Document mp2MrrNyEbrxg5Ev90QxknJ40

Contents About the Company... Page 1 Highlights of the Year 2 President's Letter 3 The Year in Review 12 Dow Medal Winners: Staking Out The Future 17 Financial Review 21 Management Statement of Responsibility 21 Opinion of Independent Public Accountants 22 Accounting Principles 23 Consolidated Statement Of Income 24 Consolidated Balance Sheet 26 Consolidated Statement of Capital Surplus 26 Consolidated Statement of Retained Earnings 27 Consolidated Statement of Changes in Financial Position 28 Notes to Financial Statements 35 Geographic Results 36 Product Group Results 38 Condensed Comparative Statements 40 Directors and Officers About the Cover In the spirit of the company's founder, the new Herbert H. Dow Meda] highlights the PrOlinc inventiveness of Dow scientists. See the story beginning on page twelve. The Dow Chemical Company is the seventh largest chemical company in the world in terms of sales, second largest in the United States. It ranked 27th in sales in 1978 among the Fortune Magazine 500 leading U.S. industrial companies -- 17th in net income. At year's end, its shares were valued on the market at $6.44 billion, 17th among companies listed on the New York Stock Exchange. Dow makes a broad range of more than two thousand products in the fields of chemicals, plastics, metals, consumer products and pharmaceuticals. The company is a significant producer of most of the products it makes. Some of the major products are polystyrene, polyethylene, chlorine, caustic soda, vinyl chloride, propylene and ethylene glycols and oxides, styrene-butadiene latex, magnesium and Styrofoam brand plastic foam. Headquartered in Midland, Michigan, where it was founded in 1897, Dow and its wholly and principal partly owned companies have 121 manufacturing locations and 162 sales offices around the world. Management is organized on a geographical basis into six areas: United States, Europe, Canada, Pacific, Latin America and Brazil. In 1979, for the first time, more than 50 percent of the company's sales were outside the United States. Dow's growth is reflected in its dividends. Payments have increased each year for the last 20 consecutive years, at a rate far faster than the inflation rate of the United States and many other major economies, yet remain a conservative 34 percent of 1979's net income. To fuel its growth, the company has invested heavily in capital equipment. Dow has spent more than $5.6 billion for new plants in the past five years. The company finances its growth largely through retained earnings, depreciation and debt, and has refrained from issuing new stock. The number of shares outstanding (adjusted for stock splits) is no more than it was 10 years ago. Dow has 55,900 employees, 21,800 of them outside the United States. They're productive: sales averaged more than $165,000 per employee in 1979. And management is stable: the principal officers have been with the company for an average of 31 years. All of the chief executives have been selected from within the company. Dow's principal objective is "to seek maximum long-term profit growth as the primary means to ensure the prosperity and well-being of our employees, stockholders and our customers by making products that the people of the world need, and to do so better than anyone else." "Product Stewardship" describes the company's concern and program for the safe manufacture, handling, use and disposal of its products by itself, its customers and consumers * oo CD CD 'J Highlights of the Year Net sales.................................. Net income.................................. U.S. and foreign income taxes .............................. Net income per share (in dollars)......................... Dividends paid per share (in dollars)......................... 1979 1978 % change (in millions unless otherwise stated) 10-year compound annual % growth $9,255.4 783.9 $6,887.6 +34.4% 575.2 +36.3% + 17.8% +18.6% 515.0 383.9 +34.1% +20.2% 4.33 3.16 +37.0% +18.7% 1.45 1.25 -16.0% +13.2% Average shares outstanding................................ Stockholders (in thousands, year-end)................. Employees (in thousands, year-end)................. Wages, salaries and benefits................................ 181.1 141.5 55.9 $1,597.7 182.1 - 0.5% -- 136.7 + 3.5% + 4.6% 53.5 - 4.5% + 1.7% $1,375.8 +16.1% +13.1% Dow Dividends Vs. Inflation Where the Profit Dollar Went -- Distribution of Pre-Tax Income 816'iOOOlS 1975 1976 1977 1978 1979 <C> 3 To Oar Stockholders 616U001S : MIDLAND. MICHIGAN. The Dow Chemical Company today reported record income taxes ol S515 million tor 1979, up 34 percent from prior year levels. Other major taxes were S233 million, making Dow's total 1979 tax bill exceed $748 million Wages, salaries, and benefits paid by the company totalled SI 6 billion, up 16 percent from 1978 levels, due in part to increased employment In addition, Dow continued its major capital expansion program, investing more than SI 2 billion in new capital projects. Dow shareholders enjoyed a 16 percent dividend increase over 1978. marking the 20th consecutive year that per share dividends have increased. Profits, up 36 percent from 1978 levels, were again insuffi cient to meet the tax. dividend, and capital expenditure requirements ol the business, and Dow expects to borrow several hundred million dollars in 1980. Elsewhere in this annual report you will find highlights of Dow's 1979 performance, complete with the usual charts, graphs, and comparisons. Those comparisons have great value as they focus on performance, profits, and earnings growth; but they can't fully convey the other values that flow from a successful enterprise. That's why this letter begins with a different kind of year-end statement, and why I want to expand on its content. Successful companies pay taxes--lots of taxes. Dow incurred more than 5748 million in 1979. But that's not the whole story. The taxes our employees incur on their earnings and that our shareholders incur on their dividends are probably in excess of S410 million, which means government collected more than Sl.l billion because Dow was in business during 1979. Incidentally, for those who think senior executives beat the system and pay no taxes, I can report that mv tax bill for 1978 was more than half my gross income. Dow (and I) expect a heavy burden. At the same time, we will continue to resist the intrusion of government into our activities, and to challenge wasteful and needless regulation and expense. Successful companies can properly reward their employees, can increase their employment levels appropriately in good business periods, and can maintain employment levels when times are tough. Dow went through the past decade with no significant layoffs, in striking contrast to many of our competitors and to other Michigan-based industries. Successful companies can reward their shareholders. Dow has a long and proud tradition of rewarding our owners' investment. Not onlv is 1979 2 the 20th consecutive year in which our dividend increased, but Dow has never reduced its dividend since it began paying regular dividends in 1912, a record we believe unparalleled in American manufacturing industry. Successful companies can reinvest in their business.In our case, that investment totalled more than Si.2 billion in 1979, and will increase in the '80 s. Incidentally, for those who wonder whether our activities abroad are good for the United States, 1 can report that Dow U.S.A. exports in 1979 had a market value of Si.2 billion, and were about Si billion greater than Dow U.S.A. imports. That's a significant factor in helping the serious balance of payments problem the U.S. faces as it remains hostage to OPEC oil. Successful companies can afford to spend money on research to find new products and new processes. In our case, some S269 million in 1979. The results are obviously good for Dow, and also get at some of society's fundamental problems. Energy conservation is a good example. Energy saving projects implemented in the past decade are saving Dow worldwide more than 20 million barrels of oil per year in energy equivalents. Annual savings in just one process in our Texas Division amounted to more energy than all 34,100 Dow U.S.A. employees use each year in their personal cars. Successful companies can use conservative accounting practices and ensure a stable financial base. That's why our pension plan is healthy and win we can elect, as we did in 1979, to increase payments to retirees Along with our 55,900 other emplovees. I'm proud to be a part of Dow, and of what our Company stands for. 1 believe each of our shareholders also has a right to be proud of Dow's 1979 performance. Your Company can hardly wait to do even better in the '80 s Paul F Oreftice President The Year in Review -- Global Position Helps Dow Achieve Outstanding Year As Soaring Costs and Prices Fail to Dampen Demand 0Z6 HJ001S . It was an outstanding year for Dow. The upsurge in sales of 34 percent and in net income of 36 percent was the greatest since 1974. The sales increase was fueled largely by price rises made necessary by huge jumps in energy and hydrocarbon feedstock costs. The cost of hydrocarbons and energy rose 39 percent and further significant increases are expected in 1980. But gains were also made in real terms, as physical volume rose 10 percent. The consistently High demand throughout the year made it possible to restore profit margins from their previously depressed levels in many parts of the world. The increased volume was reflected in Dow's operating rate, which rose from 79 percent of capacity in 1978 to 84 percent in 1979. Dow was in an unique position to benefit from robust demand and improving prices. One reason was its global positioning, with 162 sales offices worldwide and plants in 30 countries. In 1979, for the first time, more than half of Dow's sales were outside the United States. Another reason was Dow's foresight in investing heavily in new manufacturing facili ties during the past several years, even though this penalized earnings during those years. One result was that Dow entered 1979 with ample capacity that was relatively new and well-positioned to meet the growing world wide demand. Capital spending topped one billion dollars for the fourth consecutive year in 1979 and spending is expected to increase modestly for the next several years. Four major capital projects neared comple tion: a crude oil processing plant in Texas, an ethylene plant using naphtha as feedstock in Louisiana, a petrochemical complex in Canada and a chloralkali facility in Korea. These four projects alone represent an investment of Si.5 billion. While the substantial start-up costs for these new facilities will be expensive for the company in 1980, their added capacity repre sent a timely opportunity for increased sales. Additional sales capacity can be expected in future years as well. During much of the 1970s, a large percentage of capital spending was devoted to modifying older plants for greater energy conservation and pollution control. Since the bulk of that work is nearing completion, future capital budgets will be more heavily weighted to new production capacity and greater plant efficiency. Early in the year, turmoil in petrochemical pricing and availability growing out of the Iranian crisis led many U.S., European and Japanese producers to withdraw from such "third markets" as Mexico and other countries in Latin America and Asia. Dow, on the other hand, adhered to its policy of treating key customers equally, regardless of nationality. This international outlook greatly enhanced the company's reputation as a reliable supplier and earned valuable good will among large, and growing, consumers of industrial chemi cals and plastic resins. Dow's research spending rose for the 20th consecutive year and reached $269 million. Research and development, an integral part of the company's organization, has increased its spending over those years at a compound annual rate of 9.6 percent. Non-U.S. Business Even as capital spending rises outside the United States, the market value of Dow's exports from the U S continues to climb. 3 The Year in Review--Continued ST 0 0 C4 9 2 I Three new members were elected to the board of directors: Hunter W. Henry, president of Dow Brazil; Paul W. McCracken, an economist and university professor, and Joseph G. Temple, Jr., president of Dow Latin America. In February, a subsidiary of the company issued $200 million in Eurobonds to finance capital needs of Dow's operating subsidiaries outside the United States. Dow traditionally uses debt, rather than diluting its stock by issuing new shares, to finance its require ments for growth beyond that which can be covered by retained earnings. Styrene Plastics (U S. unit sales) H Acrvlonitrile-butadiene-styrene S3 Tyrtl styrene-acrylonitrile resins . Modified Additive Polystyrene 13 Impact Polystyrene H High Heat 13 Easv Flow Nieu polymer developments keep an old product growing In September, the board increased the quarterly dividend frora 35 cents to 40 cents, raising the total dividend paid during the year to $1.45, an increase of 16 percent over the $1.25 paid in 1978. At the current rate, the payout will be 51.60 in 1980. in December. MT Partnership, a 50-50 joint venture of Maligne Resources Ltd. (a whollyowned subsidiary of Dow Canada) and TCPL Resources Ltd. ( a wholly-owned subsidiary of TransCanada PipeLines Ltd.), was created. The net effect of this move provides Dow Canada with greater opportunities to expand the search for hydrocarbon and mineral deposits, increase its oil and gas holdings and continue its profitable relationship with Dome Petroleum. The number of employees grew by 2,400 to 55,900. Most of the gain was in the United States, principally at the Dowell, Louisiana, Oyster Creek and Texas Divisions. The worldwide safety performance of Dow's employees continued to improve, as measured by a seven percent reduction in "days away from work cases" compared with 1978. One of the safety highlights of the year took place on October 30 when the Latin American Area completed 10 million manhours without an injury, thereby earning the Dow President's 5afetv Award. Significant increases were recorded in the sales of most Dow products. Exceptionally strong demand for industrial chemicals was evident in the Latin American and Pacific areas. Asian demand for chlorine derivatives was extraordinarily high and Dow reinforced its commitment to these markets with the start-up of new production capacity for eth ylene dichloride and vinyl chloride monomer in Korea and Canada. Chlorothene metal cleaning solvent sold especially well in Europe; its low toxicity continues to gain recognition as an important asset for safety in the workplace. As demand for chlorine derivatives contin ues to grow in non-producing countries, the logistics and cost of marine transportation emerge as major challenges for the 1980s. Specialized cargo ships are already in short supply, and demand threatens to far outpace new shipping capacity. 