UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2006
Commission File Number: 1-3433
THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
Delaware |
| 38-1285128 |
(State or other jurisdiction of |
| (I.R.S. Employer Identification No.) |
incorporation or organization) |
|
|
2030 DOW CENTER, MIDLAND, MICHIGAN 48674
(Address of principal executive offices) (Zip Code)
989-636-1000
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý |
| Accelerated filer o |
| Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No
Class |
| Outstanding at June 30, 2006 |
Common Stock, par value $2.50 per share |
| 959,339,691 shares |
The Dow Chemical Company
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended June 30, 2006
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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Unregistered Sales of Equity Securities and Use of Proceeds. |
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2
PART I - FINANCIAL INFORMATION
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| ||||
In millions, except per share amounts (Unaudited) |
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Net Sales |
| $ | 12,509 |
| $ | 11,450 |
| $ | 24,529 |
| $ | 23,129 |
|
Cost of sales |
| 10,624 |
| 9,300 |
| 20,427 |
| 18,637 |
| ||||
Research and development expenses |
| 287 |
| 271 |
| 565 |
| 526 |
| ||||
Selling, general and administrative expenses |
| 402 |
| 383 |
| 790 |
| 774 |
| ||||
Amortization of intangibles |
| 12 |
| 13 |
| 24 |
| 27 |
| ||||
Equity in earnings of nonconsolidated affiliates |
| 232 |
| 224 |
| 400 |
| 499 |
| ||||
Sundry income - net |
| 53 |
| 57 |
| 83 |
| 139 |
| ||||
Interest income |
| 38 |
| 27 |
| 80 |
| 56 |
| ||||
Interest expense and amortization of debt discount |
| 151 |
| 188 |
| 307 |
| 375 |
| ||||
Income before Income Taxes and Minority Interests |
| 1,356 |
| 1,603 |
| 2,979 |
| 3,484 |
| ||||
Provision for income taxes |
| 310 |
| 317 |
| 694 |
| 825 |
| ||||
Minority interests’ share in income |
| 23 |
| 21 |
| 48 |
| 41 |
| ||||
Net Income Available for Common Stockholders |
| $ | 1,023 |
| $ | 1,265 |
| $ | 2,237 |
| $ | 2,618 |
|
Share Data |
|
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| ||||
Earnings per common share - basic |
| $ | 1.06 |
| $ | 1.31 |
| $ | 2.32 |
| $ | 2.73 |
|
Earnings per common share - diluted |
| $ | 1.05 |
| $ | 1.30 |
| $ | 2.29 |
| $ | 2.69 |
|
Common stock dividends declared per share of common stock |
| $ | 0.375 |
| $ | 0.335 |
| $ | 0.75 |
| $ | 0.67 |
|
Weighted-average common shares outstanding - basic |
| 963.5 |
| 964.1 |
| 965.7 |
| 960.5 |
| ||||
Weighted-average common shares outstanding - diluted |
| 975.6 |
| 976.2 |
| 978.2 |
| 974.7 |
| ||||
Depreciation |
| $ | 471 |
| $ | 451 |
| $ | 926 |
| $ | 924 |
|
Capital Expenditures |
| $ | 407 |
| $ | 364 |
| $ | 698 |
| $ | 650 |
|
See Notes to the Consolidated Financial Statements.
3
The Dow Chemical Company and Subsidiaries
|
| June 30, |
| Dec. 31, |
| ||
In millions (Unaudited) |
| 2006 |
| 2005 |
| ||
Assets |
|
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| ||
Current Assets |
|
|
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|
| ||
Cash and cash equivalents |
| $ | 3,162 |
| $ | 3,806 |
|
Marketable securities and interest-bearing deposits |
| 36 |
| 32 |
| ||
Accounts and notes receivable: |
|
|
|
|
| ||
Trade (net of allowance for doubtful receivables - 2006: $147; 2005: $169) |
| 5,359 |
| 5,124 |
| ||
Other |
| 2,685 |
| 2,802 |
| ||
Inventories |
| 5,849 |
| 5,319 |
| ||
Deferred income tax assets - current |
| 307 |
| 321 |
| ||
Total current assets |
| 17,398 |
| 17,404 |
| ||
Investments |
|
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| ||
Investment in nonconsolidated affiliates |
| 2,329 |
| 2,285 |
| ||
Other investments |
| 2,227 |
| 2,156 |
| ||
Noncurrent receivables |
| 257 |
| 274 |
| ||
Total investments |
| 4,813 |
| 4,715 |
| ||
Property |
|
|
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|
| ||
Property |
| 43,227 |
| 41,934 |
| ||
Less accumulated depreciation |
| 29,571 |
| 28,397 |
| ||
Net property |
| 13,656 |
| 13,537 |
| ||
Other Assets |
|
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| ||
Goodwill |
| 3,140 |
| 3,140 |
| ||
Other intangible assets (net of accumulated amortization - 2006: $599; 2005: $552) |
| 440 |
| 443 |
| ||
Deferred income tax assets - noncurrent |
| 3,586 |
| 3,658 |
| ||
Asbestos-related insurance receivables - noncurrent |
| 763 |
| 818 |
| ||
Deferred charges and other assets |
| 2,347 |
| 2,219 |
| ||
Total other assets |
| 10,276 |
| 10,278 |
| ||
Total Assets |
| $ | 46,143 |
| $ | 45,934 |
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Liabilities and Stockholders’ Equity |
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Current Liabilities |
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Notes payable |
| $ | 191 |
| $ | 241 |
|
Long-term debt due within one year |
| 778 |
| 1,279 |
| ||
Accounts payable: |
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Trade |
| 3,730 |
| 3,931 |
| ||
Other |
| 1,536 |
| 1,829 |
| ||
Income taxes payable |
| 682 |
| 493 |
| ||
Deferred income tax liabilities - current |
| 161 |
| 201 |
| ||
Dividends payable |
| 383 |
| 347 |
| ||
Accrued and other current liabilities |
| 2,141 |
| 2,342 |
| ||
Total current liabilities |
| 9,602 |
| 10,663 |
| ||
Long-Term Debt |
| 9,248 |
| 9,186 |
| ||
Other Noncurrent Liabilities |
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Deferred income tax liabilities - noncurrent |
| 1,137 |
| 1,395 |
| ||
Pension and other postretirement benefits - noncurrent |
| 3,379 |
| 3,308 |
| ||
Asbestos-related liabilities - noncurrent |
| 1,346 |
| 1,384 |
| ||
Other noncurrent obligations |
| 3,273 |
| 3,338 |
| ||
Total other noncurrent liabilities |
| 9,135 |
| 9,425 |
| ||
Minority Interest in Subsidiaries |
| 346 |
| 336 |
| ||
Preferred Securities of Subsidiaries |
| 1,000 |
| 1,000 |
| ||
Stockholders’ Equity |
|
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Common stock |
| 2,453 |
| 2,453 |
| ||
Additional paid-in capital |
| 701 |
| 661 |
| ||
Unearned ESOP shares |
| — |
| (1 | ) | ||
Retained earnings |
| 16,226 |
| 14,719 |
| ||
Accumulated other comprehensive loss |
| (1,652 | ) | (1,949 | ) | ||
Treasury stock at cost |
| (916 | ) | (559 | ) | ||
Net stockholders’ equity |
| 16,812 |
| 15,324 |
| ||
Total Liabilities and Stockholders’ Equity |
| $ | 46,143 |
| $ | 45,934 |
|
See Notes to the Consolidated Financial Statements.
4
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows
|
| Six Months Ended |
| ||||
|
| June 30, |
| June 30, |
| ||
In millions (Unaudited) |
| 2006 |
| 2005 |
| ||
Operating Activities |
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Net Income Available for Common Stockholders |
| $ | 2,237 |
| $ | 2,618 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
| 1,006 |
| 1,010 |
| ||
Provision for deferred income tax |
| 92 |
| 292 |
| ||
Earnings/losses of nonconsolidated affiliates less than (in excess of) dividends received |
| 44 |
| (147 | ) | ||
Minority interests’ share in income |
| 48 |
| 41 |
| ||
Pension contributions |
| (232 | ) | (436 | ) | ||
Net (gain) loss on sales of investments |
| (3 | ) | 3 |
| ||
Net gain on sales of property and businesses |
| (47 | ) | (46 | ) | ||
Other net gain |
| (7 | ) | (8 | ) | ||
Net gain on sale of ownership interest in nonconsolidated affiliate |
| — |
| (101 | ) | ||
Tax benefit - nonqualified stock option exercises |
| — |
| 64 |
| ||
Excess tax benefits from share-based payment arrangements |
| (3 | ) | — |
| ||
Changes in assets and liabilities that provided (used) cash: |
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|
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Accounts and notes receivable |
| (67 | ) | 137 |
| ||
Inventories |
| (531 | ) | (369 | ) | ||
Accounts payable |
| (460 | ) | (711 | ) | ||
Other assets and liabilities |
| (142 | ) | 95 |
| ||
Cash provided by operating activities |
| 1,935 |
| 2,442 |
| ||
Investing Activities |
|
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Capital expenditures |
| (698 | ) | (650 | ) | ||
Proceeds from sales of property and businesses |
| 55 |
| 55 |
| ||
Purchase of previously leased assets |
| (100 | ) | — |
| ||
Investments in consolidated companies |
| — |
| (105 | ) | ||
Investments in nonconsolidated affiliates |
| (29 | ) | (208 | ) | ||
Proceeds from sales of nonconsolidated affiliates |
| — |
| 87 |
| ||
Distributions from nonconsolidated affiliates |
| 4 |
| 41 |
| ||
Purchases of investments |
| (448 | ) | (475 | ) | ||
Proceeds from sales of investments |
| 364 |
| 400 |
| ||
Cash used in investing activities |
| (852 | ) | (855 | ) | ||
Financing Activities |
|
|
|
|
| ||
Changes in short-term notes payable |
| (5 | ) | 20 |
| ||
Payments on long-term debt |
| (590 | ) | (913 | ) | ||
Proceeds from issuance of long-term debt |
| — |
| 4 |
| ||
Purchases of treasury stock |
| (506 | ) | (33 | ) | ||
Proceeds from sales of common stock |
| 78 |
| 295 |
| ||
Excess tax benefits from share-based payment arrangements |
| 3 |
| — |
| ||
Distributions to minority interests |
| (32 | ) | (36 | ) | ||
Dividends paid to stockholders |
| (684 | ) | (641 | ) | ||
Cash used in financing activities |
| (1,736 | ) | (1,304 | ) | ||
Effect of Exchange Rate Changes on Cash |
| 9 |
| (229 | ) | ||
Summary |
|
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Increase (Decrease) in cash and cash equivalents |
| (644 | ) | 54 |
| ||
Cash and cash equivalents at beginning of year |
| 3,806 |
| 3,108 |
| ||
Cash and cash equivalents at end of period |
| $ | 3,162 |
| $ | 3,162 |
|
See Notes to the Consolidated Financial Statements.
5
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| ||||
In millions (Unaudited) |
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Net Income Available for Common Stockholders |
| $ | 1,023 |
| $ | 1,265 |
| $ | 2,237 |
| $ | 2,618 |
|
Other Comprehensive Income (Loss), Net of Tax |
|
|
|
|
|
|
|
|
| ||||
Net unrealized gains (losses) on investments |
| (21 | ) | 12 |
| (25 | ) | (14 | ) | ||||
Translation adjustments |
| 257 |
| (418 | ) | 364 |
| (809 | ) | ||||
Minimum pension liability adjustments |
| — |
| 4 |
| (2 | ) | 11 |
| ||||
Net gains (losses) on cash flow hedging derivative instruments |
| (7 | ) | (10 | ) | (40 | ) | 32 |
| ||||
Total other comprehensive income (loss) |
| 229 |
| (412 | ) | 297 |
| (780 | ) | ||||
Comprehensive Income |
| $ | 1,252 |
| $ | 853 |
| $ | 2,534 |
| $ | 1,838 |
|
See Notes to the Consolidated Financial Statements.
6
The Dow Chemical Company and Subsidiaries
PART I – FINANCIAL INFORMATION, Item 1. Financial Statements.
(Unaudited) |
NOTE A – CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements of The Dow Chemical Company and its subsidiaries (“Dow” or the “Company”) were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect all adjustments (including normal recurring accruals) which, in the opinion of management, are considered necessary for the fair presentation of the results for the periods presented. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, and the Current Report on Form 8-K filed on July 11, 2006, reflecting a change in the composition of the Company’s reported segments.
NOTE B – ACCOUNTING CHANGES
Accounting for Stock-Based Compensation
On January 1, 2006, the Company adopted revised Statement of Financial Accounting Standards (“SFAS”) No. 123 (“SFAS No. 123R”), “Share-Based Payment.” Because the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” and SFAS No. 123R were materially consistent under the Company’s equity plans, the adoption of this standard had an immaterial impact on the Company’s consolidated financial statements.
In November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” The FSP, which became effective in November 2005, requires an entity to follow either the transition guidance for the additional-paid-in-capital pool as prescribed in SFAS No. 123R or the alternative transition method described in the FSP. An entity that adopts SFAS No. 123R using the modified prospective application may make a one-time election to adopt the transition method described in the FSP, and may take up to one year from the latter of its initial adoption of SFAS No. 123R or the effective date of the FSP to evaluate the available transition alternatives and make its one-time election. The Company has adopted the alternative transition method provided in the FSP for calculating the tax effects of stock-based compensation under SFAS No. 123R.
See Note G for disclosures related to stock-based compensation.
Accounting for Conditional Asset Retirement Obligations
In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations,” which clarifies the term conditional asset retirement obligation as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” as a legal obligation to perform an asset retirement activity in 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. FIN No. 47 was effective no later than the end of fiscal years ending after December 15, 2005.
Dow has 156 manufacturing sites in 37 countries. Most of these sites contain numerous individual manufacturing operations, particularly at the Company’s larger sites. Asset retirement obligations are recorded in the period in which they are incurred and reasonably estimable, including those 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.
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 156 manufacturing sites where estimates of potential settlement dates cannot be reasonably made. In addition, the Company
7
has not recognized conditional asset retirement obligations for the capping of its approximately 50 underground storage wells at Dow-owned sites when there are no plans or expectations of plans to exit the sites. Dow routinely reviews all changes to the list of items under consideration for demolition to determine if an adjustment to the value of the asset retirement obligation is required.
Adoption of FIN No. 47 on December 31, 2005 resulted in the recognition of an asset retirement obligation of $34 million and a charge of $20 million (net of tax of $12 million), which was included in “Cumulative effect of changes in accounting principles” in the fourth quarter of 2005. The discount rate used to calculate the Company’s asset retirement obligations was 4.6 percent.
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, 2005, the aggregate carrying amount of conditional asset retirement obligations recognized by the Company was $34 million. These obligations are included in the consolidated balance sheets as “Other noncurrent obligations.”
If the conditional asset retirement obligation measurement and recognition provisions of FIN No. 47 had been in effect on January 1, 2005, the aggregate carrying amount of those obligations on that date would have been $32 million. If the amortization of asset retirement cost and accretion of asset retirement obligation provisions of FIN No. 47 had been in effect during 2005, the impact on “Income before Cumulative Effect on Changes in Accounting Principles” and “Net Income Available for Common Stockholders” would have been immaterial. Further, the impact on earnings per common share (both basic and diluted) would have been less than $0.01.
