Document zb9ObvMV2z53Y7QNz2MJ8Xja3

1995 ANNUAL REPORT R&S 041444 bail V .. '&l . '. ::*' m*,'** * y.ftgKaatsuccessrAsateenwyiTiencDowrstBresthggoolsofcustpma^ . employees, shareholdersLandsnaetyL -'-. f -i /,': ........;-{ ; rvMCm .MfVf *'--: 1", "rffCudumerslooKto Dowforthe b^^kS^i^Ripjilfccto ? combination ofvafoa performance; people seek the.opportunitiesto ' .seivfoe and price,fnalfofourglobal iv.matevaluable contributionsandbe;:>. ., markets. we're. committed to helping recognized for theirefforts. them succeed. ; Employees are responsibly putting - ? .-V'k-: ' `.;.i-.-- cherrastrytoworkto help our - - customers and the>company grow 1'v, ^Shareholders seek higher returns^-5- -K Fronifoefrwdwaeat.to the homes;*! lowerrisks, andso dowe?Wfe"i ;*welive taandcarswedriwe,: . are dedicated to creating value - chemistry touches every aspect of ithroughout the economic cycle modem life. Ougoai.shareclty ;` rewarding all of our shareholders,. < including many teachers whose pecqfsjwafyw^^ chemistry to make.Bfe safer more - ; pension funds are invested irt : pi^uct^ ^ Ws v :**. .`i' ' 'W** customers in almost countries around the world. Dow operateS|94 manufacturing sites in 30 countries and employs about 39,500 people who are dedicated to applyih^hemistryt^en^fcustomersy employees, sharehold^^nd s^idty. '".I / I*;fa!W<f^gfsi!n!fiTh>r i'h.vfii?'?!'' 5:' ' ifvferfe.- IftSv:. Q33 ' ** Financial Highlights of1995* In millions, except where noted Net Sales Operating Income Net Income Available for Common Stockholders Research and Development Expenses Capital Expenditures Return on Equity Earnings per Share (in dollars) Dividends Declared per Share (in dollars) 1995 $20,200 3,891 2,071 808 1,417 26.9% 7.72 2.90 1994 $16,742 1,820 931 783 1,183 11.3% 3.37 2.60 Percent Change +21 + 114 +122 +3 +20 +15.6 points + 129 +12 ' Resultsfor previouspears haue been restated to show Dow's pharmaceutical businesses as discontinued operations due to their sate in the second quarter of1993 THE DOW CHEMICAL COMPANY AND SUBSIDIARIES Shared Priorities For Success To Our Stockholders This has been a year of significant achievement and change for The Dow Chemical Company. From our overall business mix to our fundamental work processes, we continue to build a stronger Dow--a Dow that has the focus, resources and organizational capabilities to achieve our mission to be the most productive, best value-growth chemical company in the world. This is my first opportunity as Dow's new CEO to write to you about the exciting strategy we have put in place to achieve a new level of performance focused on value growth. On the strength of new innovations and expanding world markets, the global chemical industry will experience substantial growth in the coming years. We at Dow intend to be part of that growth by capturing the best opportunities for value creation. We are making good progress toward this end. We could not, however, be as well positioned as we are today without the leadership of my predecessor, Frank Popoff. His commitment to Dow's long-term success has helped create our current level of performance. As Chairman of the Board, he will continue to provide insight and guidance. The company has also benefited from the direction provided by Board members Andrew J. Butler, Fred W. Lyons, Jr., and Enrique J. Sosa, all who retired during 1995.1 would like to extend my appreciation to them for their service to the company. I would also like to extend a special thank-you to Enrique C, Falla who has stepped down from his post as Dow's Chief Financial Officer after many years of outstanding service. He will continue to provide leadership on our Board of Directors. Our new Board members, Anthony J. Carbone, Allan D. Gilmour, Michael D. Parker and J. Pedro Reinhard, bring with them a wealth of experience and have already begun to make outstanding contributions. They have been joined by John C. Danforth, who was elected to the Board in February 1996. 1995 Financial Highlights I am pleased to report that 1995 was an excellent year for Dow. Our sales of $20.2 billion set a new record, and our earnings per share were the third highest in the company's history. All of our business segments reported higher sales in 1995 compared to 1994. Our Performance Chemicals and Performance Plastics segments had a particularly strong year. Operating income from these businesses increased 53 percent over last year. Our earnings were $7.72 per share in 1995 versus $3,37 per share in 1994. Excluding earnings from discontinued operations and other special items, earnings were $8.27 per share, up 152 percent versus $3.28 in 1994, The company is in excellent financial condition. Since 1992, we have reduced our net debt by $4.9 billion. This gives us addi tional financial flexibility to pursue opportunities to create value. In our efforts to improve shareholder value, we increased our quarterly dividend by 15 percent. We also repurchased 29 million shares, slightly over 10 percent of our outstanding shares. We believe Dow stock is an excellent value and its repurchase a wise use of our cash. Creating a Yeu Level ofPerformance As we create a new level of performance for the company, we have established a series of financial objectives. By implementing our strategy for long-term success, we will strive to attain: The creation of value over the life of the business cycle. Economic profit, which we define as return in excess of the cost of capital, now drives our business decisions. We will strive to generate economic profit every year. The objective for us, however, is to create value over the life of the business cycle. A targeted return on capital that exceeds the cost of capital by 3 percent over the life of the business cycle. A return on equity of about 20 percent, averaged over the life of the cycle. Strategy for Long-Term Success To meet our objectives, we have outlined a four-part strategy. The key elements of this strategy are: maximizing shareholder value from a growing portfolio of chemistry-related businesses; setting the competitive standard business by business; gaining competitive advantage and increased productivity by leveraging site and product-line integration, technology, customer relationships and shared business services; and acting globally with investments and resources deployed in local markets. These elements are embodied in the company's Strategic Blueprint, which Dow people are using to guide their efforts. In 1995, we made significant progress on each of these fronts. Crowing Portfolio of Chemistry-Related Businesses We made strategic shifts in our business portfolio. Through a series of purposefully executed divestitures and acquisitions, we shifted our business portfolio to focus our resources on our core competencies. The most significant of the divestitures was die sale of our pharmaceutical interests. The sale of Marion Merrell Dow and our Latin American pharmaceutical businesses marked a key turning point in the company's long-term growth strategy. With this sale, we made the strategic decision to focus our resources in Dow's core chemistry-related businesses, rather than to make the large-scale investments necessaty to stay competitive in the pharmaceutical industry. Some other businesses we divested include our aspirin business, Generon Systems Inc., the Personal Care Business of DowBrands, and Advanced Cleaning Systems. Collectively, this year's divestitures have generated nearly $5.3 billion of cash to pursue new value-growth opportunities. We expanded current businesses to add value. During the last two years, we placed in service more than $3 billion of additional capacity to meet our customers' increased demand. For example, during 1995 we added to our position in the Asia-Pacific geography by bringing on stream plants in Thailand and Indonesia to meet the needs of the emerging southeast Asia market. We are developing new products and services with a clear focus on chemistry-related businesses. We are rapidly pursuing commercial opportunities based on our Insite technolog)' and our environmental expertise. DuPont Dow Elastomers L.L.C. and Radian International LLC are two examples of how, through partnerships with other companies, we are accelerating commercialization of these capabilities. Through the acquisition of Enichem's INCA International SpA in Italy, we have entered into the purified terephthalic acid (PTA) and polyethylene terephthalate (PET) businesses. We also plan to enter into the polypropylene business. Polypropylene and PET are two of the fastest growing polymers in the world and provide us with tremendous value-growth potential. They complement our current strength in plastics, allowing us to leverage our technology along with our existing market and raw material positions. They also allow us to respond to our customers' growing needs in the packaging and durables markets. Setting the Competitive Standard Business by Business We restructured our operations around our 15 global businesses. Our new structure better enables our businesses to seize opportunities for value growth. By organizing around our businesses, we are now able to leverage our functional and geographic expertise globally and are better able to understand our marketplaces and serve our customers. Each of our 15 businesses can create its own future within the context of Dow's strategy. We are combining the speed, Iflexibility, knowledge and focus of a small company with the Kchnology, global reach and financial resources of a large company. Gaining Competitive Advantage by Leveraging Our Strengths * We significandy improved productivity. We have reduced our annual controllable costs by $700 million, on a comparable basis, over the last three years, surpassing our goal of $600 million. The productivity gains we have made are the result of employee innovation. Employees began by simply looking for ways to cut costs but, in doing so, unearthed a world of opportu nity to do things faster, smarter and more efficiently. Each of our work processes is being reengineered, with the ultimate goal of leveraging our strengdis globally and across all businesses to eliminate duplication and ensure world-class practices. Here are a few of the many examples of employee efforts: Over the past three years, our polystyrene employees achieved a 30 percent reduction in conversion costs, which translated into a $41 million earnings improvement in 1995. Since 1992, employees at our polyol plant in Texas increased the production capacity of their unit by 59 percent, reducing conver sion costs by 45 percent, with a capital investment of just over $1 million. The result was a $30 million improvement in earnings. By reengineering and integrating our supply chain with 75 companies in North America, employees saved $8 million for Dow and $4 million for our customers. Productivity improvements such as these will continue. Investing Globally, Implementing Locally We expanded geographically. The changing global market place offers great growth opportunities. We continue to invest and expand in emerging markets around the world. As we expand, our business strategies will be set globally, but implemented locally. This will ensure that local differences and customer preferences will be respected. THE DOW CHEMICAL COMPANY AN0 SUBSIDIARIES We have received European Union approval to acquire three formerly state-owned production sites in eastern Germany, giving us the opportunity to expand our business in central and eastern Europe. Putting together a transaction as large and complex as this one required a great deal of energy and dedication from both Dow and government people. Their work will result in long-term growth for Dow and in renewed economic prosperity for the German plant communities. Our recent acquisitions in Argentina give us a strong ethylene and polyethylene position in the important Mercosur trading bloc formed by Argentina, Brazil, Paraguay and Uruguay. Our invest ment in the Asia-Pacific geography provides us with access to that important marketplace. Combined, our current value-growth initiatives should enable us to add $3-4 billion in annual sales by the end of the decade. Creating the Right Culture It is our people who bring our strategy to life. Therefore, we are actively renewing our corporate culture to create a workplace where geographic, functional and business barriers are eliminated, allowing Dow people to leverage their expertise across the entire company. A key to our new culture is increased individual accountability. We are delayering the organization so that there will be no more than 4 to 6 layers versus the traditional organization that has 8 to 10 layers. By doing so, we will increase the speed of decision making, enhance our organization's flexibility to meet customer needs, and make people's careers more fulfilling. Personal contri bution will be measured not by position on the organizational chart, but by job knowledge and performance. To ensure we recognize our employees' contributions appro priately in our new culture, we are revising our employee compensation program. We are adding a business link to our existing variable pay progam which ties a portion of most Dow employees' compensation directly to the company's economic profit performance. We will begin a pilot widi senior managers to tie their variable pay directly to the economic profit performance of their business. This will allow us to reward employees for their contributions to the success of their business. Pursuing Excellence in Environmental, Health anti Safety Performance I have dedicated the majority of this letter to discussing our financial objectives and our strategy for long-term success. Equally important is our ability to manage the environmental, health and safety issues that affect our businesses. Achieving environmental excellence is a business issue, and our goal is to make the environment part of every business decision we make. It is a tough goal, but we're building on our experience and expertise, and we will continue to improve. I am particularly proud that we not only met, but surpassed, our goal to reduce emissions of 17 priority compounds bv 50 percent. Our commitment was to achieve these reductions by 1995, using 1988 as a baseline. However, we accomplished the goal one year early. In 1994, Dow achieved a 67 percent reduction for our U.S. operations and a 65 percent reduction globally. I am also pleased that safety has remained a top priority during this time of rapid change. In 1995, Dow had a record safety perfor mance, reducing total recordable incidents for Dow employees and contractors by 12 percent compared to 1994. Certainly one issue that has garnered a number of headlines this year involves silicone gel breast implants. Although The Dow Chemical Company never developed, tested, manufactured or sold silicone breast implants, we have found ourselves facing lawsuits related to implants. Because of the American tort system, which is in need of reform, we are being unjustly asked to defend a product developed, produced and sold by another company, Dow Corning Corporation. Dow Corning is owned equally by Dow and Corning Inc. Wc feel compassion for women who are ill, regardless of the cause. In our view, the results of the first phase of the Brigham and Women's Hospital Study, along with the 22 previous studies from the Mayo Clinic, John Hopkins, Harvard Medical School and others that show no link between breast implants and disease, should be reassuring news for women with breast implants. We are confident this issue will be resolved based on die strength of the legal fundamentals and the mounting medical evidence. I want to assure you Dow Chemical will take die necessary measures--toda and in die future--to refute these unjustified challenges. Looking Ahead We have made significant accomplishments in 1995, and we are well positioned to seize opportunities to create addiuonal value growth. I would like to thank our employees, customers and share holders for their support during this year of rapid change. Change is necessary, but it is not always easy. I am especially proud of the way employees are meeting the challenges before them with creativity and innovation. Throughout 1996, we will stay focused on our strategy. I am confident we will experience another good year. Achieving the objectives we have set for ourselves will bring about success for all of our stakeholders. That is why we have chosen "Shared Priorities" as the theme for this year's Annual Report. I hope as you read through the following pages you will see that our value creation efforts are moving us full force toward our vision of being the best at applying chemistry for the benefit of our customers, employees, shareholders and society. President and ChiefExecutive Officer February 28, 1996 THE DOW CHEMICAL COMPANY AND SUBSIDIARIES ,,y -_y . s, . ,../ / ,./' :..y *.../' ... " /'/ y : ' _ y ,,,/ / At Dow, we want the same thingsyou want. We want to produce high-valueproducts and servicesfor our customers | provide opportunitiesfor our employees to grow and recognize their contributions\ create valuefor investors andproduce products that improve the quality oflife. Value is the key. We need to be the best value-creating chemical company in the world. From helping surgeons I heal theirpatients to improving the taste ofice cream, value is what we deliver. Around the world, we are working to be the best at applying chemistryfor the benefit ofeveryone who has a stake in Dow. Because | when our customers, employees, shareholders and society succeed, so do we. Everyone wins. Together. THE DOW CHEMICAL COMPANY AND SUBSIDIARIES 5 , :/ v Ir \ C`: '.