4 fSTC0C432 The Year in Review--Continued ' STC0C1923 Sates of magnesium rose substantially, as pricing stayed relatively competitive with aluminum. But prices did not keep pace with energy cost increases even with major im provements in manufacturing consumption of energy per unit. The emphasis on weight reduction of U.S. automobiles offers an exciting market potential for magnesium. A significant new application for magne sium is in a new product, metallurgical granules, which are made from a Dow patented process and which have gained rapid acceptance for the desulfurization of steel. Another new product, bromine chloride, is expected to find widespread acceptance as a more effective alternative to chlorine for waste and cooling water treatment. Demand for plastic molding materials surged in spite of sharply escalating prices and costs. Although further major cost increases are expected in 1980. prices are not expected to advance as fast as in 1979. Demand for Styrofoam brand polystyrene foam held level despite a slowdown in U.S. housing. Epoxy resins sold well worldwide until the market softened during the fourth quarter. Profit margins for both products were shaved by drastic benzene cost increases. Rifampicin, an antibiotic, enjoyed increased acceptance as an integral part of the drug regimen for short course chemotherapy in the treatment of tuberculosis. The sale of probucol, an agent for reducing cholestorol levels, doubled in 1979, with the prospect of doubling again in 1980. While sales of pharmaceuticals, agricultural products and consumer products were strong, a variety of factors held back earnings A high proportion of Dow pharmaceutical sales are in Mediteranean and Latin American countries, where prices are rigidly controlled and where cost increases cannot be passed along promptly. In the United States, revenues grew for Bio-Science Enterprises, but the clinical laboratory industry has come under heavy price competition.' Significant additions to the capacity to produce Tordon herbicide and Dursban and Lorsban insecticides were readied for produc tion in 1980. Sales of agricultural products grew 18 percent but profits were hurt by start up costs and a shortage of manufacturing intermediates. United States Record sales and profits were achieved in the United States. Sales grew 25 percent, from $3.65 billion to $4.58 billion. Profit before tax rose one percent, from S617 million to $626 million. The market value of Dow's exports from the United States rose dramatically, reaching ap proximately SI.2 billion. U.S. chemical exports regularly produced a strong positive influence on the nation's balance of payments. A slight decrease in export volume may occur in the first half of 1980, as major new Dow plants come on-stream in Korea and Canada. Nevertheless, as this new capacity is absorbed by growing worldwide markets, it is anticipated that exports will resume their growth trend in 1981 and beyond. Significant developments occurred in several product lines. A different and valuable family of polyethylene resins under the trademark Doivlex was commercialized. Dozi'lex products are low and intermediate density polyethylene resins produced via a low pressure process. When used in plastic film production, Dozclex resins offer improved toughness, puncture resistance and tear strength. Billions of pounds of polyethylene plastic resins are widely used in industrial and consumer products ranging from wire and cable jackets and agriculturalconstruction-packaging films to piping, gar bage bags and household products. Rapidly growing demand is anticipated for Dowlex resins and future expansions are planned to increase present capacity from 150 million pounds a year to 850 million pounds in the United States and Europe by 1983. Other plastic products also enjoyed a banner year. Demand was particularly robust during the first half with some declines noted in the second half. A new Ziploc Heavy Duty Freezer Bag was introduced after four years of extensive con sumer research and test marketing. The new Area Sales (Dollars in Billions) 1979 6 U S K O O iS . bag, offered in two sizes, is thicker, stronger and more tear resistant than any other freezer bag on the market. After a slow beginning, oilfield activity gathered speed and ended 1979 at the highest level in 20 years, helping the Dowell Division attain its best sales year. Since 1973, Dowell sales have been growing at a rate in excess of 25 percent a year and its market share now exceeds 25 percent of the U.S. industry. Dowell and Dowell Schlumberger Corporation account for some ten percent of Dow's net income. Brine chemicals had a banner year in 1979 led by record sales of magnesium hydroxide for refractory brick in steel furnaces. Outstand ing demand continued for a new family of high density bromine compounds for use in oil and gas well drilling. This new family of compounds is expected to grow about 15 percent a year over the next five years. Work neared completion on the 200,000 barrels a day crude oil processing plant at the Oyster Creek Division in Texas. Start-up of that facility is scheduled for Spring 1980. Some of the petrochemical feedstocks from the crude oil plant, in the form of naphtha and kerosene, will be used by a new naphtha cracker also nearing completion at the Loui siana Division. A portion of the fuel oil production will fire boilers at the Texas and Louisiana Division power plants. The remain ing products will be marketed by Dow as kerosene, jet fuel, gasoils, diesel fuel, #2 heating oil, low sulfur #6 fuel oil and sulfur. The feedstock going into the naphtha cracker will be used to produce ethylene, propylene and benzene, all of which will be consumed internally; butadiene, some of which will be sold, and resin oil, all of which will be sold. The crude oil plant will ultimately have the capacity to produce about 51 billion in added sales for the company. Construction continues on a new S200 million napfitha cracker at the company s Louisiana Dinsion The cracker tctll process naphtha produced by the crude oil processing plant m Texas. The Year in Review--Continued Energy conservation remains an ongoing concern of Dow engineers and scientists. Since 1972, Dow U S. A. has achieved a 21 percent reduction in the amount of energy used for each unit of production, somewhat ahead of the goal of 20 percent reduction by 1980. Additional energy conservation projects are actively being pursued by the company. Extensive experimentation continues with coal gasification and liquefaction, extraction of oil from shale, the use of lignite for power generation and the adaptation of geopressured-geothermal energy. Concern for the environment is a fundamen tal element in all Dow operations. Based on information gathered to date, Dow U.S.A. operations do not have any waste disposal sites that pose a significant threat to human health or the environment. Europe It was a volatile but favorable year in Europe, the world's largest chemicals market. Sales surged to a record $2.66 billion, up 47 percent from 1978's $1.81 billion. Profit before tax, also a record, was $334 million and represented an increase of 53 percent. Because of the sharp rise in both costs and prices, most of the sales increase came as a result of price changes versus added volume. The improved prices enabled the restoration of healthier margins, especially in products which had previously been experiencing se vere competitive pressure. Buoyant demand for base chemicals and specialty products keep many of Dow's plants running at full speed throughout the year. At the same time, the industry faced intense cost pressures, with naphtha, the primary petro chemical raw material in Europe, escalating more than 100 percent on the open market. An intensive information program with customers enabled the company to restructure its pricing promptly. The program won wide acceptance among customers who agreed that price changes were necessary to maintain an orderly supply of products. Exceptional sales gains were made by agricultural chemicals in the Middle East, particularly for such products as Dursban, Lontrel and Plictran insecticides. .Plans were announced for construction of a world-scale phenol plant, for a 50 percent expansion of propylene oxide capacity at Stade and for production of the new Dowlex linear low density polyethylene. Work started on incremental expansions for production of ethylene amines, acrylonitrile-butadienestyrene and ethylene oxide at Temeuzen. An expansion of chloromethanes capacity and a new Dowex ion exchange resins plant were underway at Stade. Plans were announced for a new plant for Saranex film at Drusenheim and new capacity lor Styrofoam brand plastic foam in the United Arab Emirates. Negotiations continue for a $1 billion petrochemical development in Saudi Arabia. Overall, business in the Mideast and Africa advanced strongly. Pacific In percentage terms, the growth of sales in the Pacific was the best of any Dow area. Sales were up 55 percent, to $627 million from $404 million. Profit before tax rose 78 percent, to $130 million from $73 million. Near the end of the year, production started at a major facility at Yeo Su, Korea. The complex includes chlorine and caustic soda plants run by the 100 percent Dow-owned Dow Chemical Korea Ltd., and ethylene dichloride, vinyl chloride monomer and low density polyethylene plants of the 50 percent Dowowned Korea Pacific Chemical Corp. Most of the chlorine is designated for the Korean market. Initially, there will be sizable exports of caustic soda. The combined plants represent a Dow investment approaching $200 million. Ground was broken for the area's next production facility, a urethane chemicals unit at Kinu-Ura, Japan, which is slated for 1981 completion. Japan strengthened its sales lead as the largest region in the area, but East Asia, Korea and South Asia all showed impressive gains. The principal sales growth was in plastics and chemicals. During the year, the company established a commercial affairs office to handle our grow ing sales to the People's Republic of China. Temeuzen, The Netherlands, is Dow Europe's largest production site, and also the location of our European Area's naphtha cracking facilities. Left: Work progress on DINA, Dow's petrochemical joint venture on the island of Krk in Yugoslavia. The infrastructure, including a V/i kilometer span bridge to the mainland, is well advanced. Right: Production began in the fall at a major new manufacturing complex in Yeo Su. Korea. Left: At Labcraiorios Lepetit in Bra::!, a lowtemperature, lowpressure process prepares miectable pharmaceuticais as dry powders. Right: The Latin America Area's largest capital investment is iii Chile, where this Petrodow plant produces low density polyethylene and polyvinyl chloride ; STC0C4925 8 9 K i9 Z6 0 3 S . The Year in Review--Continued t: s t oo o Latin America The improving economies of the major countries in Latin America helped the com pany attain S476 million in sales, up 41 percent from S337 million in 1978. Profit before tax more than doubled: 5101 million versus S38 million. With the exception of Central America, there was relative political stability' but little overall improvement in controlling inflation. Nearly all signs indicate good economic growth for the area again in 1980. Our strong position in Mexico as a reliable supplier of industrial chemicals is particularly encouraging as Mex ico's growing industrial and consumer demand provides a rapidly expanding market. Sales of agricultural products rose five percent, pharmaceuticals 19 percent, chemicals 35 percent and plastics 74 percent. Major gains were made in the sale of vinyl chloride monomer, caustic soda, polyethylene and Styron polystyrene. Brazil Sales in physical volume for Dow Brazil rose approximately 16 percent during 1979. Al though the inflation level reached 77 percent, sales in absolute dollar terms were held down as a result of a cruzeiro devaluation of about 103 percent; sales totalled 5276 million, versus 5249 million in 1978. With the benefit of new facilities coming on stream, Dow's overall operations were in the black in Brazil in 1979 for the first time since 1976. Profit before tax totalled $4 million, compared with a loss in 1978 of 56 million. At Aratu, a 9,000 ton per year plant to produce 2,4-D herbicides began operations. In Guaruja, a new epoxy resin plant started up smoothly. A new research and development center, the first of its kind in Latin America, was completed and operations started at a site near 5ao Paulo. Sales of locally manufactured products con stituted more than 80 percent of Dow sales in Brazil as a result of the first full year operation of the Aratu complex. Canada The demand for Dow products in Canada was strong throughout the year, raising sales to a record S630 million. This is up 44 percent from $439 million in 1978. Profit before tax grew from $28 miltion in 1978 to $135 million in 1979, an increase of 382 percent. Favorable market conditions permitted Dow Canada to keep selling prices ahead of cost increases. In addition, the market value of exports was up 14 percent. Over the twelve months, Canadian plants produced at an average of 89 percent of capacity. During the month of September, the entire Sarnia Divi sion complex ran at 100 percent of capacity. New global-scale plants at Fort Saskat chewan were brought on-stream during the last half of the year, together with back-up power, ethylene storage and site facilities. They produce chlorine, caustic soda, ethylene dichloride and vinyl chloride. Plants making ethylene oxide and ethylene glycol, also part of Dow Canada's S600 million Alberta Petro chemical Project, are scheduled for start-up in 1980. To provide the necessary raw material, Dow Canada designed, built and started up a 1.2 billion pound per year ethylene-fromethane cracker for Alberta Gas Ethylene Company Ltd. Dow Canada has contracted to take all of this ethylene. Dow's expanding manufacturing base in Alberta is proving to be globally competitive in ethylene derivatives. Canada's growing long-term surplus position in natural gas assures Dow of ample ethane/ethylene feedstock there for many decades The 1,900-mile Cochin Pipeline, completed in 1978, brought its first batch of Alberta ethylene to Sarnia in the fourth quarter of 1979. Dow Canada owns 32 Vz percent of this utility operated by Dome Petroleum of Calgary * 10 GO CO CO CO CO IS) CO In the province of Alberta, a massive Mfu1 S600 million complex includes Dour plants to produce chlorine, caustic soda, ethylene dtchlortde, vinyl chloride, ethylene oxide and ethylene glycol. 