See Note E for the Company’s disclosures related to asset retirement obligations.
Other Accounting Changes
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs – an amendment of ARB No. 43, Chapter 4,” which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and also requires that the allocation of fixed production overhead be based on the normal capacity of the production facilities. SFAS No. 151 was effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Because the Company previously used nameplate capacity to calculate product costs, the adoption of SFAS No. 151 on January 1, 2006 had an immaterial favorable impact on the Company’s consolidated financial statements in the first quarter of 2006.
In September 2005, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) with respect to EITF Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty.” EITF Issue No. 04-13 is effective for new arrangements entered into, and modifications or renewals of existing arrangements, in the first interim or annual period beginning after March 15, 2006. The Company has determined that its current accounting treatment for purchases and sales of inventory with the same counterparty is consistent with the guidance in EITF Issue No. 04-13; therefore, the issue had no impact on the Company’s consolidated financial statements.
In November 2005, the FASB issued FSP Nos. FAS 115-1 and 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” which addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment. The FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in the FSP amends SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations,” and Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” The Company has reviewed the guidance of FSP Nos. FAS 115-1 and 124-1 and has determined that its practices are consistent with the FSP; therefore, the adoption of the FSP on January 1, 2006 had no impact on the Company’s consolidated financial statements.
In April 2006, the FASB issued FSP No. FIN 46(R)-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R).” The guidance in this FSP is applicable prospectively to all entities (including newly created entities) and when a reconsideration event has occurred pursuant to paragraph 7 of FIN No. 46(R), beginning the first day of the first reporting period beginning after June 15, 2006. The Company will apply the guidance of this FSP, when it applies FIN No. 46(R), beginning July 1, 2006.
In June 2006, the FASB issued 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.” This 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. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of adopting this interpretation.
8
NOTE C – INVENTORIES
The following table provides a breakdown of inventories:
Inventories In millions |
| June 30, |
| Dec. 31, |
| ||
Finished goods |
| $ | 3,219 |
| $ | 2,941 |
|
Work in process |
| 1,437 |
| 1,247 |
| ||
Raw materials |
| 620 |
| 645 |
| ||
Supplies |
| 573 |
| 486 |
| ||
Total inventories |
| $ | 5,849 |
| $ | 5,319 |
|
The reserves reducing inventories from the first-in, first-out (“FIFO”) basis to the last-in, first-out (“LIFO”) basis amounted to $1,243 million at June 30, 2006 and $1,149 million at December 31, 2005.
NOTE D – GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows the carrying amount of goodwill by operating segment:
Goodwill In millions |
| Performance |
| Performance |
| Agricultural |
| Basic |
| Hydrocarbons |
| Total |
| ||||||
Balance at December 31, 2005 and June 30, 2006 |
| $ | 913 |
| $ | 750 |
| $ | 1,320 |
| $ | 94 |
| $ | 63 |
| $ | 3,140 |
|
The following table provides information regarding the Company’s other intangible assets:
Other Intangible Assets |
| At June 30, 2006 |
| At December 31, 2005 |
| ||||||||||||||
In millions |
| Gross |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net |
| ||||||
Intangible assets with finite lives: |
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|
|
| ||||||
Licenses and intellectual property |
| $ | 265 |
| $ | (148 | ) | $ | 117 |
| $ | 264 |
| $ | (138 | ) | $ | 126 |
|
Patents |
| 152 |
| (114 | ) | 38 |
| 147 |
| (103 | ) | 44 |
| ||||||
Software |
| 398 |
| (244 | ) | 154 |
| 362 |
| (224 | ) | 138 |
| ||||||
Trademarks |
| 136 |
| (40 | ) | 96 |
| 136 |
| (37 | ) | 99 |
| ||||||
Other |
| 88 |
| (53 | ) | 35 |
| 86 |
| (50 | ) | 36 |
| ||||||
Total |
| $ | 1,039 |
| $ | (599 | ) | $ | 440 |
| $ | 995 |
| $ | (552 | ) | $ | 443 |
|
During the first six months of 2006, the Company acquired software for $27 million. The weighted-average amortization period for the acquired software is five years.
Amortization expense for other intangible assets (not including software) was $12 million in the second quarter of 2006, compared with $13 million in the same period last year. Year to date, amortization expense for other intangible assets (not including software) was $24 million, compared with $27 million for the first six months of 2005. Amortization expense for software, which is included in “Cost of sales,” totaled $11 million in the second quarter of 2006 and 2005. Year to date, amortization expense for software was $21 million, compared with $22 million for the first six months of 2005. Total estimated amortization expense for 2006 and the five succeeding fiscal years is as follows:
Estimated Amortization Expense |
|
|
| |
2006 |
| $ | 90 |
|
2007 |
| 79 |
| |
2008 |
| 75 |
| |
2009 |
| 67 |
| |
2010 |
| 29 |
| |
2011 |
| 14 |
| |
9
NOTE E – COMMITMENTS AND CONTINGENT LIABILITIES
Litigation
Breast Implant Matters
On May 15, 1995, Dow Corning Corporation (“Dow Corning”), in which the Company is a 50 percent shareholder, voluntarily filed for protection under Chapter 11 of the Bankruptcy Code to resolve litigation related to Dow Corning’s breast implant and other silicone medical products. On June 1, 2004, Dow Corning’s Joint Plan of Reorganization (the “Joint Plan”) became effective and Dow Corning emerged from bankruptcy. The Joint Plan contains release and injunction provisions resolving all tort claims brought against various entities, including the Company, involving Dow Corning’s breast implant and other silicone medical products.
To the extent not previously resolved in state court actions, cases involving Dow Corning’s breast implant and other silicone medical products filed against the Company were transferred to the U.S. District Court for the Eastern District of Michigan (the “District Court”) for resolution in the context of the Joint Plan. On October 6, 2005, all such cases then pending in the District Court against the Company were dismissed. Should cases involving Dow Corning’s breast implant and other silicone medical products be filed against the Company in the future, they will be accorded similar treatment. It is the opinion of the Company’s management that the possibility is remote that a resolution of all future cases will have a material adverse impact on the Company’s consolidated financial statements.
As part of the Joint Plan, Dow and Corning Incorporated have agreed to provide a credit facility to Dow Corning in an aggregate amount of $300 million. The Company’s share of the credit facility is $150 million and is subject to the terms and conditions stated in the Joint Plan. At June 30, 2006, 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. The Company had accrued obligations of $339 million at December 31, 2005, for environmental remediation and restoration costs, including $41 million for the remediation of Superfund sites. At June 30, 2006, the Company had accrued obligations of $329 million for environmental remediation and restoration costs, including $34 million for the remediation of Superfund sites. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Company has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to twice that amount. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies for handling site remediation and restoration.
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 review and approval by the MDEQ. Revised Scopes of Work were approved by the MDEQ on October 18, 2005. 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 take certain immediate interim remedial actions in the City of Midland and along the Tittabawassee River, conduct certain studies, and propose a remedial investigation work plan by the end of 2005. The interim remedial actions required by the Framework are currently underway. 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 is required to respond to the balance of the items and revise the Remedial Investigation Work Plans by December 1, 2006. On July 12, 2006, the MDEQ approved the sampling for the first six miles of the Tittabawassee River. The Framework also contemplates that the Company, the State of Michigan and other federal and tribal governmental entities will negotiate the terms of an agreement or agreements to resolve potential governmental claims against the Company related to historical off-site contamination associated with the Midland
10
site. The Company and the governmental parties began to meet in the fall of 2005 and entered into a Confidentiality Agreement in December 2005. At the end of 2005, the Company had an accrual for off-site corrective action of $3 million (included in the total accrued obligation of $339 million at December 31, 2005) 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 June 30, 2006, the accrual for off-site corrective action was $9 million (included in the total accrued obligation of $329 million at June 30, 2006).
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. At each balance sheet date, Union Carbide compares current asbestos claim and resolution activity to the assumptions in the most recent ARPC study to determine whether the accrual continues to be appropriate.
In November 2004, Union Carbide requested ARPC to review Union Carbide’s historical asbestos claim and resolution activity and determine the appropriateness of updating its January 2003 study. In response to that request, ARPC reviewed and analyzed data through November 14, 2004, and again concluded that it was not possible to estimate the full range of the cost of resolving future asbestos-related claims against Union Carbide and Amchem because of various uncertainties associated with the litigation of those claims. ARPC did advise Union Carbide, however, that it was reasonable and feasible to construct a new estimate of the cost to Union Carbide of resolving current and future asbestos-related claims using the same two widely used forecasting methodologies used by ARPC in its January 2003 study, if certain assumptions were made. As a result, the following assumptions were made and then used by ARPC:
• The number of future claims to be filed annually against Union Carbide and Amchem is unlikely to exceed the level of claims experienced during 2004.
• The number of claims filed against Union Carbide and Amchem annually from 2001 to 2003 is considered anomalous for the purpose of estimating future filings.
• The number of future claims to be filed against Union Carbide and Amchem will decline at a fairly constant rate each year from 2005.
• The average resolution value for pending and future claims will be equivalent to those experienced during 2003 and 2004 (excluding settlements from closed claims filed in Madison County, Illinois with respect to future claims, as changes in the judicial environment in Madison County caused the historical experience of claims in that jurisdiction to not be predictive of results for future claims).
The resulting study completed by ARPC in January 2005 stated that the undiscounted cost to Union Carbide of resolving pending and future asbestos-related claims against Union Carbide and Amchem, excluding future defense and processing costs, through 2017 was estimated to be between approximately $1.5 billion and $2.0 billion, depending on which of two accepted methodologies was used. At December 31, 2004, Union Carbide’s recorded asbestos-related liability for pending and future claims was $1.6 billion. Based on the low end of the range in the January 2005 study, Union Carbide’s recorded asbestos-related liability for pending and future claims at December 31, 2004 would be sufficient to resolve asbestos-related claims against Union Carbide and Amchem into 2019. As in its January 2003 study, ARPC provided estimates for a longer period of time in its January 2005 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 studies, Union Carbide’s asbestos litigation experience, and the uncertainties surrounding asbestos litigation and legislative reform efforts, Union Carbide’s management determined that no change to the accrual was required at December 31, 2004.
11
In November 2005, Union Carbide requested ARPC to review Union Carbide’s 2005 asbestos claim and resolution activity and determine the appropriateness of updating the January 2005 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2005. In January 2006, ARPC stated that an update of the 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, 2005. Union Carbide’s asbestos-related liability for pending and future claims was $1.5 billion at December 31, 2005. Approximately 39 percent of the recorded liability related to pending claims and approximately 61 percent related to future claims.
Based on Union Carbide’s review of 2006 activity, Union Carbide determined that no change to the accrual was required at June 30, 2006. Union Carbide’s asbestos-related liability for pending and future claims was $1.4 billion at June 30, 2006. Approximately 36 percent of the recorded liability related to pending claims and approximately 64 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.
Union Carbide’s receivable for insurance recoveries related to its asbestos liability was $485 million at June 30, 2006 and $535 million at December 31, 2005. At June 30, 2006, $391 million ($398 million at December 31, 2005) 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, Union Carbide had receivables for defense and resolution costs submitted to insurance carriers for reimbursement as follows:
Receivables for Costs Submitted to Insurance Carriers
In millions |
| June 30, |
| Dec. 31, |
| ||
Receivables for defense costs |
| $ | 21 |
| $ | 73 |
|
Receivables for resolution costs |
| 333 |
| 327 |
| ||
Total |
| $ | 354 |
| $ | 400 |
|
Union Carbide expenses defense costs as incurred. The pretax impact for defense and resolution costs, net of insurance, was $14 million in the second quarter of 2006 ($14 million in the second quarter of 2005) and $28 million in the first six months of 2006 ($32 million in the first six months of 2005), and was reflected in “Cost of sales.”
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. Although Union Carbide already has settlements in place concerning coverage for asbestos claims with many of its insurers, including those covered by the 1985 Wellington Agreement, 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. The insurance carriers are contesting this litigation. Through the second quarter of 2006, Union Carbide reached settlements with several of the carriers involved in this litigation. After a further 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
12
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, or are in the process of responding, to requests for documents and are otherwise cooperating in the investigations. Separately, related civil actions have been filed in various U.S. federal and state courts. Certain of these actions have named the Company.
On June 10, 2005, the Company received a Statement of Objections from the European Commission stating that it believed that the Company and certain subsidiaries of the Company, together with other participants in the synthetic rubber industry, engaged in conduct in violation of European competition laws. It is expected that the European Commission will seek to impose a fine on the Company, the amount of which will be calculated taking into account the gravity of the violation, the role played by the participants, the duration of their participation and their importance in the synthetic rubber industry.
Polyurethane Subpoena Matter
On February 16, 2006, the Company, among others, received a subpoena from the U.S. Department of Justice as part of an investigation of polyurethane chemicals, including methylene diphenyl diisocyanate (“MDI”), toluene diisocyanate (“TDI”) and polyols. The Company is fully cooperating with the investigation.
Other Litigation Matters
In addition to breast implant, DBCP, environmental, synthetic rubber industry, and polyurethane subpoena matters, the Company is party to a number of other claims and lawsuits arising out of the normal course of business with respect to commercial matters, including product liability, governmental regulation and other actions. Certain of these actions purport to be class actions and seek damages in very large amounts. All such claims are being contested. Dow has an active risk management program consisting of numerous insurance policies secured from many carriers at various times. These policies provide coverage that will be utilized to minimize the impact, if any, of the contingencies described above.
Summary
Except for the possible effect of Union Carbide’s asbestos-related liability described above, it is the opinion of the Company’s management that the possibility is remote that the aggregate of all claims and lawsuits will have a material adverse impact on the Company’s consolidated financial statements.
Purchase Commitments
At December 31, 2005, the Company had 15 major agreements (16 in 2004 and seven in 2003) for the purchase of ethylene-related products globally. The purchase prices are determined on a cost-of-service basis, which, in addition to covering all operating expenses and debt service costs, provides the owner of the manufacturing plants with a specified return on capital. Total purchases under these agreements were $1,175 million in 2005, $1,063 million in 2004 and $676 million in 2003. The Company’s commitments associated with all of these agreements are included in the table below.
At December 31, 2005, the Company had various outstanding commitments for take or pay and throughput agreements, including the purchase agreements referred to above. Such commitments were 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 75 years; another has indefinite terms. The determinable future commitments for these latter two 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, 2005:
13
Fixed and Determinable Portion of Take or Pay and
Throughput Obligations at December 31, 2005
In millions |
|
|
| |
2006 |
| $ | 2,390 |
|
2007 |
| 2,204 |
| |
2008 |
| 2,031 |
| |
2009 |
| 1,791 |
| |
2010 |
| 1,566 |
| |
2011 and beyond |
| 6,512 |
| |
Total |
| $ | 16,494 |
|
In addition to the take or pay obligations at December 31, 2005, the Company had outstanding commitments which ranged from one to six years for steam, electrical power, materials, property and other items used in the normal course of business of approximately $156 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 nine years, and trade financing transactions in Latin America, which typically expire within one year of their inception.
Residual Value Guarantees
The Company provides guarantees related to leased assets specifying the residual value that will be available to the lessor at lease termination through sale of the assets to the lessee or third parties.