`a : , Vt \fP _ V:.v' ' ;. Ac;: ^ , U7-:A^i v. .-v: ,, /I SharedAppetit&foffitbwth 1 "Our suppliers- shopldfiave a globedprcsencef.anda largeproduct range, in addition to controlling theirfaw jnaterial supplies atidtakingpart injoint-developmentprojects," says binders Bergstrom^ apurchasing exctjjjivecit appliance manufacturer AB Electrolux. Daw has wktrt^'tid^;Btf9S^fiow became AB Electrolux'sfust global supplier. Daw sup pliespolyurethanes, tlwrmoplaftieituulotlier materials to more than <35productionfacilities in IS countries. In additiotr -/III.Electrolux gainsDaw's technical expertise. For both AB Electrolux and Daw, this ^win-win nretatiodship delivers supply accountability and lower operating cost Jbe^ relationship also helps us dxpiind ouApresence in one ofthe largest end-use marketsfarplastics? Around the world, consumersfindappliances tailoredto meet their needs with improvedperformance. THE DOW CHEMICAL COMPANY AND SUBSIDIARIES W |. I ni t/terey Daw's eveloptnent in this rabidfa expanding mar, We cstahfffpstrongpresence irt growingmI stnmng the Asia-Pacific loping opportunity ocal manufac yy M VVfej nda better undersh L/, . Mi need to grow. A New Leader In Argentina, a Dow-led consortium has acquired Petroquimica Bahia Blanca (PBB), which was formerly owned by the state PBB is the leadingproducer of ethylene in Argentina and the only producer in South' America to use low-cost naturalgasfeedstock, T< a strongposition in thefour-nation Mercosur tmdfng--~'~k blocformed by Brazil, Argentina, Paraguay and \ SjBmjh Uruguay that ispopulated by more than ZGC nm^bnKI^^' people. Argentina wilt benefitfrom the modernization andplanned expansion ofthe PBBfacility. Mercosur consumers will benefitfrom a stable, low-cost supply of ethylene -- andpolyethylene -- that will keep pfjfce- with the market's increasing needs. j^ 1A. If. 'Vm-.Hj i i '1 ? W `'W THE DOW CHEMICAL COMrPANY~`ANO SUBSIDIARIES 's'-*- - ' -f? L.j y*f'*'*%-*,1 f * 1 t '>, #' *. Back on Iter feet New devices help make surgery easierfor doctor andpatient rand Dow assists. Engineersfrom Dow andEthicon EndoSuj&iprui Inc. worked together to replace metal with Isoplast thermopggfifc sins to create a surgical stapler that is lighter, less expensive and easier to use The teamwork, part ofa long-term supply relationship, led to ajoint research paper on the project. By ng and speeding some procedures, the new stapler helps time, controls health care costs and makes sure Wyrftfte sidelinedfor long by surgery. lb*!#* R$2'3 .... 'I New Recipesfor Success i n r, ;/urn '->.4 - After more than 5C years on the market, iHethoctl cellulose ethers, ** f- ` * ` which combine cellulose and Dow's polymer clientjs(ty, are used. more widely than ever. Part ofthe credit goes to cfneu^ tpam of specialists, whofocus exclusively on serving customersfaftfefood industry. Packagedfood companies and restaurantsgflrraffi - W ingredient that improves the taste and texture ofjkeirf&ffdiT Consumers savor the benefits of better burritos,Jresher-tast donuts and lower-calorie sauces. Higher sales ofMethocel a ter' -,. r specialty chemicals improve earnings as they create valuej out the business cycle. 7 v ^; v 1 H" v* ' ; 1 i; 1^.-->9r THE DOW CHEMICAL COMPANY AND SUBSIDIARIES 1- !S`?' T4 t* `*^P(\Tf &&&&*`^se^,y tv,-> ,,-* ,,VVi " ^ ' "**5 y ,- `r, '/ ,. '^U_ ^r^^yrfk'jf'U M ; jV '"'/,/,,ViT^T^Tffii^TnK ~ ~ "" ' :',0 -'. ' `1 andJocused research and aproduct that improves our fives* registrationfrom the for an entirely new class ofcrap protection products. Tracer naturalyte insect control, thefirst product in this new class ofproducts, will offer excellent control of pests in cotton and other crops. Upon registration, growers willgain newpest managementproducts that are even safer and more effective than those on the market today. The world willgain products it needs with less risk to human health and the environment. # *, & Vs** * The Tost Track to Higher Sales With Dow's help. Hardcore DuPont Composites and Trinity Industries started the world'sfirst commercialplastic box car on the right track. Constructed using a newfabrication technology, the car is builtfrom Derakane epoxy vinyl ester resins and insulated with Trymer insulation. Builtfor Burlington Northern, the new car is . one-third lighter than the steel car it replaces, can carry ZOpercent more volume, requires less maintenance andprovides improved ' ' ', y ' 'v| V f'v'v-T'r';-.. .. insulation---significant cost-saving benefitsfor shippers. Daw gains -.a.neiv. Tiigfi-voltune applicationfor our high-valueproducts. Sl3 fcr". SUSo "- wrgjife f*1--\`1 ' "r**--Hi, i-;v ; `.r'U.VT'fIc'.P fv fc - t. - tilt-DOW CHEMICAL COMPANY AND SUBSIDIARIES Corporate Projile Dow is a diversified, worldwide manufacturer and supplier ofchemicals, plastics, energy, agricultural products, consumer goods and environmental services. Chemicals & Metals This segment includes a wide range of products that are used primarily as raw materials in the manufacture of customers' products. Dow is the largest manufacturer of chlorine and caustic soda in the world, widt about twice as much capacity as the next largest producer. Some uses of chlorine include pharmaceuticals, water purification and the manufacture of plastics. Caustic soda is used in detergents, pulp and paper, petroleum refining and the manufacture of aluminum. Other important products include ethylene dichloride, ethylene glycol, ethylene oxide, magnesium, propylene glycol, propylene oxide and vinyl chloride monomer. Performance Chemicals The products within these businesses include ingredients in many formulated products and processing aids, as well as end-use products. Specialty Chemicals includes products like Drytech superabsorbent polymers, used to produce thinner, more absorbent disposable diapers; Methocel multifunctional food gums, used in formulations when there is a need to replace fat, retain moisture and contribute pleasing texture; and Dowtherm fluids, used to control process temperature. The Emulsion Polymers business includes latex coatings and binders, which are used in the building and construction and the pulp and paper industries. Dow is the largest and most globally diverse of the styrene-butadiene latex suppliers and is the largest supplier of latex to the paper industry. DowElanco produces agricultural products like Broadstrike herbicides and Dursban and Lorsban insecticides, which are used in crop protection and producdon and for industrial pest control. Plastics Dow ranks among the world leaders in plastics production, with uses in such industries as electronics, food service, health care, packaging and recreation. Dow is the leading producer of polyethylene, such as low-density polyethylene and Dowlex linear low-density polyethylene, and polystyrene, such as Styron polystyrene and Aim advanced styrenic resins. The PET (polyethylene terephthalate polyester) and polypropylene businesses will be included in this segment. Performance Plastics Dow offers the broadest range of engineering thermoplastic and thermoset materials of any manufacturer.W This segment consists of the following businesses: Polyurethanes; Epoxy Products Sc Intermediates; Engineering Plastics; Adhesives, Sealants Sc Coatings; Insite technology licensing; and Fabricated Products. Polyurethane products, like Voranol polyether polyols and isocyanates, are used by such industries as automotive, furniture, and building and construction. Dow is the leading producer of allyl chloride and epichlorohydrin globally, which are basic products for the epoxy product chain. Dow's epoxy products and intermediates are used in a variety of applications, including the protective coat ings, electronics and personal care industries. Engineering Plastics, like Calibre polycarbonate resins. Magnum ABS resins and Pulse engineering resins, serve such industries as appliances, automotive and electronics. The Adhesives, Sealants Sc Coatings business manufactures products like Betaseal window adhesives. Insite technology enables Dow and Dow's customers to produce a range of plastics that perform better and are easier to process. Styrofoam brand plastic foam, used in the building and construction industry, is the key product for the Fabricated Products business. Hydrocarbons & Energy Dow is the world leader in olefins and styrene production. This segment encompasses procurement of fuels and crude oil-based raw materials as well as the production of olefins, aromatics, styrene and cogenerated power and steam for use in the company's operadons. Destec Energy, Inc., a Dow subsidiary, is one of the larger independent power producers in the world. It develops independent power projects and sells electrical and thermal energy. Diversified Businesses & Unallocated Diversified Businesses includes DowBrands, Radian International LLC, New Businesses, and Insurance Sc Finance. DowBrands produces household products such as Dow bathroom cleaner with Scrubbing Bubbles, Fantastik all-purpose cleaner. Glass Plus multi-surface cleaner, Saran Wrap plastic film and Ziploc plastic bags. Radian International LLC is a joint venture formed in January 1996 between Dow Environmental Inc. and Radian Corporation that will provide environmental, informadon technology and strategic chemical management services to industry and government. New Businesses consists of advanced electronic materials like Cyclotene advanced electronic resins, used for dielectric coatings, and aluminum nitride ceramic powder, used for thermal management of electronic device packaging; advanced structural materials such as tungsten carbide-based powders; technology licensing; catalysts and new developments. Insurance Sc Finance includes Dorinco Reinsurance Company, a wholly owned subsidiary of Dow, and all other Dow financial companies and holdings. Unallocated includes activities and overhead cost variances not allocated to other segments. THE DOW CHEMICAL COMPANY AND SUBSIDIARIES The Doiv Chemical Company Manufacturing Sites (94) Sales Offices Service Centers (188) Principal Subsidiaries or Affiliates Area Headquarters 1995 Sales By Geographic Areas (in millions): . a' 1995 Sales By Industry Segments (in millions): Performance Plastics Hydrocarbons <5c Energy Diversified Businesses & Unallocated $966 Chemicals & Metals Performance Chemicals Plastics THE DOW CHEMICAL COMPANY AND SUBSIDIARIES Management's Discussion and Analysis ofFinancial Condition and Results of Operations * The company's consolidated statements of income and cash flows for 1994 and 1993 have been restated to present Dow's pharmaceutical businesses as discontinued operations due to their sale in the second quarter of 1995. * To improve stockholders' ability to evaluate Dow's perfor mance, external industry segments have been revised to reflect the company's reorganization around 15 global businesses. All segment information for 1994 and 1993 has been restated to align with the new reporting segments. * The discussions in this annual report contain both historical information and forward-looking statements. The forwardlooking statements involve risks and uncertainties that affect the company's operations, markets, products, services, prices and other factors as discussed in the company's filings with the Securides and Exchange Commission. These risks and uncer tainties include, but are not limited to, economic, competitive, governmental and technological factors. Results of Operatiorts Net sales for 1995 of $20.2 billion increased 21 percent from $16.7 billion in 1994 and 34 percent from $15.1 billion in 1993. Improved economic conditions globally led to higher selling prices and an increase in volume, as illustrated in the Sales Price and Volume table on Page 18. All geographic areas and all indus try segments had higher sales versus 1994 with Europe showing particularly strong growth of 33 percent. Selling prices increased 17 percent versus 1994 and were up across all geographic areas and segments. Volume increased 4 percent versus 1994 with the gains occurring outside the United States. Sales in the United States accounted for 45 percent of the total sales in 1995, 48 percent in 1994 and 50 percent in 1993. Sales and other data by industry segment and geographic area are provided in Note S to the Financial Statements. Operating income more than doubled from $1.8 billion in 1994 to $3.9 billion in 1995 due to the stronger selling prices and a moderate volume increase. Operating income for 1993 was $1.1 billion. CHEMICALS AND METALS Chemicals and Metals had a 34 percent gain in sales in 1995 com pared to 1994, reporting $3.3 billion in sales versus $2.5 billion. The sales gain in 1995 represented a 1 percent increase in volume and a 33 percent increase in price versus 1994. In 1993, sales were $2.3 billion. Operating income rose 237 percent to $1.1 billion from $337 million in 1994. Operating income in 1993 was S154 million. During 1995, caustic soda prices recovered, more than dou bling from 1994 levels, as sales contracts were renewed at higher prices. Vinyl chloride monomer (VCM) saw significant price gains in the first half of the year. After mid-year, however, VCM prices weakened due to the impact of inventory correction, particularly in the U.S. and western Europe, During the year, Dow announced a number of capacity expansions in its Chemicals and Metals business. In order to supply growing internal derivative demands, the company plans to add 750 million pounds of chlor-alkali capacity over the next two years with expansions at its Freeport, Texas, and Stade, Germany, manufacturing sites. To keep pace with the long-term growth in the global polyvinyl chloride market, Dow intends to bring an addidonal 350 million pounds of VCM capacity on line at its Fort Saskatchewan, Alberta, manufacturing site by 1997, The company also plans to expand capacity further on the U.S. Gulf Coast. As a result of continued growth in the propylene oxide and derivatives market, especially polyurethanes, Dow plans to add 500 million pounds of capacity by the end of 1998, with capacit^^p coming on line as driven by demand. This capacity increase is in addition to the 500 million pounds of propylene oxide capacity Dow previously announced it would add at its manufacturing sites in Texas, Louisiana, Germany and Brazil by the end of 1996. ; vr: THE DOW CHEMICAL COMPANY AND SUBSIDIARIES In the spring of 1996, Dow will start up new technology at its ITexas facility to manage by-products of the propylene oxide manu facturing process. The technology will recover raw materials in the waste stream, which will result in lower waste management costs. Chlorinated organics started up a new plant in Stade, Germany, to convert perchloroethylene to trichlorethylene in order to meet the growing demand for that product. At year-end, Dow exited the methyl chloroform business, following guidelines established by the Montreal Protocol. This exit did not have a material impact on the Chemicals and Metals segment. A new cogeneradon facility, constructed and partially owned by Destec Energy, Inc., is now supplying the steam and power requirements for Dow's cal/mag business in Ludington, Michigan. The facility will be a key factor in the future competitiveness of the business as it lowers manufacturing costs. Outlookfor Chemicals antiMetals In 1996, it is expected that prices for ethylene dichloride and VCM will rise from the low base of the fourth quarter of 1995. This, coupled with anticipated stable pricing for caustic soda, magnesium, propylene oxide and many of the chlorinated organics, should result in a favorable pricing environment for Chemicals and Metals in 1996. hi the first two quarters of 1996, Chemicals and Metals volume is expected to remain flat with the second half of 1995, consistent with the global market cycle for these products. Volume is expected to rise in the last half of the year. Dollars m Millions PERFORMANCE CHEMICALS Sales for Performance Chemicals were up 15 percent in 1995 com pared to the previous year and up 25 percent versus 1993. Sales were $4.2 billion, $3.7 billion, and $3.4 billion for 1995,1994 and 1993, respectively. Volume gains of 9 percent and price increases of 6 percent contributed to higher sales in 1995 versus 1994. Operating income was $670 million, up 30 percent from $514 million in 1994, In 1993, operating income was $403 million. During the year, emulsion polymers experienced higher sales and profits as a result of favorable styrene pricing and growing demand in the U.S. and Europe. Toward the end of the t ear, a weakening in demand in the pulp and paper industry led to some price softening, which is expected to continue into 1996. To meet growing demand in the emerging markets of south east Asia and the Middle East, Dow brought on line about 50 mil lion pounds of latex capacity in Indonesia and