11 S T 000492 Staking Out the Future -- Winners of New Research Medal Typify Tradition That Creates Stream of New Products and Processes The knowledge explosion that has been reshaping the late 20th century world is only about 35 years old. It began at the end of World War II, born out of the incredibly productive results of systematic research and development by large-scale organizations. Dow's research and development organiza tion, which blossomed in the World War II era and has not stopped growing since, is a stellar example of the organizations that have spawned and are spawning the high technol ogy on which U.S. affluence is based. The company has continued to extend the use and benefits of that technology to other parts of the world. Employing more than 6,100 persons world wide, the Dow R&D organization made an investment in the future of S232 million in 1978 and S269 million in 1979. Some chemical companies have retrenched and pared their R&D budgets in recent years, but Dow has maintained its bullish outlook. Its R&D budget has continued a rapid and consistent climb. The fruits of this research are the generation of new products, the discovery of new uses for existing product families, and significant improvements in manufacturing technology -- key factors in Paul Oreffice's predictions that the '80's will be "a golden era" for the company. The company comes by its research tradi tions honestly. Herbert H. Dow, its founder, was a prolific inventor who obtained 64 patents himself during his lifetime, and the company was built on those patents and those of his early associates. A 1968 study showed the company he established was first among large U.S. industrial firms both in number of patents per dollar of sales (327.9 patents per $100 million in net sales) and patents per number of employees (114.1 patents per 10,000 employees). When the study was repeated in 1973 Dow was again first in patents per sales dollar (150.2 patents per S100 million in sales) and a close second in patents per employee (92.6 patents per 10,000 employees). Number of patents can be a misleading number, of course. Lawrence L. (Zip) Ryden was granted only five patents during his career at Dow but is remembered as the inventor of latex paint. O. R. Mclntire has also had only a 12 handful of patents durinf his Dow career, but among them were basic patents for Styrofoam brand plastic foam and high impact polystyrene. The Dow Medalists In 1979 Dow honored six of its top research scientists for their achievements. The six were awarded the newly-struck Herbert H. Dow Medal as "rare individuals whose inventive ness and pioneering in technology have had outstanding impact on the growth and well being of The Dow Chemical Company". The six: Carl B. Havens, expert in film manufacturing technology, the developer of Handi-Wrap plastic film and other film products. Robert G. Heitz, developer of the first commercial thermal process for the manufac ture of perchloroethylene, as well as the hollow fiber technology that led to desali nated water units and artificial kidney machines. Howard Johnston, expert in chloropyridine chemistry, who developed a family of agri cultural chemicals including N-Serve nitrogen stabilizer, and Tordon, Lontrel, and Garlon herbicides William C Bauman, world authority on ion exchange, whose inventions led to the development of Dowex ion exchange resins and other major Dow products. Raymond H. Rigterink, expert in the syn thesis of heterocyclic molecules, whose work paved the way to such products as Coyden coccidiostat and Dursban, Lorsban, and Reldan insecticides. Louis C. Rubens, expert on polymer foams, who developed the technology for Pelaspan and Pelaspan Pac expanded polystyrene, Ethafoam expanded polyethylene, and com posite foam systems. The work of these men has resulted in major product families that contribute significantly to Dow's sales. More than $300 million of Dow's current sales, for example, are calcu lated to result from inventions by Bauman. Winners of the iieti> Herbert H. Don' Medal are (from the tap) Carl B. Hat'Cns, Robert C. Heitz. Howard lohnston, William C. Bauman, Raymond H. Ri^termk and Louis C. Rubens. CO CD CD v.D Originating in the creative chemistry of such research giants as the 1979 Dow Medalists, a broad range of Dow products provide growing sales volume for Dow and many benefits for the consuming public. They include (11 Lorsban insecticide, (2) Dowlex polyethylene resins, (3) HandiWrap plastic food wrap, !4) Dowex ion exchange resins, (51 metallurgical granules, (61 artificial kidneys, (7) Pclaspan-Pac loose fill packing and (8) high modulus reaction injection molding materials (Dowlex photo courtesy Alpine American Corp 1 13 Staking Out the Future-- Continued ST 0 0 0 'l 9 3 I In their restless drive to stake out the future, Dow's research and development personnel follow a strategy that embraces five main points: Improvement research-- improving and ex panding the present Dow product line to maintain the company's competitive posi tion, through product and process improvements. Resource research -- developing processes to use crude oil, coal, lignite, and other materials as energy and raw material sources. New product research -- developing and commercializing new product families. Longer-range exploratory research--aimed at finding new areas for Dow and fundamental changes in raw materials and manufacturing processes. Health and environmental research--main taining Dow leadership in health arid environmental research and product safety. Improving the Product Line The eternal campaign to keep Dow products competitive, to keep upgrading them, to find new uses and better technology, is the breadand-butter work of the research establishment. Continual improvement of manufacturing op erations, for instance, is a major research concern: Production of symmetrical tetrachloro- pyridine, the raw material for Dursban insecticide, was increased by more than 50 percent in the Texas Division by redesigning the equipment. The increased production provided $45 million in increased sales. Improved yield of two to three percent in ethylene oxide production at the Louisiana Division resulted from a newly developed catalyst treatment. The improvement means a net gain of about $2 million yearly. Such efforts, and similar efforts at all manufacturing locations, saved the company an estimated $135 million last year in yield improvements, energy use, and increased production of products in short supply. Products new to Dow but old to the industry also offer significant profit opportunities on occasion, depending upon market position, technology, and raw materials. One such example is polycarbonates, a series of very high performance resins based on bisphenol and phosgene, which Dow now has in market development. Another is Bexton herbicide, the first liquid propachlor herbicide, first intro duced in two states in 1977. Raw Material and Energy Base Dow is basic in the production of key petrochemical building blocks and in the energy needed to operate its electro-chemical processes. Its pioneering operations on the Gulf Coast were originally established in Texas to take advantage of low-cost chemical feedstocks and energy based on bountiful, low-cost natural gas. In the early 1970's, observing the decline in natural gas reserves and their rising cost, Dow began work to develop technology that would allow the company to move from natural gas to crude oil, lignite, and coal as its primary 14 sources of petrochemical feedstocks and en ergy. This work has led to: A mammoth processing plant, which will process crude to naphtha for ethylene and benzene feedstocks and provide desulfurized fuel oil for Dow's Texas chemical production energy demands. A direct crude cracking process for the production of olefins directly from crude oil; the process has been pilot planted and is being scaled up to a major prototype plant. A patented coal liquefaction process which has been demonstrated (in the laboratory, at a 200 lb. I day rate) to be superior to the C/O current processes under development by the --I Department of Energy. Dow has asked to cd lease the DOE's 10-ton-per-day pilot plant in CD Bruceton, Pennsylvania, to continue develop-'^ merit of this process. Improved Fischer-Tropsch synthesis technology to produce petrochemical c~.o co feedstocks from carbon monoxide and hydrogen. Since the days of its founder Dow has been a pioneer in the production of electric power and the co-generation of steam for process needs. The cyclone boiler and the integration of gas turbines with chemical processes are examples of past Dow accomplishments. The pioneering continues; at the beginning of 19S0 Dow had in the start-up phase at its Louisiana Division a prototype entrained flow gasifier to produce low BTU gas for turbine fuel. The gasifier and turbine will be an integrated facility. The prototype gasifier unit is a major undertaking. It promises new technology based on the use of either lignite or bi tuminous coal to produce electric power with a high thermal efficiency and lower capital costs per kilowatt hour. Dow-developed products such as Heviwater completion fluids, used by the Dowell Division in oil tcell servicing, provide a growing market for bromine products. Dew s profits from bromine continue to grow at a health's rate in spite of the loss of tetraethyl lead, once their mam use, bcrirust' of the development of products such as calciuni bromide packer fluid and ftnishcr fluid for oil wells 15 Staking Out the Future --Continued The company began acquiring lignite rights in Texas and Louisiana in 1974; it now has about one billion tons of lignite reserves in the Freestone, Texas, area, and about a half-billion tons of reserves in the Logansport, Louisiana, area. Plans are to shift the Louisiana and Texas plants from natural gas to solid fuels in an orderly, long-term program. New Product Research New products (new in the last 10 years) continue to produce about 12 percent of Dow's annual sales. Dow had 34 new products in 1978 -- products new to Dow that reached at least $500,000 in sales during the year -- and 38 in 1979. These new products and new applica tions of old products totaled $88 million in sales in 1978, compared to $77 million in 1979. Some of the more significant new products; Dou'lex resins, a new family of linear low- density polyethylene resins for which Dow is building production capacity of 700 million pounds annually for a total of 850 million pounds a year. High modulus reaction injection molding materials, a new family of polyurethane polymers designed for large volume molding of exterior automobile parts. Lonban insecticide, which is being registered for many uses in many countries worldwide. Garlon herbicide, a new product for vegeta tion control, and Lontrel herbicide, which has excellent biodegradabilitv. Lorelco anti-cholestero! drug. Rifjpnm anti-infective, a pharmaceutical es pecially effective against certain tvpes of urinary tract infections, undergoing clinical trials Low-level radioactive waste solidification, a new Dow sendee in a rapidly growing market. Most of these products have market poten tials in the multimillion dollar brackets. Sources of the Sales Stream The new Dow Medalists -- they were the first named to the honor; others will be nominated in years to come -- are hardly examples of the highly visible scientist whose opinion (often on political matters) is front page news. But their quiet, often brilliant, work in the laboratory still makes them worldshakers in their own way. The inventions they produce tap small springs that gradually become a roaring stream of sales dollars, to say nothing of the benefits to society of their discoveries, which is another story. A new sodium-sulfur battery derives in large part from research by Heitz. New varieties of Ethafoam expanded polyethylene brought on the market a year ago derive from work by Rubens. A "bag-in-box" concept for packaging wines and other liquids, now beginning to appear in local supermarkets, uses Saranex plastic film, a Dow sandwich film largely developed by Havens. In the cases of Johnston and Rigterink, the new agricultural chemicals listed above clearly bear the imprint of their authorship. The six scientists newly honored have contributed enormously to the success of the company they serve. The results of their work will continue to be seen as more new products based on their research emerge at the end of the road from the laboratory to the commercial market. But these are only six of the more than 6,100 people who work in Dow's R&D organization. "Most of our people are younger, and they're junior to these men," says Malcolm E. Pruitt, corporate vice president for research, "but a lot of them will be that good, some day."