The following table provides 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 June 30, 2006 |
| Final |
| Maximum Future |
| Recorded |
| ||
Guarantees |
| 2014 |
| $ | 288 |
| $ | 8 |
|
Residual value guarantees |
| 2015 |
| 1,129 |
| 6 |
| ||
Total guarantees |
|
|
| $ | 1,417 |
| $ | 14 |
|
Guarantees at December 31, 2005 |
| Final |
| Maximum Future |
| Recorded |
| ||
Guarantees |
| 2014 |
| $ | 401 |
| $ | 19 |
|
Residual value guarantees |
| 2015 |
| 1,158 |
| 5 |
| ||
Total guarantees |
|
|
| $ | 1,559 |
| $ | 24 |
|
Asset Retirement Obligations
In accordance with SFAS No. 143, as interpreted by FIN No. 47, the Company has recognized asset retirement obligations for the following activities: demolition and remediation activities at manufacturing sites in the United States 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. See Note B for additional information.
The aggregate carrying amount of asset retirement obligations recognized by the Company was $85 million at June 30, 2006 and $92 million at December 31, 2005.
14
The following table shows changes in the aggregate carrying amount of the Company’s asset retirement obligations for the six months ended June 30, 2006:
Asset Retirement Obligations |
| 2006 |
| |
Balance at January 1 |
| $ | 92 |
|
Additional accruals |
| 1 |
| |
Liabilities settled |
| (11 | ) | |
Accretion expense |
| 1 |
| |
Revisions in estimated cash flows |
| — |
| |
Other |
| 2 |
| |
Balance at June 30 |
| $ | 85 |
|
As described in Note B, the Company has not recognized conditional asset retirement obligations for which a fair value cannot be reasonably estimated in its consolidated financial statements. It is the opinion of the Company’s management that the possibility is remote that such conditional asset retirement obligations, when estimable, will have a material adverse impact on the Company’s consolidated financial statements based on current costs.
NOTE F – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Net Periodic Benefit Cost for All Significant Plans |
| Three Months Ended |
| Six Months Ended |
| ||||||||
In millions |
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| ||||
Defined Benefit Pension Plans: |
|
|
|
|
|
|
|
|
| ||||
Service cost |
| $ | 71 |
| $ | 72 |
| $ | 141 |
| $ | 144 |
|
Interest cost |
| 207 |
| 204 |
| 411 |
| 409 |
| ||||
Expected return on plan assets |
| (275 | ) | (265 | ) | (548 | ) | (531 | ) | ||||
Amortization of prior service cost |
| 5 |
| 6 |
| 10 |
| 12 |
| ||||
Amortization of net loss |
| 56 |
| 28 |
| 110 |
| 57 |
| ||||
Net periodic benefit cost |
| $ | 64 |
| $ | 45 |
| $ | 124 |
| $ | 91 |
|
|
|
|
|
|
|
|
|
|
| ||||
Other Postretirement Benefits: |
|
|
|
|
|
|
|
|
| ||||
Service cost |
| $ | 6 |
| $ | 6 |
| $ | 12 |
| $ | 12 |
|
Interest cost |
| 29 |
| 31 |
| 58 |
| 62 |
| ||||
Expected return on plan assets |
| (7 | ) | (7 | ) | (14 | ) | (14 | ) | ||||
Amortization of prior service credit |
| (2 | ) | (2 | ) | (4 | ) | (4 | ) | ||||
Amortization of net loss |
| 2 |
| 3 |
| 4 |
| 6 |
| ||||
Net periodic benefit cost |
| $ | 28 |
| $ | 31 |
| $ | 56 |
| $ | 62 |
|
Employer Contributions
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. funded 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.
The Company’s funding policy is to contribute to those plans when pension laws and economics either require or encourage funding. Dow expects to contribute $500 million to its pension plans in 2006. Contributions of $232 million were made in the first six months of 2006.
15
Other Postretirement Benefits
The Company provides certain health care and life insurance benefits to retired employees. The Company has one non-U.S. plan, which is insignificant; 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. There is a cap on the Company portion. The Company has the ability to change these benefits at any time.
The Company funds most of the cost of these health care and life insurance benefits as incurred. Dow does not expect to contribute assets to its other postretirement benefits plan trusts in 2006. Consistent with that expectation, no contributions were made in the first six months of 2006. Benefit payments to retirees under these plans are expected to be $201 million in 2006. Payments of $86 million were made in the first six months of 2006.
NOTE G – STOCK-BASED COMPENSATION
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 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 (the “SEC”) 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 recognizes any unrecognized compensation cost at the date of retirement (the “nominal vesting period approach”). The Company will continue applying the nominal vesting period approach for the remaining portion of unvested outstanding awards as of December 31, 2005. 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 has determined that application of the nominal vesting period approach to the unvested outstanding awards at the end of 2005 and application of the non-substantive vesting period approach to stock-based compensation awarded beginning in 2006 did not have a material impact on the Company’s consolidated financial statements.
Prior to the adoption of SFAS No. 123R, the Company expensed stock options granted after January 1, 2003, when the fair value provisions of SFAS No. 123 were adopted for new grants of equity instruments (which include stock options, deferred stock grants, and subscriptions to purchase shares under the Company’s Employees’ Stock Purchase Plan [“ESPP”]) to employees. Prior to the adoption of SFAS No. 123, the Company accounted for its stock-based awards in accordance with APB Opinion No. 25. The following table provides pro forma results as if the fair-value-based measurement method had been applied to all outstanding and unvested awards, including stock options, deferred stock grants, and subscriptions to purchase shares under the Company’s ESPP, in each period presented:
16
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
In millions, except per share amounts |
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| ||||
Net income, as reported |
| $ | 1,023 |
| $ | 1,265 |
| $ | 2,237 |
| $ | 2,618 |
|
Add: Stock-based compensation expense included in reported net income, net of tax |
| 52 |
| 49 |
| 77 |
| 174 |
| ||||
Deduct: Total stock-based compensation expense determined using the fair-value-based measurement method for all awards, net of tax |
| (52 | ) | (33 | ) | (77 | ) | (143 | ) | ||||
Pro forma net income |
| $ | 1,023 |
| $ | 1,281 |
| $ | 2,237 |
| $ | 2,649 |
|
Earnings per share (in dollars): |
|
|
|
|
|
|
|
|
| ||||
Basic – as reported |
| $ | 1.06 |
| $ | 1.31 |
| $ | 2.32 |
| $ | 2.73 |
|
Basic – pro forma |
| 1.06 |
| 1.33 |
| 2.32 |
| 2.76 |
| ||||
Diluted – as reported |
| 1.05 |
| 1.30 |
| 2.29 |
| 2.69 |
| ||||
Diluted – pro forma |
| 1.05 |
| 1.31 |
| 2.29 |
| 2.72 |
|
Prior to 2006, the Company estimated the fair value of stock options and subscriptions to purchase shares under the ESPP using a binomial option-pricing model. Beginning in 2006, the Company is using a lattice-based option valuation model to estimate the fair value of stock options and subscriptions to purchase shares under the ESPP. The weighted-average assumptions used to calculate total stock-based compensation are included in the following table:
|
| Three Months Ended |
| Six Months Ended |
| ||||
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
|
Dividend yield |
| 3.69 | % | 2.73 | % | 3.33 | % | 2.57 | % |
Expected volatility |
| 27.30 | % | 23.01 | % | 25.66 | % | 22.17 | % |
Risk-free interest rate |
| 4.97 | % | 3.18 | % | 4.54 | % | 3.64 | % |
Expected life of stock options granted during period |
| 6 years |
| 5 years |
| 6 years |
| 5 years |
|
Life of Employees’ Stock Purchase Plan |
| N/A | * | 5 months |
| 6.6 months |
| 5 months |
|
*The annual plan for 2006 was granted in the first quarter of 2006 with a participation period of 10 months.
The dividend yield assumption for all periods 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 the current year 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 expected volatility assumption determined in the prior year was based entirely on the historical daily volatility of the Company’s stock. The risk-free interest rate in the current year was based on the weighted-average of U.S. Treasury strip rates over the contractual term of the options. The risk-free interest rate in the prior year was based on zero-coupon U.S. Treasury securities with maturities equal to the expected life of the option. Based on an analysis of historical exercise patterns, exercise rates were developed that resulted in an average life of 6 years for the current year. The expected life of the option in the prior year was based on historical data resulting in a 5-year life.
Employees’ Stock Purchase Plans
On February 13, 2003, the Board of Directors authorized a 10-year ESPP, which was approved by shareholders at the Company’s annual meeting on May 8, 2003. Prior to that authorization, annual ESPPs were authorized only by the Board of Directors. Under each annual offering, most employees are 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 52 percent of the eligible employees enrolled in the annual plan for 2006; approximately 40 percent of the eligible employees enrolled in 2005.
17
Employees’ Stock Purchase Plans |
| Shares |
| Exercise |
| |
Outstanding at January 1, 2006 |
| — |
| — |
| |
Granted |
| 4,398 |
| $ | 35.21 |
|
Exercised |
| (585 | ) | 35.21 |
| |
Forfeited/Expired |
| (50 | ) | 35.21 |
| |
Outstanding and exercisable at June 30, 2006 |
| 3,763 |
| $ | 35.21 |
|
Fair value of purchase rights granted during the period |
|
|
| $ | 7.83 |
|
*Weighted-average per share
Additional Information about ESPPs |
| Three Months Ended |
| Six Months Ended |
| ||||||||
In millions, except per share amounts |
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| ||||
Weighted-average fair value per share of purchase rights granted |
| — |
| $ | 6.77 |
| $ | 7.83 |
| $ | 6.77 |
| |
Total compensation expense for ESPPs |
| $ | 14 |
| $ | 3 |
| $ | 20 |
| $ | 12 |
|
Related tax benefit |
| $ | 5 |
| $ | 1 |
| $ | 7 |
| $ | 4 |
|
Total amount of cash received from the exercise of ESPPs |
| $ | 20 |
| $ | 41 |
| $ | 21 |
| $ | 85 |
|
Total intrinsic value of ESPPs exercised* |
| $ | 3 |
| $ | 16 |
| $ | 3 |
| $ | 38 |
|
Related tax benefit |
| $ | 1 |
| $ | 6 |
| $ | 1 |
| $ | 14 |
|
*Difference between the market price at exercise and the price paid by the employee to exercise the ESPPs
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 June 30, 2006, there were 23,402,193 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 June 30, 2006, there were 59,850 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 June 30, 2006, there were 168,150 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 the first half of 2006:
Stock Options |
| Shares |
| Exercise |
| Remaining |
| Aggregate |
| ||
Outstanding at January 1, 2006 |
| 45,489 |
| $ | 35.42 |
|
|
|
|
| |
Granted |
| 7,697 |
| 43.65 |
|
|
|
|
| ||
Exercised |
| (1,970 | ) | 29.46 |
|
|
|
|
| ||
Forfeited/Expired |
| (269 | ) | 43.43 |
|
|
|
|
| ||
Outstanding at June 30, 2006 |
| 50,947 |
| $ | 36.86 |
| 5.94 years |
| $ | 252 |
|
Exercisable at June 30, 2006 |
| 37,610 |
| $ | 33.47 |
| 4.81 years |
| $ | 252 |
|
*Weighted-average per share
18
Additional Information about Stock Options
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
In millions, except per share amounts |
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| ||||
Weighted-average fair value per share of options granted |
| $ | 9.54 |
| $ | 8.85 |
| $ | 10.31 |
| $ | 10.59 |
|
Total compensation expense for stock option plans |
| $ | 26 |
| $ | 18 |
| $ | 39 |
| $ | 32 |
|
Related tax benefit |
| $ | 9 |
| $ | 7 |
| $ | 14 |
| $ | 12 |
|
Total amount of cash received from the exercise of options |
| $ | 23 |
| $ | 11 |
| $ | 58 |
| $ | 258 |
|
Total intrinsic value of options exercised* |
| $ | 7 |
| $ | 6 |
| $ | 25 |
| $ | 180 |
|
Related tax benefit |
| $ | 2 |
| $ | 2 |
| $ | 9 |
| $ | 67 |
|
*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 $99 million at June 30, 2006 and is expected to be recognized over a weighted-average period of 1.2 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
Shares in thousands |
| Shares |
| Grant Date |
| |
Nonvested at January 1, 2006 |
| 5,349 |
| $ | 42.13 |
|
Granted |
| 1,376 |
| 43.46 |
| |
Vested |
| (793 | ) | 29.80 |
| |
Canceled |
| (115 | ) | 43.90 |
| |
Nonvested at June 30, 2006 |
| 5,817 |
| $ | 44.08 |
|
*Weighted-average per share
Additional Information about Deferred Stock
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
In millions |
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| ||||
Grant date fair value of deferred stock vested |
| $ | 1 |
| $ | 64 |
| $ | 24 |
| $ | 71 |
|
Total fair value of deferred stock vested |
| $ | 1 |
| $ | 101 |
| $ | 34 |
| $ | 111 |
|
Related tax benefit |
| $ | 1 |
| $ | 37 |
| $ | 13 |
| $ | 41 |
|
Total compensation expense for deferred stock awards |
| $ | 20 |
| $ | 16 |
| $ | 32 |
| $ | 30 |
|
Related tax benefit |
| $ | 8 |
| $ | 6 |
| $ | 12 |
| $ | 11 |
|
Total unrecognized compensation cost related to deferred stock awards was $142 million at June 30, 2006 and is expected to be recognized over a weighted-average period of 2.1 years. At June 30, 2006, approximately 200,000 deferred shares with a weighted-average fair value per share of $42.78 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 pre-determined 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 |
| Weighted-average |
| |
2006 |
| January 1, 2006 – December 31, 2008 |
| 0.9 |
| $ | 43.67 |
|
2005 |
| January 1, 2005 – December 31, 2007 |
| 1.0 |
| $ | 53.04 |
|
* At the end of the performance period, the actual number of shares issued can range from zero to 200 percent of the target shares granted.
19
The following table shows changes in the nonvested performance deferred stock for the first half of 2006:
Performance Deferred Stock
Shares in thousands |
| Shares |
| Grant Date |
| |
Nonvested at January 1, 2006 |
| 6,002 |
| $ | 35.83 |
|
Granted |
| 941 |
| 43.67 |
| |
Vested |
| — |
| — |
| |
Canceled |
| (77 | ) | 41.01 |
| |
Nonvested at June 30, 2006 |
| 6,866 |
| $ | 36.84 |
|
*Weighted-average per share
Total compensation expense for performance deferred stock awards was $23 million in the second quarter of 2006 ($41 million in the second quarter of 2005) and the related tax benefit was $9 million ($15 million in the second quarter of 2005). Total compensation expense for performance deferred stock awards was $31 million in the first six months of 2006 ($203 million in the first six months of 2005) and the related tax benefit was $11 million ($75 million in 2005). Total unrecognized compensation cost related to performance deferred stock awards was $93 million at June 30, 2006 and is expected to be recognized over a weighted-average period of 1.1 years. At June 30, 2006, approximately 1.3 million performance deferred shares with a weighted-average fair value of $37.26 per share had previously vested, but were not issued. These shares are scheduled to be issued in April 2007.
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 the first quarter of 2006, 53,900 stock options with a weighted-average fair value of $11.19 per share and 12,100 shares of restricted stock with a weighted-average fair value of $43.37 per share were issued under this plan. No shares were granted under this plan in the second quarter of 2006. 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.
