 | ) | |||||||||||||||||||||||
|
Foreign
|
918 | 282 | 1,200 | 586 | 349 | 935 | 602 | (198 | ) | 404 | ||||||||||||||||||||||||||
|
Total
|
$ | 927 | $ | (260 | ) | $ | 667 | $ | 750 | $ | 494 | $ | 1,244 | $ | 1,051 | $ | 104 | $ | 1,155 | |||||||||||||||||
|
Deferred
Tax Balances at December 31
|
2008
|
2007
|
||||||||||||||
|
In
millions
|
Deferred Tax
Assets (1)
|
Deferred
Tax
Liabilities
|
Deferred Tax
Assets (1)
|
Deferred
Tax
Liabilities
|
||||||||||||
|
Property
|
$ | 99 | $ | 1,908 | $ | 162 | $ | 2,157 | ||||||||
|
Tax
loss and credit carryforwards
|
2,226 | - | 2,142 | - | ||||||||||||
|
Postretirement
benefit obligations
|
2,642 | 950 | 1,066 | 912 | ||||||||||||
|
Other
accruals and reserves
|
1,462 | 306 | 1,278 | 570 | ||||||||||||
|
Inventory
|
139 | 200 | 154 | 203 | ||||||||||||
|
Long-term
debt
|
3 | 89 | 4 | 110 | ||||||||||||
|
Investments
|
186 | 1 | 154 | 2 | ||||||||||||
|
Other
– net
|
847 | 229 | 1,275 | 455 | ||||||||||||
|
Subtotal
|
$ | 7,604 | $ | 3,683 | $ | 6,235 | $ | 4,409 | ||||||||
|
Valuation
allowance
|
(487 | ) | - | (323 | ) | - | ||||||||||
|
Total
|
$ | 7,117 | $ | 3,683 | $ | 5,912 | $ | 4,409 | ||||||||
|
(1)
Included in current deferred tax assets are prepaid tax assets totaling
$141 million in 2008 and $135 million in 2007.
|
||||||||||||||||
Uncertain
Tax Positions
On
January 1, 2007, the Company adopted the provisions of FIN No. 48. The
cumulative effect of adoption was a $290 million reduction of retained
earnings. At December 31, 2008, the total amount of unrecognized tax
benefits was $736 million ($892 million at December 31, 2007), of
which $690 million would impact the effective tax rate, if recognized
($864 million at December 31, 2007).
Interest
and penalties associated with uncertain tax positions are recognized as
components of the “Provision for income taxes,” and totaled $3 million in
2008 and $29 million in 2007. The Company’s accrual for interest and
penalties was $124 million at December 31, 2008 and $152 million
at December 31, 2007.
|
Total
Gross Unrecognized Tax Benefits
|
||||||||
|
In
millions
|
2008
|
2007
|
||||||
|
Balance
at January 1
|
$ | 892 | $ | 865 | ||||
|
Increases
related to positions taken on items from prior years
|
41 | 99 | ||||||
|
Decreases
related to positions taken on items from prior years
|
(191 | ) | (164 | ) | ||||
|
Increases
related to positions taken in the current year
|
34 | 110 | ||||||
|
Settlement
of uncertain tax positions with tax authorities
|
(29 | ) | (1 | ) | ||||
|
Decreases
due to expiration of statutes of limitations
|
(11 | ) | (17 | ) | ||||
|
Balance
at December 31
|
$ | 736 | $ | 892 | ||||
The
Company is currently under examination in a number of tax jurisdictions. It is
reasonably possible that these examinations may be resolved within twelve
months. As a result, it is reasonably possible that the total gross unrecognized
tax benefits of the Company will be reduced by approximately $250 million
($285 million at December 31, 2007). The amount of settlement remains
uncertain and it is reasonably possible that before settlement, the amount of
gross unrecognized tax benefits may increase or decrease by approximately
$20 million. The impact on the Company’s results of operations is expected
to be immaterial.
Tax
years that remain subject to examination for the Company’s major tax
jurisdictions are shown below:
|
Tax
Years Subject to Examination by Major Tax Jurisdiction at December
31
|
||
|
Jurisdiction
|
Earliest
Open Year
|
|
|
2008
|
2007
|
|
|
Argentina
|
2002
|
2001
|
|
Brazil
|
2003
|
2002
|
|
Canada
|
2001
|
2001
|
|
France
|
2007
|
2005
|
|
Germany
|
2002
|
2002
|
|
Italy
|
2004
|
2003
|
|
The
Netherlands
|
2008
|
2007
|
|
Spain
|
2004
|
2003
|
|
Switzerland
|
2006
|
2005
|
|
United
Kingdom
|
2006
|
2005
|
|
United
States:
|
||
|
Federal
income tax
|
2001
|
2001
|
|
State
and local income tax
|
1989
|
1989
|
The
reserve for non-income tax contingencies related to issues in the United States
and foreign locations was $163 million at December 31, 2008 and
$226 million at December 31, 2007. This is management’s best estimate
of the potential liability for non-income tax contingencies. Inherent
uncertainties exist in estimates of tax contingencies due to changes in tax law,
both legislated and concluded through the various jurisdictions’ tax court
systems. It is the opinion of the Company’s management that the possibility is
remote that costs in excess of those accrued will have a material adverse impact
on the Company’s consolidated financial statements.
Dow
is a diversified, worldwide manufacturer and supplier of approximately 3,300
products. The Company’s products are used primarily as raw materials in the
manufacture of customer products and services. The Company serves the following
industries: appliance; automotive; agricultural; building and construction;
chemical processing; electronics; furniture; housewares; oil and gas; packaging;
paints, coatings and adhesives; personal care; pharmaceutical; processed foods;
pulp and paper; textile and carpet; utilities; and water treatment.
Dow
conducts its worldwide operations through global businesses, which are
aggregated into reportable operating segments based on the nature of the
products and production processes, end-use markets, channels of distribution and
regulatory environment. The Company’s reportable operating segments are
Performance Plastics, Performance Chemicals, Agricultural Sciences, Basic
Plastics, Basic Chemicals, and Hydrocarbons and Energy. Unallocated and Other
contains the reconciliation between the totals for the reportable segments and
the Company’s totals. It also represents the operating segments that do not meet
the quantitative threshold for determining reportable segments, research and
other expenses related to new business development activities, and other
corporate items not allocated to the reportable operating segments.
The
Corporate Profile included below describes the operating segments, how they are
aggregated, and the types of products and services from which their revenues are
derived.
Corporate
Profile
Dow
is a diversified chemical company that combines the power of science and
technology with the “Human Element” to constantly improve what is essential to
human progress. The Company delivers a broad range of products and services to
customers in approximately 160 countries, connecting chemistry and innovation
with the principles of sustainability to help provide everything from fresh
water, food and pharmaceuticals to paints, packaging and personal care products.
In 2008, Dow had annual sales of $57.5 billion and employed approximately
46,000 people worldwide. The Company has 150 manufacturing sites in
35 countries and produces approximately 3,300 products. The following
descriptions of the Company’s operating segments include a representative
listing of products for each business.
PERFORMANCE
PLASTICS
Applications: automotive
interiors, exteriors, under-the-hood and body engineered systems • building and
construction, thermal and acoustic insulation, roofing • communications
technology, telecommunication cables, electrical and electronic connectors •
footwear • home and office furnishings: kitchen appliances, power
tools, floor care products, mattresses, carpeting, flooring, furniture padding,
office furniture • information technology equipment and consumer electronics •
packaging, food and beverage containers, protective packaging • sports and
recreation equipment • wire and cable insulation and jacketing materials for
power utility and telecommunications
Dow Automotive is a leading
global provider of technology-driven solutions that meet consumer demands for
vehicles that are safer, stronger, quieter, lighter, cleaner, more comfortable
and stylish. The business provides plastics, adhesives, glass bonding systems,
emissions control technology, films, fluids, structural enhancement and
acoustical management solutions to original equipment manufacturers, tier,
aftermarket and commercial transportation customers. With
offices and application development centers around the world, Dow Automotive
provides materials science expertise and comprehensive technical capabilities to
its customers worldwide.
|
|
·
|
Products: BETAFOAM™ NVH
and structural foams; BETAMATE™ structural adhesives; BETASEAL™ glass
bonding systems; DOW™ polyethylene resins; IMPAXX™ energy management foam;
INSPIRE™ performance
polymers; INTEGRAL™ adhesive films; ISONATE™ pure and modified methylene
diphenyl diisocyanate (MDI) products; MAGNUM™ ABS resins; PELLETHANE™
thermoplastic polyurethane elastomers; Premium brake fluids and
lubricants; PULSE™ engineering resins; SPECFLEX™ semi-flexible
polyurethane foam systems; VORACTIV™ polyether and copolymer
polyols
|
Dow Building Solutions
manufactures and markets an extensive line of insulation, weather barrier, and
oriented composite building solutions and adhesives. The business is the
recognized leader in extruded polystyrene (XPS) insulation, known industry-wide
by its distinctive Blue color and the Dow STYROFOAM™ brand for more than
60 years.