! oo --- I CD CD CO CO 16 Financial Review Management Discussion and Analysis of the Consolidated Statement of Income G. fames Williams, Financial Vice President Net income in 1979 scored one of its greatest gains in the company's history -- up 36 percent. This, despite skyrocket ing costs, political uncertainties in many parts of the world and wildly fluctuating cur rencies. Nevertheless, the return on sales, 8.5 percent, still fell short of the level required to finance necessary and increasingly costly capital investments for the future. Sales rose 34 percent. The increase alone, 52.37 billion, is more than all of the company's sales in 1971. Volume increases accounted for 10 percent. Sales rose substantially in all of our areas; the greatest percentage gains were made in Europe and the Pacific. Among our product lines, petrochemicals, especially plastic resins, showed the greatest growth. Sales increases for industry segments and geographic areas were: Percent increase from prior year 1979 1978 Industry segments Chemicals/Metals ............. Plastics'Packaging............. Bioproduct/Consumer Products ......................... Geographic areas United States ..................... Europe/Africa..................... Canada................................. Pacific................................... .. . Latin America ................... Brazil ................................... 35 39 16 26 47 44 55 41 11 6 15 16 5 12 11 37 21 31 17 u g u io o is ; Financial Review -- Continued Earnings Per Share ] Dividends Paid Per Share 1975 1976 1977 1978 1979 13 Energy And Hydrocarbons Purchase Price Index 1 Dow Selling Price Index 1975 1976 1977 1978 1979 Dow's share of sales of companies in which we own 20 to 50 percent increased 24 percent and totaled approximately $1.1 billion. Principal 50 percent owned companies Percent increase from prior year 1979 1978 Dow Coming.............................. Dowell-Schlumberger................. Asahi-Dow.................................. Cordis-Dow ................................ Korea Pacific................................ 27 17 25 37 24 20 23 12 29 16 Prices and Costs. Huge increases in oil-related costs required the chemical industry to raise its prices sharply. Dow's selling prices and costs (in U.S. dollars) changed as follows: Prices United States Non-U.S. ... Global ....... Percent increase from prior year 1979 1978 12.9 32.7 22.1 1.0 2.8 1.8 Percent increase from prior \ ear 1979 1978 Costs Feedstocks and energy, per unit Labor and benefits, per employee.............................. Research and development ... Depreciation............................. Maintenance and repair.......... 39 13 16 13 28 6 14 14 14 S CO `TO O <70 to CO <_r> Earnings rose primarily because of significant improvements in our non-U.S. business, due directly to the global manufacturing and marketing position that Dow has developed over the years. Net income increased more than operating income due primarily to the sale of some oil and gas properties. Earnings per share benefitted from a smaller number of shares outstanding. Percent increase from prior vear 1979 1978 Net income.............................. Earnings per share ................. Operating income................... 36 37 27 4 5 3 18 Operating income by industry segments and geographic areas reflected the following changes: Percent increase (decrease) from prior year 1979 1978 Industry segments ChemicalsfMetals ............... Plastics/Packaging............... Bioproducts/Consumer Products .......................... . . 6 67 (33) (10) 11 114 Capital Spending Percent increase (decrease) from prior year 1979 1978 Geographic areas United States ................. ....... Europe'Africa................. . . . . Canada............................ ....... Pacific.............................. ....... Latin America ............... ....... Brazil .............................. ........ ... 65 50 113 149 (12) 3 6 (30) 46 (19) 338 Capital spending and completions remained the highest in the chemical industry. Capital spending reached SI.27 billion--16 percent of last year's gross plant properties. Spending in the last five years exceeds today's net plant investment. Completions totaled $1.19 billion, up S131 million from 197S. Financing. Debt increased during 1979 by $258 million, versus S342 million in 1978. Net interest expense was up 15 percent compared to eight percent in 1978 primarily because of more borrowing. Borrowing included 5200 million in 15-year Eurobonds at a very favorable rate of 9.625 percent to finance capital needs outside the United States. Wages and taxes. Dow employees received Si.30 billion in wages and salaries, and S297 million in benefits, an increase of 16 percent. Major taxes on income and property and other assessments were S748 million, versus $572 million in 197S. Distribution of the 1979 Income Dollar 19 9 EG100 01 S ; Financial Review -- Continued Employee stock ownership. Dow distributed 201,000 shares to U.S. employees as part of the Dow Investment Benefit Plan. In addition, employees subscribed to purchase 1.4 million shares in 1979-80 stock purchase plan. Members of the board of directors own more than 3.4 million shares. Dividends were raised by the board of directors in September from 35 cents quarterly a share to 40 cents. Payments for the year were $1.45, an increase of 20 cents. Investment income rose to S91 million pri marily as the result of the sale of certain oil and gas properties in Canada. The translation of foreign currencies resulted in a loss of 56 million, versus a gain in 1978 of $10 million -- an outstanding performance again in view of the wild fluctuations in currency exchange rates. Subsidiaries and affiliates. Our equity in income from companies in which Dow owns 20-50 percent went up 35 percent, due partly to sharply higher profits at Asahi-Dow Ltd. Dow's equity in income from non-consolidated subsidiaries declined to $20 million from $37 million in 1978, when the Dow Banking Corporation showed greatly increased profits and currency translation gains. The outlook for 1980 is reasonably good. Some slowdown in the U.S. economy had started by vear-end, but is not expected to be severe or long-lasting, or to spread to all world econo mies. Our sales capacity will rise substantially and we expect operating rates to remain good. Costs will continue to rise, but so will prices. There will be heavy start-up costs and higher interest expense. Earnings will benefit from a new accounting rule which provides for the capitalization of interest expense. 1978 versus 1977. Sales in 1978 were up 10 percent over 1977. Of the S653 million increase, volume accounted for $545 million. Prices increased a modest 1.8 percent. Sales were most noteworthy in the Pacific and Latin America areas and among agricultural chemi cals. Dow's share of sales of 20-50 percent owned companies increased 23 percent. Costs in 1978 far outpaced sales price gains. The cost of sales went from 75.9 percent of sales in 1977 to 76.7 percent in 1978. Earnings showed a small increase despite higher depreciation, interest and operating costs. Debt increased $342 million, versus $549 million in 1977. Net interest expense was up 8 percent. Borrowing included $300 million in 30 year debentures at 8.625 percent. Investment and financial income declined to $10 million, versus $27 million in 1977 when the company disposed of interests in oil shale properties. Subsidiaries and affiliates: Dow's equity in income from non-consolidated subsidiaries rose 32 percent. Equity in income from 20-50 percent owned companies rose 21 percent to $77 million. ' ST00C4937 20 to lA ilb llL A L b lA lfc M L IN IS C O N SO LID ATED STATEM ENTS Management's Statement of Responsibility for Financial Statements The following consolidated financial statements and related notes of The Dow Chemical Company and its subsidiary companies were prepared by the management in accordance with generally accepted accounting principles. The Board of Directors, through the threemember Audit Committee, is responsible for assuring that management fulfills its responsibilities in the preparation of the financial statements. The Company is responsible for the integrity and objectivity of the consolidated financial statements, which are presented in a consistent manner on the accrual basis of accounting. Established accounting procedures are designed to provide accurate books, records and accounts which fairly reflect the transactions of the Company. The training of qualified personnel and the assignment of duties are intended to provide internal controls at a cost appropriate to our evaluation of the risks involved. Such controls are monitored by an internal audit staff, providing reasonable assurances that transactions are executed in accordance with management's authorization and that adequate accountability for the Company's assets is maintained. Deloitte Haskins & Sells, independent public accountants, with direct access to the Board of Directors through its Audit Committee, have examined the consolidated financial statements prepared by the Company, and their report follows. Opinion of Independent Public Accountants TO THE STOCKHOLDERS AND DIRECTORS OF THE DOW CHEMICAL COMPANY We have examined the consolidated balance sheets of The Dow Chemical Company and its subsidiary companies as of December 31,1979 and 1978, and the related consolidated statements of income, retained earnings, capital surplus, and changes in financial position for the years then ended. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, such financial statements present fairly the financial position of The Dow Chemical Company and its subsidiary companies at December 31, 1979 and 1978, and the results of their operations and the changes in their financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. Detroit, Michigan February 15, 1980 21 CO --I o CD ICZ. CO CO CO Accounting Principles ' ST0094939 CONSOLIDATION The accompanying consoli exploration, development and production of oil dated financial statements include the assets, and gas reserves. Capitalized costs are amortized Ei liabilities, revenues and expenses of all significant using the unit-of-production method on the basis 2C subsidiaries except for banks and insurance of total estimated units of proved reserves and D. companies. Because of the nature of their opera non-productive efforts are charged to expense. er tions, the accounts of these companies are not si- consolidated. However, their earnings are in cluded in consolidated net income under the GOODWILL The excess of the cost of investments in subsidiaries over carrying value of assets th equity method of accounting. acquired is shown as goodwill. Goodwill arising since October 1970 is amortized over 40 years. In D NON-CONSOLIDATED EQUITY INVESTMENTS the opinion of management, goodwill prior to that di a: SI Investments in companies which are 20%-50% owned are carried on the equity basis. Marketable equity securities are carried at the lower of cost or market. Other investments are carried at cost less date requires no amortization. RETIREMENT PLANS The Company and certain subsidiaries have plans which provide retirement In reserves. benefits for eligible employees. The major plan m ar of TRANSLATION OF FOREIGN CURRENCIES Cash, marketable securities, receivables and lia bilities are translated at current rates. Property, covers substantially all full-time United States employees. The policy is to accrue and fund pension cost as computed by an actuary. m ar th ra inventories and investments in capital stock are translated at rates prevailing when the transactions occurred. Deferred income taxes are translated in the same manner as the assets or liabilities to TAXES ON INCOME AND INVESTMENT CREDITS The companies compute and record income taxes currently payable based upon their determination of taxable income which may be s which they relate. different from pretax accounting income. These in 2C sh Di Revenues and expenses are translated at appropri ate current rates for each month, except that depreciation is recorded at historical rates. Foreign currency gains and losses are reflected in income currently. differences may arise from recording in pretax accounting income transactions which enter into the determination of taxable income in another period. The tax effect of these timing differences is recognized by adjustment currently to the provi d S3 Ci an INVENTORIES Inventories are stated at cost, which is less than market value. Cost is deter mined on the last-in, first-out basis, except for operating supplies, which are carried on the first- sion for taxes. Provision is made for taxes on that income of subsidiaries which is taxable in the United States as earned, and on unremiited earnings of subsidi T1 in, first-out basis. ary and 50% owned companies to the extent that sl< such earnings are deemed to be not permanently ye PLANT PROPERTIES AND DEPRECIATION invested. Income taxes are provided on the ioi m an Land, buildings and equipment, including prop erty under capital lease agreements, are carried at cost less accumulated depreciation. Depreciation is based on the estimated service lives of depreciable assets and is provided using the declining balance method. undistributed income of 20%-49% owned compa nies at the time the Company records its equity in such earnings. A portion of the taxes due on foreign operations conducted through a domestic international sales corporation (DISC) is deferrable under U S. tax Expenditures for renewals and betterments are capitalized, and maintenance and repairs are charged to income as incurred. Fully depreciated assets are retained in the property and depreciation accounts until they are removed from service. In the case of disposals, the assets and related depreciation are removed from the accounts and the net amount, less proceeds from disposal, is charged or credited to income. rules. However, it is the practice of the Companv to fully accrue such taxes currently. Laws governing the determination of United States and certain foreign income taxes provide for investment credits for acquisition of qualified facilities. Such credits are reflected as a reduction of income tax expense on the flow-through basis in the year in whicn they are earned. In addition to tax credits, certain foreign countries EXPLORATION AND DEVELOPMENT COSTS provide incentives which are granted to encourage The successful efforts method is used in account new investment. Generally, such grants are ing for costs incurred in the acquisition. credited to income as earned. 