20
NOTE H – EARNINGS PER SHARE CALCULATIONS
Earnings Per Share Calculations |
| Three Months Ended |
| Three Months Ended |
| ||||||||
In millions, except per share amounts |
| Basic |
| Diluted |
| Basic |
| Diluted |
| ||||
Net income available for common stockholders |
| $ | 1,023 |
| $ | 1,023 |
| $ | 1,265 |
| $ | 1,265 |
|
Weighted-average common shares outstanding |
| 963.5 |
| 963.5 |
| 964.1 |
| 964.1 |
| ||||
Add dilutive effect of stock options and awards |
| — |
| 12.1 |
| — |
| 12.1 |
| ||||
Weighted-average common shares for EPS calculations |
| 963.5 |
| 975.6 |
| 964.1 |
| 976.2 |
| ||||
Earnings per common share |
| $ | 1.06 |
| $ | 1.05 |
| $ | 1.31 |
| $ | 1.30 |
|
Stock options and deferred stock awards excluded from EPS calculations (1) |
|
|
| 18.7 |
|
|
| 5.8 |
|
Earnings Per Share Calculations |
| Six Months Ended |
| Six Months Ended |
| ||||||||
In millions, except per share amounts |
| Basic |
| Diluted |
| Basic |
| Diluted |
| ||||
Net income available for common stockholders |
| $ | 2,237 |
| $ | 2,237 |
| $ | 2,618 |
| $ | 2,618 |
|
Weighted-average common shares outstanding |
| 965.7 |
| 965.7 |
| 960.5 |
| 960.5 |
| ||||
Add dilutive effect of stock options and awards |
| — |
| 12.5 |
| — |
| 14.2 |
| ||||
Weighted-average common shares for EPS calculations |
| 965.7 |
| 978.2 |
| 960.5 |
| 974.7 |
| ||||
Earnings per common share |
| $ | 2.32 |
| $ | 2.29 |
| $ | 2.73 |
| $ | 2.69 |
|
Stock options and deferred stock awards excluded from EPS calculations (1) |
|
|
| 16.9 |
|
|
| 4.4 |
|
(1) Outstanding options to purchase shares of common stock and deferred stock awards that were not included in the calculation of diluted earnings per share because the effect of including them would have been anti-dilutive.
NOTE I – OPERATING SEGMENTS AND GEOGRAPHIC AREAS
In the first quarter of 2006, Dow made some adjustments to its segment reporting to align this reporting with recent changes in the Company’s organization and its evolving strategic business model. The reporting changes are described below and reflected in the following Corporate Profile and in the segment information for the three months and six months ended June 30, 2006 and 2005. On July 11, 2006, the Company filed a Current Report on Form 8-K that provided revised historical information reflecting the change in the composition of the Company’s reported segments.
Specialty Plastics and Elastomers is a recently formed business unit that includes a broad range of performance plastomers and elastomers, specialty copolymers, synthetic rubber, PVDC resins and films, and specialty film substrates. Beginning in the first quarter of 2006, the results for this business are reported in Performance Plastics. The business includes Engineering Plastics, Wire and Cable, specialty films, and the elastomers businesses recently acquired from DuPont Dow Elastomers L.L.C., all of which were previously reported in Performance Plastics. In addition, the business includes polybutadiene rubber, styrene butadiene rubber and several specialty resins which were previously reported in Basic Plastics.
Peroxymeric chemicals and solution vinyl resins, which were formerly managed and reported in Performance Chemicals, are now reported in the Dow Epoxy business in Performance Plastics.
Results for Dow Corning Corporation, a 50:50 joint venture, which were formerly reported in Unallocated and Other, are now reported in Performance Chemicals.
Results for SAFE-TAINER™ closed-loop delivery system, which were formerly reported in Basic Chemicals, are now reported in Performance Chemicals in the Specialty Chemicals business. SAFE-TAINER™, which is a system for delivering chlorinated solvents to the industrial cleaning industry, was previously managed as part of the Global Chlorinated Organics business, which produces chlorinated solvents.
21
Corporate Profile
Dow is a diversified chemical company that offers a broad range of innovative chemical, plastic and agricultural products and services to customers in more than 175 countries, helping them to provide everything from fresh water, food and pharmaceuticals to paints, packaging and personal care. In 2005, Dow had annual sales of $46 billion and employed approximately 42,000 people worldwide. The Company has 156 manufacturing sites in 37 countries and supplies more than 3,200 products grouped within the operating segments listed on the following pages.
PERFORMANCE PLASTICS
Applications: automotive interiors, exteriors, under-the-hood and body engineered systems • building and construction, thermal and acoustic insulation, roofing • communications technology, telecommunication cables, electrical and electronic connectors • footwear • home and office furnishings: kitchen appliances, power tools, floor care products, mattresses, carpeting, flooring, furniture padding, office furniture • information technology equipment and consumer electronics • packaging, food and beverage containers, protective packaging • sports and recreation equipment • wire and cable insulation and jacketing materials for power utility and telecommunications•
Dow Automotive serves the global automotive market and is a leading supplier of plastics, adhesives, sealants and other plastics-enhanced products for interior, exterior, under-the-hood, vehicle body structure and acoustical management technology solutions. With offices and application development centers around the world, Dow Automotive provides materials science expertise and comprehensive technical capabilities to its customers worldwide.
• Products: AFFINITY™ polyolefin plastomers; AMPLIFY™ functional polymers; BETABRACE™ reinforcing composites; BETADAMP™ acoustical damping systems; BETAFOAM™ NVH and structural foams; BETAGUARD™ sealants; BETAMATE™ structural adhesives; BETASEAL™ glass bonding systems; CALIBRE™ polycarbonate resins; DOW™ polyethylene resins; DOW™ polypropylene resins and automotive components made with DOW™ polypropylene; IMPAXX™ energy management foam; Injection-molded dashmats and underhood barriers; INSPIRE™ performance polymers; INTEGRAL™ adhesive film; ISONATE™ pure and modified methylene diphenyl diisocyanate (MDI) products; ISOPLAST™ engineering thermoplastic polyurethane resins; MAGNUM™ ABS resins; PAPI™ polymeric MDI; PELLETHANE™ thermoplastic polyurethane elastomers; Premium brake fluids and lubricants; PULSE™ engineering resins; SPECFLEX™ semi-flexible polyurethane foam systems; SPECTRIM™ reaction moldable polymers; STRANDFOAM™ polypropylene foam; VERSIFY™ plastomers and elastomers; VORANATE™ specialty isocyanates; VORANOL™ polyether polyols
Dow Building Solutions manufactures and markets an extensive line of insulation, weather barrier, and oriented composite building solutions, as well as a line of cushion packaging foam solutions. The business is the recognized leader in extruded polystyrene (XPS) insulation, known industry-wide by its distinctive Blue color and the Dow STYROFOAM™ brand for more than 50 years. The business also manufactures foam solutions for a wide range of applications including cushion packaging, electronics protection and material handling.
• Products: EQUIFOAM™ comfort products; ETHAFOAM™ polyethylene foam; IMMOTUS™ acoustic panels; QUASH™ sound management foam; SARAN™ vapor retarder film and tape; STYROFOAM™ brand insulation products (including XPS and polyisocyanurate rigid foam sheathing products); SYMMATRIX™ oriented composites; SYNERGY™ soft touch foam; TRYMER™ polyisocyanurate foam pipe insulation; and WEATHERMATE™ weather barrier solutions (housewraps, sill pans, flashings and tapes)
Dow Epoxy is a leading global producer of epoxy resins and related products for a wide range of industries and applications such as coatings, electronics, civil engineering, and composites. With plants strategically located across four continents, the business is focused on providing customers around the world with differentiated solution-based epoxy products and innovative technologies and services.
• Products: D.E.H.™ epoxy curing agents; D.E.N.™ epoxy novolac resins; D.E.R.™ epoxy resins (liquids, solids and solutions); Epoxy intermediates (Acetone, Allyl chloride, Bisphenol-A, Epichlorohydrin, OPTIM™ synthetic glycerine and Phenol); Peroxymeric chemicals (CYRACURE™ cycloaliphatic epoxides; FLEXOL™ plasticizers; and TONE™ monomers, polyols and polymers); Specialty acrylic monomers (Glycidyl methacrylate, Hydroxyethyl acrylate and Hydroxypropyl acrylate); and UCAR™ solution vinyl resins
22
The Polyurethanes and Thermoset Systems business is a leading global producer of polyurethane raw materials and thermoset systems. Differentiated by its ability to globally supply a high-quality, consistent and complete product range, this business emphasizes both existing and new business developments while facilitating customer success with a global market and technology network.
• Products: THE ENHANCER™ and LIFESPAN™ carpet backings; FROTH-PAK™ polyurethane spray foam; GREAT STUFF™ polyurethane foam sealant; INSTA-STIK™ roof insulation adhesive; ISONATE™ MDI; PAPI™ polymeric MDI; Propylene glycol; Propylene oxide; SPECFLEX™ copolymer polyols; SYNTEGRA™ waterborne polyurethane dispersions; TILE BOND™ roof tile adhesive; VORACOR™, VORALAST™, VORALUX™ and VORASTAR™ polyurethane systems; VORANATE™ isocyanate; VORANOL™ and VORANOL™ VORACTIV™ polyether and copolymer polyols
Specialty Plastics and Elastomers is a business portfolio of specialty products including a broad range of engineering plastics and compounds, performance elastomers and plastomers, specialty copolymers, synthetic rubber, polyvinylidene chloride resins and films (PVDC), and specialty film substrates. The business serves such industries as automotive, civil construction, wire and cable, building and construction, consumer electronics and appliances, food and specialty packaging, and footwear.
• Products: AFFINITY™ polyolefin plastomers (POPs); AMPLIFY™ functional polymers; CALIBRE™ polycarbonate resins; DOW XLA™ elastic fiber; EMERGE™ advanced resins; ENGAGE™ polyolefin elastomers; FLEXOMER™ very low density polyethylene (VLDPE) resins; EXO™ Overmolding Systems; INTEGRAL™ polyolefin films; ISOPLAST™ engineering thermoplastic polyurethane resins; MAGNUM™ ABS resins; NORDEL™ hydrocarbon rubber; PELLETHANE™ thermoplastic polybutadiene rubber; Polyurethane elastomers; PRIMACOR™ copolymers; PROCITE™ polystyrene films; PULSE™ engineering resins; REDI-LINK™ polyethylene; SARAN™ PVDC resins and films; SARANEX™ barrier films; SI-LINK™ crosslinkable polyethylene; Styrene-butadiene rubber; TYRIL™ SAN resins; TYRIN™ chlorinated polyethylene resins; TRENCHCOAT™ polyolefin films; UNIGARD™ high-performance flame-retardant compounds; UNIGARD™ reduced emissions flame-retardant compounds; UNIPURGE™ purging compounds; VERSIFY™ plastomers and elastomers; Wire and cable insulation and jacketing compounds; ZETABON™ coated metal cable armor
The Technology Licensing and Catalyst business includes licensing and supply of related catalysts for the UNIPOL™ polypropylene process, the METEOR™ process for ethylene oxide (EO) and ethylene glycol (EG), the LP OXO™ process for oxo alcohols, and the QBIS™ bisphenol A process. Licensing of the UNIPOL™ polyethylene process and related catalysts, including metallocene catalysts, are handled through Univation Technologies, LLC, a 50:50 joint venture of Union Carbide.
• Products: LP OXO™ process technology; METEOR™ EO/EG process technology and catalysts; QBIS™ bisphenol A process technology and DOWEX™ QCAT™ catalyst; SHAC™ catalysts; UNIPOL™ process technology
The Performance Plastics segment also includes a portion of the results of the Siam Group, a group of Thailand-based joint ventures.
PERFORMANCE CHEMICALS
Applications: agricultural and pharmaceutical products and processing • building materials • chemical processing and intermediates • food processing and ingredients • household products • metal 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 diverse portfolio of multi-functional ingredients and polymers for numerous markets and applications. Within Designed Polymers, Liquid Separations uses several technologies to separate dissolved minerals and organics from water, making purer water for human and industrial uses. Designed Polymers businesses also market a range of products that enhance the physical and sensory properties of end-use products in a wide range of applications including food, pharmaceuticals, oilfields, paints and coatings, personal care, and building and construction. The business also includes Advanced Electronic Materials and the results of Dowpharma, which provides the pharmaceutical and biopharmaceutical industries with products and services for drug discovery, development, manufacturing and delivery.
23
• Products: Acrolein derivatives; Basic nitroparaffins and nitroparaffin-based specialty chemicals of ANGUS Chemical Company, a wholly owned subsidiary of Dow; Biocides; CELLOSIZE™ hydroxyethyl cellulose; DOWEX™ ion exchange resins; ETHOCEL™ ethylcellulose resins; FILMTEC™ membranes; METHOCEL™ cellulose ethers; POLYOX™ water-soluble resins; Products for hair/skin care from Amerchol Corporation, a wholly owned subsidiary of Dow
The Dow Latex and Acrylic Monomers business is a major global supplier of synthetic latex, used for coating paper and paperboard (for magazines, catalogues and food packaging), and in decorative and industrial paints, adhesives, textile products, and construction products such as caulks and sealants, and a leading supplier of acrylic monomers.
• Products: Acrylic acid/Acrylic esters; Acrylic latex; Butadiene-vinylidene latex; DRYTECH™ superabsorbent polymers; NEOCAR™ branched vinyl ester latexes; POLYPHOBE™ rheology modifiers; Polystyrene latex; Styrene-acrylate latex; Styrene-butadiene latex; UCAR™ all-acrylic, styrene-acrylic and vinyl-acrylic latexes
The Specialty Chemicals business provides products used as functional ingredients or processing aids in the manufacture of a diverse range of products. Applications include agricultural and pharmaceutical products and processing, building and construction, chemical processing and intermediates, food processing and ingredients, household products, coatings, pulp and paper manufacturing, and transportation. Dow Haltermann Custom Processing provides contract and custom manufacturing services to other specialty chemical and agricultural chemical producers.
• Products: Alkyl alkanolamines; CARBOWAX™ polyethylene glycols and methoxypolyethylene glycols; Diphenyloxide; DOW™ polypropylene glycols; DOWFAX™, TERGITOL™ and TRITON™ surfactants; DOWTHERM™, SYLTHERM™ and UCARTHERM™ heat transfer fluids; Ethanolamines; Ethylene oxide- and propylene oxide-based glycol ethers; Ethyleneamines; Isopropanolamines; SAFE-TAINER™ closed-loop delivery system; UCAR™ deicing fluids; UCON™ fluids; VERSENE™ chelating agents; Fine and specialty chemicals from the Dow Haltermann Custom Processing business; Test and reference fuels, printing ink distillates, pure hydrocarbons and esters, and derivatives from Haltermann Products, a wholly owned subsidiary of Dow
The Performance Chemicals segment also includes the results of Dow Corning Corporation, and a portion of the results of the OPTIMAL Group and the Siam Group, all joint ventures of the Company.
AGRICULTURAL SCIENCES
Applications: control of weeds, insects and plant diseases for agriculture and pest management • agricultural seeds and traits (genes)
Dow AgroSciences is a global leader in providing pest management, agricultural and crop biotechnology products and solutions. The business develops, manufactures and markets products for crop production; weed, insect and plant disease management; and industrial and commercial pest management. Dow AgroSciences is building a leading plant genetics and biotechnology business in agricultural seeds, traits, healthy oils, animal health, and food safety.