Saudi Arabia. The company divested its latex interests in Sumitomo Dow Limited as part of a restructuring of that joint venture. Dow's Specialty Chemicals business had a very strong year with many products setting new global records for sales and volume. GAS/SPEC solvents and services set its third consecutive record for sales and profitability as the result of solid price and demand. Polyglycols, Ethocel ethylcellulose resins, Versene chelants, Methocel cellulose ethers, oxygenated solvents, Dowfax surfactants, and diphenyl oxide (DPO) all achieved record profits. Dow added polyglycol capacity in Europe and butylene oxide capacity in North America to meet growing global demand for these products. New DPO production technology is being installed in Texas, allowing phenol to be integrated as a raw mate rial. This technology will be brought on line in the first half of 1996 and will replace an older unit in Michigan, which will be shut down. Volume growth for liquid separations was strong during the year, but prices softened. As pan of a global restructuring of its liquid membranes business, the company is closing a manufactur ing unit in Nakskov, Denmark. THE 00W CHEMICAL COMPANY AND SU S I D I A R I E S Drytech superabsorbents saw substantial price weakening in 1995 as a result of new capacity added to the industry. In 1995, Dow sold its aspirin business and Generon Systems as the company made strategic shifts in its business portfolio to focus its resources on core businesses. None of the divesdtures undertaken during the year will have a material impact on the Performance Chemicals segment. Dow had record sales of agricultural products through DowElanco, which is a global joint venture between Dow and Eli Lilly, with Dow holding a 60 percent share. The record sales and profits were due to price increases of 4 percent and volume gains of 9 percent. Strong growth in demand in the Pacific and higher sales in Europe, driven by improved conditions in the cereal grain market, contributed to the record performance. In 1995, DowElanco introduced the Sentricon termite colony elimination system. Sentricon uses new technology to eliminate entire colonies of termites. DowElanco expects U.S, registration in late 1996 for a new line of Naturalyte insecticides based on fermentation technology, initially targeted at the cotton and vegetable markets. DowElanco announced in January 1996 that it would form a strategic alliance with Mycogen Corporation, a diversified agricul tural biotechnology company. This new alliance will increase the company's participation in this exciting new technology. Outlook for Performance Chemicals The Performance Chemicals segment is expected to experience another good year in 1996 based on the strength of demand and pricing for many of the specialty chemicals. Prices for emulsion polymers are expected to soften in 1996. DowElanco sees oppor tunities for continued growth in 1996, especially in Europe and the Pacific. Dollars in Millions PLASTICS Plastics reported sales of S3.9 billion in 1995, an increase of 28 percent versus the previous year. Sales were $3.1 billion in 1994 and $2.5 billion in 1993. Prices rose 29 percent, compared to 1994, while volume declined 1 percent. Operating income rose 178 percent to $1.5 billion, versus $531 million in 1994. Operating income in 1993 was $89 million. Plastics had a record 1995, with solid price and volume increases in the first half of the year resulting in record sales in the first and second quarters. In the third quarter, demand weakened as the result of inventory correction in the U.S. and Europe and actions taken by China to cut off imports of plastics. Polyethylene experienced record sales and profits in 1995 on the strength of increased prices, notably in the first half of the year. Polystyrene had another outstanding year. Results were driven by significant price increases supported by increased industry pricing for styrene monomer. Dow was also able to retain the significant volume increases achieved in 1994. Dow's polystyrene business added the equivalent of two world scale plants in 1995: a joint venture with Siam Cement resulted in a new 200 million pound grassroots plant in Map Ta Phut, Thailand, and proprietary manufacturing technology yielded an additional 165 million pounds around the world. During the year, a number of significant acquisitions were undertaken in the pursuit of value-growth opportunities. The company received European Union approval for the acquisition of three formerly state-owned chemical companies in eastern Germany (BSL). As part of this acquisition, Dow plans to build a linear low density polyethylene plant, as well as |(M i'.JV.VMj,- upgrade an existing low density polyethylene plant. Dollars in MiiRons During 1995, the company announced its intention to enter ^^hthee polypropylene and purified terephthalic acid (PTA)/polyLylene terephthalate (PET) markets. Dow plans to construct a olypropylene unit at BSL to come on line in 1998. In January 1996, Dow acquired EniChem's INCA International SpA, provid ing the company with PTA/PET production capability. The company also led a consortium that acquired Petroquimica Bahia Blanca (PBB) in Argentina, giving the company a strong polyolefins position in the important four-nation Mercosur trading bloc of Argentina, Brazil, Paraguay and Uruguay. Outlookfor Plastics During the first half of 1996, the Plastics segment is expected to see greater pricing stability and a modest increase in demand. During the second half of the year, pricing is expected to trend upward as demand again approximates supply in large volume plastics markets. PERFORMANCE PLASTICS Sales for Performance Plastics were $5.4 billion in 1995, an increase of 18 percent versus $4,5 billion in 1994. In 1993, sales were $4.1 billion. Increases of 13 percent in price and 5 percent in volume contributed to the sales gains in 1995 versus 1994. Operating income rose 73 percent to a record $1.1 billion in 1995. Operating income was $611 million and $304 million for 1994 and 1993, respectively. ^ In 1995, polyurethanes and epoxies had record sales and profitability. Prices for these products increased steadily during the year, showing less quarter-to-quaner volatility than the Plastics segment. Engineering thermoplastics (ETPs) sales increased versus a year ago as higher prices offset lower demand from the auto industry. Dow divested its ABS interests in Sumitomo Dow, leaving the joint venture to focus on polycarbonate applications. In the first half of the year, Sumitomo Dow added 50 million pounds of additional polycarbonate capacity to meet the demands of the small appliance, computer and automotive markets. The ABS divestiture will not have a material impact on the Performance Plastics segment. Lower manufacturing costs and reduced expenses con tributed to record profitability for Fabricated Products. Prices were up slightly and volume held steady with growth in Europe offsetting a modest volume decline in the U.S. A new production facility for Styrofoam brand products was brought on line mid year in Turkey to supply the European market. The global commercialization of Insite technology continues. Sales of polymers produced via Insite technology are exceeding expectations. These product families are gaining rapid acceptance by customers globally because of their unique functionality and cost performance. To meet growing demand, Dow has converted two production units in Texas to produce polymers based on Insite technology and has announced that another conversion will take place at its operations in Spain, with an expected start-up date of April 1996. Outlookfor Performance Plastics Demand is expected to continue to grow for Performance Plastics, although at a slightly lower rate than in 1995. Prices are expected to increase modestly. DuPont Dow Elastomers L.L.C., a planned 50-50 joint ven ture between Dow and DuPont which will produce a broad port folio of general purpose and specialty elastomers, announced the formation of a leadership team for the new company in September 1995. The official start-up of the enterprise is planned in the first quarter of 1996. Combined global elastomer sales for the two com panies currently are about $1 bil lion. The new enterprise has the potential to grow at more than twice the industry rate, leading to total revenues of $2 billion within five years. This growth will be led by application development programs for Insite technology. THE DOW CHEMICAL COMPANY ANO SUBSIDIARIES HYDROCARBONS AND ENERGY Hydrocarbons and Energy reported sales of $2.4 billion in 1995, up 16 percent from $2 billion in 1994 and 31 percent compared to $1.8 billion in 1993. This segment saw price gains of 9 percent and volume gains of 7 percent compared to the previous year. Hydrocarbons and Energy repotted an operating loss of $83 million, compared to operating income of S74 million in 1994 and $46 million in 1993. Operating rates in the industry were high during the first half of the year due to strong derivatives demand, coupled with the need to rebuild ethylene inventories that were critically low at the end of 1994. As a result, incremental capacity expansions were brought on line within the industry. In the second half of the year, there was a slowdown in ethylene demand as derivatives were in a destocking mode. This led to lower operating rates and price decreases that bottomed at the end of the year. Ethylene and styrene production for Dow continued at high operating rates that were above the industiy average. Overall, yearly average unit feedstock costs for Hydrocarbons and Energy were up 8 percent in 1995 compared to the previous year, in line with crude oil increases for liquid feedstocks, although energy and light feedstocks were down about 3 percent. In December 1994, an ethylene plant in Texas, with an annual capac ity of 1.5 billion pounds, was brought on line, and the associated aromatics integration was successfully completed. Preliminary engineering work was undertaken for a staged expansion of the ethylene cracker in Alberta, Canada. The initial phase of the expansion is expected to be completed by mid-1998, and will increase plant capability to between 1.8 and 2 billion pounds. Future expansion will occur as ethylene is required to meet demand. Capacity is planned ultimately to be increased to 2.3 billion pounds per year. The acquisition of #,* mj-jn Petroquimica Bahia Blanca (PBB) gives Dow access to ethane-based ethylene in Argentina. PBB cur rently has a production capacity of 539 million pounds of ethylene per year. It is the only regional producer using ethane as its prin cipal raw material, providing a cost advantage to the company. A cogeneration project for the Temeuzen site was approved and is due to start up in 1997. The new cogeneration plant, which will replace less efficient facilities, will be built by Destec Energy Inc., under a joint venture with local utility companies. Independent power producer Destec Energy, Inc., a publicly traded Dow subsidiary (77 percent owned), reported revenues for 1995 of $641 million, compared with $727 million in 1994 and $674 million in 1993. Operating results were down substantially, reflecting the losses experienced by its Texas cogeneration facilities following the expiration of major utility power sales contracts in 1995 and 1994. In 1995, Destec placed some of its available Texas capacity and will place additional amounts in 1996, Destec has increased activity in international markets with the announcement of power project developments in England and Taiwan, which were added to an international portfolio of developing projects that includes Canada and the Netherlands. Destec acquired interests in a fifth international project in the Dominican Republic, and the Crockett cogeneration project near San Francisco. Destec also successfully completed and started up the Wabash River Coal Gasification Repowering Project in Terre Haute, Indiana. In 1995, Destec put the equivalent of 768 megawatts of new generating capacity into operation. At year-end, Destec had seven projects in construction or advanced development, representing additional capacity of more than 1,700 megawatts. Outlookfor Hydrocarbons andEnergy As derivative demand trends upward in 1996, ethylene operati rates are expected to increase, leading to a stronger market in the second half of the year. No major expansions are being added in 1996. Dow's joint venture styrene plant with Siam Cement ------15 5 5 --MM in Thailand is expected to be brought on line at the end of the year to capture growth in fjjjE 1*44--53 southeast Asia countries. a J, V i,-:*-a siir-i/aa l-.;#*a atSSfi THE DOW CHEMICAL COMPANY AND SUBSIDIARIES In 1996, Destec plans to pursue aggressively additional opportunities to place its available Texas power. With regard to international markets, Destec plans to continue to proceed toward finalization of its power purchase agreement for the Taiwan project, finance the project in the Netherlands, and finance and begin operations of the projects in the United Kingdom and the Dominican Republic. Destec also plans to begin operations of its project in Ontario, Canada, in late 1996. DIVERSIFIED BUSINESSES AND UNALLOCATED The operating results of DowBrands, New Businesses, including "Dow Environmental Inc., and consolidated insurance and finance subsidiaries are grouped in this segment together with activities and overhead cost variances not allocated to other segments. Sales for this segment were $966 million, $953 million and $927 million, in 1995, 1994 and 1993, respectively. This segment reported an operating loss of 5363 million in 1995, versus an operating loss of $247 million in 1994. In 1993, this segment had an operating income of $78 million. DowBrands, Dow's consumer products affiliate, had sales of $866 million, up from $845 million in 1994 and $846 in 1993. DowBrands restructured its organization in the third quarter, reducing the U.S. workforce by 4 percent and lowering administrative costs. The sale of the Personal Care Business was completed in November. The Home Food Management value center had a strong year w:ith sales in North America up 11 percent versus the prior year. Z7;iploc brand bags had record sales despite new competition introduced in the U.S. early in 1995. Sales in the rest of the world were down 2 percent. In early 1996, a letter of intent was signed between DowBrands Europe and The Melitta Group of Germany to form a joint venture that com bines both food care businesses in the European area. Sales for the Home Care value center remained flat. Volume growth for Dow bathroom cleaner with Scrubbing Bubbles, Spray'N Wash tough stain remover and Smart Cleanser soft scouring cleanser, which earned a 21 percent market share after its first full year on the market, was offset by declines in laundry products. The New Businesses unit performs research aimed at devel oping new high-value products. New product development has been targeted on two key market segments: advanced structural materials and advanced electronic materials. These businesses represent significant value-growth opportunities that would allow Dow to leverage its existing strength in polymer chemistry. Dow's goal is to have all these research and development projects cash neutral in the fifth year of development. To achieve this goal, the company has set strict project milestones. In 1995, Dow ended its collaboration with Ballard Power Systems Inc. to develop fuel cell technology, sold its Advanced Cleaning Systems business, and announced it would sell Boride Products Inc., as the company worked to focus its resources on high-value businesses. These divestitures will not have a material impact on the company. The primary components of the 1995 operating loss in this segment were severance costs of $181 million, research and other expenses of $109 million related to new developmental activities in New Businesses, and overhead cost variances not allocated to other segments of $119 million. These costs were partially offset by pretax income from the insurance and finance company operations of $61 million. The 1994 operating loss was related to severance costs of $124 million, activities in New Businesses of $91 million, and asset write-offs and provisions for environmental remediation of $38 million not assigned to Dow's other industry segments. These costs were partially offset by pre tax income from the insurance and finance company operations of $40 million. The 1993 operat ing income of this segment was comprised primarily of pretax income from the insurance and finance company operations of $98 million and favorable vari ances resulting from resource use reduction of $60 million, which were partially offset by expenses related to new developmental activities in the New Businesses of $70 million. sis a s> a A^ THE DOW CHEMICAL COMPANY AND SUBSIDIARIES Outlookfor Diversified Businesses In January 1996, Dow Environmental Inc. formed a joint venture with the Radian subsidiary of The Hartford Steam Boiler Inspection and Insurance Company to provide environmental, information technology, and strategic chemical management services. The joint venture, named Radian International LLC, is expected to have