|
|
·
|
Products: FROTH-PAK™
polyurethane spray foam; GREAT STUFF™ polyurethane foam sealant;
INSTA-STIK™ roof insulation adhesive; SARAN™ vapor retarder film and tape;
STYROFOAM™ brand insulation products (including XPS and polyisocyanurate
rigid foam sheathing products); THERMAX™ brand insulation; TILE BOND™ roof
tile adhesive; WEATHERMATE™ weather barrier solutions (housewraps, sill
pans, flashings and tapes)
|
Dow Epoxy is a leading global
producer of epoxy resins, intermediates and specialty resins and epoxy systems
for a wide range of industries and applications such as coatings, electrical
laminates, civil engineering, wind energy, adhesives and composites. With plants
strategically located across four continents, the business is focused on
providing customers around the world with differentiated solution-based epoxy
products and innovative technologies and services.
|
|
·
|
Products: AIRSTONE™
epoxy systems; D.E.H.™ epoxy curing agents or hardeners; D.E.N.™ epoxy
novolac resins; D.E.R.™ epoxy resins (liquids, solids and solutions);
Epoxy resin waterborne emulsions and dispersions; Epoxy intermediates
(acetone, allyl chloride, bisphenol A, epichlorohydrin, and phenol);
FORTEGRA™ epoxy tougheners; Glycidyl methacrylate (GMA); UCAR™ solution
vinyl resins
|
The
Polyurethanes and Polyurethane
Systems business is a leading global producer of polyurethane raw
materials and polyurethane systems. Dow’s polyurethane products and fully
formulated polyurethane systems are used for a broad range of applications
including construction, automotive, appliance, furniture, bedding, shoe soles,
decorative molding, athletic equipment and more.
|
|
·
|
Products: ECHELON™
polyurethane prepolymer; ENFORCER™ and ENHANCER™ for polyurethane carpet
and turf backing; HYPOL™ prepolymers; ISONATE™ MDI; MONOTHANE™ single
component polyurethane elastomers; PAPI™ polymeric MDI; Propylene glycol;
Propylene oxide; RENUVA™ Renewable Resource Technology; SPECFLEX™ copolymer
polyols; TRAFFIDECK™ and VERDISEAL™ waterproofing systems; VORACOR™ and
VORALAST™ polyurethane systems and VORALAST™ R renewable content
system; VORALUX™ and VORAMER™ MR series; VORANATE™ isocyanate; VORANOL™
VORACTIV™ polyether and copolymer polyols; VORASTAR™ polyurethane systems;
XITRACK™ polyurethane rail ballast stabilization
systems
|
Specialty Plastics and Elastomers
includes a broad range of engineering plastics and compounds, performance
elastomers and plastomers, monomers, specialty copolymers, synthetic rubber,
polyvinylidene chloride resins and films (PVDC), and specialty film substrates.
Key applications include automotive, adhesives, civil construction, wire and
cable, building and construction, consumer electronics and appliances, food and
specialty packaging, textiles, and footwear.
|
|
·
|
Products: AFFINITY™
polyolefin plastomers (POPs); AMPLIFY™ functional
polymers; CALIBRE™ polycarbonate resins; DOW XLA™ elastic fiber; EMERGE™
advanced resins; ENGAGE™ polyolefin elastomers; FLEXOMER™ very low density
polyethylene (VLDPE) resins; INTEGRAL™ adhesive films; ISOPLAST™
engineering thermoplastic polyurethane resins; MAGNUM™ ABS resins; NORDEL™
hydrocarbon rubber; PELLETHANE™ thermoplastic
polyurethane elastomers; PRIMACOR™ copolymers; PROCITE™ window
envelope films; PULSE™ engineering resins; REDI-LINK™ polyethylene-based
wire & cable insulation compounds; SARAN™ PVDC resin and SARAN™ PVDC
film; SARANEX™ barrier films; SI-LINK™ polyethylene-based low voltage
insulation compounds; TRENCHCOAT™ protective films; TYRIL™ SAN
resins; TYRIN™ chlorinated polyethylene; UNIGARD™ HP high-performance
flame-retardant compounds; UNIGARD™ RE reduced emissions flame-retardant
compounds; UNIPURGE™ purging compound; VERSIFY™ plastomers and
elastomers
|
The Technology Licensing and
Catalyst business includes licensing and supply of related catalysts,
process control software and services for the UNIPOL™ polypropylene process, the
METEOR™ process for ethylene oxide (EO) and ethylene glycol (EG), the LP OXO™
process for oxo alcohols, the Mass ABS process technology and Dow’s proprietary
technology for production of purified terephthalic acid (PTA). Licensing of the
UNIPOL™ polyethylene process and sale of related catalysts, including
metallocene catalysts, are handled through Univation Technologies, LLC, a 50:50
joint venture of Union Carbide.
|
|
·
|
Products: LP OXO™ SELECTOR™
technology and NORMAX™ catalysts; METEOR™ EO/EG process technology and
catalysts; PTA process technology; UNIPOL™ PP process technology and SHAC™
and SHAC™ ADT catalyst systems
|
PERFORMANCE
CHEMICALS
Applications: agricultural and
pharmaceutical products and processing • building materials • chemical
processing and intermediates • electronics • food processing and ingredients •
gas treating solvents • household products • metal degreasing and dry cleaning •
oil and gas treatment • paints, coatings, inks, adhesives, lubricants • personal
care products • pulp and paper manufacturing, coated paper and paperboard •
textiles and carpet • water purification
Designed Polymers is a
business portfolio of products and systems characterized by unique
chemistry, specialty functionalities, and people with deep expertise in
regulated industries. Within Designed Polymers, Dow Water Solutions offers
technology-based solutions for desalination, water purification, trace
contaminant removal and water recycling. Also in Designed Polymers, businesses
such as Dow Wolff Cellulosics, Dow Biocides and ANGUS Chemical Company (a wholly
owned subsidiary of Dow), develop and market a range of products that enhance or
enable key physical and sensory properties of end-use products in applications
such as food, pharmaceuticals, oil and gas, paints and coatings, personal care,
and building and construction.
|
|
·
|
Products and Services:
Acrolein derivatives; Basic nitroparaffins and nitroparaffin-based
specialty chemicals; CANGUARD™ BIT preservatives; CELLOSIZE™ hydroxyethyl
cellulose; Chiral compounds and biocatalysts; CLEAR+STABLE™ carboxymethyl
cellulose; CYCLOTENE™ advanced electronics resins; DOW™
electrodeionization; DOW™ latex powders; DOW™ ultrafiltration; DOWEX™ ion
exchange resins; DOWICIDE™ antimicrobial bactericides and fungicides;
FILMTEC™ elements; FORTEFIBER™ soluble dietary fiber; Hydrocarbon resins;
Industrial biocides; METHOCEL™ cellulose ethers; POLYOX™ water-soluble
resins; Quaternaries; Reverse osmosis, electrodeionization and
ultrafiltration modules; SATINFX™ delivery system; SATISFIT™ Weight Care
Technology; SILK™ semiconductor dielectric resins; SOLTERRA™ boost; UCARE™
polymers; WALOCEL™ cellulose polymers; WALSRODER™
nitrocellulose
|
The
Dow Latex business
provides the broadest line of styrene-butadiene products supporting customers in
paper and paperboard applications, as well as carpet and artificial turf
backings. UCAR Emulsion Systems manufactures and sells latexes for use in
architectural and industrial coatings, adhesives, construction products and
traffic paint.
|
|
·
|
Products: EVOCAR™ vinyl
acetate ethylene; FOUNDATIONS™ latex; NEOCAR™ branched vinyl ester
latexes; Styrene-acrylic latex; Styrene-butadiene latex; UCAR™
all-acrylic, styrene-acrylic and vinyl-acrylic latexes; UCAR™ POLYPHOBE™
rheology modifiers; UCARHIDE™
opacifier
|
The
Specialty Chemicals
business provides products and services used in a diverse range of applications,
such as agricultural and pharmaceutical products and processing, building and
construction, chemical processing and intermediates, electronics, food
processing and ingredients, gas treating solvents, fuels and lubricants, oil and
gas, household and institutional cleaners, coatings and paints, pulp and paper
manufacturing, metal degreasing and dry cleaning, and
transportation.
|
|
·
|
Products: Acrylic
acid/Acrylic esters; AMBITROL™ and NORKOOL™ industrial coolants; Butyl
CARBITOL™ and Butyl CELLOSOLVE™ solvents; CARBOWAX™ and CARBOWAX™ SENTRY™
polyethylene glycols and methoxypolyethylene glycols; DOW™ polypropylene
glycols; DOWANOL™ glycol ethers; DOWCAL™, DOWFROST™ and DOWTHERM™ heat
transfer fluids; DOWFAX™, TERGITOL™ and TRITON™ surfactants; Dow
Haltermann Custom Processing and Haltermann Products; Ethanolamines;
Ethyleneamines; SAFE-TAINER™ closed-loop delivery system; SYNALOX™
lubricants; UCAR™ deicing fluids; UCARSOL™ formulated solvents; UCON™
fluids and VERSENE™ chelating
agents
|
The
Performance Chemicals segment also includes the results of Dow Corning
Corporation, and a portion of the results of the OPTIMAL Group of Companies and
the SCG-Dow Group, all joint ventures of the Company.