• Products: CLINCHER™ herbicide; DITHANE™ fungicide; LORSBAN™ insecticides; FORTRESS™ fungicide; GARLON™ herbicide; GLYPHOMAX™ herbicide; GRANITE™ herbicide, HERCULEX™ I insect protection; KEYSTONE™ herbicides; LAREDO™ fungicide; LONTREL™ herbicide; MUSTANG™ herbicide; MYCOGEN™ seeds; NATREON™ canola and sunflower oil; NEXERA™ seeds; PHYTOGEN™ brand cottonseeds; PROFUME™ gas fumigant; SENTRICON™ Termite Colony Elimination System; STARANE™ herbicide; STINGER™ herbicide; SURPASS™ herbicide; TELONE™ soil fumigant; TORDON™ herbicide; TRACER™ NATURALYTE™ insect control; VIKANE™ structural fumigant; WIDESTRIKE™ insect protection
BASIC PLASTICS
Applications: adhesives • appliances and appliance housings • agricultural films • automotive parts and trim • beverage bottles • bins, crates, pails and pallets • building and construction • coatings • consumer and durable goods • consumer electronics • disposable diaper liners • fibers and nonwovens • films, bags and packaging for food and consumer products • hoses and tubing • household and industrial bottles • housewares • hygiene and medical films • industrial and consumer
24
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 all process technologies, the business offers customers one of the industry’s broadest ranges of polyethylene resins via a strong global network of local experts focused on partnering for long-term success.
• Products: ASPUN™ fiber grade resins; ATTANE™ ultra low density polyethylene (ULDPE) resins; CONTINUUM™ bimodal polyethylene resins; DOW™ high density polyethylene (HDPE) resins; DOW™ low density polyethylene (LDPE) resins; DOWLEX™ polyethylene resins; ELITE™ enhanced polyethylene (EPE) resins; TUFLIN™ linear low density polyethylene (LLDPE) resins; UNIVAL™ HDPE resins
The Polypropylene business, a major global polypropylene supplier, provides a broad range of products and solutions tailored to customer needs by leveraging Dow’s leading manufacturing and application technology, research and product development expertise, extensive market knowledge and strong customer relationships.
• Products: DOW™ homopolymer polypropylene resins; DOW™ impact copolymer polypropylene resins; DOW™ random copolymer polypropylene resins; INSPIRE™ performance polymers
The Polystyrene business, the global leader in the production of polystyrene resins, is uniquely positioned with geographic breadth and participation in a diversified portfolio of applications. Through market and technical leadership and low cost capability, the business continues to improve product performance and meet customer needs.
• Products: STYRON A-TECH™ and C-TECH™ advanced technology polystyrene resins and a full line of STYRON™ general purpose polystyrene resins; STYRON™ high-impact polystyrene resins
The Basic Plastics segment also includes the results of Equipolymers and a portion of the results of EQUATE Petrochemical Company K.S.C. and the Siam 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, all joint ventures of the Company.
25
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 for use in Dow’s global operations. 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 Siam Group, both joint ventures of the Company.
Unallocated and Other includes the results of Dow 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 overhead and other cost recovery variances not allocated to the operating segments.
26
Operating Segments |
| Three Months Ended |
| Six Months Ended |
| ||||||||
In millions |
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| ||||
Sales by operating segment |
|
|
|
|
|
|
|
|
| ||||
Performance Plastics |
| $ | 3,442 |
| $ | 3,052 |
| $ | 6,935 |
| $ | 6,037 |
|
Performance Chemicals |
| 1,968 |
| 1,883 |
| 3,854 |
| 3,805 |
| ||||
Agricultural Sciences |
| 962 |
| 1,031 |
| 1,923 |
| 2,020 |
| ||||
Basic Plastics |
| 2,986 |
| 2,577 |
| 5,783 |
| 5,386 |
| ||||
Basic Chemicals |
| 1,416 |
| 1,351 |
| 2,784 |
| 2,821 |
| ||||
Hydrocarbons and Energy |
| 1,654 |
| 1,468 |
| 3,074 |
| 2,902 |
| ||||
Unallocated and Other |
| 81 |
| 88 |
| 176 |
| 158 |
| ||||
Total |
| $ | 12,509 |
| $ | 11,450 |
| $ | 24,529 |
| $ | 23,129 |
|
EBIT(1) by operating segment |
|
|
|
|
|
|
|
|
| ||||
Performance Plastics |
| $ | 412 |
| $ | 498 |
| $ | 1,138 |
| $ | 965 |
|
Performance Chemicals |
| 362 |
| 406 |
| 663 |
| 856 |
| ||||
Agricultural Sciences |
| 161 |
| 238 |
| 377 |
| 497 |
| ||||
Basic Plastics |
| 493 |
| 527 |
| 969 |
| 1,351 |
| ||||
Basic Chemicals |
| 219 |
| 267 |
| 373 |
| 694 |
| ||||
Hydrocarbons and Energy |
| 2 |
| — |
| — |
| — |
| ||||
Unallocated and Other |
| (180 | ) | (172 | ) | (314 | ) | (560 | ) | ||||
Total |
| $ | 1,469 |
| $ | 1,764 |
| $ | 3,206 |
| $ | 3,803 |
|
Equity in earnings of nonconsolidated affiliates by operating segment (included in EBIT) |
|
|
|
|
|
|
|
|
| ||||
Performance Plastics |
| $ | 26 |
| $ | 52 |
| $ | 47 |
| $ | 108 |
|
Performance Chemicals |
| 115 |
| 84 |
| 184 |
| 164 |
| ||||
Agricultural Sciences |
| — |
| — |
| — |
| — |
| ||||
Basic Plastics |
| 36 |
| 49 |
| 62 |
| 112 |
| ||||
Basic Chemicals |
| 35 |
| 33 |
| 63 |
| 99 |
| ||||
Hydrocarbons and Energy |
| 20 |
| 8 |
| 42 |
| 18 |
| ||||
Unallocated and Other |
| — |
| (2 | ) | 2 |
| (2 | ) | ||||
Total |
| $ | 232 |
| $ | 224 |
| $ | 400 |
| $ | 499 |
|
(1) The Company uses EBIT (which Dow defines as earnings (loss) before interest, income taxes and minority interests) as its measure of profit/loss for segment reporting purposes. EBIT by operating segment includes all operating items relating to the businesses; items that principally apply to the Company as a whole are assigned to Unallocated and Other. A reconciliation of EBIT to “Net Income Available for Common Stockholders” is provided below:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
In millions |
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| ||||
EBIT |
| $ | 1,469 |
| $ | 1,764 |
| $ | 3,206 |
| $ | 3,803 |
|
+ Interest income |
| 38 |
| 27 |
| 80 |
| 56 |
| ||||
- Interest expense and amortization of debt discount |
| 151 |
| 188 |
| 307 |
| 375 |
| ||||
- Provision for income taxes |
| 310 |
| 317 |
| 694 |
| 825 |
| ||||
- Minority interests’ share in income |
| 23 |
| 21 |
| 48 |
| 41 |
| ||||
Net Income Available for Common Stockholders |
| $ | 1,023 |
| $ | 1,265 |
| $ | 2,237 |
| $ | 2,618 |
|
Transfers of products between operating segments are generally valued at cost. However, transfers of products to Agricultural Sciences from other segments are generally valued at market-based prices; the revenues generated by these transfers in the first six months of 2006 and 2005 were immaterial.
Geographic Areas |
| Three Months Ended |
| Six Months Ended |
| ||||||||
In millions |
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| ||||
Sales by geographic area |
|
|
|
|
|
|
|
|
| ||||
United States |
| $ | 4,654 |
| $ | 4,368 |
| $ | 9,389 |
| $ | 8,745 |
|
Europe |
| 4,612 |
| 4,166 |
| 8,859 |
| 8,607 |
| ||||
Rest of World |
| 3,243 |
| 2,916 |
| 6,281 |
| 5,777 |
| ||||
Total |
| $ | 12,509 |
| $ | 11,450 |
| $ | 24,529 |
| $ | 23,129 |
|
27
The Dow Chemical Company and Subsidiaries
PART I – FINANCIAL INFORMATION, Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of The Dow Chemical Company and its subsidiaries (“Dow” or the “Company”). This section covers the current performance and outlook of the Company and each of its operating segments. The forward-looking statements contained in this section and in other parts of this document involve risks and uncertainties that may affect the Company’s operations, markets, products, services, prices and other factors as more fully discussed elsewhere and in filings with the U.S. Securities and Exchange Commission (“SEC”). These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental and technological factors. Accordingly, there is no assurance that the Company’s expectations will be realized. The Company assumes no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws.
In the second quarter of 2006, the Company’s management and employees continued to focus on financial discipline, lowering the total cost to serve customers and price/volume management, in an effort to further improve Dow’s financial performance. The Company also continued to face the challenges of higher feedstock and energy costs. For the second quarter of 2006, record quarterly sales were achieved with sales up 9 percent from the second quarter of last year and 4 percent from the first quarter of 2006. This increase was due in part to an increase in prices, up 5 percent overall, driven by significantly higher feedstock and energy costs. Feedstock and energy costs were up 18 percent over the second quarter of last year, adding approximately $800 million in higher costs. Other raw materials were also up, adding another $120 million to cost of sales. Operating expenses rose in the second quarter of 2006, but remained low as a percentage of total sales. Capital spending remained on target in the second quarter at $407 million, bringing year-to-date capital spending to $698 million; the Company plans to spend approximately $1.8 billion on capital expenditures in 2006. Dow’s results for the three-month and six-month periods ended June 30, 2006 are discussed in further detail below.
Selected Financial Data |
| Three Months Ended |
| Six Months Ended |
| ||||||||
In millions, except per share amounts |
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| ||||
Net sales |
| $ | 12,509 |
| $ | 11,450 |
| $ | 24,529 |
| $ | 23,129 |
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of sales |
| $ | 10,624 |
| $ | 9,300 |
| $ | 20,427 |
| $ | 18,637 |
|
Percent of sales |
| 84.9 | % | 81.2 | % | 83.3 | % | 80.6 | % | ||||
|
|
|
|
|
|
|
|
|
| ||||
Research and development, and selling, general and administrative expenses |
| $ | 689 |
| $ | 654 |
| $ | 1,355 |
| $ | 1,300 |
|
Percent of sales |
| 5.5 | % | 5.7 | % | 5.5 | % | 5.6 | % | ||||
|
|
|
|
|
|
|
|
|
| ||||
Effective tax rate |
| 22.9 | % | 19.8 | % | 23.3 | % | 23.7 | % | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income available for common stockholders |
| $ | 1,023 |
| $ | 1,265 |
| $ | 2,237 |
| $ | 2,618 |
|
|
|
|
|
|
|
|
|
|
| ||||
Earnings per common share – basic |
| $ | 1.06 |
| $ | 1.31 |
| $ | 2.32 |
| $ | 2.73 |
|
Earnings per common share – diluted |
| $ | 1.05 |
| $ | 1.30 |
| $ | 2.29 |
| $ | 2.69 |
|
|
|
|
|
|
|
|
|
|
| ||||
Operating rate percentage |
| 84 | % | 83 | % | 84 | % | 85 | % |
Net sales for the second quarter of 2006 were $12.5 billion, up 9 percent from $11.5 billion in the second quarter of last year, and a new quarterly sales record. Compared with the same quarter of 2005, prices rose 5 percent and volume grew 4 percent. Prices improved in all operating segments, except Performance Chemicals and Agricultural Sciences, with significant increases in Basic Plastics, up 11 percent, and Hydrocarbons and Energy, up 18 percent, driven by a significant year-over-year increase in feedstock and energy costs. From a geographic standpoint, prices rose in all geographic areas except Asia Pacific, which experienced a 3 percent decline in prices, including the negative impact of currency which accounted for one-quarter of the decline. Compared with the second quarter of last year, the change in volume by operating segment was mixed, with increases in Performance Plastics (up 11 percent), Performance Chemicals (up 6 percent) and Basic Plastics (up 5 percent); and declines in Agricultural Sciences and Hydrocarbons and
28
Energy (both down 5 percent). Volume for Basic Chemicals was unchanged from the second quarter of 2005. Performance Plastics volume improved largely due to the addition of sales of ENGAGETM, NORDELTM and TYRINTM elastomers, acquired mid-year 2005 when Dow divested its interest in DuPont Dow Elastomers L.L.C. (“DDE”). By geographic area, volume improved in all geographic areas except North America, where volume was flat in the United States and down in Canada. Sales for the first six months of 2006 were $24.5 billion, up 6 percent from $23.1 billion in the same period last year. Compared with the first half of 2005, both prices and volume were up 3 percent. In addition to the increase in Performance Plastics volume related to the elastomers acquired from DDE, year-to-date volume for Performance Plastics improved due to lump sum technology licensing revenue earned in the first quarter of 2006. For additional details, see the Sales Volume and Price table at the end of the section entitled “Segment Results.”
Gross margin was $1.9 billion for the second quarter of 2006, down from $2.2 billion in the second quarter of last year. Despite an increase in sales, gross margin declined principally due to an increase of approximately $800 million in feedstock and energy (“H&E”) costs and higher non-H&E raw material costs of $120 million in the second quarter of 2006. Year to date, gross margin was $4.1 billion, compared with $4.5 billion in the first six months of 2005.
The Company’s global plant operating rate (for its chemicals and plastics businesses) was 84 percent in the second quarter of 2006, compared with 83 percent in the second quarter of 2005. For the first half of 2006, Dow’s global plant operating rate was 84 percent, down from 85 percent in the same period of 2005. Compared with last year, the Company’s operating rate was lower due to an increase in planned maintenance turnarounds at several of Dow’s manufacturing facilities.
Personnel count was 42,372 at June 30, 2006, down from 42,413 at December 31, 2005 and 42,832 at June 30, 2005. Despite the addition of approximately 115 employees associated with the acquisition of businesses from DDE mid-year 2005, headcount has continued to decline as the Company has remained focused on improving organizational efficiency and financial performance.
Operating expenses (research and development, and selling, general and administrative expenses) totaled $689 million in the second quarter of 2006, up $35 million or 5 percent, from $654 million in the second quarter of last year. Compared with last year, research and development (“R&D”) expenses increased $16 million, and selling, general and administrative (“SG&A”) expenses increased $19 million. More than half of the increase in operating expenses resulted from the adoption of SFAS No. 123R, which requires the allocation of a portion of stock-based compensation expense to operating expenses. Prior to the adoption of SFAS No. 123R on January 1, 2006, all stock-based compensation expense was reflected in “Cost of sales.” See Notes B and G to the Consolidated Financial Statements for additional information on this accounting standard. In addition to the increase in stock-based compensation expense, expenses related to the businesses acquired from DDE and expenses related to the Company’s new “Human Element” advertising campaign contributed to the increase in operating expenses. For the first half of 2006, operating expenses totaled $1,355 million, up $55 million (4 percent) from $1,300 million in the first half of 2005. The increase included higher R&D expenses of $39 million and higher SG&A expenses of $16 million. Despite these increases, operating expenses remained low as a percentage of net sales.
Amortization of intangibles was $12 million in the second quarter of 2006, compared with $13 million in the second quarter of last year. For the first half of 2006, amortization of intangibles was $24 million, compared with $27 million for the same period last year. See Note D to the Consolidated Financial Statements for additional information on intangible assets.