sales of nearly $400 million in 1996. Overall performance for DowBrands is expected to improve, in part through the introduction of several product improvements and line extensions. Manufacturing costs are expected to decrease with the improved productivity at the Urbana, Ohio, facility and the closing of the Mauldin, South Carolina, plant. COMPANY SUMMARY Operating Income Operating income was $3.9 billion in 1995, up 114 percent from $1.8 billion in 1994 and 263 percent from $1,1 billion in 1993. Gross margin improved by $2.3 billion versus 1994, primarily as a result of higher selling prices. The ratio of operating income to sales was 19 percent in 1995, versus 11 percent in 1994 and 7 percent in 1993. Sales price increases across all segments and volume increases in Performance Chemicals and Performance Plastics led to the improved 1995 results. Operating income substantially improved in most segments. Prices began to show noticeable improvement in the latter half of 1994 and this continued until late 1995. The United States contributed 41 percent of the total operating income in 1995 compared to 56 percent in 1994 and 74 percent in 1993. The United States portion of the total decreased as a result of operating income improvements in Europe and the rest of the world. Operating income in Europe was $1.1 billion in 1995 versus $237 million in 1994 and a $23 million loss in 1993. Operating income from Rest of World showed continued improve ment, increasing to $1.2 billion in 1995 from $559 million in 1994 and $302 million in 1993. Operating Costs andExpenses Cost Components as a Percent ofTotal Hydrocarbons and energy Wages, salaries and employee benefits Maintenance Depreciation Supplies, services and other raw materials Total 1995 25% 1994 Restated 26% 21 22 56 88 41 100% 38 100% 799^ 2^^ 25 7 9 34 100% Dow's global plant operating rates for its chemicals and plas tics businesses were 92 percent of capacity in 1995 and 1994 and 85 percent in 1993. The 1995 sales volume growth of 4 percent over 1994 was primarily achieved by new capacity while the 1994 growth of 8 percent over 1993 was primarily achieved by higher plant operating rates. Depreciation expense was $1.4 billion in 1995, $1.2 billion in 1994 and $1.3 billion in 1993. Research and development, promotion and advertising, and selling and administrative expenses increased by $207 million or 7 percent compared to 1994. Research and development expenses were $808 million for 1995, up 3 percent compared to 1994 while 1994 was flat compared to 1993. Promotion and advertising expenses of $416 million were flat against $411 million in 1994; 1993 costs were $367 million. Selling and administrative expenses for 1995 were $1,8 billion, up 11 percent from $1.6 billion in 1994 which was up 7 percent from $1.5 billion in 1993. The increase in 1995 was primarily the result of variable compensation accruals based on improved company earnings and the negative impact of exchange rate changes on expenses incurred outside the U.S. Selling and administrative expenses represented 9 percent of sales in 1995 and 10 percent in 1994 and 1993. Sales Price and Volume Percentage changesfrompriorpear Geographic Areas: United States Europe Rest of World All Areas Industry Segments: Chemicals and Metals Performance Chemicals Plastics Performance Plastics Hydrocarbons and Energy Diversified Businesses and Unallocated All Segments Price 1995 Volume Total 12% 25 16 17 - 12% 8% 33 8 24 4 21 33% 1% 34% 6 9 15 29 (1) 28 13 5 18 9 7 16 -1 1 17 4 21 Price 1994 Volume Total 1% 7% 8% 4 8 12 3 15 18 3 8 11 4% 3% 7% CD 9 12 10 8 22 (1) 11 67 10 13 (2) 5 3 3 8 11 Price 1995 Volume Total - (12)o/o (3) (5) 3% (2) 4 2 39b (14) 1 (3) (6)% (2) (8) (4) (6) 2 (5) 2/o 2 2 9 (9) 2 (6) 0 (6) (2) (3) THE 00W CHEMICAL COMPANY AND SUBSIDIARIES The personnel count at December 31,1995 was 39,537 (versus 53,730 at the end of 1994, 55,436 at the end of 1993 and b 1,353 at the end of 1992. Excluding the discontinued pharma ceutical businesses, the personnel count has been reduced by 21 percent over the last three years. This reduction in personnel reflects continuing rationalization and work process improve ments throughout the company. lYet Income Net income available for common stockholders in 1995 was $2.1 billion or $7.72 per share, an increase of 122 percent com pared to net income of $931 million or $3.37 per share in 1994. The increase is primarily attributable to increased sales prices. The increase of 46 percent in 1994, compared to 1993 net income of $637 million or $2.33 per share, was primarily due to stronger operating results. The following table summarizes the impact of special items on earnings per common share. Impact of Dow Corning Corporation breast implant charges Net gain (loss) on investments Discontinued operations Other earnings Net earnings per common share 1995 1994 Restated 1993 Restated $(1.24) .69 8.27 $ 7.72 $ (.25) (.26) .60 3.28 $3.37 $(.70) 1.31 .26 1.46 $2.33 Dow's share of the earnings of 20%-50% owned companies amounted to $70 million compared to $29 million in 1994 and a loss of$127 million in 1993. The major impact on this was from Dow Corning Corporation in which the company is a 50 percent shareholder. Excluding Dow Corning, Dow's shares of 20/o-50% company earnings were $44 million, $26 million and $16 million for 1995, 1994 and 1993, respectively. Dow Corning repotted net losses of $7 million in 1994 and $287 million in 1993. In 1995 the company did not record its share of equity earnings in Dow Corning after the first quarter due to Dow Coming's filing for protection under Chapter 11 and the company's write-down of its investment as discussed below. Dow Coming's 1994 and 1993 losses reflected after tax charges against income related to breast implant litigation of $152 million and $415 million, respectively. The negative impact of these charges on Dow's net income was $70 million or 25 cents per share in 1994 and $192 million or 70 cents per share in 1993. See Note Q to the Financial Statements for further discussion of breast implant litigation. Interest expense (including capitalized interest) and amorti zation of debt discount increased $72 million to $434 million in 1995, up 20 percent from $362 million in 1994 and up 5 percent from $413 million in 1993, The apparent increase in 1995 was primarily due to the apportionment of interest to discondnued operations in the restatement of 1994 results (see Note C to the Financial Statements). Interest income and foreign exchange-net improved $191 million to $289 million in 1995 versus $98 million in 1994. The gain was primarily attributable to the investment of the cash received from the sale of the pharmaceutical businesses. For a discussion of the company's risk management program for both foreign currency and interest rate risk, see Note J to the Financial Statements. 1994=100 I 1 ! 3 J i I 3 I 1 1 i i i i i i i 3 1 1 3 ! 1 I 1 ^ THE DOW CHEMICAL CO PANY AND SUBSIDIARIES The loss on investments of S330 million in 1995 was due to the company's write-down of its investment in Dow Corning as a result of Dow Coming's decision to file for Chapter 11 (see Note Q to the Financial Statements). In 1994, Dow recorded a loss on investments of $42 million. The loss was due to a $132 million pretax charge related to the pending sale of the Personal Care Business of DowBrands. Partially offsetting this charge was a pre tax gain of $90 million recorded by the company on the sale of its common shares of Magma Power Company, primarily as a result of the merger agreement between Magma and California Energy Company, Inc. In 1993, Dow recorded a net gain on investments of $592 million, primarily due to the sale of its interest in Dowell Schlumberger and portions of its interests in Magma and Crestar Energy Inc. Acquisitions and divestitures are discussed in Note C to the Financial Statements. The provision for taxes on income was $1.4 billion in 1995 versus $654 million in 1994 and $514 million in 1993. Dow's over all effective tax rate for 1995 was 40.9 percent versus 40.2 percent for 1994 and 40.9 percent for 1993. The underlying factors affect ing Dow's overall effective tax rates are discussed in Note D to the Financial Statements. U.S. and other tax law and rate changes during the year did not have a material impact on Dow. Minority interests' share of net income in 1995 was $196 million compared to $200 million in 1994 and $171 million in 1993. The 1994 increase reflected the improved profitability of DowElanco, which is 60 percent owned, as well as the full-year impact of certain limited partnerships (see Note K to the Financial Statements). Discontinued operations accounted for an after tax gain of $187 million in 1995, $169 million of which resulted from the sale of Dow's shares of Marion Merrell Dow to Hoechst A.G. for $5.1 billion and the sale of the company's Latin American phar DollarsinMilBonr maceutical businesses to Roussel Uclaf S.A. for $133 million in the second quarter 1995. A further $18 million income after tax was earned from the operations of the pharmaceutical businesses in the first quarter 1995. Provision for taxes was $418 million, $382 million on the sale and $36 million from operations. The income, net of taxes, from operations in 1994 and 1993 was $166 million and $71 million with provision for taxes of $125 million and $92 million, respectively (see Note C to the Financial Statements). Dividends The Board of Directors has announced a quarterly dividend of 75 cents per share, payable April 30,1996, to stockholders of record on March 29, 1996. This will be the 337th consecutive quarterly dividend since 1912. Dow has maintained or increased the dividend throughout that time. In 1995, the company increased declared dividends to $2.90 per common share from $2.60 in 1994 and 1993. Environment Dow's global operations are subject to increasingly stringent laws and government regulations related to environmental protection and remediation. Dow's environmental responsibilities and potential liabilities receive direct and ongoing scrutiny by man agement to ensure compliance with these laws and regulations. Dow's Environmental Management Standard clearly defines the overall environmental management system, performance objec tives and design requirements needed to minimize the long term cost of environmental protection as well as to comply with these laws and regulations. This standard was reviewed, revised and re communicated throughout the organization in 1995. It is Dow's stated policy that all global operations and products meet Dow's Environmental Management Standard or their country's laws and regulations, whichever is more stringent. Assessments are used by management to measure con tinually and report Dow's progress against diis standard and its performance objectives. It has been Dow's policy to adhere to a waste management hierarchy that minimizes the impact of wastes and emissions on the environment. First, Dow works to eliminate or minimize THE DOW CHEMICAL COMPANY AND SUBSIDIARIES the generation of waste and emissions at the source through research, process design, plant operations and maintenance. Second, Dow finds ways to reuse and recycle materials. Finally, unusable or non-recyclable hazardous waste is treated before dis posal to eliminate or reduce the hazardous nature and volume of the waste. Treatment may include destruction by chemical, physi cal, biological or thermal (incineration) means. Disposal of waste materials in landfills is considered only after all other options have been thoroughly evaluated and determined infeasible. Dow has specific requirements for wastes that are transferred to nonDow facilities. Wastes that are recycled, treated or recovered for energy off-site represent less than 1 percent of the total amount of wastes reported as part of the Pollution Prevention Act. Dow's policy of treating its wastes on-site has resulted in less than 10 percent of its total environmental liability being directed at remediation under federal or state "Superfund" statutes. Dow's focused approach to waste and emission reduction resulted in achieving its public commitment to reduce global emissions of 17 priority compounds (as defined by the U.S. Environmental Protection Agency's 33/50 program) and emissions of an expanded list of compounds (defined by each geographic area) by 50 percent by 1995 (1988 base year). Global reductions of 65 percent and 53 percent, respectively, were achieved one year ahead of schedule in 1994. Dow is in the process of developing new environmental, health and safety performance improvement goals for the year 2005. These goals, as well as other performance data, will be made available in May 1996 with the publication of Dow's EH&S Progress Report. The costs of site remediation are accrued as a part of the shutdown of a facility or, in the case of a landfill, over its useful life. Tlie nature of such remedia tion includes the cleanup of soil contamination and the closure of landfills and other waste manage ment facilities. The policies adopted to reflect properly the monetary impacts of environmen tal matters are discussed in Note A to the Financial Statements. To assess the impact on the finan cial statements, environmental experts review currendv available facts to evaluate the probability and scope of potential liabilities. Inherent uncertainties exist in such evaluations primarily due to unknown conditions, changing governmental reguladons and legal standards regarding liability, and evolving technologies for handling site remediation and restoration. These liabilities are adjusted periodically as remediation efforts progress or as addi tional technical or legal information becomes available. Dow has been named as a potentially responsible party (PRP) under federal or state Superfund statutes at approxi mately 85 sites. Dow readily cooperates in remediation at sites where its liability is clear, thereby minimizing legal and adminis trative costs. However, at several of these Superfund sites, Dow has had no known involvement and is contesting all liability; at many others, Dow disputes major liability, believing its responsi bility to be de minimis. Because current law imposes joint and several liability upon each party at a Superfund site, Dow has evaluated its potential liability in light of die number of other companies which have also been named PRPs at each site, the estimated apportionment of costs among all PRPs and the finan cial ability and commitment of each to pay its expected share. Management has estimated that the company's probable liability for the remediation of Superfund sites at Deceinber31, 1995 was $17 million, which has been accrued. In addidon, receivables of $14 million for probable third-party recoveries have been recorded related to these sites. Other recoveries are possible since Dow has numerous insurance policies secured from many carriers at various times that may provide coverage at different levels for environmental liabilities. The company is currently involved in lidgation to determine the scope and extent of such coverage. Dow has not recorded any receivables for these possible recoveries. THE DOW CHEMICAL COMPANY AND S LI S I D I A R I E S In addition to the Superfund-related liability referenced above, Dow had an accrued liability of $258 million at December 31, 1995 representing the total probable costs that the company could incur related to the remediation of current or former Dow-owned sites. The company had not recorded as a receivable any thirdparty recovery related to these sites. In total, Dow's accrued liability for probable environmental remediation and restoration costs was $275 million at December 31, 1995, as compared to $234 million at the end of 1994. This is management's best estimate of these liabilities, although possible costs for environmental remediation and restoration could range up to 50 percent higher. The amounts charged to income on a pretax basis related to environmental remediation totaled $89 million in 1995, $64 mil lion in 1994 and $69 million in 1993. Capital expenditures for environmental protection were $80 million in 1995, $103 million in 1994 and $149 million in 1993. Capital expenditures for envi ronmental protection are currently projected at $76 million in 1996 and $82 million in 1997. It is the opinion of the company's management that the possi bility is remote that costs in excess of those accrued or disclosed will have a material adverse impact on the company's consolidated financial statements. Capital Expenditure* Capital spending for the year was $1.4 billion, up 21 percent from $1.2 billion in 1994 and flat with $ 1.4 billion in 1993. Capital spending in 1994 and 1993 includes spending in pharmaceuticals of $109 million and $193 million, respectively. The increase of $245 million in 1995 was the direct result of the company's investment of $318 million to purchase assets formerly leased. Approximately 40 percent of the company's capital expenditures was directed toward additional capacity for new and existing products, while about 10 percent was committed to projects related to environmental protection, safety and loss prevention, and industrial hygiene. The remaining capital was utilized to maintain