20 22 b 1A1 lb 11 U \L J l r t l LiULnc j C O N SO LID ATED STATEM ENTS Consolidated Statement of Income Net Sales ................................ Operating Costs and Expenses Cost of sales.............................. Selling and administrative Operating income Other Income (Expense) Equity in earnings: Non-consolidated subsidiaries 20%-50% owned companies Interest income............................. Interest and debt discount and expense.............................. Gain on sale of oil and gas properties.......................... Sundry income -- net................... Income Before Provision for Taxes on Income Provision for Taxes on Income...................... Income Before Minority Interest ................... Minority Interests' Share in Income............. Net Income ....................................................... Earnings per Share........................................... Srr .Altimntiny Pwnir/i'f and Vok'S :o Fntana.il Statcnitnti Year Ended December 31 1979______________ 1978 (In thousands) $9,255,387 $6,887,623 7,231,630 690,166 7,921,796 1,333,591 5,284,001 552,219 5,836,220 1,051,403 20,174 103.253 86,340 (358,534) 84,846 42,889 37,296 76.597 49,813 (287,059) 40,011 1,312,559 515,000 797,559 13,661 $ 783,898 $4.33 968,061 383,900 584,161 8,937 5 575,224 53.16 OO CD CD >TD 23 Consolidated Balance Sheet HST 0 0 0 4 9 December 31 _________ ASSETS__________________________________ 1979___________ 1978 Current Assets Cash........................................................... ............................ Marketable securities and interest-bearing deposits (at cost, approximately market)...................................... Accounts and notes receivable: Trade, (less allowance for doubtful receivables -- 1979, $53,113; 1978, $44,392)........................................ Miscellaneous..................................................................... Deferred income tax benefits.............................................. Inventories: Finished and in process................................................... Materials and supplies..................................................... (In thousands) S 42,307 $ 57,622 209,400 340,905 1,572,905 480,246 135,345 1,290,851 357,099 70,245 856,812 629,255 456,293370,293 3,753,308 3,116,270 Investments Capital stock -- at cost plus equity in accumulated earnings: Banking and insurance subsidiaries............................... Associated companies (50% owned).............................. 20%-49% owned companies .......................................... Other--at cost (less reserves--1979, $856; 1978, $1,260) Noncuirent receivables (less reserves -- 1979, $268; 1978, $726) ..................................................... Plant Properties.................................................................... Less -- Accumulated depreciation...................................... 185,931 598,743 71,788 69,732 154,203 333,966 80,828 59,083 96,13596,465 1,022,329724,545 8,909,244 8,037,638 3,672,8403,275,509 5,236,404 4,762,129 Goodwill................................................................................ Deferred Charges and Other Assets.................................. TOTAL........................................................................ 106,89284,039 132,704102,137 S10,251,637 $8,789,120 See Accounting Principles ani Xotes Financial Statements 24 ZUtOOOiS . LIABILITIES Current Liabilities Notes payable ....................................................................... Long-term debt due within one year................................. Accounts payable ................................................................. United States and foreign taxes on income....................... Accrued and other current liabilities................................. December 31 1979___________ 1978 (In thousands) $ 528,321 $ 386,024 72,728 1,173,893 74,451 836,613 266,659 163,305 573,501490,586 2,615,102 1,950,979 Long-Term Debt ................................................................... 3,054,9792,937,264 Other Liabilities Minority interests in subsidiary companies..................... Deferred employee benefits ................................................ Deferred income taxes......................................................... 39,514 63,528 49,165 45,339 581,876411,679 684,918________ 506,183 Stockholders' Equity Common stock...................................................................... Capital surplus...................................................................... Retained earnings................................................................. 501,387 497,705 479,878 447,036 3,364,8732,859,554 4,346,138 3,804,295 Less--Treasury stock at cost .............................................. 449,500409,601 3,896,638 3,394,694 TOTAL........................................................................ $10,251,637 $8,789,120 Srr Accounting Principles and Notes to Financial Statements 25 Consolidated Statement of Capital Surplus Balance at Beginning of the Year........................... Add: Excess of selling or market price over par value of common stock issued to employees . Income tax benefit realized from sale of common stock to employees........................... Excess of face value of debentures over par value of common stock issued on conversion Balance at End of the Year...................................... Year Ended December3! 1979 1978 (In thousands) $447,036 $435,677 30,158 2,612 72 $479,878 11,072 277 10 $447,036 f/ 6 K ' 0 0 1 S : Consolidated Statement of Retained Earnings Balance at Beginning of the Year........................................ Add (Deduct): Net income......................................................................... Adjustments related to subsidiary companies ............. Cash dividends declared.................................................. Balance at End of the Year.................................................... Year Ended December 31 1979 1978 (In thousands! $2,859,554 $2,520,949 783,898 575,224 (6,781] (139) (271,798)(236,480) $3,364,873$2,859,554 See elilcii'iPrtnrt[>/e> and Votes tii Ft.-utiwul Slit.'emc'its 26 CO Consolidated Statement of Changes in Financial Position Source of Working Capital Net income.............................................................................. Charges (credits) to income not involving working capital: Depreciation.................................................................... Equity in net income of non-consolidated companies, less dividends received......................... Deferred income taxes................................................... Provided from operations......................................... New long-term debt........................................................... Disposition of property and noncurrent investments .................................................................... Sale of common stock to employees................................ Total working capital provided ................................ Year Ended December 31 1979 1978 (In thousands) 5 783,898 S 575.224 634,445 (92,804) 170,198 1,495,737 316,936 165,672 36,524 2,014,869 562,037 (90,677) 68,315 1,114,899 508,752 96,065 12,675 1,732,391 Use of Working Capital New plant properties.......................................................... Cash dividends declared................................................... Purchase of treasury stock................................................. Reduction of long-term debt ............................................. Increase in noncurrent receivables and sundrv assets ....................................... Investment in associated companies (50% owned)................................................. Total working capital used ......................................... Increase (Decrease) in Working Capital.......................... 1.267,719 271,798 39,899 199,221 70,163 193,154 2,041,954 S (27,085) 1,075,173 236,480 53,853 44,841 30,897 1,441,244 $ 291,147 Increase (Decrease) in Working Capital by Element Cash and marketable securities........................................ Receivables.......................................................................... Deferred taxes .................................................................... Inventories.......................................................................... Notes payable and current portion of long-term debt................................................................ Accounts payable .............................................................. Income taxes and accruals................................ ................ Increase (Decrease) in Working Capital.......................... $ (146,820) 405.201 65,100 313,557 (140,574) (337,280) (186.269) S (27,085) S 263,173 291.193 (3,477) (67,973) 121,711 (191,862) (121,618) $ 291,147 m tG O O iS ` > c k c Siv .-Uvi'K'ifi'ij' Principles mu/ .Voles lo hnancial Shilmenb 27 Notes to Financial Statements A. GAIN ON SALE OF OIL AND GAS PROPER TIES Maligne Resources Limited, a wholly-owned subsidiary of Dow Chemical of Canada Limited, has owned a 25 percent undivided interest in a portion of the onshore oil and gas properties of Dome Petroleum Limited under the terms of a 1974 agreement. In December 1979, Maligne exercised its right to acquire a like interest in significant additional onshore properties from Dome. Maligne then sold a half interest in essentially all of its oil and gas interests to TCPL Resources Ltd., a whollyowned subsidiary of TransCanada Pipe Lines Lim ited. One of the conditions of sale is that certain areas under active exploration have provision for reevaluation of purchase prices in 1981 and 1982. Using the tentative contract prices, the transaction resulted in a pre-tax gain of $84.8 million and $50.1 million after tax, or $.28 per share. The two parties then entered into a joint venture which provides that each contribute their oil and gas properties as the initial investment. The joint venture will pursue acquisition, exploration and development programs intended to increase the existing hydrocarbon reserves. B. INVENTORIES The amount of reserve re quired to reduce inventories from the first-in, firstout basis to the last-in, first-out basis at December 31,1979 and 1978 was $794.6 million and $412.4 million, respectively. C. INVESTMENTS The Company's equity in the net assets of investments accounted for by the equity method approximated the carrying amount of such investments at December 31,1979 and 1978. Dividends received from the companies were $30.6 million in 1979 and $23.2 million in 1978. D. MARKETABLE EQUITY SECURITIES Other investments at December 31, 1979 and 1978 included marketable equity securities, at cost, in the amount of $8.5 million and S3.0 million, respectively. The market value of these securities exceeded cost by $1.3 million at December 31,1979 and S2.0 million at December 31, 1978, after deducting $0.7 million of unrealized losses at December 31,1979 and $0.1 million at December 31,1978. E. FOREIGN CURRENCY The effect of foreign currency translation and exchange adjustments on income was a loss of 56.3 million for 1979 and a gain of $10.0 million for 1978. G. PLANT PROPERTIES Plant properties con sisted of the following: December 31 1979 1978 Land............................................ .. Land and waterway improvements ..................... Buildings.................................... Machinery and equipment. . .. Wells and brine systems .... Office furniture and equipment.............................. Oil and gas land and leaseholds..................... Other.......................................... Construction in progress . . .. .. (In thousands) $ 155,341 $ 141,698 249,607 681,075 5,975,265 213,879 231,585 593,201 5,291,740 200.638 132,051 118,664 112,231 62,146 1.327,649 160,889 45,026 1,254.197 Total.................................... .. 8,909,244 Less -- Accumulated depreciation......................... .. 3,672,840 Net...................................... .. $5,236,404 8,037,638 3,275.509 $4,762,129 H. LEASED PROPERTIES Capital leases in cluded with owned property in the balance sheet were: December 31 1979 1978 Land................................................. Land and waterway improvements ......................... Buildings........................................ Machinery and equipment .... Office furniture and equipment ................................ (In thousands) S 522 149 1.392 165,403 $ 250 176,997 8.051 13.112 Total ...................................... Less -- Accumulated depreciation.............................. Net.......................................... 175,517 103,371 $ 72,146 190.359 99.661 $ 90.698 Minimum lease commitments at December 31,1979 were as follows: Capital Operating Leases Leases 1980 ................................................ 1981 ................................................ 1982 ................................................ 1983 .............................................. 1984 ................................................ 