AGRICULTURAL
SCIENCES
Applications: control of
weeds, insects and plant diseases for agriculture and pest management •
agricultural seeds and traits (genes)
Dow AgroSciences is a global
leader in providing pest management, agricultural and crop biotechnology
products and solutions. The business develops, manufactures and markets products
for crop production; weed, insect and plant disease management; and industrial
and commercial pest management. Dow AgroSciences is building a leading
biotechnology business in agricultural seeds, traits and healthy
oils.
|
|
·
|
Products: AGROMEN™
seeds; BRODBECK™ seed; CLINCHER™ herbicide; DAIRYLAND™ seed; DELEGATE™
insecticide; DITHANE™ fungicide; EXZACT™ precision traits; FORTRESS™
fungicide; GARLON™ herbicide; GLYPHOMAX™ herbicide; GRANITE™ herbicide;
HERCULEX™ I, HERCULEX™ RW and HERCULEX™ XTRA insect protection;
KEYSTONE™ herbicides; LAREDO™ fungicide; LONTREL™ herbicide;
LORSBAN™ insecticides; MILESTONE™ herbicide; MUSTANG™ herbicide; MYCOGEN™
seeds; NEXERA™ canola and sunflower seeds; PHYTOGEN™ brand cottonseeds;
PROFUME™ gas fumigant; RENZE™ seed; SENTRICON™ termite colony elimination
system; SIMPLICITY™ herbicide; STARANE™ herbicide; TELONE™ soil fumigant;
TORDON™ herbicide; TRACER™ NATURALYTE™ insect control; TRIUMPH™ seed;
VIKANE™ structural fumigant; WIDESTRIKE™ insect
protection
|
BASIC
PLASTICS
Applications: adhesives •
appliances and appliance housings • agricultural films • automotive parts and
trim • beverage bottles • bins, crates, pails and pallets • building and
construction • coatings • consumer and durable goods • consumer electronics •
disposable diaper liners • fibers and nonwovens • films, bags and packaging for
food and consumer products • hoses and tubing • household and industrial
bottles • housewares • hygiene and medical films • industrial and consumer films
and foams • information technology • oil tanks and road equipment • plastic pipe
• textiles • toys, playground equipment and recreational products • wire and
cable compounds
The
Polyethylene business is
the world’s leading supplier of polyethylene-based solutions through sustainable
product differentiation. Through the use of multiple catalyst and process
technologies, the business offers customers one of the industry’s broadest
ranges of polyethylene resins via a strong global network of local experts
focused on partnering for long-term success.
|
|
·
|
Products: ASPUN™ fiber
grade resins; ATTANE™ ultra low density polyethylene (ULDPE) resins;
CONTINUUM™ bimodal polyethylene resins; DOW™ high density polyethylene
(HDPE) resins; DOW™ low density polyethylene (LDPE) resins; DOWLEX™
polyethylene resins; ELITE™ enhanced polyethylene (EPE) resins; TUFLIN™
linear low density polyethylene (LLDPE) resins; UNIVAL™ HDPE
resins
|
The
Polypropylene business,
a major global polypropylene supplier, provides a broad range of products and
solutions tailored to customer needs by leveraging Dow’s leading manufacturing
and application technology, research and product development expertise,
extensive market knowledge and strong customer relationships.
· Products: DOW™ homopolymer
polypropylene resins; DOW™ impact copolymer polypropylene resins; DOW™ random
copolymer polypropylene resins; INSPIRE™ performance polymers
The
Polystyrene business,
the global leader in the production of polystyrene resins, is uniquely
positioned with geographic breadth and participation in a diversified portfolio
of applications. Through market and technical leadership and low cost
capability, the business continues to improve product performance and meet
customer needs.
|
|
·
|
Products: STYRON A-TECH™
and C-TECH™ advanced technology polystyrene resins and a full line of
STYRON™ general purpose polystyrene resins; STYRON™ high-impact
polystyrene resins
|
The
Basic Plastics segment also includes the results of Equipolymers and Americas
Styrenics LLC, as well as a portion of the results of EQUATE Petrochemical
Company K.S.C. and the SCG-Dow Group, all joint ventures of the
Company.
BASIC
CHEMICALS
Applications: agricultural
products • alumina • automotive antifreeze and coolant systems • carpet and
textiles • chemical processing • dry cleaning • dust control • household
cleaners and plastic products • inks • metal cleaning • packaging, food and
beverage containers, protective packaging • paints, coatings and adhesives •
personal care products • petroleum refining • pharmaceuticals • plastic pipe •
pulp and paper manufacturing • snow and ice control • soaps and detergents •
water treatment
The
Core Chemicals business
is a leading global producer of each of its basic chemical products, which are
sold to many industries worldwide, and also serve as key raw materials in the
production of a variety of Dow’s performance and plastics products.
|
|
·
|
Products: Acids;
Alcohols; Aldehydes; Caustic soda; Chlorine; Chloroform; COMBOTHERM™
blended deicer; DOWFLAKE™ calcium chloride; DOWPER™ dry cleaning solvent;
Esters; Ethylene dichloride (EDC); LIQUIDOW™ liquid calcium chloride;
MAXICHECK™ procedure for testing the strength of reagents; MAXISTAB™
stabilizers for chlorinated solvents; Methyl chloride; Methylene chloride;
Monochloroacetic acid (MCAA); Oxo products; PELADOW™ calcium chloride
pellets; Perchloroethylene; Trichloroethylene; Vinyl acetate monomer
(VAM); Vinyl chloride monomer (VCM); Vinylidene chloride
(VDC)
|
The
Ethylene Oxide/Ethylene
Glycol business is a key supplier of ethylene glycol to MEGlobal, a 50:50
joint venture and a world leader in the manufacture and marketing of merchant
monoethylene glycol and diethylene glycol. Dow also supplies ethylene oxide to
internal derivatives businesses. Ethylene glycol is used in polyester fiber,
polyethylene terephthalate (PET) for food and beverage container applications,
polyester film and antifreeze.
|
|
·
|
Products: Ethylene
glycol (EG); Ethylene oxide (EO)
|
The
Basic Chemicals segment also includes the results of MEGlobal and a portion of
the results of EQUATE Petrochemical Company K.S.C. and the OPTIMAL Group of
Companies, all joint ventures of the Company.
HYDROCARBONS
AND ENERGY
Applications: polymer and
chemical production • power
The Hydrocarbons and Energy
business encompasses the procurement of fuels, natural gas liquids and crude
oil-based raw materials, as well as the supply of monomers, power and steam
principally for use in Dow’s global operations. The business regularly sells its
by-products; the business also buys and sells products in order to balance
regional production capabilities and derivative requirements. The business also
sells products to certain Dow joint ventures. Dow is the world leader in the
production of olefins and aromatics.
|
|
·
|
Products: Benzene;
Butadiene; Butylene; Cumene; Ethylene; Propylene; Styrene; Power, steam
and other utilities
|
The
Hydrocarbons and Energy segment also includes the results of Compañía Mega S.A.
and a portion of the results of the SCG-Dow Group, both joint ventures of the
Company.
Unallocated and Other includes
the results of New Ventures (which includes new business incubation platforms
focused on identifying and pursuing new commercial opportunities); Venture
Capital; the Company’s insurance operations and environmental operations; and
certain overhead and other cost recovery variances not allocated to the
operating segments.