the company's existing asset base, including projects related to cost reduction, energy conservation and facilities sup port. Major projects underway during 1995 included an s/b latex plant at Menak, Indonesia; an expansion of waste treatment facilities in Terneuzen, the Netherlands; an upgrade of the MDI facilities in La Porte, Texas; and a new parabis and bisphenol-A plant and an allyl chloride/epichlorohydrin rehabilitation in Stade, Germany. Start-up on each of these plants has been com pleted and they are now operational. Because the company designs and builds most of its capital projects in-house, it had no major capital commitments, other than for the purchase of materials from fabricators. Liquidity and Capital Resources The sale of Marion Merrell Dow Inc. (MMDI) to Hoechst A.G. for $5.1 billion had a very positive effect on the liquidity and capital resources of the company. The impact can be seen in the improvement in working capital, decreased short-term borrowings, decreased long-term debt and increased purchase of treasury shares. Operating activities provided $3.3 billion in cash in 1995, as compared to $2.7 billion in 1994 and $2.1 billion in 1993 (see the Consolidated Statements of Cash Flows). The items affecting operating activities are discussed in the operating income and net income analyses. Cash provided by investing activities was $2.9 billion in 1995, due to the MMDI sale, versus' cash used in investment activities of $1.3 billion in 1994 and $615 million in 1993. Total working capital at year-end was $5.0 billion versus $2.1 billion at the end of 1994. Cash, cash equivalents, mar ketable securities and interestbearing deposits increased by THE DOW CHEMICAL COMPANV A 0 SUBSIDIARIES $2.3 billion. Inventories and trade receivables together decreased ^680 million in 1995, primarily as a result of the sale of the pharm aceutical businesses, Days-sales-in-inventory were 90 days, 80 days and 82 days at the end of 1995, 1994 and 1993, respec tively. Days-sales-outstanding-in-receivables were 56 days at the end of 1995 and 52 days for 1994 and 1993. Short-term borrowings at December 31,1995 were $323 mil lion, a decrease of $418 million from year-end 1994. Long-term debt due within one year decreased $159 million to $375 million at the end of 1995 compared to $534 million at the end of 1994. Long-term debt due in 1996 will be funded by operating cash flows. Accounts payable decreased by $316 million to $2.2 billion and income taxes payable increased $127 million during the year. Long-term debt was $4.7 billion, a decrease of $598 million from year-end 1994. During the year, $247 million of new long term debt was incurred while $951 million of long-term debt was retired and $375 million was transferred to long-term debt due within one year. Total debt was $5.4, $6.6 and $6.9 billion at December 31, 1995, 1994 and 1993, respectively. Net debt, which equals total debt less cash, cash equivalents, marketable securities and interestbearing deposits, was $2.0, $5.4 and $6.1 billion at December 31, 1995,1994 and 1993, respectively. The debt to total capitaliza tion ratio decreased to 36 percent at year-end 1995 from 38 percent at the end of 1994. In 1989 and 1995, the Board of Directors authorized, subject to certain business and market conditions, the purchase of the ompany's common stock. Due to the favorable cash flow created by the sale of the pharmaceutical businesses, $2.1 billion worth of common stock was purchased in 1995 versus $38 million in 1994 and $17 million in 1993 (see Note L to the Financial Statements). The company has unused and available credit facilides with various U.S. and foreign banks totaling $1.9 billion in support of its working capital requirements and commercial paper borrow ings. Additional unused credit facilities totaling $1.3 billion are available for use by foreign subsidiaries. At December 31, 1995, there was a total of $1.4 billion in available SEC registered debt securities between Dow and Dow Capital pic., a wholly owned subsidiary, and 30 billion in available Japanese yen (approximately $291 million) registered with Japan's Ministry of Finance. Minority interest in subsidiary companies decreased during the year from $2.5 to $1.8 billion at the end of 1995, as a result of the sale of MMDI. The company's strong position of $2.8 billion in cash and cash equivalents will support its involvement in new acquisitions and joint ventures as discussed in Note C to the Financial Statements. There are two other possibilities for sub stantial cash requirements. Eli Lilly and Company (Lilly) holds a put option which could require the company to purchase Lilly's 40 percent interest in DowElanco at fair market value (see Note Q to the Financial Statements). And, in 1996, the outside investors in DowBrands L.P. could liquidate or terminate the limited partnership which would cause the partners' capital accounts to be redeemed at current fair value (see Note K to the Financial Statements). THE DOW CHEMICAL COMPANY AND SUBSIDIARIES ResponsibilityJor Financial Statements and Independent Auditors ' Report Management Statement oJ'Rexponsibitily The management of The Dow Chemical Company and its subsidiaries prepared the accompanying consolidated financial statements, and has responsibility for their integrity, objectivity and freedom from material misstatement or error. These state ments were prepared in accordance with generally accepted accounting principles. The financial statements include amounts that are based on management's best esdmates and judgments. Management also prepared the other information in this annual report and is responsible for its accuracy and consistency with the financial statements. The Board of Directors, through its Audit Committee, assumes an oversight role with respect to the preparation of the financial statements. Management recognizes its responsibility for fostering a strong ethical climate so that the Company's affairs are conducted according to the highest standards of personal and corporate conduct. Management has established and maintains an internal control structure that provides reasonable assurance as to tire integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the preven tion and detection of fraudulent financial repotting. The internal control structure provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees with signifi cant roles in the financial reporting process and updated as necessary. Management continually monitors internal controls for compliance. The Company maintains a strong internal audit ing program that independently assesses the effectiveness of the internal controls and recommends possible improvements. Deloitte Sc. Touche llp, independent auditors, with direct access to the Board of Directors through its Audit Committee, has audited the consolidated financial statements prepared by die Company, and their report follows. Management has considered recommendations from the internal auditors and Deloitte Sc Touche llp concerning the inter nal control structure and has taken actions that are cost-effective in the circumstances to respond appropriately to these recommen dations. Management further believes die controls are adequate to accomplish the objectives discussed herein. Independent Auditors ' Report To the Stockholders andBoard ofDirectors of The Dow Chemical Company: We have audited the accompanying consolidated balance sheets of The Dow Chemical Company and its subsidiaries as of December 31, 1995 and 1994, and the related consolidated state ments of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's man agement. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and signifi cant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Dow Chemical Company and its subsidiaries at December 31,1995 and 1994, and die results of their operations and dieir cash flows for each of the diree years in die period ended December 31,1995 in conformity with generally accepted accounting principles. DELOITTE Sc TOUCHE LLP Midland, Michigan February 7,1996 US the dow Chemical company and subsidiaries Consolidated Statements ofIncome In millions, exceptforper share amounts Net Sales Operating Costs and Expenses Cost of sales Insurance and finance company operations, pretax income Research and development expenses Promotion and advertising expenses Selling and administrative expenses Amortization of intangibles Total operating costs and expenses Operating Income Other Income (Expense) Equity in earnings (losses) of 20%-50% owned companies Interest expense and amortization of debt discount Interest income and foreign exchange-net Net gain (loss) on investments Sundry income (expense)-net Total other income (expense) Income before Provisionfor Taxes on Income andMinority Interests Provisionfor Taxes on Income Minority Interests' Share in Income Preferred Stock Dividends Incomefrom Continuing Operations Discontinued Operations Income from pharmaceutical businesses. net of taxes on income Gain on sale of pharmaceutical businesses. net of taxes on income Net Income Availablefor Common Stockholders Average Common Shares Outstanding Earningsper Common Sharefrom Continuing Operations Earningsper Common Share Common Stock Dividends Declaredper Share See /Votes to Financial Statements. 1995 $20,200 13,337 (61) 808 416 1,771 38 16,309 3,891 1994 Restated $16,742 12,131 (40) 783 411 1,594 43 14,922 1,820 1995 Restated S 15,052 11,370 (98) 786 367 1,485 68 13,978 1,074 70 (434) 289 (330) 43 (362) 3,529 1,442 196 7 1,884 29 (362) 98 (42) 83 (194) 1,626 654 200 7 765 (127) (413) 140 592 (8) 184 1,258 514 171 7 566 18 169 $ 2,071 268.2 $ 7.03 $ 7.72 $ 2.90 166 " $ 931 276.1 $ 2.77 $ 3.37 $ 2.60 71 - $ 637 273.6 S 2.07 S 2.33 S 2.60 THE DOW CHEMICAL COMPANY AND SUBSIDIARIES Consolidated Balance Sheets In millions Current Assets Investments Plant Properties Other Assets TotalAssets See Notes to Financial Statements, Assets Cash and cash equivalents Marketable securities and interest-bearing deposits Accounts and notes receivable: Trade (less allowance for doubtful receivables1995, $53; 1994, $104) Other Inventories: Finished and work in process Materials and supplies Deferred income tax assets-current Total current assets Capital stock at cost plus equity in accumulated earnings of 20/o-50% owned companies Other investments Noncurrent receivables Total investments Plant properties Less accumulated depreciation Net plant properties Goodwill (net of accumulated amortization1995, $177; 1994, $676) Deferred income tax assets-noncurrent Deferred charges and other assets Total other assets December 51 1995 1994 $ 2,839 611 $ 569^ 565^ 2,729 1,380 2,197 551 247 10,554 848 1,558 314 2,720 23,218 15,105 8,113 658 779 758 2,195 $23,582 3,359 1,099 2,079 633 389 8,693 931 1,529 330 2,790 23,210 14,484 8,726 4,36 1,132 839 6,336 $26,545 THE DOW CHEMICAL COMPANY AND SUBSIDIARIES In millions, exceptfor share amounts Current Liabilities Liabilities and Stockholders' Equity Notes payable Long-term debt due within one year Accounts payable: Trade Other Income taxes payable Deferred income tax liabilities-current Dividends payable Accrued and other current liabilities Total current liabilities Long-Term Debt Other Concurrent Liabilities Deferred income tax liabilities-noncurrent Pension and other postretirement benefits-noncurrent Other noncurrent obligations Total other liabilities Minority Interest in Subsidiary Companies Temporary Equity Temporary equity-other Preferred stock (authorized 250,000,000 shares of $1.00 par value each; issued Series A-1995: 1,521,175; 1994: 1,549,014) at redemption value Guaranteed ESOP obligation Total temporary equity Stockholders ' Equity Common stock (authorized 500,000,000 shares of $2.50 par value each; issued 1995 and 1994: 327,125,854) Additional paid-in capital Retained earnings Unrealized gains (losses) on investments Cumulative translation adjustments Treasury stock, at cost (shares 1995: 76,168,614; 1994: 50,002,967) Net stockholders' equity TotalLiabilities and Stockholders'Equity See Notes to Financial Statements. December 31 1995 1994 $ 323 375 1,529 717 791 55 192 1,619 5,601 4,705 659 1,880 1,260 3,799 1,775 313 $ 741 534 1,928 634 664 56 202 1,859 6,618 5,303 644 1,987 1,253 3,884 2,506 - 131 (103) 341 133 (111) 22 818 315 10,159 62 (349) (3,644) 7,361 $23,582 818 326 8,857 (21) (330) (1,438) 8,212 $26,545 THE DOW CHEMICAL COMPANY AND SUBSIDIARIES Consolidated Statements ofStockholders' Equity In millions Common Stock Balance at beginning and end of year Additional Paid-in Capital Balance at beginning of year Tax benefit of contingent value rights Issuance of treasury stock at less than cost Balance at end of year Retained Earnings Balance at beginning of year Net income Preferred stock dividends declared Common stock dividends declared Balance at end of year Unrealized Gains (Losses) on Investments Balance at beginning of year Unrealized gains (losses) Balance at end of year Cumulative Translation Balance at beginning of year Adjustments Translation adjustments Balance at end of year Treasury Stock Balance at beginning of year Purchases Reclassification to Temporary Equity Issuance to employees and employee plans Balance at end of year Net Stockholders' Equity See Notes to Financial Statements. 1995 $ 818 326 (11) 315 8,857 2,078 (7) (769) 10,159 (21) 83 62 (330) (19) (349) (1,438) (2,115) (313) 222 (3,644) $ 7,361 1994 S 8] X 366 $ 81^^ 35^ (40) 326 8,645 938 (7) (719) 8,857 1C5 (126) (21) (304) (26) (330) 34 __(18) 366 8,720 644 ' (7) (712) 8,645 107 105 (107) , (197) (304) K (1,596) (38) (1,715) (it) 195 (1,438) $ 8,212 (1,596) $ 8,034 4 1 i THE DOW CHEMICAL COMPANY AND SUBSIDIARIES Consolidated Statements of Cask Flows In millions Operating Activities Income from continuing operations Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Provision for deferred income taxes Undistributed (earnings) losses of 20/o-50/o owned companies Minority interests' share in income Net (gain) loss on investments Net gain on sale of plant properties Other net Changes in assets and liabilities that provided (used) cash: Accounts receivable Inventories Accounts payable Other assets and liabilities Operating activities related to discontinued operations Cash provided by operating activities Investing Activities Purchases of plant properties Investments in unconsolidated affiliates Purchases of consolidated companies (net of cash acquired) Proceeds from sales of plant properties Proceeds from outside investors in limited partnerships Proceeds from sale of pharmaceutical businesses (net of cash divested) Purchases of investments Proceeds front sales of investments Investing activities related to discontinued operations Cash provided by (used in) investing activities Financing Activities Changes in short-term notes payable Proceeds from issuance of long-term debt Payments on long-term debt Purchases of treasury stock Proceeds from sales of common stock Distributions to minority interests Dividends paid to stockholders Financing activities related to discontinued operations Cash used in financing activities Effect ofExchange Rate Changes on Cash Summary Increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 1995 $1,884 1,442 268 (35) 196 330 (24) (99) (311) (369) 15 (40) 84 3,341 (1,417) (325) (10) 107 5,060 (2,260) 1,751 (28) 2,878 (390) 247 (951) (2,115) 158 (155) (766) 16 (3,956) 7 2,270 569 $2,839 1994 Restated $ 765 1,302 41 (17) 200 42 (73) (69) (612) (245) 456 689 250 2,729 (1,074) (43) -- 108 (1,419) 1,358 (219) (1,289) (29) 100 (340) (38) 110 (187) (723) (170) (1,277) (0 162 407 $ 569 1993 Restated $ 566 1,352 47 162 171 (592) (48) 52 (78) 176 78 (354) 554 2,086 (1,204) (27) -- 77 200 - (237) 952 (376) (615) 121 1,056 (1,598) (17) 82 (111) (719) (251) 0,437) (2) 32 375 $ 407 Sec Notes to Financial Statements THE DOW CHEMICAL COMPANY AND SUBSIDIARIES Notes to Financial Statements In millions, exceptfor share amounts Tabic ofContents A Summary'of Significant Accounting Policies...................... B Accounting Change......................................... C Acquisitions and Divestitures.............................................. D Taxes on Income.................................................................. E Inventories............................................................................ F Related Company Transactions........................................... G Plant Properties................................................................... H Leased Properties................................................................ I Notes Payable, Long-Term Debt and Available Credit Facilities................................................... 30 31 32 33 34 34 34 34 35 J Financial Instruments........................................................ 3(1 K Limited Partnerships.......................................................... 3l| L Stockholders' Equity.......................................................... 37 M Stock Option Plans............................................................. 38 N Redeemable Preferred Stock............................................. 38 0 Pension Plans...................................................................... 38 P Other Postretirement Benefits........................................... 