1985 and thereafter..................... Total minimum lease payments Less Estimated executory costs (In thousa nds) S 24,992 20,586 14,458 11.536 10.925 100.036 S 43.165 32.575 27,953 24.372 21,331 141.352 182.533 446 5291.248 Net minimum lease payments Less -- Amounts estimated to represent interest............... 182,087 70,281 Present value of net minimum lease obligations.. Less -- Current accounts payable ...................................... 111,806 16.180 Long-term capital lease obligations ............... S 95.626 F. INVESTMENT GRANTS Sundry income in cludes investment grants of S7.8 million in 1979 and S4.7 million in 1978. Minimum operating lease commitments have not been reduced by minimum sublease rentals of $3.5 million due in the future under noncancelable subleases. ST00J4945 f 28 RentaJ payments under operating leases charged to expense were: 1979 1978 Minimum rentals........ Contingent rentals . . . Less -- Sublease rentals Net......................... (In thousands) $ 92,060 S 86,886 7,652 1,339 (2,470) (1,610) $ 97,242 S 86,615 I. LONG-TERM DEBT AND AVAILABLE CREDIT FACILITIES Details of debt due after one year were as follows: December 31 1979 1978 (In thou sands) Promissory notes. 8.00%, final maturity 1986 . S 120,000 $ 120,000 4.50%, final maturity 1990 5.00%, final maturity 1991 70.000 60,000 75,000 64,000 Debentures: 7.40%, final maturity 1987. Canadian dollar................. 214,025 210,800 4.35%. final maturity 1988 42,270 47,247 6.70%, final maturitv 1998 69,264 73,051 9.625%, final maturity 1994 200,000 7.75%. final maturity 1999 73,252 79.948 8 875%, final maturity 2000 108.150 120,000 8.90%, final maturitv 2000 111.043 120,000 7.40%, final maturity 2002 7.625%, final maturity 2003 8.50o. final maturity 2005 86,142 89,964 225,000 91,072 93,044 225,000 8.50%. final maturity 2006 200,000 200,000 7.875%, final maturitv 2007 8.625%, final maturity 2008 300,000 300,000 300,000 300,000 Bonds. 6.25%. final maturity 1988, Swiss franc ............... 49.383 8.50%, final maturitv 1989, Swiss franc 37.500 37.037 Other -- Various rates and maturities Foreign currency loans . . . 105.880 70,961 Brazilian U S. dollar loans.................................... 240,775 316,835 Other U S. dollar loans . 157,293 85,446 Pollution control bond obligations . 157.135 148,325 Capital lease obligations 95.626 116.987 Less -- Unamortized debt discount ... 3,063,319 8.340 2.944.136 6.872 Total S3.054.979 S2.937.264 The average interest rate on long-term debt was 8.4% compared to 8 1% in 1978. Installments due on long-term debt and capital lease obligations in the five years after 1979 are (in millions): 1980, S72.7; 1981, S141 4; 1982, $142 9; 1983, 5180.7:1984,5184.9. The Company had approximately $480 million of committed credit unused and available at December 31, 1979 under agreements with various United States banks which require retention of average cash balances aggregating approximately $34 million. These requirements were satisfied by balances maintained for normal business operations. Other unused credit included $456.7 million available to the Company under revolving credit agreements, and $288.8 million for use by foreign subsidiaries. J. STOCKHOLDERS' EQUITY The authorized capital stock consists of 25,000,000 preferred shares with a par value of $1.00 per share, none of which has been issued, and common capital stock of 500,000,000 shares with a par value of $2.50. Changes in the number and amount of issued shares of common stock were: Shares Amount Issued January 1, 1978 Sold to employees............... Conversion of debentures . 198,550,656 530,100 1,380 (thousands) 5496,377 1,325 3 Issued December 31, 1978 . Sold to employees............. Conversion of debentures . 199,082,136 1,462,521 10,337 497,705 3,656 26 Issued December 31, 1979 . 200,554.994 $501,387 The number of shares of treasury stock held at December 31,1979 and 1978 was 19,373,819 and 17,907,898, respectively. K. OIL AND GAS PRODUCING ACTIVITIES The Company is engaged in limited oil and gas producing activities, primarily in the United States and Canada, which are not material to its business operations or financial position. The aggregate amount of capitalized costs at December 31, 1979 was $231.7 million, with accumulated depreciation and depletion of $91.9 million, as compared with $219.8 million and $86.3 million, respectively, at December 3], 1978. Costs of oil and gas operations for 1979 were $103.2 million for property acquisition and development and 550.8 million for exploration and production (lifting) costs. Comparable amounts for 1978 were $33.1 million and $36.8 million, respectively. Estimated quantities of proved oil and gas reserves (unaudited) at December 31,1979 were 12.2 million barrels of crude oil, condensate and natural gas liquids, and 493.4 billion cubic feet of natural gas. as compared with (unaudited) 10.8 million barrels of crude oil, condensate and natural gas liquids, and 546.5 billion cubic feet of natural gas at December 31,1978. The present value of estimated future net revenues at December 31, 1979 amounts to $487.0 million (unaudited). L. TAXES ON INCOME on income consisted of: (In millions) Federal The provision for taxes State and Local Foreign Total 1979 Current.......... Deferred........ Total.......... $250.8 33.5 S284.3 $ 14.9 S 14 9 $143.6 72.2 $215.8 S409.3 105,7 5515.0 1978 Current........... Deferred........ Total.......... $192.1 54.5 S246 6 $ 17 7 $17 7 S102.3 17.3 $119.6 S312.1 71 8 S383 9 29 9*GH00JLS c. 5 L c r* r c. r r * c The current tax provision was reduced by invest ment tax credits of $98.1 million in 1979 and $79.2 million in 1978. Deferred tax provisions related to the following: 1979 1978 (In millions) Excess of depreciation and depletion claimed for tax purposes over book amounts................................ $113.4 Doubtful accounts and other losses in excess of those deductible currently for tax purposes....................................... (5.3) Undistributed earnings of foreign subsidiaries deemed not to be permanently invested............................ 10.5 Income of export companies................... 2.5 Intercompany profit eliminated in consolidation....................................... (6.9) Use of LIFO method in countries where it is not allowed for tax purposes . . (39 5) Other--net................................................... 31.0 $49 1 (4.3) 7.4 11.4 1.5 32 3.5 Total........................................................$105 7 $71.8 Effective consolidated tax rates for 1979 and 1978 were 39.2% and 39.7%, respectively. Major dif ferences between these rates and the United States statutory rate were: Percent 1979 1978 Statutory rale............................................... U S. investment credits............................ Taxes on income of foreign operations at tax rales different from U.S. statutory rate.................................. Untaxed equity in income of companies whose accounts are not consolidated.............................. State and local income taxes (net of federal tax).................................. Other.............................................................. 46.0 (6.3) 0.7 (3.5) 0.6 J_7 48.0 (7.0) 1.5 (4.6) 1.0 0.8 Effective rate................................................. 39.2 39.7 Unremitted earnings of subsidiary and 50%-owned companies which are deemed to be permanently invested amounted to.approximately $1.2 billion and $1.0 billion at December 31,1979 and 1978, respectively. Income tax returns filed in the United States through 1973 have been settled. M. STOCK OPTION AND AWARD PLANS At the May 1979 annual meeting, the stockholders authorized the Board of Directors to put into effect The Dow Chemical Company 1979 Award and Option Plan. The Plan provides a maximum of 6,100,000 shares of its common stock to officers and other managerial, administrative or professional employees of the Company who may be granted awards of deferred stock or options pursuant to the Plan, in lieu of cash for services. During the fiveyear period from the date of adoption of the Plan, the Company may grant options, incentive rights or a combination thereof covering an aggregate of 4,000,000 shares of common stock which may be purchased upon exercise of options or may be transferred in respect of incentive rights. The Company may also grant awards during the ten- year period ending May 1989 of 2,100,000 shares of deferred stock plus dividend units not to exceed 1,500,000 outstanding at any one time. Deferred stock awarded in 1979 and 1978 was 327,781 and 102,784 shares, respectively. 1979 included 1,420 shares of deferred stock awarded under the 1969 Award Plan. The ten-year award period for this plan ended in May 1979. At December 31,1979 and 1978, there were 1,773,639 and 1,694,905 shares, respec tively, available for grant. Dividend units represent the right to receive for a specified period cash payments equivalent in value to cash dividends paid during such period on one share of common stock. Dividend units awarded in 1979 and 1978 were 8,052 and 8,148, respectively. Outstanding dividend units at December 31,1979 and 1978 were 363,210 and 355,158, respectively; dividend units available for grant at December 31, 1979 and 1978 were 1,493,964 and 1,144,842, respectively. In addition, management incentive awards which are related to consolidated net income may be granted to key employees, including directors and officers. Awards may be made in dividend units or deferred stock authorized by the Award Plan, or in cash, or a combination thereof. Plans for granting to officers and key employees options to purchase common stock at the fair market value at date of grant were authorized in 1972, 1976 and 1979. Changes in the number of shares optioned under these plans were: 1979 1978 Outstanding January 1........... Granted .................................... Exercised.................................... Expired or terminated ........... Outstanding December 31 . .. 3.973,215 607,450 (118,525) (559,810) 3.902,330 4,004. ns 639.600 (8.370) (662.133) 3,973.215 Exercisable December 31 ... 3.294,880 3.333.613 Available for grani. December 31.......................... 3.823.150 323.800 Price range on outstanding options at December 31 . .. $22.14 to S53.94 S22 14 to $53.94 Aggregate amounts charged to expense for all plans were $11.8 million and $5.3 million in 1979 and 1978, respectively. The Company made offerings of common stock to its employees, excluding directors, in 1979 at $22.60 per share, and in 1978 at $22.75 per share, or at the market price if lower on the date of distribution, payable generally through payroll deductions. Unfilled subscriptions, which may be cancelled at the option of the employee, were 1,193,841 and 1,271,707 shares, respectively, at December 31, 1979 and 1978. Partial payments on these subscriptions "STOOD 4947 30 b l A l l b 11L A L b m i iC iv ic in o aggregating $17.3 million and $19.8 million at December 31,1979 and 1978, respectively, are included in current liabilities. In computing earnings per share, no adjustment was made for common shares issuable under award, option and stock purchase plans because there would be no material dilutive effect. N. INVESTMENT BENEFIT PLAN Under the Tax Reform Act of 1976, the Company is entitled to an additional one percent investment tax credit if a like amount is used to acquire its stock for distribution to employees. To carry out these provisions, the Company established in 1976 the Dow Investment Benefit Plan for all U.S. employees excluding directors. Cost of $7.3 million in 1979 and $6.9 million in 1978 was offset in income tax expense by an equivalent amount of investment tax credit. O. RETIREMENT PLANS The cost of all retire ment plans was $115.3 million in 1979 and $101.1 million in 1978. For the Company's major plan, actuarially deter mined value of vested benefits exceeded the market value of the fund by $12.3 million at December 31, 1979. Payments to beneficiaries under this plan were $31.6 million in 1979 and $24.9 million in 1978. P. CONTINGENT LIABILITIES Suits have been started against the Company and certain subsidi aries because of alleged product damage and other claims. All suits are being contested and the amount of uninsured liability thereunder is considered to be adequately provided for. The Company has contracted to purchase electricity and process steam from a nuclear power plant being constructed by Consumers Power Company at Midland, Michigan. If due to regulatory problems, (1) Consumers is unable to complete this plant prior to December 31,1984, or (2) the Company terminates its purchase contract, the Company would be obligated to pay a termination fee, which as of December 31,1979 is estimated at $175 million and $350 million, respectively. A Canadian subsidiary has entered into an agreement to purchase substantially all of the output of an ethylene plant in the Province of Alberta. The owner of the plant. The Alberta Gas Ethylene Company, Ltd., has borrowed $325 million which has been guaranteed as to principal and interest by the Company. As a result of recent political disturbances, three minor subsidiaries in Iran have been eliminated from the consolidated group. A provision of $3.4 million for possible losses has been included in accrued liabilities in the accompanying financial statements. .> ^ CD CD CD Q. QUARTERLY STATISTICS Unaudited results were as follows (in millions, except per share): 1979 1st Quarter Net sales.......................................................... .... 52,075 Cost of sales.................................................... 1,585 Operating income ......................................... 337 Net income .................................................... 176 Earnings per share ......................................... ..................97 Cash dividends paid per share ................... Market price range of common stock: High................................................................. 29.63 Low ................................................................. 