Dow’s share of the earnings of nonconsolidated affiliates was $232 million in the second quarter of 2006, compared with $224 million in the second quarter of last year. For the first six months of 2006, equity earnings were $400 million, compared with $499 million for the same period last year. Compared with last year, year-to-date equity earnings declined as lower results from EQUATE Petrochemical Company K.S.C. (“EQUATE”), the OPTIMAL Group (“OPTIMAL”), and Siam Polyethylene Company Limited (“Siam Polyethylene”), and the absence of equity earnings from DDE and UOP LLC (“UOP”), which the Company exited in 2005, more than offset improved equity earnings from Dow Corning Corporation (due to a favorable tax settlement reached in the second quarter of 2006), Compañía Mega S.A., MEGlobal and Univation Technologies, LCC. Results from EQUATE and OPTIMAL were lower in 2006 due to planned maintenance turnarounds at the joint ventures in the first quarter of this year. The maintenance turnaround at EQUATE continued into the second quarter of 2006.
Sundry income – net includes a variety of income and expense items such as the gain or loss on foreign currency exchange, dividends from investments, and gains and losses on sales of investments and assets. Sundry income – net for the second quarter of 2006 was $53 million, compared with $57 million in the same quarter of 2005. In the second quarter of 2005, net sundry income was reduced by a loss of $31 million associated with the early extinguishment of $845 million of debt. Year to date, net sundry income was $83 million, compared with $139 million in the first half of 2005. In 2005, year-to-date net sundry income included a $70 million pretax gain ($41 million reflected in the Basic Chemicals segment; $29 million reflected in the Basic Plastics segment) recorded in the first quarter on the sale of a portion of Union Carbide’s interest in EQUATE.
29
Net interest expense (interest expense less capitalized interest and interest income) was $113 million in the second quarter of 2006, compared with $161 million in the second quarter of last year. Year-to-date, net interest expense was $227 million, down from $319 million in the first six months of 2005. Compared with last year, net interest expense was lower due to higher interest income, reflecting an increase in interest rates, and lower interest expense, reflecting a significant reduction in total debt.
The effective tax rate for the second quarter of 2006 was 22.9 percent, versus 19.8 percent for the second quarter of 2005. The effective tax rate for the first six months of 2006 was 23.3 percent, compared with 23.7 percent for the same period last year. 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. In the first quarter of 2006, the closure of tax audit issues in the United States lowered the effective tax rate compared with last year. In the second quarter of 2006, the effective tax rate was favorably impacted by an enacted reduction in the Canadian tax rate. In the second quarter of 2005, the Company finalized its plan for the repatriation of foreign earnings subject to the requirements of the American Jobs Creation Act of 2004 (“AJCA”), resulting in a credit to the “Provision for income taxes” of $113 million. Absent this credit, the effective tax rate for the second quarter of 2005 would have been 26.8 percent; and the effective tax rate for the first six months of 2005 would have been 26.9 percent.
Net income available for common stockholders was $1,023 million or $1.05 per share for the second quarter of 2006, compared with $1,265 million or $1.30 per share for the second quarter of 2005. Net income for the first six months of 2006 was $2,237 million or $2.29 per share, compared with $2,618 million or $2.69 per share for the same period of 2005. The following tables summarize the impact of certain items recorded in the three-month and six-month periods ended June 30, 2005, as previously described in this section:
|
| Pretax |
| Impact on |
| Impact on |
| |||||||||
|
| Three Months Ended |
| Three Months Ended |
| Three Months Ended |
| |||||||||
In millions, except per share amounts |
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| |||
Loss on early extinguishment of debt |
| — |
| $ | (31 | ) | — |
| $ | (20 | ) | — |
| $ | (0.02 | ) |
AJCA repatriation of foreign earnings |
| — |
| — |
| — |
| 113 |
| — |
| 0.12 |
| |||
Total |
| — |
| $ | (31 | ) | — |
| $ | 93 |
| — |
| $ | 0.10 |
|
|
| Pretax |
| Impact on |
| Impact on |
| |||||||||
|
| Six Months Ended |
| Six Months Ended |
| Six Months Ended |
| |||||||||
In millions, except per share amounts |
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| |||
Gain on sale of EQUATE shares |
| — |
| $ | 70 |
| — |
| $ | 46 |
| — |
| $ | 0.05 |
|
Loss on early extinguishment of debt |
| — |
| (31 | ) | — |
| (20 | ) | — |
| (0.02 | ) | |||
AJCA repatriation of foreign earnings |
| — |
| — |
| — |
| 113 |
| — |
| 0.12 |
| |||
Total |
| — |
| $ | 39 |
| — |
| $ | 139 |
| — |
| $ | 0.15 |
|
(1) Impact on “Income before Income Taxes and Minority Interests”
(2) Impact on “Net Income Available for Common Stockholders”
(3) Impact on “Earnings per common share – diluted”
SEGMENT RESULTS
In the first quarter of 2006, Dow made some adjustments to its segment reporting to align this reporting with recent changes in the Company’s organization and its evolving strategic business model. Detailed information regarding the changes can be found in Note I to the Consolidated Financial Statements.
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. See Note I to the Consolidated Financial Statements for a reconciliation of EBIT to “Net Income Available for Common Stockholders.”
30
PERFORMANCE PLASTICS
Performance Plastics sales were $3,442 million for the second quarter of 2006, up 13 percent from $3,052 million in the second quarter of 2005 due to an 11 percent improvement in volume and 2 percent increase in price. The improvement in volume was largely due to the addition of ENGAGETM, NORDELTM and TYRINTM elastomers, which were acquired mid-year 2005 when Dow divested its interest in DDE (mentioned previously). Excluding the acquisition of these products, volume increased 4 percent versus the second quarter of 2005. Overall, prices rose 2 percent as price increases were partially offset by a 1 percent decline related to currency, principally in Europe. EBIT for the segment was $412 million in the second quarter, down from $498 million in the same period of last year. EBIT declined as the impact of higher feedstock and energy costs, higher operating expenses and lower equity earnings more than offset improved volume and operating rates. Equity earnings were lower in the second quarter of this year due to last year’s dissolution of DDE and the fourth quarter 2005 sale of Union Carbide’s indirect 50 percent interest in UOP. In addition, the results for the second quarter of 2005 included a gain of $31 million associated with the dissolution of DDE and the acquisition of certain DDE assets.
Dow Automotive sales for the second quarter of 2006 were down slightly from the record level achieved a year ago. Despite this decline, the second quarter represented the second best quarterly sales for the business. Compared with the second quarter of last year, volume declined 5 percent, but was partially offset by a 4 percent increase in price. Volume declined primarily in North America, where auto builds were down. Latin America and Asia Pacific continued their positive growth trends with Latin America setting a quarterly sales record, up 40 percent from the same period a year ago. EBIT for the business declined significantly from the second quarter of last year due to the decline in volume, higher raw material costs, and increased spending associated with the consolidation of manufacturing operations in North America and Europe.
Dow Building Solutions sales for the second quarter of 2006 were up 6 percent versus the same quarter last year with volume improving 5 percent and price up 1 percent. Compared with last year, volume improved as softness in residential housing was more than offset by strong demand in commercial building. EBIT was flat with the same quarter of 2005 as increased raw material costs and spending on growth initiatives offset the additional margin realized on the increase in sales volume.
Dow Epoxy sales for the second quarter of 2006 were up 6 percent from the same period last year, as volume strengthened and price remained unchanged from a year ago. Volume improvement was broad-based across end-use applications. Particular strength was reported for civil engineering applications in Europe and coatings in Asia Pacific. EBIT for the business was relatively flat versus the second quarter of last year as margin on increased volume offset the impact of higher feedstock and energy costs.
Polyurethanes and Thermoset Systems sales increased 5 percent from the second quarter of 2005 with volume up 3 percent and price up 2 percent. Volume improved as solid gains from polyols, isocyanates and thermoset systems were partially offset by lower sales of propylene oxide. Sales of GREAT STUFFTM polyurethane foam sealant set a new quarterly record. Compared with the second quarter of last year, EBIT declined as volume growth and price increases were more than offset by rising feedstock and energy costs, higher operating costs and costs associated with major planned maintenance activity in the second quarter of this year.
Specialty Plastics and Elastomers sales for the second quarter were up 40 percent versus the same quarter of 2005 driven by higher volume, reflecting the addition of ENGAGETM, NORDELTM and TYRINTM elastomers. Excluding the acquisition of these products from DDE, volume was up approximately 6 percent from the same quarter last year with strong growth in engineering plastics, synthetic rubber and specialty copolymers, particularly in Europe and Asia Pacific. Despite the increase in volume, EBIT for the second quarter of 2006 was down significantly from last year, due to substantial increases in feedstock and energy costs, lower equity earnings due to the divestiture of DDE, and higher operating expenses related to the acquisition of products from DDE. In addition, EBIT in the first six months of 2005 included a $31 million gain on the dissolution of DDE.
Technology Licensing and Catalyst sales for the second quarter were up from the second quarter of 2005 due to higher ongoing royalties and increased catalyst sales. EBIT improved as the additional margin from increased sales more than offset a decline in equity earnings due to the sale of Union Carbide’s indirect 50 percent interest in UOP in the fourth quarter of 2005.
For the first half of 2006, Performance Plastics sales were $6,935 million, up 15 percent from $6,037 million in the first half of 2005, driven by a 14 percent increase in volume and a 1 percent increase in price, including the negative impact of currency (principally in Europe) which reduced sales by 2 percent. Excluding the impact of acquiring ENGAGETM, NORDELTM and TYRINTM elastomers from the dissolution of DDE, volume was up 7 percent versus the same period last year. Lump sum licensing revenue earned in the first quarter of 2006 contributed to the increase in volume. Performance Plastics EBIT was $1,138 million for the first six months of 2006, up from $965 million for the same period in 2005, as higher sales and improved operating rates more than offset a significant increase in feedstock and energy costs, higher operating expenses and lower equity earnings.
31
PERFORMANCE CHEMICALS
Performance Chemicals sales were $1,968 million in the second quarter of 2006, up 5 percent from $1,883 million in the second quarter of 2005. Compared with last year, volume increased 6 percent, while price declined 1 percent. EBIT for the second quarter was $362 million, down from $406 million in the second quarter of 2005. Compared with last year, EBIT declined as the benefit of volume gains and higher equity earnings from OPTIMAL and Dow Corning (which benefited from a favorable tax settlement reached in the second quarter of 2006) was more than offset by higher feedstock and energy costs and lower selling prices.
Designed Polymers sales for the quarter were up 7 percent from the second quarter of 2005, reflecting a 9 percent increase in volume and a 2 percent decrease in price. Improvements in volume were broad-based in the second quarter with strong sales for biocides, specialty chemical products of ANGUS Chemical Company, liquid membranes and ion exchange resins. Compared with the second quarter of last year, EBIT improved slightly as volume growth, improved operating rates and a favorable litigation settlement more than offset the decline in prices and increased raw material costs.
Dow Latex and Acrylic Monomers sales for the quarter were down 1 percent compared with the second quarter of 2005, as a 6 percent decline in prices more than offset volume growth of 5 percent. Prices for acrylates declined significantly compared with the strong levels of a year ago due to recent capacity additions within the industry. Compared with last year, volume was strong in Europe for paper and carpet latex, as well as acrylic monomers. Despite increased volume, EBIT for the second quarter of 2006 declined significantly from the same quarter last year principally due to the decline in selling prices, a significant increase in feedstock and energy costs, and lower operating rates.
Specialty Chemicals sales were up 8 percent compared with the second quarter of 2005, due to a 5 percent increase in volume and a 3 percent increase in price. Volume improvement was broad-based with increased sales across most product lines and geographic areas. Price increases were principally driven by raw material cost pressures. Despite increases in price and volume, as well as higher equity earnings from OPTIMAL, EBIT was up only slightly due to higher raw material and energy costs in the second quarter of this year.
Performance Chemicals sales were $3,854 million for the first six months of 2006, up 1 percent from $3,805 million in the same period last year, reflecting a 2 percent increase in volume and a 1 percent decline in price (due to the unfavorable impact of currency in Europe). EBIT for the first six months of 2006 was $663 million, compared with $856 million in 2005. Despite volume growth and improved equity earnings from OPTIMAL and Dow Corning, EBIT declined in 2006 due to significantly higher raw material and energy costs, lower selling prices and lower operating rates.
AGRICULTURAL SCIENCES
Sales for Agricultural Sciences were $962 million in the second quarter of 2006, down 7 percent from $1,031 million a year ago, as volume declined 5 percent and price declined 2 percent. Compared with the second quarter of last year, the decline in volume was led by reduced sales of selective corn herbicides in North America, due to a shift by farmers to plant herbicide tolerant corn, and competitive conditions in the corn seed sector. Unfavorable weather conditions in parts of the United States also contributed to reduced herbicide sales. In addition, U.S. fungicide sales were lower in the second quarter of 2006 due to fewer concerns about a potential outbreak of soybean rust. Partially offsetting these declines were strong sales for the new range and pasture herbicide, aminopyralid. The Company’s new business platform for sales of NATREON™ healthy oil continued to ramp up, and two North American restaurant chains converted to this product. In Brazil, farming economics negatively impacted price. EBIT for the second quarter of 2006 was $161 million, down from $238 million in the second quarter of last year, principally due to lower volume and higher raw material costs.
For the first six months of 2006, sales for Agricultural Sciences were $1,923 million, down 5 percent from $2,020 million in 2005, due to a 3 percent decline in volume and a 2 percent drop in price related to the unfavorable impact of currency in Europe. Compared with the first half of 2005, volume in North America was down due to competitive pressures in the corn seed sector and reduced selective herbicide sales. Pressure from generic products and poor weather conditions in Europe also contributed to the decline in volume. For the first six months of 2006, EBIT for the segment was $377 million, down from $497 million a year ago due to reduced sales volume and higher raw material and energy costs.
32
BASIC PLASTICS
Basic Plastics sales for the second quarter of 2006 were $2,986 million, up 16 percent from $2,577 million a year ago, as prices rose 11 percent and volume increased 5 percent. Strong increases in price were reported in North America and Europe, the result of significantly higher feedstock and energy costs in the second quarter of this year, while modest price improvement was reported in Asia Pacific and Latin America. Volume grew in all geographic areas as overall demand continued to improve. EBIT for the second quarter was $493 million, down 6 percent from $527 million in the second quarter of 2005, primarily due to higher costs for raw materials and reduced equity earnings from Siam Polyethylene and EQUATE.
Polyethylene sales were up significantly in the second quarter of 2006 as prices rose 14 percent and volume improved 6 percent. While prices were up in all geographic areas, the most significant increases were reported in North America and Europe, where double-digit price increases reflected the impact of significantly higher feedstock and energy costs, and generally good industry conditions. Volume was up in all geographic areas, except Europe, as demand improved and customers began to replenish inventories. Volume in Europe was negatively impacted by planned maintenance turnarounds at the Company’s plants in The Netherlands and Germany. Despite improved sales, EBIT for the second quarter declined from the same period last year, due to significantly higher raw material costs and lower equity earnings from EQUATE and Siam Polyethylene.
Polypropylene sales were up 17 percent from the second quarter of 2005, due to a 16 percent increase in prices and a 1 percent improvement in volume. Strong, double-digit price improvement was reported in all geographic areas, reflecting the impact of significantly higher feedstock and energy costs compared with the second quarter of 2005. Volume improved in North America and Europe due to continued high levels of demand, which offset a decline in Asia Pacific, where weaker demand and lower prices made it less attractive economically to import polypropylene from North America. EBIT improved from the same quarter last year as higher prices combined with lower manufacturing costs to offset the impact of significantly higher feedstock and energy costs. In the second quarter of 2005, manufacturing costs were increased by an unplanned outage at the Company’s polypropylene plant in Freeport, Texas.