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 are
provided in the following table:
|
Operating
Segment Information
|
||||||||||||||||||||||||||||||||
|
In
millions
|
Performance
Plastics
|
Performance
Chemicals
|
Agricultural
Sciences
|
Basic
Plastics
|
Basic
Chemicals
|
Hydrocarbons
and Energy
|
Unallocated
and Other
|
Total
|
||||||||||||||||||||||||
|
2008
|
||||||||||||||||||||||||||||||||
|
Sales
to external customers
|
$ | 15,793 | $ | 9,229 | $ | 4,535 | $ | 12,974 | $ | 5,693 | $ | 8,968 | $ | 322 | $ | 57,514 | ||||||||||||||||
|
Intersegment
revenues
|
33 | 55 | - | - | 74 | - | (162 | ) | - | |||||||||||||||||||||||
|
Equity
in earnings of nonconsolidated affiliates
|
28 | 437 | 4 | 76 | 209 | 41 | (8 | ) | 787 | |||||||||||||||||||||||
|
Goodwill
impairment losses (1)
|
209 | - | - | 30 | - | - | - | 239 | ||||||||||||||||||||||||
|
Restructuring
charges (2)
|
111 | 24 | 3 | 148 | 103 | 18 | 432 | 839 | ||||||||||||||||||||||||
|
Purchased
in-process R&D (3)
|
- | - | 44 | - | - | - | - | 44 | ||||||||||||||||||||||||
|
Acquisition-related
expenses (4)
|
- | - | - | - | - | - | 49 | 49 | ||||||||||||||||||||||||
|
Asbestos-related
credit (5)
|
- | - | - | - | - | - | (54 | ) | (54 | ) | ||||||||||||||||||||||
|
EBIT
(6)
|
264 | 1,010 | 761 | 981 | 15 | (70 | ) | (1,078 | ) | 1,883 | ||||||||||||||||||||||
|
Total
assets
|
10,223 | 8,233 | 4,676 | 6,531 | 3,790 | 3,233 | 8,788 | 45,474 | ||||||||||||||||||||||||
|
Investments
in nonconsolidated affiliates
|
375 | 1,023 | 41 | 726 | 505 | 520 | 14 | 3,204 | ||||||||||||||||||||||||
|
Depreciation
and amortization
|
706 | 455 | 111 | 592 | 292 | 80 | - | 2,236 | ||||||||||||||||||||||||
|
Capital
expenditures
|
743 | 480 | 191 | 168 | 305 | 389 | - | 2,276 | ||||||||||||||||||||||||
|
2007
|
||||||||||||||||||||||||||||||||
|
Sales
to external customers
|
$ | 15,116 | $ | 8,351 | $ | 3,779 | $ | 12,878 | $ | 5,863 | $ | 7,105 | $ | 421 | $ | 53,513 | ||||||||||||||||
|
Intersegment
revenues
|
32 | 63 | - | 5 | 72 | - | (172 | ) | - | |||||||||||||||||||||||
|
Equity
in earnings of nonconsolidated affiliates
|
68 | 382 | 4 | 176 | 405 | 87 | - | 1,122 | ||||||||||||||||||||||||
|
Restructuring
charges (2)
|
180 | 85 | 77 | 88 | 7 | 44 | 97 | 578 | ||||||||||||||||||||||||
|
Purchased
in-process R&D (3)
|
- | 7 | 50 | - | - | - | - | 57 | ||||||||||||||||||||||||
|
EBIT
(6)
|
1,390 | 949 | 467 | 2,006 | 813 | (45 | ) | (897 | ) | 4,683 | ||||||||||||||||||||||
|
Total
assets
|
11,698 | 8,824 | 4,152 | 8,808 | 4,691 | 3,370 | 7,258 | 48,801 | ||||||||||||||||||||||||
|
Investments
in nonconsolidated affiliates
|
331 | 1,051 | 38 | 637 | 615 | 402 | 15 | 3,089 | ||||||||||||||||||||||||
|
Depreciation
and amortization
|
598 | 444 | 109 | 576 | 375 | 87 | 1 | 2,190 | ||||||||||||||||||||||||
|
Capital
expenditures
|
547 | 525 | 116 | 158 | 316 | 413 | - | 2,075 | ||||||||||||||||||||||||
|
2006
|
||||||||||||||||||||||||||||||||
|
Sales
to external customers
|
$ | 13,944 | $ | 7,867 | $ | 3,399 | $ | 11,833 | $ | 5,560 | $ | 6,205 | $ | 316 | $ | 49,124 | ||||||||||||||||
|
Intersegment
revenues
|
28 | 56 | - | - | 77 | - | (161 | ) | - | |||||||||||||||||||||||
|
Equity
in earnings of nonconsolidated affiliates
|
89 | 368 | 1 | 173 | 241 | 85 | 2 | 959 | ||||||||||||||||||||||||
|
Restructuring
charges (2)
|
242 | 12 | - | 16 | 184 | - | 137 | 591 | ||||||||||||||||||||||||
|
Asbestos-related
credit (5)
|
- | - | - | - | - | - | (177 | ) | (177 | ) | ||||||||||||||||||||||
|
EBIT
(6)
|
1,629 | 1,242 | 415 | 2,022 | 689 | - | (594 | ) | 5,403 | |||||||||||||||||||||||
|
Total
assets
|
10,640 | 7,170 | 3,947 | 7,871 | 4,341 | 3,075 | 8,537 | 45,581 | ||||||||||||||||||||||||
|
Investments
in nonconsolidated affiliates
|
282 | 847 | 16 | 617 | 533 | 436 | 4 | 2,735 | ||||||||||||||||||||||||
|
Depreciation
and amortization
|
641 | 393 | 113 | 470 | 382 | 74 | 1 | 2,074 | ||||||||||||||||||||||||
|
Capital
expenditures
|
377 | 364 | 94 | 169 | 283 | 488 | - | 1,775 | ||||||||||||||||||||||||
|
(1)
See Note G for information regarding the goodwill impairment
losses.
|
||||||||||||||||||||||||||||||||
|
(2)
See Note B for information regarding restructuring
charges.
|
||||||||||||||||||||||||||||||||
|
(3)
See Note C for information regarding purchased in-process research and
development.
|
||||||||||||||||||||||||||||||||
|
(4)
See Note C for information regarding acquisition-related
expenses.
|
||||||||||||||||||||||||||||||||
|
(5)
See Note K for information regarding asbestos-related
credits.
|
||||||||||||||||||||||||||||||||
|
(6)
The Company uses EBIT (which Dow defines as earnings before interest,
income taxes and minority interests) as its measure of profit/loss for
segment reporting purposes. EBIT by operating segment includes all
operating items relating to the businesses; items
that principally apply to the Company as a whole are assigned to
Unallocated and Other. A reconciliation of EBIT to “Net Income Available
for Common Stockholders” is provided below:
|
||||||||||||||||||||||||||||||||
|
In
millions
|
2008
|
2007
|
2006
|
|||||||||
|
EBIT
|
$ | 1,883 | $ | 4,683 | $ | 5,403 | ||||||
|
+
Interest income
|
86 | 130 | 185 | |||||||||
|
- Interest
expense and amortization of debt discount
|
648 | 584 | 616 | |||||||||
|
- Provision
for income taxes
|
667 | 1,244 | 1,155 | |||||||||
|
- Minority
interests’ share in income
|
75 | 98 | 93 | |||||||||
|
Net
Income Available for Common Stockholders
|
$ | 579 | $ | 2,887 | $ | 3,724 | ||||||
The
Company operates 150 manufacturing sites in 35 countries. The United States is
home to 42 of these sites, representing 53 percent of the Company’s long-lived
assets. Sales are attributed to geographic areas based on customer location;
long-lived assets are attributed to geographic areas based on asset
location.
|
Geographic
Area Information
|
||||
|
In
millions
|
United
States
|
Europe
|
Rest
of World
|
Total
|
|
2008
|
||||
|
Sales
to external customers
|
$18,459
|
$21,850
|
$17,205
|
$57,514
|
|
Long-lived
assets (1)
|
$7,631
|
$4,343
|
$2,320
|
$14,294
|
|
2007
|
||||
|
Sales
to external customers
|
$18,271
|
$19,614
|
$15,628
|
$53,513
|
|
Long-lived
assets (1)
|
$7,586
|
$4,542
|
$2,260
|
$14,388
|
|
2006
|
||||
|
Sales
to external customers
|
$18,172
|
$16,776
|
$14,176
|
$49,124
|
|
Long-lived
assets (1)
|
$7,505
|
$3,946
|
$2,271
|
$13,722
|
|
(1)
Long-lived assets in Germany represented approximately 14 percent of
the total at December 31, 2008 and December 31, 2007 and
11 percent of the total at December 31,
2006.
|
||||
Matters
Involving the Acquisition of Rohm and Haas Company
Introduction
On
July 10, 2008, the Company and Rohm and Haas Company (“Rohm and Haas”)
entered into an Agreement and Plan of Merger (the “Merger Agreement”) for the
acquisition of Rohm and Haas for $78 in cash per share of Rohm and Haas common
stock (the “Merger”). The Merger did not close in January 2009, as originally
anticipated, in light of the Company’s determination that recent material
developments had created unacceptable uncertainties with respect to the funding
and economics of the combined Dow and Rohm and Haas enterprise. This assessment
was based on several macro-economic factors such as the continued crisis in
global financial and credit markets and unprecedented demand destruction,
combined with the failure of Petrochemical Industries Company (K.S.C.) of Kuwait
to fulfill its obligation to close the K-Dow Petrochemicals (“K-Dow”) joint
venture transaction and fund the initial purchase price on January 2,
2009.