39 Q Commitments and Contingent Liabilities......................... 40 R Supplementary Information.............................................. 42 S Industry Segments and Geographic Areas........................ 42 A Summary ofSignificant Accounting Policies Principles of Consolidation and Basis ofPresentation 'Die accompanying consolidated financial statements of The Dow Chemical Company and its subsidiaries (the Company) include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries. Intercompany transactions and balances are elimi nated in consolidation. Investments in companies 20/o-50/o owned (related companies) are accounted for on the equity basis. The Company's consolidated statements of income and cash flows have been restated to reflect the pharmaceutical businesses as discontinued operations (see Note C). Certain reclassifications of prior years' amounts have been made to conform to the presen tation adopted for 1995. Use ofEstimates in Financial Statement Preparation The preparation of financial statements in conformity with generally accepted accounring principles requires estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company's financial statements include amounts that are based on management's best estimates and judgments. Actual results could differ from those estimates. Inventories Inventories are stated at the lower of cost or market. The method of determining cost is used consistendy from year to year at each subsidiary and varies among the last-in, first-out (LIFO) method; the first-in, first-out (FIFO) method; and the average cost method. Plant Properties, Investments and Other Assets Land, buildings and equipment, including property under capital lease agreements, are carried at cost less accumulated depreciation. Depreciation is based on the estimated service lives of depreciable assets and is generally provided using the declin ing balance method. Fully depreciated assets are retained in property and depreciation accounts until they are removed from service. In the case of disposals, assets and related depreciation^ are removed from the accounts and the net amount, less pro- V ceeds from disposal, is charged or credited to income. The excess of the cost of investments in subsidiaries over the carrying value of assets acquired is shown as goodwill, which is amortized on a straight-line basis over its estimated useful life with a maximum of 40 years. The Company evaluates long-lived assets for impairment based on the recoverability of the asset's cariying amount. When it is probable that undiscounted future cash flows will not be suf ficient to recover the asset's carrying amount, the asset is written down to its fair value. Foreign Currency Translation The local currency has primarily been used as the functional currency throughout the world. Translation gains and losses of those operations that use local currency as the functional currency, and the effects of exchange rate changes on transactions designated as hedges of net foreign investments, are included as a separate component of stockholders' equity. Where the U.S. dollar is used as the functional currency, foreign currency gains and losses are reflected in income currently. Cash and Cash Equivalents Cash and cash equivalents include time deposits and readily marketable securities with original maturities of three months or less. Cain Recognition on Sale of Subsidiaries' Stock Company policy is to record gains from the sale or odier issuance of previously unissued stock by its subsidiaries. Financial Instruments Interest differentials on swaps and forward rate agreements designated as hedges of exposures to interest rate risk are recorded as adjustments to interest expense over the contract period. Premiums for early termination of derivatives designated as hedges are amortized as adjustments to interest expense over the original contract period. Interest derivatives not designated as hedges are marked-to-market at the end of each accounting period. In millions, exceptfor share amounts A Summary ofSignificant Accounting Policies (continued) The Company calculates the fair value of financial instru* ments using quoted market prices whenever available. When quoted market prices are not available, the Company uses stan dard pricing models for various types of financial instruments (such as forwards, options, swaps, etc.) which take into account the present value of estimated future cash flows. Investments in debt and marketable equity securities are classified as either Trading, Available-for-Sale or Held-to-Maturity. Investments classified as TVading are reported at fair value with unrealized gains and losses included in income. Investments classi fied as Available-for-Sale are reported at fair value with unrealized gains and losses recorded in a separate component of stockhold ers' equity. Investments classified as Held-to-Maturity are recorded at amortized cost. The cost of investments sold is determined by specific identification. Environment Accruals for environmental matters are recorded when it is probable diat a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Accruals for environmental liabilities are generally included in the balance sheet as "Other noncurrent obligations" at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. Accruals for insurance or other third party recoveries for environmental liabilities are recorded when it is probable that a claim will be realized. Accruals for recoveries are included in the balance sheet as "Noncurrent receivables." Environmental costs are capitalized if the costs extend the life of the property, increase its capacity, and/or mitigate or prevent contamination from future operations. Costs related to environmental contamination treatment and cleanup are charged to expense. Taxes on Income The Company accounts for taxes on income using the asset and liability method wherein deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted rates. Provision is made for taxes on undistributed earnings of foreign subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested. Certain countries provide tax incentives which are granted to encourage new investment. Generally, such grants are credited to income as earned. Earnings per Common Share The calculation of earnings per share is based on the weighted average number of common shares outstanding during the applicable period. B Accounting Change The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123 (Accounting for Stock-Based Compensation) in October 1995. Under SFAS No. 123, companies are permitted to either adopt this new standard and record expense for stock options and other stock-based employee compensation plans based on their fair value at date of grant, or continue to apply Accounting Principles Board (APB) Opinion No. 25 and increase its footnote disclosure. The Company has decided to continue to apply APB Opinion No. 25 and, in 1996, to increase footnote disclosures to include the pro forma impact on net income and earnings per share of the application of the fair value based method of accounting. SFAS No. 121 (Accounting for the Impairment of LongLived Assets and for Long-Lived Assets to Be Disposed Of) requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in cir cumstances indicate that the carrying amount of an asset may not be recoverable. The Company will adopt SFAS No. 121 in 1996 and has not yet determined what impact, if any, adoption of the new standard will have on the Company's financial statements. THE DOW CHEMICAL COMPANY AND SUBSIDIARIES Notes to Financial Statements In millions, exceptfor share amounts C Acquisitions and Divestitures chemical management services to industries and governments In April 1995, the Company signed an agreement with worldwide. The joint venture was formed by both partners Bundesanstalt fuer vereinigungsbcdingte Sonderaufgaben (BvS) transferring net assets. The value of assets transferred by the for the privatization of three state-owned chemical companies in Company was approximately $32. Radian International LLC is eastern Germany (referred to herein as BSL). Economic transfer expected to have annual revenues of nearly $400. of business operadons to the Company, through management In January 1996, the Company acquired an 80 percent share consulting and service agreements, occurred in June 1995 with in EniChem's INCA Intemadonal SpA subsidiary, a producer of legal closing anticipated in mid-1996. The Company will polyethylene terephthalate (PET) resin and its major precursor, consolidate BSL effective with the legal closing date. purified terephthalic acid (PTA). The investment by the Company On closing, the Company will take an 80 percent stake in was $161. BSL for an investment of approximately $200. BvS will maintain In January 1996, DowElanco, a 60 percent joint venture, a 20 percent stake in the operations during a restructuring period announced agreements with Mycogen Corporation and the of five years. After the restructuring period, the Company will Lubrizol Corporation for transactions through which DowElanco, have a call option and BvS a put option for the remaining 20 per- for a cash investment of $152, will take approximately a 46 per , cent of BSL for an additional investment of approximately $167. cent equity stake in Mycogen and Mycogen will acquire BvS is providing certain incentives to BSL during the restructur DowElanco's United Agriseeds subsidiary. ing period to cover portions of the reconstruction program and In June 1995, the Company completed the sale of its has retained all environmental cleanup obligations for operations 197 million shares of Marion Merrell Dow to Hoechst A.G. for through the legal closing date. $5.1 billion or $25.75 per share. In addition, subsidiaries of the The Company intends to build several new facilities at the Company completed the sale of the Company's Latin American BSL sites including a Dowlex linear low density polyethylene pharmaceutical businesses based in Argentina, Brazil and Mexico plant and polypropylene, aniline and acrylic acid plants, and to to Roussel Uclaf S.A. for $133. These two transactions, net of taxes upgrade the chlorine plant and steam cracker. A 16-inch multi on income of $382, increased the Company's second quarter of feedstock liquid pipeline will be constructed from the port of 1995 earnings by $169 or 62 cents per share. Net sales of the Rostock to the Boehlen site, as well as harbor facilities, terminals pharmaceutical businesses were $757 for the period January 1, and pump stations. As part of the restructuring of the acquired 1995 through March 31,1995 and $3.3 billion and $3.0 billion for sites, several facilities will be closed and demolished. the years 1994 and 1993, respectively. Provisions for taxes on In December 1995, a Company-controlled consortium income were $36, $125 and $92 for the same periods. Discondni^^B acquired the shares of Petroquimica Bahia Blanca (PBB) and operations included interest expense of $77, $159 and $150 for Indupa owned by the Argentine Government for $358. The the periods 1995, 1994 and 1993, respectively, allocated based investment by the Company was $289. This privatization resulted on net assets employed in the businesses. in the consortium owning a controlling interest in and operating In the fourth quarter of 1994, the Company recorded a PBB, the leading ethylene producer in Argentina, and Indupa. pretax charge of $132 related to the pending sale of the Personal The consortium subsequendy agreed, in 1996, to sell Indupa and Care Business of DowBrands. The sale was completed in purchase Polisur, a polyethylene manufacturer. The additional net November 1995 to Electronic Hair Styling Inc. for $22. investment by the Company is expected to be $85. In separate transactions in 1994 and 1993, the Company sold In January 1995, the Company and E.I, duPont de Nemours its ownership in Magma Power Company and recognized pretax and Company announced their intention to form a 50:50 joint gains of $90 and $62, respectively. venture to be named DuPont Dow Elastomers L.L.C. The new In November 1993, Dow Chemical Canada Inc. (DCC1) company will focus on the discovery, development, production sold shares of Crestar Energy Inc. (Crestar). The net proceeds to and sale of thermoset and thermoplastic elastomer products. the Company were $172 and generated a pretax gain of $101. Tile joint venture will be formed by both partners transferring As a result of the sale, DCCI's common share holding in Crestar net assets. The estimated book value of assets transferred by the was reduced from 50 percent to 17.5 percent. Company will be approximately $500. The combined annual In January 1993, the Company sold its 50 percent ownership sales of the existing businesses exceed $1 billion. Closing of this in the Dowell Schlumberger group of companies to Schlumberger transacdon is expected in the first quarter of 1996. Limited. The selling price was $675 in cash and a warrant to pur In January 1996, the Company and The Hartford Steam chase 7.5 million shares of Schlumberger stock with an exercise Boiler Inspection and Insurance Company formed a 60:40 joint price of $59.95 per share. The warrant is fully vested and non- venture named Radian International LLC. The new company transferable, and expires in the year 2000. The sale generated a will provide environmental, informadon technology and strategic pretax gain of $450. THE DOW CHEMICAL COMPANY AND SUBSIDIARIES In millions, exceptfor share amounts D Taxes on Income Operating loss carryforwards at December31, 1995 amounted to $609 of which $240 is subject to expiration in the years 1996 through 2000. The remaining balances expire in years beyond 2000 or have an indefinite carryforward period. Tax credit carryforwards at December 31,1995 amounted to $18 of which $12 is subject to expiration in the years 1996 through 2000. The remaining balances expire in years beyond 2000 or have an indefinite carryforward period. Undistributed earnings of foreign subsidiaries and related companies which are deemed to be permanently invested amounted to $3,026, $2,053, and $1,782 at December 31, 1995, 1994 and 1993, respectively. It is not practicable to calculate the unrecognized deferred tax liability on those earnings. Domestic andForeign Components ofIncome before Taxes on Income andMinority Interests 1995 1994 Domestic Foreign $1,513 2,016 $ 773 853 Total $3,529 $1,626 ------------------------------------- 1993 $ 761 497 $1,258 Reconciliation to US. Statutory Rate Taxes at U.S. statutory rate Write-down of investment Amortization of nondeductible intangibles Foreign rates other than 35% Other-net Total tax provision Effective tax rate 1995 $1,235 124 2 15 66 $1,442 40.9% 1994 $569 - 52 28 5 $654 40.2% 1993 $440 - 17 48 9 $514 40.9% Provisionfor Taxes on Income Federal State and local Foreign Total Current $ 535 132 507 $1,174 1995 Deferred $112 156 $268 Total $ 647 132 663 $1,442 Current $329 13 271 $613 1994 Deferred $23 3 15 $41 Total $352 16 286 $654 Deferred Tax Balances at December 31 Property Tax loss and credit carryforwards Long-term debt Postretirement benefit obligations Odier accruals and reserves Other-net Subtotal Less: Valuation allowance Total 1995 $(801) 204 177 596 75 77 $ 328 16 $ 312 1994 $(716) 330 112 673 370 75 $ 844 23 $ 821 Current $279 48 140 $467 1993 Deferred $10 2 35 $47 Total $289 50 175 $514 THE DOW CHEMICAL COMPANY AND SUBSIDIARIES Notes to Financial Statements In millions, exceptfor share amounts E Inventories The amounts of reserve required to reduce inventories from the first-in, first-out (FIFO) basis to the last-in, first-out (LIFO) basis at December 31,1995 and 1994, were $66 and $119, respectively. The inventories that were valued on a LIFO basis represented 34 and 35 percent of the total inventories at December 31, 1995 and 1994, respectively. A reduction of certain inventories resulted in the liquidatH of some quantities of LIFO inventory, which increased pretax income by $8 in 1995 and $16 in 1994, and decreased pretax income by $18 in 1993. F Related Company Transactions In May 1995, Dow Coming Corporation (Dow Corning), in which the Company is a 50 percent shareholder, filed for protec tion under Chapter 11 of the United States Bankruptcy Code. As a result the Company fully reserved its investment in Dow Corning and will not recognize its 50 percent share of future equity earnings while Dow Corning remains in Chapter 11 (see Note Q). The Company's investments in other related companies, accounted for by the equity method, approximate the Company's equity in the net assets of these companies. Dividends received from related companies were $33 in 1995, $15 in 1994 and $36 in 1993. All other transactions with related companies, and balances due to or from related compa nies, were not material in amount. G Plant Properties Plant Properties at December 51 Land Land and waterway improvements Buildings Transportation and construction equipment Machinery and equipment Utility and supply lines Office furniture and equipment Wells and mineral reserves Other Construction in progress Total 1995 $ 371 678 2,043 236 16,452 1,340 749 383 74 892 $23,218 1994 S 414 660 2,337 211 15,332 1,315 836 355 184 