Polystyrene sales for the second quarter of 2006 were up 1 percent as a 4 percent decline in prices was offset by a 5 percent increase in volume. Prices declined in all geographic areas, except Europe, where a modest improvement was reported. The decline in prices reflected the continuation of relatively weak demand. Volume improved, particularly in Asia Pacific where customers began to restock inventories ahead of the Christmas season. Compared with the second quarter of last year, volume was up 15 percent in Asia Pacific. EBIT for the business was unchanged from the second quarter of 2005.
Basic Plastics sales for the first six months of 2006 were $5,783 million, up 7 percent from $5,386 million in the first half of 2005. Compared with 2005, prices were up 5 percent and volume improved 2 percent. EBIT for the first half of 2006 was $969 million, down from $1,351 million in the first half of 2005. Despite improved price and volume, EBIT declined significantly during the first half of 2006 due to sharp increases in feedstock and energy costs, as well as increases in other raw material costs, and a decline in equity earnings. In addition, EBIT in the first six months of 2005 included a $29 million gain on the sale of EQUATE shares.
BASIC CHEMICALS
Second quarter sales for the Basic Chemicals segment were $1,416 million, up 5 percent from $1,351 million for the second quarter of last year. Volume was flat versus the second quarter of 2005 with higher demand for ethylene oxide / ethylene glycol (“EO/EG”) offsetting a modest decline in chlor-alkali and derivative products. Caustic soda volume was lower as weakness in pulp and paper, chemical processing, and soap and detergent applications more than offset continued strong demand in the alumina industry. Volume for vinyl chloride monomer (“VCM”) matched last year levels, with good demand for polyvinyl chloride in seasonal applications. EO/EG reported volume growth in all geographic areas with good demand from the polyester and PET industries. Prices increased 5 percent, with improvement in all major products. In Core Chemicals, prices improved for caustic soda and VCM due to solid industry fundamentals, while a modest improvement in EO/EG prices was not sufficient to offset a significant increase in raw material costs. Despite the increase in prices, EBIT of $219 million in the second quarter of 2006 was down from $267 million in the second quarter of last year, primarily due to the impact of higher feedstock and energy costs, as well as lower operating rates in some businesses.
For the first half of 2006, sales for the Basic Chemicals segment were $2,784 million, down 1 percent from $2,821 million for the same period last year. Compared with last year, volume declined 2 percent, as prices increased 1 percent, including the unfavorable impact of currency (principally in Europe), which reduced sales 1 percent. EBIT for the first six months of 2006 was $373 million, down significantly from the very strong $694 million reported in the same period last year, as higher feedstock and energy costs significantly reduced profitability in EG and VCM. Lower equity earnings from EQUATE and OPTIMAL also contributed to the decline in EBIT. In addition, results for the first half of 2005 included a gain of $41 million associated with the sale of EQUATE shares.
33
HYDROCARBONS AND ENERGY
Hydrocarbons and Energy sales for the second quarter of 2006 were $1,654 million, up 13 percent from $1,468 million in the second quarter of 2005. Despite a 5 percent decline in volume, sales were up from last year due to an 18 percent increase in selling prices, which was driven by significantly higher feedstock costs. Purchased feedstock and energy costs were up 18 percent from the same period last year. Volume was down from the second quarter of 2005 principally due to reduced ethylene sales to MEGlobal, as that joint venture conducted a series of planned maintenance turnarounds in Canada. For the first half of 2006, sales for the Hydrocarbons and Energy segment were $3,074 million, up 6 percent from $2,902 million in the same period last year, as a 16 percent increase in selling prices was partially offset by a 10 percent decline in volume. Year to date, feedstock costs were up $1.6 billion, or 19 percent, compared with the first six months of 2005.
The Hydrocarbons and Energy business transfers materials to Dow’s derivatives businesses at cost. Hydrocarbons and Energy EBIT for the second quarter of 2006 was $2 million versus $0 million in the same quarter of last year. Year-to-date EBIT for 2006 was $0 million, unchanged from the first six months of 2005.
UNALLOCATED AND OTHER
Sales for Unallocated and Other, which primarily relate to the Company’s insurance operations, were $81 million in the second quarter of 2006, down from $88 million in the same period of 2005. Year-to-date sales were $176 million, up 11 percent from $158 million in the first six months of 2005.
Included in the results for Unallocated and Other are:
• results of insurance operations,
• gains and losses on sales of financial assets,
• stock-based compensation expense,
• expenses related to Dow Ventures,
• asbestos-related defense and resolution costs,
• foreign exchange hedging results, and
• overhead and other cost recovery variances not allocated to the operating segments.
EBIT for the second quarter of 2006 was a loss of $180 million, compared with a loss of $172 million for the second quarter of 2005. Compared with last year, results declined due to an increase in stock-based compensation expense and an unfavorable swing in foreign exchange hedging results. In the second quarter of 2005, EBIT included a loss of $31 million associated with the early extinguishment of $845 million of debt.
EBIT for the first six months of 2006 was a loss of $314 million, compared with a loss of $560 million for the same period last year. Compared with last year, 2006 year-to-date results were favorably impacted by lower stock-based compensation expense of approximately $135 million and lower expenses related to the allowance for doubtful receivables of approximately $60 million. As mentioned previously, results in the first six months of last year were reduced by a $31 million loss on the early extinguishment of debt.
Sales Volume and Price by Operating Segment and Geographic Area
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
Percentage change from prior year |
| Volume |
| Price |
| Total |
| Volume |
| Price |
| Total |
|
Operating segments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Plastics |
| 11 | % | 2 | % | 13 | % | 14 | % | 1 | % | 15 | % |
Performance Chemicals |
| 6 |
| (1 | ) | 5 |
| 2 |
| (1 | ) | 1 |
|
Agricultural Sciences |
| (5 | ) | (2 | ) | (7 | ) | (3 | ) | (2 | ) | (5 | ) |
Basic Plastics |
| 5 |
| 11 |
| 16 |
| 2 |
| 5 |
| 7 |
|
Basic Chemicals |
| — |
| 5 |
| 5 |
| (2 | ) | 1 |
| (1 | ) |
Hydrocarbons and Energy |
| (5 | ) | 18 |
| 13 |
| (10 | ) | 16 |
| 6 |
|
Total |
| 4 | % | 5 | % | 9 | % | 3 | % | 3 | % | 6 | % |
Geographic area sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| — |
| 7 | % | 7 | % | 1 | % | 6 | % | 7 | % |
Europe |
| 5 | % | 6 |
| 11 |
| 2 |
| 1 |
| 3 |
|
Rest of World |
| 9 |
| 2 |
| 11 |
| 7 |
| 2 |
| 9 |
|
Total |
| 4 | % | 5 | % | 9 | % | 3 | % | 3 | % | 6 | % |
34
OUTLOOK
Continued global GDP growth should drive higher demand for the chemical industry, especially in China and other emerging regions of the world. With supply growth limited, industry supply/demand balances should remain favorable. However, continued volatility in feedstock and energy costs adds uncertainty to the profit outlook. Crude oil and natural gas are expected to remain high and volatile, with that volatility accentuated by geopolitical uncertainties, particularly for oil. Brent crude is expected to remain above $70 per barrel in the months ahead. Barring significant disruptions from hurricanes, U.S. natural gas is expected to average between $6.00 and $7.00 per MM Btu for several months, before rising late in the year.
For the third quarter of 2006, purchased feedstock and energy costs are expected to be about $400 million higher than in second quarter of 2006, although this expectation may be impacted by continued volatility. Prices for crude oil, naphtha and ethane are all expected to average higher in the third quarter, while U.S. natural gas prices are expected to remain relatively stable barring a significant disruption from hurricanes.
With many price increases announced, product prices are expected to rise in response to higher feedstock and energy costs, but the full implementation of these increases may not be fast enough to result in margin expansion for some businesses. The solid demand experienced during the second quarter of 2006 is expected to continue into the third quarter for many of Dow’s businesses, although Dow AgroSciences and certain other businesses expect to see a typical seasonal decline.
Given the challenges of the first half of the year, the Company believes it will be difficult to meet its earlier expectation that earnings in 2006 will be better than in 2005. However, 2006 and 2007 are still expected to be very good years for Dow.
CHANGES IN FINANCIAL CONDITION
The Company’s cash flows from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows, are summarized in the following table:
Cash Flow Summary |
| Six Months Ended |
| ||||
In millions |
| June 30, |
| June 30, |
| ||
Cash provided by (used in): |
|
|
|
|
| ||
Operating activities |
| $ | 1,935 |
| $ | 2,442 |
|
Investing activities |
| (852 | ) | (855 | ) | ||
Financing activities |
| (1,736 | ) | (1,304 | ) | ||
Effect of exchange rate changes on cash |
| 9 |
| (229 | ) | ||
Net change in cash and cash equivalents |
| $ | (644 | ) | $ | 54 |
|
Cash provided by operating activities was lower in the first six months of 2006 than in the same period last year due to lower earnings and an increase in working capital requirements. At June 30, 2006, total inventories were $5.8 billion, up from $5.3 billion at year-end 2005, due in part to higher costs for feedstocks and energy, as well as other raw materials.
Cash used in investing activities in the first six months of 2006 declined slightly compared with the same period last year. While the Company acquired previously leased assets for $100 million and increased capital expenditures $48 million in the first six months of 2006, cash used in investing activities in the first six months of last year included $98 million for the acquisition of the remaining 28 percent of PBBPolisur S.A., a consolidated company, and $170 million paid to Cargill Dow LLC, a former 50:50 joint venture of the Company, partially offset by proceeds of $87 million from the sale of DDE.
Cash used in financing activities in the first six months of 2006 increased significantly compared with the same period last year, principally due to an increase in purchases of treasury stock (related to a share repurchase program authorized in July 2005), an increase in dividends paid to stockholders and a decline in proceeds from sales of common stock (related to the exercise of stock options and the Employees’ Stock Purchase Plan), partially offset by lower payments on long-term debt. During the second quarter of 2005, the Company significantly reduced debt levels, including the early extinguishment of $845 million of debt.
35
The following tables present working capital, total debt and certain balance sheet ratios:
Working Capital |
| June 30, |
| Dec. 31, |
| ||
Current assets |
| $ | 17,398 |
| $ | 17,404 |
|
Current liabilities |
| 9,602 |
| 10,663 |
| ||
Working capital |
| $ | 7,796 |
| $ | 6,741 |
|
Current ratio |
| 1.81:1 |
| 1.63:1 |
| ||
Days-sales-outstanding-in-receivables |
| 39 |
| 39 |
| ||
Days-sales-in-inventory |
| 61 |
| 59 |
|
Total Debt |
| June 30, |
| Dec. 31, |
| ||
Notes payable |
| $ | 191 |
| $ | 241 |
|
Long-term debt due within one year |
| 778 |
| 1,279 |
| ||
Long-term debt |
| 9,248 |
| 9,186 |
| ||
Total debt |
| $ | 10,217 |
| $ | 10,706 |
|
Debt as a percent of total capitalization |
| 36.0 | % | 39.1 | % |
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 June 30, 2006, there were no commercial paper borrowings outstanding. In the event Dow has short-term liquidity needs and is unable to access these short-term markets for any reason, Dow has the ability to access liquidity through its committed and available credit facilities with various U.S. and foreign banks totaling $3.0 billion in support of its working capital requirements and commercial paper borrowings. At the beginning of 2006, these facilities included a $1.25 billion 364-day revolving credit facility, set to mature in April 2006, and a $1.75 billion 5-year revolving credit facility, with an April 2009 maturity date. In April 2006, these credit facilities were replaced with a $3 billion 5-year revolving credit facility which matures in April 2011.
At June 30, 2006, the Company had $3.5 billion of SEC-registered securities available for issuance under U.S. shelf registrations, as well as Euro 1.5 billion (approximately $1.9 billion) available for issuance under the Company’s Euro Medium Term Note Program.
Dow’s public debt instruments and documents for its private funding transactions contain, among other provisions, certain covenants and default provisions. At June 30, 2006, 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 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
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. During the first six months of 2006, the Company purchased 12,010,800 shares of the Company’s common stock under this program. See PART II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds for additional information.
Contractual Obligations
Information related to the Company’s contractual obligations and commercial commitments at December 31, 2005 can be found in Notes K, L, M, N and T to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. There have been no material changes in the Company’s contractual obligations or commercial commitments since December 31, 2005.
The Company also had outstanding guarantees at June 30, 2006. Additional information related to these guarantees can be found in the “Guarantees” table provided in Note E to the Consolidated Financial Statements.
36
Dividends
On July 28, 2006, the Company paid a quarterly dividend of $0.375 per share to stockholders of record on June 30, 2006. Since 1912, the Company has paid a cash dividend every quarter and, in each instance, Dow has maintained or increased the amount of the dividend, adjusted for stock splits. During that 94-year period, Dow has increased the amount of the quarterly dividend 46 times (approximately 12 percent of the time) and maintained the amount of the quarterly dividend approximately 88 percent of the time.
Accounting Changes
See Note B to the Consolidated Financial Statements for a discussion of accounting changes and recently issued accounting pronouncements.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note A to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (“2005 10-K”) describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. Dow’s critical accounting policies that are impacted by judgments, assumptions and estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s 2005 10-K. Since December 31, 2005, there have been no material changes in the Company’s critical accounting policies.
Asbestos-Related Matters of Union Carbide Corporation
Introduction
Union Carbide Corporation (“Union Carbide”), a wholly owned subsidiary of the Company, is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to Union Carbide’s products.
Influenced by the bankruptcy filings of numerous defendants in asbestos-related litigation and the prospects of various forms of state and national legislative reform, the rate at which plaintiffs filed asbestos-related suits against various companies, including Union Carbide and Amchem, increased in 2001, 2002 and the first half of 2003. Since then, the rate of filing has significantly abated. Union Carbide expects more asbestos-related suits to be filed against Union Carbide and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.
The table below provides information regarding asbestos-related claims filed against Union Carbide and Amchem:
|
| 2006 |
| 2005 |
|
Claims unresolved at January 1 |
| 146,325 |
| 203,416 |
|
Claims filed |
| 9,130 |
| 20,456 |
|
Claims settled, dismissed or otherwise resolved |
| (34,327 | ) | (25,402 | ) |
Claims unresolved at June 30 |
| 121,128 |
| 198,470 |
|
Claimants with claims against both Union Carbide and Amchem |
| 42,096 |
| 64,682 |
|
Individual claimants at June 30 |
| 79,032 |
| 133,788 |
|
37
Plaintiffs’ lawyers often sue dozens or even hundreds of defendants in individual lawsuits on behalf of hundreds or even thousands of claimants. As a result, the damages alleged are not expressly identified as to Union Carbide, Amchem or any other particular defendant, even when specific damages are alleged with respect to a specific disease or injury. In fact, there are no personal injury cases in which only Union Carbide and/or Amchem are the sole named defendants. For these reasons and based upon Union Carbide’s litigation and settlement experience, Union Carbide does not consider the damages alleged against Union Carbide and Amchem to be a meaningful factor in its determination of any potential asbestos liability.