Litigation
On
January 26, 2009, Rohm and Haas commenced an action in the Court of
Chancery of the State of Delaware to compel the Company to acquire Rohm and Haas
for $78 in cash per share of Rohm and Haas common stock (plus a “ticking fee”
commencing on January 10, 2009). The complaint (the “Complaint”) in the
action alleges that all conditions to the Company’s obligation to close the
Merger were met on January 23, 2009 and that the Company, pursuant to the
terms of the Merger Agreement, was required to close the Merger within two
business days thereafter, i.e., by January 27,
2009. The Complaint further alleges that the Company advised Rohm and Haas on
January 25, 2009 that it would not close the Merger on or by
January 27, 2009, and that the Company knowingly and intentionally breached
the Merger Agreement.
On
January 27, 2009, the Court determined to expedite proceedings in the case
and ordered that the trial commence on March 9, 2009. The trial will relate
to the issue of whether the Court should order specific performance and thus
require the Company to close the Merger. The Court also stated that it strongly
encouraged the parties to focus on a business solution to the
dispute.
On
February 3, 2009, the Company filed its answer (the “Answer”) to the
Complaint. The Answer denied that all conditions to closing had been met as of
January 23, 2009, noting that the United States Federal Trade Commission
(“FTC”) action on January 23, 2009 was only a provisional acceptance of the
proposed consent order and not final approval, and that the FTC reserves
discretion to reject the proposed consent order after the close of the public
comment period. The Answer denied that Rohm and Haas is entitled to a decree of
specific performance, and asserted affirmative defenses of frustration of
purpose, commercial impracticability, impossibility of performance and undue
hardship – all arising from the sudden and rapid economic and financial
downturn, the dramatic falloff in the Company’s earnings in the fourth quarter
of 2008 and continuing into the first quarter of 2009, the risk of the Company’s
inability to comply with financial covenants contained in the bridge loan
expected to provide temporary financing for the Merger, the risk of the Company
losing access to the capital markets due to potential loss of its investment
grade rating, and the collapse of the K-Dow joint venture. The Company also
asserted that specific performance is not appropriate because Rohm and Haas has
adequate remedies at law for any breach of the Merger Agreement.
Summary
Because
of the uncertainties associated with the litigation described above, management
cannot estimate the impact of the ultimate resolution of the litigation. It is
the opinion of the Company’s management that it is reasonably possible that the
ultimate resolution could have a material adverse impact on the consolidated
financial statements of the Company.
|
The
Dow Chemical Company and Subsidiaries
|
||||||||||||||||||||
|
In
millions, except per share amounts (Unaudited)
|
||||||||||||||||||||
|
2008
|
1st
|
2nd
|
3rd
|
4th
|
Year
|
|||||||||||||||
|
Net
sales
|
$ | 14,824 | $ | 16,380 | $ | 15,411 | $ | 10,899 | $ | 57,514 | ||||||||||
|
Cost
of sales
|
12,908 | 14,643 | 13,975 | 10,493 | 52,019 | |||||||||||||||
|
Gross
margin
|
1,916 | 1,737 | 1,436 | 406 | 5,495 | |||||||||||||||
|
Goodwill
impairment losses
|
- | - | - | 239 | 239 | |||||||||||||||
|
Restructuring
charges
|
- | - | - | 839 | 839 | |||||||||||||||
|
Purchased
in-process research and development charges
|
- | - | 27 | 17 | 44 | |||||||||||||||
|
Acquisition-related
expenses
|
- | - | 18 | 31 | 49 | |||||||||||||||
|
Asbestos-related
credit
|
- | - | - | 54 | 54 | |||||||||||||||
|
Net
income (loss) available for common stockholders
|
941 | 762 | 428 | (1,552 | ) | 579 | ||||||||||||||
|
Earnings (Loss) per common share
- basic (1)
|
1.00 | 0.82 | 0.46 | (1.68 | ) | 0.62 | ||||||||||||||
|
Earnings (Loss) per common share
- diluted (1)
|
0.99 | 0.81 | 0.46 | (1.68 | ) | 0.62 | ||||||||||||||
|
Common
stock dividends declared per share of
common
stock
|
0.42 | 0.42 | 0.42 | 0.42 | 1.68 | |||||||||||||||
|
Market price range of common
stock: (2)
|
||||||||||||||||||||
|
High
|
40.04 | 43.43 | 39.99 | 32.28 | 43.43 | |||||||||||||||
|
Low
|
33.01 | 34.30 | 30.82 | 14.93 | 14.93 | |||||||||||||||
|
2007
|
1st
|
2nd
|
3rd
|
4th
|
Year
|
|||||||||||||||
|
Net
sales
|
$ | 12,432 | $ | 13,265 | $ | 13,589 | $ | 14,227 | $ | 53,513 | ||||||||||
|
Cost
of sales
|
10,605 | 11,398 | 11,864 | 12,533 | 46,400 | |||||||||||||||
|
Gross
margin
|
1,827 | 1,867 | 1,725 | 1,694 | 7,113 | |||||||||||||||
|
Restructuring
charges (credit)
|
- | (4 | ) | - | 582 | 578 | ||||||||||||||
|
Purchased
in-process research and development
charges
(credit)
|
- | - | 59 | (2 | ) | 57 | ||||||||||||||
|
Net
income available for common stockholders
|
973 | 1,039 | 403 | 472 | 2,887 | |||||||||||||||
|
Earnings per common share - basic
(3)
|
1.01 | 1.09 | 0.42 | 0.50 | 3.03 | |||||||||||||||
|
Earnings per common share -
diluted (3)
|
1.00 | 1.07 | 0.42 | 0.49 | 2.99 | |||||||||||||||
|
Common
stock dividends declared per share of
common
stock
|
0.375 | 0.42 | 0.42 | 0.42 | 1.635 | |||||||||||||||
|
Market price range of common
stock: (2)
|
||||||||||||||||||||
|
High
|
47.26 | 47.60 | 47.96 | 47.43 | 47.96 | |||||||||||||||
|
Low
|
39.02 | 43.71 | 38.89 | 39.20 | 38.89 | |||||||||||||||
|
See
Notes to the Consolidated Financial Statements.
|
||||||||||||||||||||
|
(1)
Due to a decline in the share count during 2008 and a loss in the 4th
quarter, the sum of the four quarters does not equal the earnings per
share
|
|||||
|
amount
calculated for the year.
|
|||||
|
(2)
Composite price as reported by the New York Stock
Exchange.
|
|||||
|
(3)
Due to a decline in the share count during 2007, the sum of the four
quarters does not equal the earnings per share amount calculated for the
year.
|
|||||
The
Dow Chemical Company and Subsidiaries
PART
II
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not
applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation
of Disclosure Controls and Procedures
As
of the end of the period covered by this Annual Report on Form 10-K, 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 and 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.
Management’s
Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. The Company’s internal control framework and processes are
designed to provide reasonable assurance to management and the Board of
Directors regarding the reliability of financial reporting and the preparation
of the Company’s consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America.
The
Company’s internal control over financial reporting includes those policies and
procedures that:
|
|
·
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
|
·
|
provide
reasonable assurance that transactions are recorded properly to allow for
the preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and Directors of the Company;
|
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on the consolidated financial statements;
and
|
|
|
·
|
provide
reasonable assurance as to the detection of fraud.
|
Because
of its inherent limitations, any system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements.
Management
assessed the effectiveness of the Company’s internal control over financial
reporting and concluded that, as of December 31, 2008, such internal control is
effective. In making this assessment, management used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control—Integrated
Framework.