24.38 2nd Quarter 52,307 1,753 395 215 1.19 .35 29.00 24.75 3rd Quarter $2,426 1,888 366 199 1.09 .35 34.88 25.00 4th Quarter $2,447 2,006 236 194 1.08 .40 33.75 27.13 Total $9,255 7,232 1,334 784 4.33 1.45 34.88 24.38 1978 Net sales........................................................ ....... $1,649 Cost of sales.................................................. ....... 1,276 Operating income ....................................... ........ 248 Net income .................................................. ........ 130 Earnings per share....................................... ....................71 Cash dividends paid per share ................. ....................30 Market price range of common stock: High........................................................ ........ 27.25 Low ........................................................ ........ 22.00 $1,748 1,329 287 154 .84 .30 28.50 22.00 $1,674 1,271 272 153 .85 .30 30.88 23.50 $1,817 1,408 244 138 .76 .35 30.88 24.63 $6,888 5,284 1,051 575 3.16 1.25 30.88 22.00 31 CO ' ST0 O H 949 R GEOGRAPHIC AND INDUSTRY SEGMENTS The Company conducts its worldwide operations through separate geographic area organizations which represent major markets or combinations of related markets. The results for all areas for 1979 and 1978 were (in millions): United States Europe/ Africa Canada Pacific Latin America Brazil Elim. & Corp. Assets Consoli dated Year ended December 31, 1979: Sales to unaffiliated customers.......................... Transfers between Total sales and transfers........................ Operating income............... Profit (loss) before income taxes.................................... Identifiable assets at December 31, 1979 ........ $4,583 816 55,399 S 685 $ 626 $4,851 $2,663 188 S2.851 S 349 $ 334 $2,458 $ 630 44 $ 674 $ 66 $ 135 $1,317 $627 5627 SI 17 S130 $636 S476 4 $480 $102 $101 364 $276 18 294 $ 15 $4 614 $(1,070) $ 9,255 $(1,070) $ 9.255 5 1,334 $ (17) $ 1,313 $ 12 $10,252 Year ended December31, 1978. Sales to unaffiliated customers.......................... Transfers between areas.................................... Total sales and transfers ........................ Operating income............... Profit (loss) before income taxes .................................... Identifiable assets at December 31, 1978 ......... $3,646 606 S4.252 $ 682 $ 617 $4,330 $1,813 123 51.936 $ 212 $ 218 $2,058 $ 439 25 $ 464 $ 44 5 28 $ 922 S404 1 S405 555 S 73 $536 $337 2 $339 $~41 $ 38 261 $249 9 $258 $~17 S (6) $625 $(766) $6,888 S(766) $ 6,888 S 1,051 $ 968 $ 57 S 8.789 Transfers between areas are valued at cost plus a markup. There were no direct sales to foreign customers from domestic operations. Aggregation of products into industry segments is generally made on the basis of process technology and channels of distribution. The Chemicals/ Metals segment embodies chemicals, hydrocarbon intermediates and the Company's magnesium business. The Plastics/Packaging segment includes large volume polyethylene and polystyrene products as well as a variety of plastic coatings, films and foams. The Bioproducts/Consumer Products segment encompasses human, animal and plant health care products, in addition to household films and cleaning chemicals. Industry segment results for 1979 and 1978 were (in millions): rear ended December 31, 1979; Chemicals/ Metals Plastics/ Packaging Bioproducts/ Consumer Products Eliminations & Corp. Assets Consolidated Sales to unaffiliated customers .. Intersegment transfers................ Total sales and transfers ......... Operating income...................... 54,786 1,170 $5,956 $ 578 53,458 37 $3,495 S 693 $1,011 39 $1,050 5 63 5(1,246) S(1,246) $ 9,255 $ 9,255 $ 1,334 Identifiable assets at December 31, 1979 ................. Depreciation ............................. Additions to property............... $5,668 $ 428 $ 992 52,206 S 154 S 205 SI .033 5 52 S 71 51,345 S10.252 S 634 5 1,265 32 b 1A 1lb 11L-AL b l / t i L i v i u v i a Chemicals/ Metals Plastics/ Packaging Bioproducts/ Consumer Products Eliminations & Corp. Assets Consolidated Year ended December 31, 1978: Sales to unaffiliated customers .. Intersegment transfers................. Total sales and transfers ......... Operating income........................ Identifiable assets at December 31, 1978 .................. Depreciation ............................... Additions to property................. S3,535 862 $4,397 $543 $4,868 $ 376 $ 841 $2,479 40 $2,519 $ 414 $1,911 $ 137 $ 180 $ 874 9 $ 883 $ 94 $ 874 $ 49 $ 54 $ (911) $ (911) $1,136 $6,888 $6,888 $1,051 $8,789 $ 562 $1,075 Transfers between industry segments are generally valued at standard cost. It is not practicable to estimate what the impact might be upon the revenue or profitability of geographic areas or industry segments if transfers/purchases had been made at the prevailing market prices. S. SUPPLEMENTARY INFORMATION ON EFFECTS OF CHANGING PRICES (Unaudited) The first table below shows certain income data presented in the historical cost income statement on page 23, adjusted to constant dollars and current costs expressed in dollar values generally at the average 1979 price level. The changes to costs and income are presumed to reflect some of the deleterious effects of inflation on reported income under the two different methods of measuring inflation. Those changes are moderated because the primary financial statements already give substantia] recognition to the effects of inflation by worldwide use of declining balance depreciation and the last-in, first-out method for valuing inventories. The second table is a five-year comparison of selected supplementary financial data adjusted for effects of changing prices. Certain information pertaining to years ended on or before December 31,1978 is omitted because it is impracticable to obtain such information. CO --t cn> Consolidated Statement of Income Adjusted for Changing Prices o Year Ended December 31,1979 -J (In millions) CO As Reported in the Adjusted for General Adjusted for Changes in CJ1 CO Financial Inflation Specific Prices Statements (Constant Dollars) (Current Costs) Net sales .............................................................. Cost of sales, excluding depreciation................. Depreciation expense ........................................ Interest expense--net........................................ Gain on sale of oil and gas properties ............... Other operating expense..................................... Provision for taxes on income ........................... Income from continuing operations.................. Purchasing power gain on net monetary liabilities held during the year .................... Increase in the general price level over increase in specific prices .................... Total $9,255 6,617 634 272 (85) 518 515 8,471 784 $ 784 $9,255 6,645 668 272 (85) 518 515 8,533 722 435 SI,157 $9,255 6,645 694 272 (85) 518 515 8,559 6% 435 (355) $ 776 33 Five-Year Comparison of Selected Supplementary Financial Data Adjusted for Effects of Changing Prices (Average 1979 Dollars) Years Ended December 31 Historical cost information adjusted for genera) inflation (constant dollars): Net sales ......................................................................... Income from continuing operations ............................. Income from continuing operations per share ............. Purchasing power gain on net monetary liabilities held during the year.................................................... Net assets held at year-end ............................................ Current cost information: Income from continuing operations .............................. Income from continuing operations per share ............. Increase in the general price level over increase in specific prices...................... ............ Net assets held at year-end ............................................ Cash dividends declared per share ................................... Market price per share at year-end ................................... Average Consumer Price Index (1967 = 100).................... 1979 1978 1977 1976 1975 (In millions, except per share data) $9,255 722 3.99 435 6,316 696 3.84 355 6,690 1.48 30.30 217.6 S7,670 1.44 26.68 1954 $7,474 1.37 31.28 181.5 $7,214 1.21 54.16 170.5 $6,598 1.01 59.94 161.2 Income tax expense as shown by the primary financial statements has not been changed. Historical Cost Adjusted for General Inflation The supplemental data in constant dollars reflect historical costs adjusted for changes in purchasing power of the dollar as measured by the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics.These amounts do not purport to represent appraised value or any other measure of current value. Depreciation was computed under the straight line method. At December 31,1979, there was an excess of monetary liabilities over monetary assets. As inflation erodes the purchasing power of the dollar, net debts are repayable with dollars of lesser value resulting in a gain in purchasing power of $435 million. Current Costs Cost of sales was calculated by applying the last-in, first-out method to all inventories. Inventories valued at 52,117 million at December 31,1979 were determined by using the year-end purchase prices of raw materials and supplies and the standard cost of manufacturing for finished goods and work-in-process inventories which approximates current cost. Net plant properties were determined primarily through the use of indices related specifically to the construction cost of chemical plants. These values which totaled $7,629 million at December 31,1979 represent the estimated cunent costs of existing assets and do not consider technological improvements and efficiencies associated with normal replacement of productive capacities. Depreciation was computed using the straight line method. Cost for assets outside the United States was determined in local currency and translated into U.S. dollars at exchange rates in effect at year-end. Increases in current costs of inventories and plant properties held during the year, less the effect of general inflation, are not included in income from continuing operations but are shown below: Increase in current cost ............................. ........................ Less -- General inflation............................ ........................ Net ........................ ........................ Inventories $380 223 5157 Plant Properties S 420 932 $(512) Total $ 800 1.155 5 (355) IS6H001S 34 Geographic Results (Unaudited) (dollars in millions) Sales Operating Income Profit (Loss) Before Tax Gross Plant Properties Capital Expenditures Employees (thousands) United States.......... Europe/Africa........ Canada ................... Pacific ..................... Latin America........ Brazil....................... TOTAL ................... United States.......... Europe/Africa........ Canada ................... Pacific ..................... Latin America........ Brazil....................... TOTAL ................... United States......... Europe/ Africa........ Canada ................... Pacific ..................... Latin America........ Brazil....................... Unallocated ........... TOTAL ................... United States......... Europe/Africa........ Canada ................... Pacific ..................... Latin America........ Brazil....................... TOTAL ................... United States......... Europe' Africa .... Canada ................... Pacific..................... Latin America ........ Brazil....................... TOTAL ................... United States.......... Europe' Africa .... Canada ................... Pacific ..................... Latin America........ Brazil....................... TOTAL ................... 1979 $4,583 2,663 630 627 476 276 $9,255 1979 $ 685 349 66 117 102 15 $1,334 1979 $ 626 334 135 130 101 4 (17) $1,313 1979 $5,488 1,631 1,059 243 82 406 $8,909 1979 $ 748 126 292 58 8 36 $1,268 1979 34.1 11.4 3.8 1.9 2.5 2.2 55.9 1978 $3,646 1,813 439 404 337 249 $6,888 1978 S 682 212 44 55 41 17 $1,051 1978 $ 617 218 28 73 38 (6) $ 968 1978 $4,951 1,522 927 184 79 375 $8,038 1978 S 616 106 250 62 4 37 $1,075 1978 32.3 11.4 3.3 1.8 2.6 2.1 53.5 1977 $3,457 1,618 396 295 277 191 $6,234 1977 $ 664 201 63 38 50 4 $1,020 1977 $ 621 194 46 43 47 (20) $ 931 1977 $4,489 1,441 682 129 77 340 $7,158 1977 S 661 162 210 40 5 85 $1,163 1977 32.0 11.6 3.0 1.7 2.7 2.2 53.2 1976 $3,077 1,502 370 270 234 199 $5,652 1976 $ 641 230 68 52 52 53 $1,096 1976 $ 610 237 66 59 50 17 $1,039 1976 $3,984 1,290 477 91 73 256 $6,171 1976 S 764 200 88 30 5 113 $1,200 1976 31.9 11.6 2.8 1.7 2.8 2.2 53.0 1975 32,724 1,273 323 181 225 162 $4,888 1975 S 635 249 82 29 52 30 $1,077 1975 $ 606 299 80 46 55 24 $1,110 1975 $3,292 1.096 436 63 72 145 S5.104 1975 S 577 185 65 23 7 _____78 S 935 1975 31.2 12.1 2.8 1.6 3.2 2.2 53.1 35 STATISTIC AL STATEM ENTS Product Group Results (Unaudited) ESGK'OOIS i (dollars itt millions) Sales Chemicals/Metals ... Plastics/Packaging . . . Bioproducts/ Consumer Products . TOTAL ....................... 1979 $4,786 3,458 1,011 $9,255 1978 $3,535 2,479 874 $6,888 1977 $3,333 2,146 755 $6,234 1976 $3,048 1,891 713 $5,652 1975 52,747 1,429 712 $4,888 Product Group Sales Analysis Chemicals/Metals Group Uses Approximate Sales (In millions) 1979 1978 Inorganic Chemicals Major Products Caustic soda.................................. Chlorinated solvents..................... Chlorine.......................................... Ethylene dibromide ..................... Organic Chemicals Major Products Acetone .......................................... Ethylene glycol............................... Glycerine........................................ Isocyanates and VORANOL polvglycols ............ Phenol ........................................ Propylene glycols........................... Metals Major Products Magnesium sheet, plate and extrusions .................................. Magnesium ingot........................... Functional Chemicals and Services Major Products <& Services Calcium chloride ........................... Dow Industrial Service................. Dowell Division............................. Hydroscience Associates, Inc. . . . Hydrocarbons Major Products Ethylene.......................................... Wanda Petroleum........................... Oil and Gas Division ................... Total sales ............................. Production of papier, alumina, rayon, petroleum products and industrial chemicals Metal cleaning, dry cleaning, paint removers Chemical intermediate, water treatment, paper Leaded gasoline, soil and grain fumigant Solvent, production of methyl methacrylate Antifreeze, polyester fiber production Alkyd resins, tobacco products Rigid, elastomeric and flexible urethane products and foams Plastic resins and adhesives Polyester resins, pet food humectant SI,121 1,584 321 Commercial and military products Aluminum alloys, steel processing Highway deicing & dust control Industrial equipment cleaning Petroleum production services Waste treatment engineering Chemical intermediate Trading and marketing of petroleum products Fuel and petroleum products ................................................................................ 835 925 _________ $4,786 $ 916 1,189 291 687 452 $3,535 Plastics / Packaging Group Molding Materials Major Products Acrylonitrile-butadienestyrene (ABS) High density polyethylene ......... Low density polyethylene STYRON polystyrene Used in injection molding, blow molding and extrusion processes for fabrication of articles and in the automotive. appliance, packaging, wire and cable, housewares, toy and construction industries 51,749 $1,156 36 Operating Income Chemicals /Metals ... Plastics/Packaging ... Bioproducts/ Consumer Products . TOTAL ....................... 1979 $ 578 693 63 $1,334 1978 $ 543 414 94 $1,051 1977 $ 603 373 44 $1,020 1976 S 622 392 82 51,096 1975 $ 694 301 82 SI,077 tSGVCOOlS Plastics/Packaging Group (Cont.l Coatings and Monomers Major Products Epoxy resins.................................. Stvrene-butadiene latexes........... Styrene monomer ......................... Vinyl chloride monomer ............. Uses Coatings, adhesives, laminates Paper and carpeting Production of polystyrene plastic Production of polyvinylchloride plastic Plastic Products Major Products Polyethylene film.......................... Polystyrene film and sheet............ STYROFOAM polystyrene foam .. SARA.N film .................................. Industrial packaging, agricultural use Functional and decorative packaging Insulation, floral and craft uses Commercial packaging Total sales.................................. Bioproducts/Consumer Product Group Health Care Products and Services Major Products & Services Bio-Science Enterprises ............... Diagnostic products and equipment.................................. NOVAH1STINE products............. RIFADIN and RIFOCLN antibiotics.................................. Diagnostic services Medical laboratory' tests Cough and cold preparations Broad spectrum antibiotics used primarily for TB treatment Agricultural Chemicals Major Products COYDEN and ZOAMIX coccidiostats.............................. DURSBAN insecticide ................. Phenoxy herbicides....................... TORDON herbicide ..................... Treatment of poultry disease Broad range insecticide Weed and Drush control Weed and brush control Consumer Products Major Products DOW Bathroom Cleaner............... HAND1-WRAP plastic film......... SARAN WRAP plastic film ......... 7IP! nr* kaoc Household use Household plastic film Household plastic film Food storage Approximate Sales (In millions) 1979 1978 $1,301 $ 970 408 353 $3,458 $2,479 S 426 S 380 471 398 114 96 51.011 S 874 37 Condensed Comparative Statements (In millions except per share) SSGU-OOJLS Financial Condition Income Other Statistics 38 Current Assets. Cash and marketable securities.................................. Receivables (less reserves) .......................................... Inventories..................................................................... Total current assets............................................ Current Liabilities: Notes payable............................................................... Accounts payable and accruals.................................. Total current liabilities .................................... Working capital........................................................... Net Property................................................................. Other Assets................................................................. Investment (A) plus (B) plus (C)................................ Long-Term Indebtedness ............................................ Other Liabilities........................................................... Total................................................................... Common Stockholders' Equity (D) minus (E).......... Net sales......................................................................... Cost of sales................................................................... Selling and administrative expenses......................... Operating income.............................................. Investment and sundry income -- net....................... Interest expense ........................................................... Taxes on income........................................................... Minority interests' share in income........................... Income before extraordinary items and cumulative effect of accounting change................. Extraordinary items -- net of tax................................. Cumulative effect of accounting change -- net of tax Net income......................................................... Per share of common stock (in dollars) ('): Income before extraordinary items and cumulative effect of accounting change............. Extraordinary items.................................................. Cumulative effect of accounting change............... Net income per share................................................ Cash dividends paid per share.............................. Average common shares outstanding (thousands) . 1979 $ 252 2,188 1,313 3,753 528 2,087 2,615 .(A) 1,138 (B) 5,236 (C) 1,263 (D) 7,637 3,055 685 (E) 3,740 $3,897 $9,255 7,231 690 1,334 251 (272) 515 14 784 S 784 $4.33 $4.33 $1.45 181,149 1978 S 398 1,718 1.000 3,116 386 1,565 1,951 1,165 4,762 911 6,838 2,937 506 3,443 $3,395 $6,888 5,284 552 1,051 154 (237) 384 9 l 575 S 575 { S3 16 53.16 51.25 182,091 Additions to property................................................ Depreciation ................................................... Research and development expenses....................... Taxes (major).................................. ............................ Wages and salaries paid ............................................ Cost of employee benefits ........................................ Number of employees at year-end (thousands).... Market closing price on December 3l(*)................. $1,268 634 269 748 1.301 297 55.9 32.13 51,075 562 232 572 1,113 262 53.5 24.88 Adjusted for stock splits. If the accounting change is applied retroactively, pro forma net income per share before extraordinary items would be 1974, $3.03; 1973, $1.40; 1972, $.98, 1971. $.82; 1970, $.69. 1977 $ 135 1,430 1,067 2,633 470 1,288 1,759 874 4,276 842 5,993 2,473 422 2,896 $3,097 $6,234 4,734 480 1,020 131 (220) 372 5 553 1976 $ 132 1,323 998 2,454 429 1,281 1,710 744 3,649 840 5.233 1,998 388 2,386 $2,847 $5,652 4,125 431 1,096 104 (160) 420 6 611 5 553 S3.00 S 611 S3.30 S3.00 Si.10 184,354 SI.163 492 203 976 223 53.2 26.75 S3.30 S .90 185,412 SI,200 420 187 596 887 205 53.0 43.38 1975 $ 374 1,070 814 2,260 268 1,225 1,494 766 2,884 797 4,448 1,684 331 2,016 $2,431 $4,888 3,398 413 1,077 141 (107) 473 5 630 S 630 $3.40 $3.40 $ .73 185,205 S 935 363 167 635 790 170 53.1 45.81 1974 $ 423 1,039 722 2,185 220 1,358 1,579 605 2,334 674 3.613 1,426 247 1,674 $1,939 $4,938 3,395 405 1,137 41 (90) 523 5 560 11 (41) $ 530 S3.03 .06 (.22)* $2.87 $ .55 185,022 S 890 343 148 613 738 149 53.3 27.50 1973 $ 317 744 497 1,560 214 797 1,011 549 1,875 557 2,982 1,339 119 1,459 $1,523 $3,067 2,226 330 510 58 (92) 199 9 267 4 S 272 $1.46 .02 $1.48 $ .48 184,228 $ 415 275 118 314 611 101 49.8 28.75 1972 $ 162 595 423 1,181 269 533 802 379 1,745 481 2,605 1,201 77 1,278 $1,326 $2,403 1,757 286 359 58 (93) 129 7 187 (6) $ 181 SI. 02 (.03) S .99 S .45 182,648 $ 359 234 104 218 516 85 48.8 25.38 1971 1970 $ 106 504 395 1,005 368 423 791 214 1,564 508 2,287 1,010 75 1,085 $1,202 $2,052 1,517 250 284 43 (78) 91 4 154 5 78 445 368 891 229 407 636 255 1,438 474 2,168 969 65 1,035 $1,132 $1,911 1,417 233 259 .-I 36C/> (73 M 88 => 4 130 CO S 154 _______________ CD S 102 S .85 $ .85 $ .44 181,714 S 364 218 95 161 464 72 47.8 19.72 S .72 (.16) 5 56 S .43 181.150 S 348 207 91 136 433 o4 47.4 12.27 39 m co o is Directors & Officers Board of Directors Earle B. Barnes Chairman of the Board Clyde H. Boyd President. Dow Chemical Europe S A. C. B. Branch Honorary Chairman of the Board Melvin Calvin University Professor. Chemtstrv, University of California Herbert D. Doan Partner. Doan Associates (a venture capital company} Herbert H. Dow Secretary Carl A. Gerstacker Chairman. Finance Committee Hunter VV. Henry" President. Dow Quirmca. 5. A. J. M. Leathers Vice President. Manufacturing and Engineering Technology Robert W. Lundeen Executive Vice President H. H. Lyon Vice President Paul VV. McCracken University Processor. Business Administration. University or Michigan Robert E, Naegele President. Dow Chemical of Carada. Limited Paul F Oreffice President and Chief Executive Officer David L Rooke President. Dow Chemical U S A. Dave W. Schornstein President. Dow Chemical Pacific Limited Paul G. Stroebel Director of Corporate Business Development Joseph G. Temple, Jr.'* President, Dow Chemical Latin America C. James Williams Financial Vice President Officers and Assistant Officers Paul F. Oreffice President and Chief Executive Officer Earle B. Barnes Chairman oi the Board Robert VV. Lundeen Executive Vice President Etcvl H. Blair Vice President Clyde H. Boyd Vice President Herbert H. Dow Secretary Wilson A Gay Treasurer A. P. Hanmer Vice President and Controller I. F. Harlow Vice President and General Counsel J. M. Leathers Vice President H. H.Lyon Vice President M. E. Pruitt Vice President David L. Rooke Vice President G. James Williams Financial Vice President R. W. Barker Assistant Secretary Dale A. Bywater Auditor Lois J. Hoerlein Assistant Secretary John S. Walshaw Assistant Treasurer Glenn W. White Assistant Secretary Executive Committee Paul F. Oreffice, Chairman Earle B Barnes Herbert D. Doan Herbert H. Dow Robert W. Lundeen David L. Rooke G. James Williams Clyde H. Boyd (Alternate) Finance Committee Carl A. Gerstacker, Chairman ClydeH Bovd^ Herbert H. Dow Wilson A Gay A. P. Hanmer I F Harlow Robert VV. Lundeen H H. Lyon G. James Williams F. C. Yehle Audit Committee Melvin Calvin, Chairman Herbert D. Doan Paul W. McCracken Compensation Committee Carl A. Gerstacker. Chairman Herbert D. Doan Herbert H. Dow H. H. Lyon*+ Investment Policy Committee G. James W'iUiams, Chairman Wilson A Gav^ Carl A. Gerstacker Robert W. Lundeen H. H. Lyon E. C. Yehle Public Interest Committee Herbert H. Dow, Chairman Herbert D. Doan Julius E. Johnson Robert W. Lundeen Keith R. McKennon Robert E. Naegele Dave W. Schornstein Joseph G Temple. Jr T (J. H. Pearce. Secretary! Nominating Committee Earle B. Barnes, Chairmanr C. B Branch Herbert D Doan Carl A. Gerstacker Paul F Oreffice ` E/t'r.Vif to the Board o! D:ri\t.,r' \ovember 8 1979 *" F/crti'i/ to the Board of Director.. Inly 10. 1979. * Elected May 2. 1979. Elected December 6. 1979 r ST0 0 0 49 5 7 40 Of Special Interest to Stockholders... OSGiGOOlSi Stockholders Equity (Dollars in Billions) Dow's policy of plowing back earnings in the company means steady growth in stockholders' stake in the business. 2.85 2.43 & 3.40 3.10 3.90 1975 1976 1977 1978 1979 Stockholder Profile Stockholders, by size of holding 1 to 99 44% ----------100 to 500 41% -- 501 to 1.000 8%----1,001 and More 7% Distribution of shares by size of holding 1 to 99 1% 100 to 500 O/j 501 to 1,000 4% ------1,001 and More 88% [( Stockholders, by type Individuals 95%-----------Institutions 5% ------------ Distribution of shares, by type of stockholders Institutions 66%----------Individuals 34%------------ As of December 31,1979,141,462 Stockholders of record owned 181,181,175 shares of Dow stock. Annual Meeting The 1980 Annual Meeting of stockholders will be held at 2 p.m. (EDT) Friday, May 9, in the Midland Center for the Arts, Midland, Michi gan. A formal notice of the meeting, with a proxy statement and proxy form, will be mailed to each stockholder separately from this report. Form10-K A copy of the company's annual report to the Securities and Exchange Commission on Form 10-K will be provided without charge to any stockholder requesting it in writing. Please address: Corporate Secretary, The Dow Chemical Company, 2030 Dow Center, Midland, Michigan 48640. Exchange Listings NYSE Symbol: DOW New York, Midwest, Pacific, Amsterdam, Antwerp, Basel, Bern, Brussels, Dusseldorf, Frankfurt, Geneva, Hamburg, Lausanne, London, Paris, Tokyo, Toronto, Zurich. Transfer Agents The AmeriTrust Company P.O. Box 6477, Cleveland, Ohio 44101 The Royal Trust Company P.O. Box 7500, Station A Toronto 116, Ontario, Canada Registrars The AmeriTrust Company P.O. Box 6477, Cleveland, Ohio 44101 Montreal Trust Company 15 King Street West Toronto, Ontario, Canada M5H 1B4 Dividend Reinvestment Plan An automatic dividend reinvestment plan is available to all Dow stockholders. Information can be obtained by writing to: AmeriTrust Company, P.O. Box 6477, Cleveland, Ohio 44101. Cassette Tapes Available Cassette tapes for the blind of this report and quarterly reports can be obtained by writing: Financial Communications Manager, The Dow Chemical Company, 2030 Dow Center, Midland, Michigan 48640. Corporate Headquarters The Dow Chemical Company 2030 Dow Center, Midland, Michigan Tel: 517-636-1000 48640