Estimating the Liability
Based on a study completed by Analysis, Research & Planning Corporation (“ARPC”) in January 2003, Union Carbide increased its December 31, 2002 asbestos-related liability for pending and future claims for the 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. At each balance sheet date, Union Carbide compares current asbestos claim and resolution activity to the assumptions in the most recent ARPC study to determine whether the accrual continues to be appropriate.
In November 2004, Union Carbide requested ARPC to review Union Carbide’s historical asbestos claim and resolution activity and determine the appropriateness of updating its January 2003 study. In January 2005, ARPC provided Union Carbide with a report summarizing the results of its study. At December 31, 2004, Union Carbide’s recorded asbestos-related liability for pending and future claims was $1.6 billion. Based on the low end of the range in the January 2005 study, Union Carbide’s recorded asbestos-related liability for pending and future claims at December 31, 2004 would be sufficient to resolve asbestos-related claims against Union Carbide and Amchem into 2019. As in its January 2003 study, ARPC provided estimates for a longer period of time in its January 2005 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 studies, Union Carbide’s asbestos litigation experience, and the uncertainties surrounding asbestos litigation and legislative reform efforts, Union Carbide’s management determined that no change to the accrual was required at December 31, 2004.
In November 2005, Union Carbide requested ARPC to review Union Carbide’s 2005 asbestos claim and resolution activity and determine the appropriateness of updating the January 2005 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2005. In January 2006, ARPC stated that an update of the 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, 2005. Union Carbide’s asbestos-related liability for pending and future claims was $1.5 billion at December 31, 2005. Approximately 39 percent of the recorded liability related to pending claims and approximately 61 percent related to future claims.
Based on Union Carbide’s review of 2006 activity, Union Carbide determined that no change to the accrual was required at June 30, 2006. Union Carbide’s asbestos-related liability for pending and future claims was $1.4 billion at June 30, 2006. Approximately 36 percent of the recorded liability related to pending claims and approximately 64 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 |
| Six Months Ended |
| Aggregate Costs |
| |||||
In millions |
| June 30, |
| June 30, |
| to Date as of |
| |||
Defense costs |
| $ | 28 |
| $ | 32 |
| $ | 447 |
|
Resolution costs |
| $ | 73 |
| $ | 98 |
| $ | 1,138 |
|
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 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.
38
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.
Union Carbide’s receivable for insurance recoveries related to its asbestos liability was $485 million at June 30, 2006 and $535 million at December 31, 2005. At June 30, 2006, $391 million ($398 million at December 31, 2005) 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, Union Carbide had receivables for defense and resolution costs submitted to insurance carriers for reimbursement as follows:
Receivables for Costs Submitted to Insurance Carriers
In millions |
| June 30, |
| Dec. 31, |
| ||
Receivables for defense costs |
| $ | 21 |
| $ | 73 |
|
Receivables for resolution costs |
| 333 |
| 327 |
| ||
Total |
| $ | 354 |
| $ | 400 |
|
Union Carbide expenses defense costs as incurred. The pretax impact for defense and resolution costs, net of insurance, was $14 million in the second quarter of 2006 ($14 million in the second quarter of 2005) and $28 million in the first six months of 2006 ($32 in the first six months of 2005), and was reflected in “Cost of sales.”
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. Although Union Carbide already has settlements in place concerning coverage for asbestos claims with many of its insurers, including those covered by the 1985 Wellington Agreement, 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. The insurance carriers are contesting this litigation. Through the second quarter of 2006, Union Carbide reached settlements with several of the carriers involved in this litigation. After a further 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.
39
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Dow’s business operations give rise to market risk exposure due to changes in foreign exchange rates, interest rates, commodity prices and other market factors such as equity prices. To manage such risks effectively, the Company enters into hedging transactions, pursuant to established guidelines and policies, which enable it to mitigate the adverse effects of financial market risk. Derivatives used for this purpose are designated as hedges per SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” where appropriate. A secondary objective is to add value by creating additional non-specific exposure within established limits and policies; derivatives used for this purpose are not designated as hedges per SFAS No. 133. The potential impact of creating such additional exposures is not material to the Company’s results.
The global nature of Dow’s business requires active participation in the foreign exchange markets. As a result of investments, production facilities and other operations on a global basis, the Company has assets, liabilities and cash flows in currencies other than the U.S. dollar. The primary objective of the Company’s foreign exchange risk management is to optimize the U.S. dollar value of net assets and cash flows, keeping the adverse impact of currency movements to a minimum. To achieve this objective, the Company hedges on a net exposure basis using foreign currency forward contracts, over-the-counter option contracts, cross-currency swaps, and nonderivative instruments in foreign currencies. Main exposures are related to assets and liabilities denominated in the currencies of Europe, Asia Pacific and Canada; bonds denominated in foreign currencies – mainly the Euro and Japanese yen; and economic exposure derived from the risk that currency fluctuations could affect the U.S. dollar value of future cash flows. The majority of the foreign exchange exposure is related to European currencies and the Japanese yen.
The main objective of interest rate risk management is to reduce the total funding cost to the Company and to alter the interest rate exposure to the desired risk profile. Dow uses interest rate swaps, “swaptions,” and exchange-traded instruments to accomplish this objective. The Company’s primary exposure is to the U.S. dollar yield curve.
Dow has a portfolio of equity securities derived from its acquisition and divestiture activity. This exposure is managed in a manner consistent with the Company’s market risk policies and procedures.
Inherent in Dow’s business is exposure to price changes for several commodities. Some exposures can be hedged effectively through liquid tradable financial instruments. Feedstocks for ethylene production and natural gas constitute the main commodity exposures. Over-the-counter and exchange traded instruments are used to hedge these risks when feasible.
Dow uses value at risk (“VAR”), stress testing and scenario analysis for risk measurement and control purposes. VAR estimates the potential gain or loss in fair market values, given a certain move in prices over a certain period of time, using specified confidence levels. On an ongoing basis, the Company estimates the maximum gain or loss that could arise in one day, given a two-standard-deviation movement in the respective price levels. These amounts are relatively insignificant in comparison to the size of the equity of the Company. The VAR methodology used by Dow is based primarily on the variance/covariance statistical model. The year-end VAR and average daily VAR for the aggregate of non-trading and trading positions for 2005 and 2004 are shown below:
Total Daily VAR at December 31* |
| 2005 |
| 2004 |
| ||||||||
In millions |
| Year-end |
| Average |
| Year-end |
| Average |
| ||||
Foreign exchange |
| $ | 3 |
| $ | 6 |
| $ | 2 |
| $ | 2 |
|
Interest rate |
| $ | 55 |
| $ | 65 |
| $ | 80 |
| $ | 87 |
|
Equity exposures, net of hedges |
| $ | 2 |
| $ | 2 |
| $ | 1 |
| $ | 2 |
|
Commodities |
| $ | 23 |
| $ | 21 |
| $ | 26 |
| $ | 29 |
|
*Using a 95 percent confidence level
Since December 31, 2005, there have been no material changes in the Company’s risk management policies or in the Company’s daily VAR for the aggregate of non-trading and trading positions.
For further disclosure regarding market risk, see Note I to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
40
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s Disclosure Committee and the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to paragraph (b) of Exchange Act Rules 13a-15 or 15d-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
41
Asbestos-Related Matters of Union Carbide Corporation
No material developments regarding this matter occurred during the second quarter of 2006. For a summary of the history and current status of this matter, see Note E to the Consolidated Financial Statements; and Management’s Discussion and Analysis of Financial Condition and Results of Operations, Asbestos-Related Matters of Union Carbide Corporation.
Environmental Matters
The Company and the Texas Commission on Environmental Quality (the “TCEQ”) are in the process of combining 12 Notices of Enforcement (“NOEs”) issued by the TCEQ in relation to the Company’s Freeport, Texas, site into a single enforcement matter for resolution. Nine of the 12 initial penalty assessments associated with the NOEs were received by the Company in the second quarter of 2006. The 12 NOEs primarily relate to alleged fugitive air emissions, air emission events and environmental recordkeeping violations; and seek a combined civil penalty of $858,738. While the Company expects that the penalty will ultimately be reduced, resolution of all 12 NOEs will result in a combined civil penalty in excess of $100,000.
There were no material changes in the Company’s risk factors in the second quarter of 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table provides information regarding purchases of the Company’s common stock by the Company during the three months ended June 30, 2006:
Issuer Purchases of Equity Securities
Period |
| Total number of |
| Average price |
| Total number of shares |
| Maximum number of |
| |
April 2006 |
| 339,793 |
| $ | 40.07 |
| — |
| 16,912,600 |
|
May 2006 |
| 1,542,700 |
| 40.19 |
| 1,542,700 |
| 15,369,900 |
| |
June 2006 |
| 3,098,828 |
| 38.58 |
| 3,094,900 |
| 12,275,000 |
| |
Second quarter 2006 |
| 4,981,321 |
| $ | 39.18 |
| 4,637,600 |
| 12,275,000 |
|
(1) Includes 343,721 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 G to the Consolidated Financial Statements.
(2) On July 14, 2005, the Company publicly announced that the Board of Directors had authorized on that day the repurchase of up to 25 million shares of Dow common stock over the period ending on December 31, 2007. 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.
42
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of stockholders of The Dow Chemical Company was held on May 11, 2006. At that meeting, Jacqueline K. Barton, James A. Bell, Barbara Hackman Franklin, Andrew N. Liveris, Geoffery E. Merszei, J. Pedro Reinhard, Ruth G. Shaw and Paul G. Stern were re-elected to the Company’s Board of Directors for one-year terms to expire at the annual meeting in 2007. In addition, the terms of the following directors continued after that meeting: Arnold A. Allemang, Jeff M. Fettig and James M. Ringler.
The following table gives a brief description of each matter voted upon at the above referenced annual meeting and, as applicable, the number of votes cast for, against or withheld, as well as the number of abstentions and broker nonvotes.
Description of Matter |
| For |
| Against |
| Withheld |
| Abstentions |
| Broker |
| |
1. | Election of Directors: |
|
|
|
|
|
|
|
|
|
|
|
| Jacqueline K. Barton |
| 820,025,112 |
| N/A |
| 18,584,378 |
| N/A |
| N/A |
|
| James A. Bel1 |
| 825,290,164 |
| N/A |
| 13,319,326 |
| N/A |
| N/A |
|
| Barbara H. Franklin |
| 816,306,480 |
| N/A |
| 22,303,010 |
| N/A |
| N/A |
|
| Andrew N. Liveris |
| 813,655,573 |
| N/A |
| 24,953,917 |
| N/A |
| N/A |
|
| Geoffery E. Merszei |
| 796,970,882 |
| N/A |
| 41,638,608 |
| N/A |
| N/A |
|
| J. Pedro Reinhard |
| 812,860,132 |
| N/A |
| 25,749,358 |
| N/A |
| N/A |
|
| Ruth G. Shaw |
| 825,219,142 |
| N/A |
| 13,390,348 |
| N/A |
| N/A |
|
| Paul G. Stern |
| 820,043,867 |
| N/A |
| 18,565,623 |
| N/A |
| N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. | Ratification of the appointment of Deloitte & Touche LLP as independent registered public accounting firm for 2006 |
| 819,697,014 |
| 12,257,072 |
| N/A |
| 6,655,404 |
| N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. | Stockholder Proposal on Bhopal |
| 39,741,164 |
| 590,861,982 |
| N/A |
| 69,081,728 |
| 138,924,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. | Stockholder Proposal on Genetically Engineered Seed |
| 43,408,941 |
| 582,653,002 |
| N/A |
| 73,622,931 |
| 138,924,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. | Stockholder Proposal on Respiratory Problems |
| 36,500,304 |
| 588,581,137 |
| N/A |
| 74,603,433 |
| 138,924,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. | Stockholder Proposal on Security of Chemical Facilities |
| 43,114,359 |
| 582,484,301 |
| N/A |
| 74,086,214 |
| 138,924,616 |
|
N/A - - Not applicable
See the Exhibit Index on page 46 of this Quarterly Report on Form 10-Q for exhibits filed with this report.
43
Trademark Listing
The following trademarks or service marks of The Dow Chemical Company and certain affiliated companies of Dow appear in this report: AFFINITY, AMPLIFY, ASPUN, ATTANE, BETABRACE, BETADAMP, BETAFOAM, BETAGUARD, BETAMATE, BETASEAL, CALIBRE, CARBOWAX, CELLOSIZE, COMBOTHERM, CONTINUUM, CYRACURE, D.E.H., D.E.N., D.E.R., DOW, DOW XLA, DOWEX, DOWEX QCAT, DOWFAX, DOWFLAKE, DOWLEX, DOWPER, DOWTHERM, DRYTECH, ELITE, EMERGE, ENGAGE, THE ENHANCER, EQUIFOAM, ETHAFOAM, ETHOCEL, EXO, FILMTEC, FLEXOL, FLEXOMER, FROTH-PAK, GREAT STUFF, IMMOTUS, IMPAXX, INSPIRE, INSTA-STIK, INTEGRAL, ISONATE, ISOPLAST, LIFESPAN, LIQUIDOW, LP OXO, MAGNUM, MAXICHECK, MAXISTAB, METEOR, METHOCEL, NEOCAR, NORDEL, OPTIM, PAPI, PELADOW, PELLETHANE, POLYOX, POLYPHOBE, PRIMACOR, PROCITE, PULSE, QBIS, QUASH, REDI-LINK, SAFE-TAINER, SARAN, SARANEX, SHAC, SI-LINK, SPECFLEX, SPECTRIM, STRANDFOAM, STYROFOAM, STYRON, STYRON A-TECH, STYRON C-TECH, SYMMATRIX, SYNERGY, SYNTEGRA, TERGITOL, TILE BOND, TONE, TRENCHCOAT, TRITON, TRYMER, TUFLIN, TYRIL, TYRIN, UCAR, UCARTHERM, UCON, UNIGARD, UNIPOL, UNIPURGE, UNIVAL, VERSENE, VERSIFY, VORACOR, VORACTIV, VORALAST, VORALUX, VORANATE, VORANOL, VORASTAR, WEATHERMATE, ZETABON
The following trademarks or service marks of Dow AgroSciences LLC and certain affiliated companies of Dow AgroSciences LLC appear in this report: CLINCHER, DITHANE, FORTRESS, GARLON, GLYPHOMAX, GRANITE, HERCULEX, KEYSTONE, LAREDO, LONTREL, LORSBAN, MUSTANG, MYCOGEN, NATREON, NEXERA, PHYTOGEN, PROFUME, SENTRICON, STARANE, STINGER, SURPASS, TELONE, TORDON, TRACER NATURALYTE, VIKANE, WIDESTRIKE
The following trademark of Dow Corning Corporation appears in this report: SYLTHERM
44
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
THE DOW CHEMICAL COMPANY | ||
Registrant | ||
| ||
| ||
Date: August 1, 2006 | ||
| ||
| ||
| /s/WILLIAM H. WEIDEMAN |
|
| William H. Weideman |
|
| Vice President and Controller |
|
45
EXHIBIT NO. |
| DESCRIPTION |
|
|
|
23 |
| Analysis, Research & Planning Corporation’s Consent. |
|
|
|
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 held on May 11, 2006, as amended pursuant to a resolution adopted by the Board of Directors of The Dow Chemical Company on July 14, 2006, to provide for an annual, all inclusive, payment of $200,000 to a non-employee Chairman of the Board. |
|
|
|
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. |
46