The
Company’s independent auditors, Deloitte & Touche LLP, with direct access to the
Company’s Board of Directors through its Audit Committee, have audited the
consolidated financial statements prepared by the Company. Their report on the
consolidated financial statements is included in Part II, Item 8. Financial
Statements and Supplementary Data. Deloitte & Touche LLP’s report on the Company’s
internal control over financial reporting is included herein.
|
/s/
ANDREW N. LIVERIS
|
/s/
GEOFFERY E. MERSZEI
|
|
|
Andrew
N. Liveris
President,
Chief Executive Officer and
Chairman
of the Board
|
Geoffery
E. Merszei
Executive
Vice President and Chief Financial Officer
|
|
|
/s/
WILLIAM H. WEIDEMAN
|
||
|
William
H. Weideman
Vice
President and Controller
|
||
|
February
11, 2009
|
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors and Stockholders of
The
Dow Chemical Company:
We
have audited the internal control over financial reporting of The Dow Chemical
Company and subsidiaries (“the Company”) as of December 31, 2008, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s
Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on
the criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedule listed in the Index at Item 15 (a)
2. as of and for the year ended December 31, 2008 of the Company and our report
dated February 17, 2009 expressed an unqualified opinion on those financial
statements and financial statement schedule and included an explanatory
paragraph relating to the Company’s involvement in litigation related to an
agreement to acquire Rohm and Haas Company.
|
/s/
DELOITTE & TOUCHE LLP
|
||
|
Deloitte
& Touche
LLP
Midland,
Michigan
|
||
|
February
17, 2009
|
ITEM 9B. OTHER INFORMATION.
None.
The
Dow Chemical Company and Subsidiaries
PART
III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
Information
relating to Directors, certain executive officers and certain corporate
governance matters (including identification of Audit Committee members and
financial expert(s)) is contained in the definitive Proxy Statement for the
Annual Meeting of Stockholders of The Dow Chemical Company to be held on
May 14, 2009, and is incorporated herein by reference. See also the
information regarding executive officers of the registrant set forth in Part I
under the caption “Executive Officers of the Registrant” in reliance on General
Instruction G to Form 10-K.
On
July 10, 2003, the Board of Directors of the Company adopted a code of ethics
that applies to its principal executive officer, principal financial officer and
principal accounting officer, and is incorporated herein by reference to Exhibit
14 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2003.
ITEM 11. EXECUTIVE COMPENSATION.
Information
relating to executive compensation and the Company’s equity compensation plans
is contained in the definitive Proxy Statement for the Annual Meeting of
Stockholders of The Dow Chemical Company to be held on May 14, 2009, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Information
with respect to beneficial ownership of Dow common stock by each Director and
all Directors and executive officers of the Company as a group is contained in
the definitive Proxy Statement for the Annual Meeting of Stockholders of The Dow
Chemical Company to be on held May 14, 2009, and is incorporated herein by
reference.
Information
relating to any person who beneficially owns in excess of 5 percent of the
total outstanding shares of Dow common stock is contained in the definitive
Proxy Statement for the Annual Meeting of Stockholders of The Dow Chemical
Company to be on held May 14, 2009, and is incorporated herein by
reference.
Information
with respect to compensation plans under which equity securities are authorized
for issuance is contained in the definitive Proxy Statement for the Annual
Meeting of Stockholders of The Dow Chemical Company to be held on May 14,
2009, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
There
were no reportable relationships or related transactions in 2008.
Information
relating to director independence is contained in the definitive Proxy Statement
for the Annual Meeting of Stockholders of The Dow Chemical Company to be held on
May 14, 2009, and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES.
Information
with respect to fees and services related to the Company’s independent auditors,
Deloitte & Touche LLP,
and the disclosure of the Audit Committee’s pre-approval policies and procedures
are contained in the definitive Proxy Statement for the Annual Meeting of
Stockholders of The Dow Chemical Company to be held on May 14, 2009, and
are incorporated herein by reference.
The
Dow Chemical Company and Subsidiaries
PART
IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES.
(a) The
following documents are filed as part of this report:
|
|
The
Company’s 2008 Consolidated Financial Statements and the Report of
Independent Registered Public Accounting Firm are included in Part II,
Item 8. Financial Statements and Supplementary
Data.
|
|
|
Financial
Statement Schedules – The following Financial Statement Schedule should be
read in conjunction with the Consolidated Financial Statements and Report
of Independent Registered Public Accounting Firm included in Part II, Item
8 of this Annual Report on Form
10-K:
|
|
Schedule
II
|
Valuation
and Qualifying Accounts
|
Schedules
other than the one listed above are omitted due to the absence of conditions
under which they are required or because the information called for is included
in the Consolidated Financial Statements or the Notes to the Consolidated
Financial Statements.
|
|
Exhibits
– See the Exhibit Index on pages 134-137 of this Annual Report on Form
10-K for exhibits filed with this Annual Report on Form 10-K or
incorporated by reference. The following exhibits, listed on the Exhibit
Index, are filed with this Annual Report on Form
10-K:
|
|
Exhibit
No.
|
Description of Exhibit
|
|
A
copy of The Dow Chemical Company Executives’ Supplemental Retirement Plan,
as amended, restated and effective as of January 1,
2009.
|
|
|
A
copy of The Dow Chemical Company 1988 Award and Option Plan, as amended
and restated on December 10, 2008, effective as of January 1,
2009.
|
|
|
A
copy of The Dow Chemical Company 1994 Executive Performance Plan, as
amended and restated on December 10, 2008, effective as of
January 1, 2009.
|
|
|
A
copy of the Summary Plan Description for The Dow Chemical Company
Company-Paid Life Insurance Plan, Employee-Paid Life Insurance Plan, and
Dependent Life Insurance Plan, amended and restated on October 21,
2008, effective as of December 1, 2008.
|
|
|
A
copy of the Summary Plan Description for The Dow Chemical Company Retiree
Company-Paid Life Insurance Plan, Retiree Optional Life Insurance Plan,
and Retiree Dependent Life Insurance Plan, amended and restated on
October 21, 2008, effective as of December 1, 2008.
|
|
|
A
copy of the Performance Shares Deferred Stock Agreement Pursuant to The
Dow Chemical Company 1988 Award and Option Plan, as amended, restated and
effective as of January 1, 2009.
|
|
|
A
copy of the Deferred Stock Agreement Pursuant to The Dow Chemical Company
1988 Award and Option Plan, as amended, restated and effective as of
January 1, 2009.
|
|
|
A
copy of the Non-Qualified Stock Option Agreement Pursuant to The Dow
Chemical Company 1988 Award and Option Plan, as amended, restated and
effective as of January 1, 2009.
|
|
|
A
copy of The Dow Chemical Company Voluntary Deferred Compensation Plan for
Non-Employee Directors, effective for deferrals after January 1, 2005, as
amended and restated on December 10, 2008, effective as of
January 1, 2009.
|
|
|
A
copy of The Dow Chemical Company Elective Deferral Plan, effective for
deferrals after January 1, 2005, as amended, restated and effective
as of January 1, 2009.
|
|
|
A
copy of an employment agreement dated February 14, 2006, between
Heinz Haller and The Dow Chemical
Company.
|
|
Computation
of Ratio of Earnings to Fixed Charges.
|
|
|
Subsidiaries
of The Dow Chemical Company.
|
|
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
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.
|
A
copy of any exhibit can be obtained via the Internet through the Company’s
Investor Relations webpage on www.dow.com, or the Company
will provide a copy of any exhibit upon receipt of a written request for the
particular exhibit or exhibits desired. All requests should be addressed to the
Vice President and Controller of the Company at the address of the Company’s
principal executive offices.
The
Dow Chemical Company and Subsidiaries
Valuation
and Qualifying Accounts
For
the Years Ended December 31
In
millions
|
COLUMN
A
|
COLUMN
B
|
COLUMN
C
|
COLUMN
D
|
COLUMN
E
|
|||||
|
Description
|
Balance
at
Beginning
of
Year
|
Additions
to Reserves
|
Deductions
from
Reserves
|
Balance
at
End
of
Year
|
|||||
|
2008
|
|||||||||
|
RESERVES
DEDUCTED FROM ASSETS TO WHICH THEY APPLY:
|
|||||||||
|
For
doubtful receivables
|
$118
|
39
|
33
|
(1)
|
$124
|
||||
|
Other
investments and noncurrent receivables
|
$473
|
20
|
51
|
$442
|
|||||
|
2007
|
|||||||||
|
RESERVES
DEDUCTED FROM ASSETS TO WHICH THEY APPLY:
|
|||||||||
|
For
doubtful receivables
|
$122
|
14
|
18
|
(1)
|
$118
|
||||
|
Other
investments and noncurrent receivables
|
$365
|
122
|
14
|
$473
|
|||||
|
2006
|
|||||||||
|
RESERVES
DEDUCTED FROM ASSETS TO WHICH THEY APPLY:
|
|||||||||
|
For
doubtful receivables
|
$169
|
9
|
56
|
(1)
|
$122
|
||||
|
Other
investments and noncurrent receivables
|
$329
|
47
|
11
|
$365
|
|||||
|
2008
|
2007
|
2006
|
||||||||||
|
(1)
Deductions represent:
|
||||||||||||
|
Notes
and accounts receivable written off
|
$ | 23 | $ | 22 | $ | 44 | ||||||
|
Credits
to profit and loss
|
6 | - | 1 | |||||||||
|
Miscellaneous
other
|
4 | (4 | ) | 11 | ||||||||
| $ | 33 | $ | 18 | $ | 56 | |||||||
The
Dow Chemical Company and Subsidiaries
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 18th
day of February 2009.
|
THE
DOW CHEMICAL COMPAY
|
||
|
By:
|
/s/ W.