1,566 $23,210 Depreciation expenses were $1,369 in 1995, $1,224 in 1994 and $1,252 in 1993. Maintenance and repair costs were $895 in 1995, $941 in 1994 and $964 in 199.3. Capitalized interest was $28 in 1995, $66 in 1994 and $65 in 1993. H Leased Properties The Company routinely leases premises for use as sales and administrative offices, warehouses and tanks for product storage, motor vehicles, railcars, computers, office machines and equip ment under operating leases. In addition, a 77/o owned U.S. subsidiary leases a 262 megawatt syngas facility and a Canadian subsidiary leases an ethylene plant. The Company has the option to purchase the ethylene plant and certain other leased equipment and buildings at the termination of the leases. During 1995, the company purchased approximately $318 of leased assets. Rental expenses under operating leases were $433, $371 and $427 for 1995,1994 and 1993, respectively. The minimum future lease commitments for all operating leases are included at right. Minimum Operating Lease Commitments 1996 1997 1998 1999 2000 2001 and thereafter Total minimum lease commitments S 262 253 404 196 148 1,050 $2,313 THE DOW CHEMICAL COMPANY AND SUBSIDIARIES In millions, exceptfor share amounts | Notes Payable, Long-Term Debt and Available Credit Facilities Notes payable consists of obligations due to banks with a variety of interest rates and maturities. The notes payable out standing at December 31,1995 and 1994 were S323 and $741, respectively, on which the year-end weighted average interest rates were 4.29 percent and 4.80 percent, respectively, excluding the effects of short-term borrowings in highly inflationary coun tries. Included in notes payable at December 31,1995 and 1994 were commercial paper amounts of $4 and $191, respectively. The average interest rate on long-term debt was 6.73 percent in 1995 compared to 6.64 percent in 1994. Annual installments on long-term debt for the next five years are as follows: 1996, $375; 1997, $610; 1998, $308; 1999, $201; 2000, $175. The Company had unused and available credit facilities at December 31,1995, with various U.S. and foreign banks totaling $1.9 billion, which required the payment of commitment fees. Additional unused credit facilities totaling $1.3 billion at December 31,1995 were available for use by foreign subsidiaries. These facilities are available in support of commercial paper borrowings and working capital requirements. Promissory Notes andDebentures at December 31 4.63%, final maturity 1995 8.25%, final maturity 1996 5.75%, final maturity 1997 5.75%, final maturity 2001 7.38%, final maturity 2002 9.35%, final maturity 2002 7.13%, final maturity 2003 8.63%, final maturity 2006 8.55%, final maturity 2009 9.00%, final maturity 2010 9.20%, final maturity 2010 6.85%, final maturity 2013 7,13%, final maturity 2015 9.00%, final maturity 2021 8.85%, final maturity 2021 8.70%, final maturity 2022 7.38%, final maturity 2023 Subtotal 1995 $ 150 197 145 194 148 187 140 125 193 138 219 188 96 150 $2,270 Foreign Bonds at December 31 1995 6.75%, final maturity 1995, German mark 5.63%, final maturity 1996, German mark 10.87%, final maturity 1997, British pound sterling 4.00%, final maturity 1998, Japanese yen 4.75%, final maturity 1999, Swiss franc 4.63%, final maturity 2000, Swiss franc 6.38%, final maturity 2001, Japanese yen $ 209 345 194 173 130 242 Subtotal $1,293 1994 $ 150 150 200 15 150 200 150 200 150 150 200 150 24 300 200 138 150 $2,677 1994 $ 194 194 374 201 152 114 251 $1,480 Other Facilities- Various Rates andMaturities atDecember 51 1995 1994 U.S. dollar loans Foreign currency loans 9.42%, final maturity 2004, Dow ESOP 9.11%, final maturity 2005, MMDI ESOP Medium-term notes, final maturity 2022 Pollution control/industrial revenue bonds. final maturity 2024 Unexpended construction funds Capital lease obligations $ 126 168 103 380 $4 255 111 90 585 781 707 (4) (20) 11 32 Subtotal $1,565 $1,764 Long-Term Debt at December 31 Promissory notes and debentures Foreign bonds Other facilities Less unamortized debt discount Less long-term debt due within one year Long-term debt 1995 $2,270 1,293 1,565 (48) (375) $4,705 1994 $2,677 1,480 1,764 (84) (534) $5,303 THE DOW CHEMICAL COMPANY AND SUBSIDIARIES Notes to Financial Statements In millions, exceptfor share amounts J Financial Instruments Fair Value ofFinancialInstruments at December 51 Cost Nonderivatives: Interest-bearing deposits Marketable equity and debt securities: Trading Available-for-Sale Debt securities Equity securities Held-to-Maturity Other $ 571 2,293 1,256 367 54 262 Total investments $ 4,803 Long-term debt $(4,705) Derivatives relating to: Foreign currency Interest Cross-currency swaps - The cose approximates thefair valuefor allotherfinancialinstruments. 1995 Gain Loss Fair Value _ _ $ 571 -- _ 2,293 $ 38 100 26 $164 - $ (1) (33) - $ (34) $(442) 1,293 434 54 288 $ 4,933 $(5,147) $ 48 23 1 $ (46) (53) (161) $2 (30) (160) Cost S 92 414 824 454 408 337 S 2,529 $(5,303) - 1994 Gain Loss Fair Value $ 92 $20 434 3 $(22) 805 64 (45) 473 1 0) 408 - (7) 330 $88 $(75) $ 2,5^2 $33 _ $(5,270) $52 $(70) $ (18) 37 (45) (8) 15 (93) (78) Investment* Total investments at December 31, 1995 and 1994 included cash equivalents of $2,738 and $455, marketable securities and interest-bearing deposits of $611 and $565, and other investments of $1,558 and $1,529, respectively. The proceeds from sales of Available-for-Sale securities were $1,292 and $981 and the sales resulted in gross realized gains of $61 and $55 and losses of $20 and $26 in 1995 and 1994, respectively. Maturities for most debt securities ranged from one to ten years for the Available-for-Sale classification and one to five years for the Held-to-Maturity classification at December 31,1995 and 1994. Foreign Currency Ritk Management The Company's global operations require active participation in the foreign exchange markets. The Company enters into foreign exchange forward contracts and options to hedge various currency exposures or create desired exposures. Exposures primarily relate to (a) assets and liabilities denominated in foreign currency in Europe, Asia and Canada; (b) bonds denominated in foreign currency; and (c) economic exposures derived from the risk that currency fluc tuations could affect the dollar value of future cash flows at the operating income level. The primary business objective of die activity is to optimize the U.S. dollar value of the Company's assets, liabilities and future cash flows with respect to exchange rate fluctuations. Hedging is done on a net exposure basis. Namely, assets and liabilities denominated in the same currency are netted and only the balance is hedged. At December 31,1995 and 1994, the Company had forward contracts outstanding with various expiration dates (primarily in January of the next year) to buy, sell or exchange foreign curren cies with a U.S. dollar equivalent of $5,805 and $6,573, respec tively. The unrealized gains or losses on these contracts, based on the foreign exchange rates at December 31, 1995 and 1994, v.-ere^ a gain of $2 and a loss of $18, respectively, and were included in| income in "Interest income and foreign exchange-net." At December 31,1995 and 1994, the Company had crosscurrency swaps outstanding with a notional principal amount of $2,247 and $1,427, respectively. The $1 in gains and $161 in losses in 1995 and the $15 in gains and $93 in losses in 1994 related to cross-currency swaps were primarily recognized in income in "Interest income and foreign exchange-net" and offset the gains and losses from the assets and liabilities being hedged. Interest Rate Risk Management The Company enters into various interest rate contracts with the objective of lowering funding costs, diversifying sources of funding or altering interest rate exposure. In these contracts, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed and floating interest amounts calculated on an agreed upon notional principal amount. The notional principal on all types of interest derivative con tracts at December 31,1995 and 1994 totaled $3,455 and $2,837, with a weighted average remaining life of 2.7 and 3.3 years, respectively. The $23 in gains and $53 in losses in 1995 and the $37 in gains and $45 in losses in 1994 related to interest deriva tives were not recognized in income as diey represented hedges of debt-related exposures. THE DOW CHEMICAL COMPANY AND SUBSIDIARIES In millions, exceptfor share amounts J Financial Instruments (continued) Interest Derivatives at December 31,1995 Notional Amount Maturities WeightedAverage Rate Receive Pay Receive fixed hedge Receive floating hedge nrher $1,282 1,507 666 1996-2003 1996--2004 1996-2005 6.5% 5.9% - 5.9% 7.0% - Interest Derivatives atDecember 31, 1994 Notional WeightedAverage Rate Amount Maturities Receive Pay Receive fixed hedge $1,630 1995-2005 Receive floating hedge 1,024 1996-2005 Other 183 1995-1998 6.1% 5.5% 5.5% 6.8% The Company's risk management program for both foreign currency and interest rate risk is based on fundamental, mathe matical and technical models that take into account the implicit cost of hedging. Risks created by derivative instruments and the mark-to-market valuations of positions are stricdy monitored at all times. The Company uses value at risk and stress tests to moni tor risk. Because the counterparties to these contracts are major international financial institutions, credit risk arising from these contracts is not significant and the Company does not anticipate any such losses. The net cash requirements arising from risk management activities are not expected to be material. The Company's overall financial strategies and impacts from using derivatives in its risk management program are reviewed periodi cally with the Finance Committee of the Company's Board of Directors and revised as market conditions dictate. The Company's global orientation in diverse businesses with a large number of diverse customers and suppliers mini mizes concentrations of credit risk. No concentration of credit risk existed at December 31,1995. K LimitedPartnerships In April 1993, three wholly owned subsidiaries of the Company contributed assets with an aggregate fair value of $977 to Chemtech Royalty Associates L.R (Chemtech), a newly formed Delaware limited partnership. In August and October 1993, out side investors acquired limited partner interests in Chemtech totaling 20 percent in exchange for $200. In December 1991, three wholly owned subsidiaries of the Company contributed assets with an aggregate market value of $2 billion to DowBrands L.R, a newly formed Delaware limited partnership. Outside investors made cash contributions of $45 in December 1991 and $855 in June 1992 in exchange for an aggregate 31 percent limited partner interest in DowBrands L.R The two partnerships (Chemtech and DowBrands L.R) are separate and distinct legal entities from the Company and its affiliates and have separate assets, liabilities, businesses and oper ations. Each partnership has as a general partner a wholly owned subsidiary of the Company which directs the business activities of the partnership and has fiduciary responsibilities to the part nership and its other partners. The outside investors in each partnership receive a cumula tive annual priority return on their investments in the partnership and participate in residual earnings. The annual priority return is $14 and $67 for Chemtech and DowBrands L.R, respectively. The partnerships will not terminate unless a termination or liquidation event occurs. One such event, which is within the control of outside investors, occurs in the year 2000 for Chemtech and 1996 for DowBrands L.R In addition, the partnership agreements provide for various windup provisions wherein subsidiaries of the Company may purchase at any time the limited partnership interests of the outside investors. Upon windup, liquidation or termination, the partners' capital accounts will be redeemed at current fair values. For financial reporting purposes, the assets (other than intercompany loans, which are eliminated), liabilities, results of operations and cash flows of the partnerships and subsidiaries are included in the Company's consolidated financial statements and outside investors' limited partnership interests are reflected as minority interests. Supplemental contractual disclosures required by the part nership agreements are contained within Note R to the Financial Statements of the December 31,1993 Form 10-K of The Dow Chemical Company. L Stockholders'* Equity In 1989, the Board of Directors authorized, subject to certain business and market conditions, the purchase of up to 18,000,000 shares of the Company's common stock. In August 1995, the pur chases under this authorization were completed. In 1995, the Board of Directors authorized, subject to certain business and market conditions, the purchase of up to 25,000,000 shares of the Company's common stock. At December 31, 1995, the number of shares purchased under this authorization was 14,888,000. The Company is utilizing options as part of its stock repurchase program. The Company's potential repurchase obliga tion related to these options has been reclassified from stock holders' equity to temporary equity and amounted to $313 at December 31, 1995. The number of treasury shares purchased was 29,188,000 in 1995, 591,000 in 1994, and 300,000 in 1993. The number of treasury shares issued to employees under option and purchase programs was 3,022,000 in 1995,2,836,000 in 1994, and 1,946,000 in 1993. The number of treasury shares con tributed to the U.S. pension plan for funding future retiree health care benefits through a 401(h) account was 391,000 in 1994 and 251,000 in 1993. THE DOW CHEMICAL COMPANY AND SUBSIDIARIES Notes to Financial Statements f In millions, exceptfor share amounts L Stockholders' Equity (continued) There are no significant restrictions limiting the Company's ability to pay dividends. Gross undistributed earnings of20%-50/o owned companies included in retained earnings were S95 and $428 at December 31, 1995 and 1994, respectively. In computing earnings per common share, no adjustment was made for common shares issuable under award, option and stock purchase plans, or conversion of preferred shares issued, because there would be no material dilution. Resened Treasury Stock at December 51 In thousands ofshares 1995 Stock option plans Employees'stock purchase plan 16,735 1,080 Total shares reserved 17,815 1994 16,517 894 17,411 1,040 16,847 M Stock Option Plans The Company has various stock option plans. Options under all plans are granted at the market price of the shares on the date of the grants. The Company follows APB Opinion No. 25 in account ing for these plans. Stock options were exercised at prices ranging from $23.54 to $67.75 in 1995, $18.46 to $65.06 in 1994 and $18.46 to $59.75 in 1993. Option Plans In thousands ofshares Outstanding at January 1 Granted Exercised Expired Outstanding at December 31 Price Range Exercisable at December 31 Available for future grant 1995 14,735 2,682 (2,355) (42) 15,020 $36.04-874.63 12,373 523 Tlie Company made offerings of common stock to its employees, excluding directors, in 1995,1994 and 1993 at $55.00, $54.50 and $45.00 per share, respectively, payable gener ally through payroll deductions. Unfilled subscriptions, cancelable at the option of the employee, were 1,080,000, 894,000 and 1,040,000 shares at December31, 1995, 1994 and 1993, respec tively. Partial payments received on these subscriptions aggregat ing $39, $32 and $28 at December 31,1995,1994 and 1993, respectively, were included in current liabilities. 1994 14,059 2,634 (1,862) (96) 14,735 $23.54-$ 74.63 12,189 559 1995 11,657 3,431 - Jm 14,059 $ 18.46-.$ 60.88 10,776 407 N Redeemable Preferred Stock Tlie Company has an employee stock ownership plan (the ESOP), which is an integral part of the Salaried Employees Savings Plan. The ESOP borrowed funds at a 9.42 percent interest rate with a final maturity in 2004, and used the proceeds to purchase convertible preferred stock from the Company. The preferred stock is convertible into approximately 1.5 million shares of the Company's common stock at $86,125 per common share. The div idend yield on the preferred stock is 775 percent of the $86.125 redemption value. In the event the Company consummates certain merger or consolidation transactions involving the Company's common stock, the preferred stock must be redeemed by the Company for cash at a redemption price equal to 105 percent of the $86,125 per share redemption value, plus accrued and unpaid dividends. The convertible preferred stock issued to the ESOP is reported as temporary equity in the Company's balance sheet. Since the Company has guaranteed the ESOP's borrowings, the princi pal amount of the ESOP loan is reported as long-term debt and a reduction of temporary equity in the Company's balance sheet. 