H. WEIDEMAN
|
|
|
W.
H. Weideman, Vice President and
Controller
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Annual Report
on Form 10-K has been signed on the 18th day of February 2009 by the following
persons in the capacities indicated:
|
/s/ A.
A. ALLEMANG
|
/s/ G.
E. MERSZEI
|
|
|
A.
A. Allemang, Director
|
G.
E. Merszei, Director, Executive Vice President and Chief Financial
Officer
|
|
|
/s/ J.
K. BARTON
|
/s/ D.
H. REILLEY
|
|
|
J.
K. Barton, Director
|
D.
H. Reilley, Director
|
|
|
/s/
J. A. BELL
|
/s/ J.
M. RINGLER
|
|
|
J.
A. Bell, Director
|
J.
M. Ringler, Director
|
|
|
/s/ J.
M. FETTIG
|
/s/ R.
G. SHAW
|
|
|
J.
M. Fettig, Director
|
R.
G. Shaw, Director
|
|
|
/s/ B.
H. FRANKLIN
|
/s/ P.
G. STERN
|
|
|
B.
H. Franklin, Director
|
P.
G. Stern, Presiding Director
|
|
|
/s/ J.
B. HESS
|
/s/ W.
H. WEIDEMAN
|
|
|
J.
B. Hess, Director
|
W.
H. Weideman, Vice President and Controller
|
|
|
/s/ A.
N. LIVERIS
|
||
|
A.
N. Liveris, Director, President, Chief Executive Officer and Chairman of
the Board
|
||
|
|
2(a)
|
Agreement
and Plan of Merger dated as of August 3, 1999 among Union Carbide
Corporation, The Dow Chemical Company and Transition Sub Inc.,
incorporated by reference to Annex A to the proxy statement/prospectus
included in The Dow Chemical Company’s Registration Statement on Form S-4,
File No. 333-88443, filed October 5,
1999.
|
|
|
2(b)
|
Agreement
and Plan of Merger, dated as of July 10, 2008, among The Dow Chemical
Company, Ramses Acquisition Corp. and Rohm and Haas Company, incorporated
by reference to Exhibit 2.1 to The Dow Chemical Company Current
Report on Form 8-K filed on July 10,
2008.
|
|
|
2(c)
|
Joint
Venture Formation Agreement, dated November 28, 2008, between The Dow
Chemical Company and Petroleum Industries Company (K.S.C.), incorporated
by reference to Exhibit 2.1 to The Dow Chemical Company Current
Report on Form 8-K filed on February 19,
2009.
|
|
|
3(i)
|
The
Restated Certificate of Incorporation of The Dow Chemical Company as filed
with the Secretary of State, State of Delaware on May 11, 2007,
incorporated by reference to Exhibit 3(i) to The Dow Chemical Company
Quarterly Report on Form 10-Q for the quarter ended June 30,
2007.
|
|
|
3(ii)
|
The
Bylaws of The Dow Chemical Company, as amended and re-adopted in full on
October 8, 2008, effective October 9, 2008, incorporated by
reference to Exhibit 99.1 to The Dow Chemical Company Current Report
on Form 8-K filed on October 14,
2008.
|
|
|
4
|
Indenture,
dated as of April 1, 1992, between The Dow Chemical Company and the First
National Bank of Chicago, as trustee (incorporated by reference to Exhibit
4.1 to The Dow Chemical Company’s Registration Statement on Form S-3, File
No. 333-88617 (the "S-3 Registration Statement")), as amended by the
Supplemental Indenture, dated as of January 1, 1994, between The Dow
Chemical Company and The First National Bank of Chicago, as trustee
(incorporated by reference to Exhibit 4.2 to the S-3 Registration
Statement), as amended by the Second Supplemental Indenture, dated as of
October 1, 1999, between The Dow Chemical Company and Bank One Trust
Company, N.A. (formerly The First National Bank of Chicago), as trustee
(incorporated by reference to Exhibit 4.3 to the S-3 Registration
Statement), as amended by the Third Supplemental Indenture, dated as of
May 15, 2001, between The Dow Chemical Company and Bank One Trust Company,
N.A. (formerly The First National Bank of Chicago), as trustee
(incorporated by reference to Exhibit 4.4 to The Dow Chemical Company’s
Registration Statement on Form S-4, File No. 333-67368); and all other
such indentures that define the rights of holders of long-term debt of The
Dow Chemical Company and its consolidated subsidiaries as shall be
requested to be furnished to the Securities and Exchange Commission
pursuant to Item 601(b)(4)(iii)(A) of Regulation
S-K.
|
|
|
10(a)
|
A
copy of The Dow Chemical Company Executives’ Supplemental Retirement Plan,
as amended, restated and effective as of January 1,
2009.
|
|
|
10(b)
|
The
Dow Chemical Company 1979 Award and Option Plan, as amended through May
1983 (included as part of and incorporated by reference to the Prospectus
contained in Post-Effective Amendment No. 4 to The Dow Chemical Company’s
Registration Statement on Form S-8, File No. 2-64560, filed June 23,
1983), as amended April 12, 1984 (incorporated by reference to Exhibit
10(ff) to The Dow Chemical Company Annual Report on Form 10-K for the year
ended December 31, 1984), as amended April 18, 1985 (incorporated by
reference to Exhibit 10(fff) to The Dow Chemical Company Annual Report on
Form 10-K for the year ended December 31, 1985), as amended October 30,
1987 (incorporated by reference to Exhibit 10(j) to The Dow Chemical
Company Annual Report on Form 10-K for the year ended December 31,
1987).
|
|
|
10(c)
|
The
Dow Chemical Company Voluntary Deferred Compensation Plan for Outside
Directors (for deferrals made through December 31, 2004), as amended
effective as of July 1, 1994, incorporated by reference to Exhibit 10(f)
to The Dow Chemical Company Annual Report on Form 10-K for the year ended
December 31, 1994, as amended in the manner described in the
definitive Proxy Statement for the Annual Meeting of Stockholders of The
Dow Chemical Company held on May 14, 1998, incorporated by
reference.
|
|
|
10(d)
|
Intentionally
left blank.
|
|
|
10(e)
|
The
Dow Chemical Company Dividend Unit Plan, incorporated by reference to
Exhibit 10(j) to The Dow Chemical Company Annual Report on Form 10-K for
the year ended December 31, 1992.
|
|
|
10(f)
|
A
copy of The Dow Chemical Company 1988 Award and Option Plan, as
amended and restated on December 10, 2008, effective as of
January 1, 2009.
|
|
|
10(g)
|
Intentionally
left blank.
|
|
|
10(h)
|
A
copy of The Dow Chemical Company 1994 Executive Performance Plan, as
amended and restated on December 10, 2008, effective as of
January 1, 2009.
|
|
|
10(i)
|
The
Dow Chemical Company 1994 Non-Employee Directors’ Stock Plan, incorporated
by reference to Exhibit 10(o) to The Dow Chemical Company Annual Report on
Form 10-K for the year ended December 31,
1994.
|
|
|
10(j)
|
Intentionally
left blank.
|
|
|
10(k)
|
A
written description of the 1998 Non-Employee Directors’ Stock Incentive
Plan, incorporated by reference to the definitive Proxy Statement for the
Annual Meeting of Stockholders of The Dow Chemical Company held on May 14,
1998.
|
|
|
10(l)
|
A
written description of compensation for Directors of The Dow Chemical
Company, incorporated by reference to the definitive Proxy Statement for
the Annual Meeting of Stockholders of The Dow Chemical Company to be held
on May 14, 2009.
|
|
|
10(m)
|
A
written description of the manner in which compensation is set for the
Executive Officers of The Dow Chemical Company, incorporated by reference
to the definitive Proxy Statement for the Annual Meeting of Stockholders
of The Dow Chemical Company to be held on May 14,
2009.
|
|
|
10(n)
|
A
resolution adopted by the Board of Directors of The Dow Chemical Company
on May 5, 1971, and most recently amended on July 9, 1998, describing the
employee compensation program for decelerating Directors, incorporated by
reference to Exhibit 10(p) to The Dow Chemical Company Annual Report on
Form 10-K for the year ended December 31, 1998; as amended, re-adopted in
full and restated on March 21, 2003, incorporated by reference to
Exhibit 10(n) to The Dow Chemical Company Quarterly Report on Form 10-Q
for the quarter ended March 31, 2003; as amended, re-adopted in full
and restated on February 10, 2005, incorporated by reference to
Exhibit 10(n) to The Dow Chemical Company Quarterly Report on Form 10-Q
for the quarter ended March 31,
2005.
|
|
|
10(o)
|
The
template used for The Dow Chemical Company Key Employee Insurance Program
(“KEIP”), which provides benefits using insurance policies that replace
benefits otherwise payable under The Dow Chemical Company Executives’
Supplemental Retirement Plan and Company-Paid Life Insurance Plan,
incorporated by reference to Exhibit 10(o) to The Dow Chemical Company
Annual Report on Form 10-K for the year ended December 31, 2002. KEIP
is a component of the annual pension benefits listed in and incorporated
by reference to the definitive Proxy Statement for the Annual Meeting of
Stockholders of The Dow Chemical Company to be held on May 14,
2009.
|
|
|
10(p)
|
The
Dow Chemical Company Elective Deferral Plan (for deferrals made through
December 31, 2004), amended and restated as of September 1,
2006, incorporated by reference to Exhibit 10(p) to The Dow Chemical
Company Quarterly Report on Form 10-Q for the quarter ended
September 30, 2006.
|
|
|
10(q)
|
Intentionally
left blank.
|
|
|
10(r)
|
Intentionally
left blank.
|
|
|
10(s)
|
A
copy of the Summary Plan Description for The Dow Chemical Company
Company-Paid Life Insurance Plan, Employee-Paid Life Insurance Plan, and
Dependent Life Insurance Plan, amended and restated on October 21,
2008, effective as of December 1,
2008.
|
|
|
10(t)
|
A
copy of the Summary Plan Description for The Dow Chemical Company Retiree
Company-Paid Life Insurance Plan, Retiree Optional Life Insurance Plan,
and Retiree Dependent Life Insurance Plan, amended and restated on
October 21, 2008, effective as of December 1,
2008.
|
|
|
10(u)
|
Amended
and Restated 2003 Non-Employee Directors’ Stock Incentive Plan, adopted by
the Board of Directors of The Dow Chemical Company on December 10,
2007,incorporated by reference to Exhibit 10(u) to The Dow Chemical
Company Annual Report on Form 10-K for the year ended December 31,
2007.
|
|
|
10(v)
|
Non-Qualified
Stock Option Agreement Pursuant to The Dow Chemical Company 1994
Non-Employee Directors’ Stock Plan, incorporated by reference to
Exhibit 10.1 to The Dow Chemical Company Current Report on
Form 8-K filed on September 3,
2004.
|
|
|
10(w)
|
Non-Qualified
Stock Option Agreement Pursuant to The Dow Chemical Company 2003
Non-Employee Directors’ Stock Incentive Plan, incorporated by reference to
Exhibit 10(w) to The Dow Chemical Company Quarterly Report on
Form 10-Q for the quarter ended September 30,
2004.
|
|
|
10(x)
|
A
copy of the Performance Shares Deferred Stock Agreement Pursuant to The
Dow Chemical Company 1988 Award and Option Plan, as amended, restated and
effective as of January 1,
2009.
|
|
|
10(y)
|
A
copy of the Deferred Stock Agreement Pursuant to The Dow Chemical Company
1988 Award and Option Plan, as amended, restated and effective as of
January 1, 2009.
|
|
|
10(z)
|
A
copy of the Non-Qualified Stock Option Agreement Pursuant to The Dow
Chemical Company 1988 Award and Option Plan, as amended, restated and
effective as of January 1,
2009.
|
|
|
10(aa)
|
Settlement
Agreement and General Release between Richard L. Manetta and The Dow
Chemical Company dated December 10, 2004, incorporated by reference
to Exhibit 10.1 to The Dow Chemical Company Current Report on
Form 8-K filed on December 16,
2004.
|
|
|
10(bb)
|
Deferred
Compensation Agreement between Richard L. Manetta and The Dow Chemical
Company dated December 10, 2004, incorporated by reference to Exhibit 10.2
to The Dow Chemical Company Current Report on Form 8-K filed on
December 16, 2004.
|
|
|
10(cc)
|
A
copy of The Dow Chemical Company Voluntary Deferred Compensation Plan for
Non-Employee Directors, effective for deferrals after January 1, 2005, as
amended and restated on December 10, 2008, effective as of
January 1, 2009.
|
|
|
10(dd)
|
A
copy of The Dow Chemical Company Elective Deferral Plan, effective for
deferrals after January 1, 2005, as amended, restated and effective
as of January 1, 2009.
|
|
|
10(ee)
|
The
template for communication to employee Directors who are decelerating
pursuant to The Dow Chemical Company Retirement Policy for Employee
Directors, incorporated by reference to Exhibit 10(ee) to The Dow Chemical
Company Quarterly Report on Form 10-Q for the quarter ended June 30,
2005.
|
|
|
10(ff)
|
Purchase
and Sale Agreement dated as of September 30, 2005 between Catalysts,
Adsorbents and Process Systems, Inc. and Honeywell Specialty Materials
LLC, incorporated by reference to Exhibit 10(ff) to The Dow Chemical
Company Quarterly Report on Form 10-Q for the quarter ended September 30,
2005.
|
|
|
10(gg)
|
Employment
agreement with Geoffery Merszei, Executive Vice President and Chief
Financial Officer, incorporated by reference to Exhibit 10(gg) to The Dow
Chemical Company Annual Report on Form 10-K for the year ended December
31, 2005.
|
|
|
10(hh)
|
Employment
agreement dated June 18, 2005, between William F. Banholzer and The
Dow Chemical Company, incorporated by reference to the Current Report on
Form 8-K filed on March 16,
2006.
|
|
|
10(ii)
|
A
copy of an employment agreement dated February 14, 2006, between Heinz
Haller and The Dow Chemical
Company.
|
|
|
10(jj)
|
Change
in Control Executive Severance Agreement - Tier 1, incorporated by
reference to Exhibit 10(jj) to The Dow Chemical Company Annual Report on
Form 10-K for the year ended December 31,
2007.
|
|
|
10(kk)
|
Change
in Control Executive Severance Agreement - Tier 2, incorporated by
reference to Exhibit 10(kk) to The Dow Chemical Company Annual Report on
Form 10-K for the year ended December 31,
2007.
|
|
|
10(ll)
|
Voting
Agreement dated as of July 10, 2008, by and among Rohm and Haas
Company, The Dow Chemical Company and each of the persons and entities
listed on Schedule I thereto, incorporated by reference to
Exhibit 10.1 to The Dow Chemical Company Current Report on Form 8-K
filed on July 10, 2008.
|
|
|
10(mm)
|
Term
Loan Agreement, dated as of September 8, 2008, among The Dow Chemical
Company, as borrower, the lenders party thereto and Citibank, N.A, as
administrative agent for the lenders, incorporated by reference to
Exhibit 99.1 to The Dow Chemical Company Current Report on
Form 8-K filed on September 9,
2008.
|
|
|
10(nn)
|
Investment
Agreement, dated as of October 27, 2008, between The Dow Chemical
Company and Berkshire Hathaway Inc., incorporated by reference to
Exhibit 10.1 to The Dow Chemical Company Current Report on
Form 8-K filed on October 27,
2008.
|
|
|
10(oo)
|
Investment
Agreement, dated as of October 27, 2008, between The Dow Chemical
Company and The Kuwait Investment Authority, incorporated by reference to
Exhibit 10.2 to The Dow Chemical Company Current Report on
Form 8-K filed on October 27,
2008.
|
|
|
12.1
|
Computation
of Ratio of Earnings to Fixed
Charges.
|
|
|
14
|
Code
of Ethics for Principal Executive Officer, Principal Financial Officer and
Principal Accounting Officer, incorporated by reference to Exhibit 14
to The Dow Chemical Company Annual Report on Form 10-K for the year
ended December 31, 2003.
|
21
Subsidiaries of The Dow Chemical Company.
|
|
23(a)
|
Consent
of Independent Registered Public Accounting
Firm.
|
23(b) Analysis,
Research & Planning Corporation’s Consent.
31(a)
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31(b) Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32(a) Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32(b) Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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,
INSITE, 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, STEVENS ROOFING SYSTEMS, 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 registered service mark of American Chemistry Council appears in
this report: Responsible
Care
|
The
following trademark of Ann Arbor Technical Services, Inc. appears in this
report: GeoMorph
138