0 Pension Plans Tlie Company has defined benefit pension plans which cover employees in the U.S. and a number of foreign countries. The Company's funding policy is to contribute annually, at a rate that is intended to approximate a level percentage of compensation for the covered employees, to those plans where pension laws and economics either require or encourage funding. The U.S. funded plan is the largest plan. Its benefits are based on length of service and the employee's three-highest con secutive years of compensation. Tlie weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations were 7.25 and 5.5 percent, respectively, for 1995 at^^ 7.75 and 5.5 percent, respectively, for 1994. The assumed long^^P term rate of return on assets was 9 percent for 1995 and 1994. THE DOW CHEMICAL COMPANY AND SUBSIDIARIES In millions, exceptfor share amounts 0 Pension Plans (continued) All other pension plans used assumptions in determining the actuarial present value of the projected benefit obligations that are consistent with (but not identical to) those of the U.S. plan. Defined contribution plans cover employees in some sub sidiaries in the U.S. and in other countries, including Australia, France, Spain, and the United Kingdom. In addition, employees in the U.S. are eligible to participate in defined contribution plans (Employee Savings Plans) by contributing a portion of their com pensation which is then matched by the Company. Contributions charged to income for defined contribution plans were $75 in 1995, $49 in 1994, and $50 in 1993, The net periodic pension cost for all significant defined benefit plans was as follows: Net Periodic Pension Cost Service cost-benefits earned during the period Interest cost on projected benefit obligation Actual (return) on assets Amortization and deferred amounts Employee contributions to the plans Net periodic pension cost 1993 $ 146 374 (1,062) 686 (8) $ 136 1994 $ 150 334 (94) (256) (8) $ 126 1993 $ 133 322 (485) 151 (8) $ 113 The funded status of significant defined benefit plans for the Company was as follows: DefinedBenefit Plans atDecember 31 Fully Funded 1995 1994 Actuarial present value of benefit obligation: Vested Nonvested Accumulated benefit obligation Effect of projected compensation increases $ (4,098) (310) (4,408) (787) $(3,287) (292) (3,579) (826) Projected benefit obligation for services rendered to date Plan assets at market value, primarily publicly traded stocks and bonds Plan assets in excess of (less than) projected benefit obligation Unrecognized transition obligation Unrecognized net (gains) losses Unrecognized prior service cost Additional minimum liability (5,195) 5,321 126 34 (154) 193 - (4,405) 4,439 34 28 57 9 - Accrued pension asset (liability) $ 199 $ 128 Partially Funded 1995 1994 $(372) (39) (411) (101) (512) 56 (456) 27 19 35 (65) $(440) $(467) (40) (507) (125) (632) 221 (411) 45 (1) 39 (49) $(377) P Other Postretirement Benefits The Company provides certain health care and life insurance benefits to retired employees. The Company funds most of the cost of these health care and life insurance benefits as incurred. The U.S. plan covering the parent company is the largest plan. The plan provides health care benefits, including hospital, physi cians' services, drug and major medical expense coverage, and life insurance benefits. The plan provides benefits supplemental to Medicare after retirees are eligible for these benefits for employ ees hired before January 1, 1993. The cost of these benefits is shared by the Company and the retiree, with the Company portion increasing as the retiree has increased years of credited service. The Company has the ability to change these benefits at any time. Effective October 1993, the Company amended its health care benefits plan in the U.S. to cap the cost absorbed by the Company at approximately twice the 1993 cost per person for employees who retire after December 31, 1993. Effective April 1994, the Company extended this amendment to cover all other retired employees. The effect of the October 1993 amendment was to reduce the net periodic postretirement cost by $21 for 1993 and the accumulated postretirement benefit obligation by $327 at December 31, 1993. The effect of the April 1994 amend ment was to reduce the net periodic postretirement cost by $71 for 1994 and the accumulated postretirement benefit obligation by$101 at December31,1994. For 1995, a discount rate of 7.25 percent and weighted aver age medical cost trend rates starting at 7.52 percent and declining to 4.60 percent in 2004 were assumed. For 1994, the discount rate assumption was 7.75 percent and the medical cost trend rate assumption was 9.47 percent declining to 5.53 percent in 2004. The assumed long-term rate of return on assets was 9 percent for 1995 and 1994. Increasing the assumed medical cost trend rate by 1 percentage point in each year would increase the accumulated postretirement benefit obligation at December 31,1995 by $48 and the net periodic postretirement benefit cost for the year by $3. All other postretirement health care and other benefit plans used assumptions in determining the actuarial present value of accumulated postretirement benefit obligations that are consistent with (but not identical to) those of the U.S. parent company plan. THE DOW CHEMICAL COMPANY AND SUBSIDIARIES Notes to Financial Statements In millions, exceptfor share amounts P Other Pottretirement Benefits (continued) The net periodic benefit cost of all significant plans was as follows: Net Periodic Postretirement Cost 1995 1994 1993 Service costs-benefits earned during the period Interest cost on accumulated postretirement benefit obligation Actual (return) on assets Amortization and deferred amounts Net periodic postretirement cost $ 21 86 (16) (36) $ 55 $ 24 88 - (42) $ 70 S 34 122 (9) S 147 The postretirement benefit obligations of all significant plans were as follows: Partially Funded Postretirement Plans at December 51 1995 191 Accumulated postretirement benefit obligation: Retirees Fully eligible active plan participants Other active plan participants S (697) (199) (214) $ (676) (290) (210) Total accumulated postretirement benefit obligation Plan assets at market value, primarily publicly traded stocks and bonds (1.110) (1,176) 103 52 Unfunded accumulated postretirement benefit obligation Unrecognized gain from experience favorable to assumptions Negative prior service costs (1.007) (1,124) (224) (312) (166) (373) Accrued postretirement benefit liability $(1,543) $(1,663) Q Commitments and Contingent Liabilities In January 1994, Dow Coming Corporation (Dow Corning), in which Dow is a 50 percent shareholder, announced a pretax charge of $640 ($415 after tax) for the fourth quarter of 1993. In January 1995, Dow Corning announced a pretax charge of $241 ($152 after tax) for the fourth quarter of 1994. These charges included Dow Coming's best estimate of its potential liability for breast implant litigation based on a global Breast Implant irrigation Settlement Agreement (the Settlement Agreement); litigation and claims outside of the Settlement Agreement; and provisions for legal, administrative and research costs related to breast implants. The charges for 1993 and 1994 included pretax amounts of $1,240 and $441, respectively, less expected insurance recoveries of $600 and $200, respectively. The 1993 amounts reported by Dow Corning were determined on a present value basis. On an undiscounted basis, the estimated liability above for 1993 was $2,300 less expected insurance recoveries of $1,200. As a result of the Dow Corning actions, the Company recorded its 50 percent share of the charges, net of tax benefits available to Dow. The impact on the Company's net income was a charge of$192 for 1993 and a charge of $70 for 1994. Dow Corning reported an after tax net loss of $167 for the second quarter of 1995, of which the Company's share amounted to $83. Dow Coming's second quarter loss was a result of a $221 after tax charge taken to reflect a change in accounting method from the present value basis noted above to an undiscounted basis resulting from the uncertainties associated with its voluntary filing for protection under Chapter 11 of the United States Bankruptcy Code on May 15, 1995. As a result of Dow Coming's 1995 second quarter loss and Chapter 11 filing, the Company recognized a pretax charge against income of $330 for the second quarter of 1995, fully reserved its investment in Dow Corning and will not recognize its 50 percent share of future equity earnings while Dow Corning remains in Chapter 11. On September 1, 1994, Judge Sam C. Pointer, Jr. of the United States District Court for the Northern District of Alabama approved the Settlement Agreement, pursuant to which plaintiffs choosing to participate in the Settlement Agreement released the Company from liability. The Company was not a participant in the Settlement Agreement nor was it required to contribute to the settlement. On October 9, 1995, Judge Pointer issued an order which concluded that the Settlement Agreement was not workable in its then-current form because the funds committed to it by industry participants were inadequate. Tire order provided that plaintiffs who had previously agreed to participate in the Settlement Agreement could opt out after November 30,1995. The Company's maximum exposure for breast implant product liability claims against Dow Coming is limited to its investment in Dow Corning which, after the second quarter charge noted above, is zero. As a result, any future charges by Dow Corning related to such claims or as a result of the Chapter 11 proceeding would not have an adverse impact on the Company's consolidated financial statements. The Company is separately named as a defendant in over 13,000 breast implant product liability cases. In these situations, plaintiffs have alleged that the Company should be liable for Dow Coming's alleged torts based on the Company's 50 percent stock ownership in Dow Corning and that the Company should be liable by virtue of alleged "direct participation*' by the Company or its agents in Dow Coming's breast implant business. These latter, direct participation claims include counts sounding in strict liability, fraud, aiding and abetting, conspiracy, concert of action and negligence. Judge Pointer has been appointed by the Federal Judicial Panel on Multidistrict Litigation to oversee all of die product liabil ity cases involving silicone breast implants filed in the U.S. federal courts. Initially, in a ruling issued on December 1. 1993, Judge Pointer granted the Company's motion for summary judgement, finding that there was no basis on wrhich a jury could conclude that the Company was liable for any claimed defects in the breast implants manufactured by Dow Coming. In an interlocutory opi^ ion issued on April 25,1995, however. Judge Pointer affirmed l^J December 1993 ruling as to plaintiffs' corporate control claims but vacated that ruling as to plaintiffs' direct participation claims. THE DOW CHEMICAL COMPANY AND SUBSIDIARIES * In millions, exceptfor share amounts Q Commitments and Contingent Liabilities (continued) It is the opinion of the Company's management that the pos sibility is remote that plaintiffs will prevail on the theory that the Company should be liable in the breast implant litigation because of its shareholder relationship with Dow Corning. The Company's management believes that there is no merit to plaintiffs' claims that the Company is liable for alleged defects in Dow Coming's silicone products because of the Company's alleged direct partici pation in the development of those products, and the Company intends to contest those claims vigorously. Management believes that the possibility is remote that a resolution of plaintiffs' direct participation claims, including the vigorous defense against those claims, would have a material adverse impact on the Company's financial position or cash flows. Nevertheless, in light of Judge Pointer's April 25 ruling, it is possible that a resolution of plain tiffs' direct participation claims, including the vigorous defense against those claims, could have a material adverse impact on the Company's net income for a particular period, although it is impossible at this time to estimate the range or amount of any such impact. Numerous lawsuits have been brought against the Company and other chemical companies alleging that the manufacture, dis tribution or use of pesticides containing dibromochloropropane (DBCP) has caused, among other things, property damage, including contamination of groundwater. To date, there have been no verdicts or judgments against the Company in connec tion with these allegations. It is the opinion of the Company's management that the possibility is remote that the resolution of such lawsuits will have a material adverse impact on the Company's consolidated financial statements. The Company has accrued $275 at December 31, 1995, for probable environmental remediation and restoration liabilities, including $ 17 for the remediation of Superfund sites. This is man agement's best estimate of these liabilities, although possible costs for environmental remediation and restoration could range up to 50 percent higher. It is the opinion of the Company's management that the possibility is remote that costs in excess of those accrued or disclosed will have a material adverse impact on the Company's consolidated financial statements. In addition to the breast implant, DBCP and environmental remediation matters, the Company and its subsidiaries are parties to a number of other claims and lawsuits arising out of the normal course of business with respect to commercial matters, including product liabilities, governmental regulation and other actions. Certain of these actions purport to be class actions and seek, dam ages in very large amounts. All such claims are being contested. Dow has an active risk management program consisting of numerous insurance policies secured from many carriers at various times. These policies provide coverage which will be utilized to minimize the impact, if any, of the contingencies described above. Except for the possible effect on the Company's net income for breast implant litigation described above, it is the opinion of the Company's management that the possibility is remote that the aggregate of all claims and lawsuits will have a material adverse impact on the Company's consolidated financial statements. Eli Lilly and Company (Lilly) is a 40 percent partner with the Company in DowElanco, a global agricultural products joint venture. Lilly holds a put option requiring the Company to pur chase Lilly's interest in DowElanco at fair market value. Lilly notified the company in September 1994 that it did not plan to exercise the put option at that time. No subsequent notificadon has been received. A Canadian subsidiary has entered into two 20-year agree ments, which expire in 1998 and 2004, to purchase ethylene. The purchase price is determined on a cost-of-service basis which, in addition to covering all operating expenses and debt service costs, provides the owner of the manufacturing plants with a specified return on capital. Total purchases under the agreements were $204, $252 and $237 in 1995, 1994 and 1993, respecrively. At December 31,1995, the Company had various outstand ing commitments for take or pay and throughput agreements, including the Canadian subsidiary's ethylene contracts, for terms extending from one to 20 years. In general, such commitments were at prices not in excess of current market prices. The table below shows the fixed and determinable portion of the take or pay and throughput obligations: Fixed andDeterminable Portion ofObligations 1996 1997 1998 1999 2000 2001 through expiration of contracts Total $248 204 185 102 73 174 $986 In addition to the take or pay obligations at December 31, 1995, the Company had outstanding purchase commitments which range from one to eighteen years for steam, electrical power, materials, property, and other items used in the normal course of business of approximately $588. In general, such com mitments were at prices not in excess of current market prices. In addition, the Company had other outstanding direct and indirect commitments for construction performance and lease payment guarantees and other obligations of approximately $423. THE 0 Q W CHEMICAL COMPANY AND SUBSIDIARIES Notes to financial Statements In millions, exceptfor share amounts R Supplementary Information Accrued and Other Current Liabilities at December 51 1995 Accrued vacations Employees' retirement plans Interest payable Accrued payroll Accrued miscellaneous taxes Insurance companies' reserves Sundry $ 178 152 125 288 123 192 561 Total $1,619 1994 S 200 163 124 316 146 168 742 $1,859 Sundry Income (Expense) -Net Royalty income Gain (loss) on securities Cain on sale of assets Dividend income Other-net Total Other Supplementary Information Cash payments for interest Cash payments for taxes on income Provision for doubtful receivables 1995 S 23 79 24 8 (91) $ 43 1994 S 21 (15) 73 32 (28) S S3 m $ 14 (55) 48 86 (101) $ (8) 1995 % 501 1,203 18 1994 S568 334 7 1993 $603 494 18 S Industry Segments and Geographic Areas The Company is a diversified, worldwide manufacturer and supplier of more than 2,500 product families, which are grouped into the following industry segments: Chemicals and Metals, Performance Chemicals, Plastics, Performance Plastics, Hydrocarbons and Energy, and Diversified Businesses and Unallocated. The Company's wide range of products are used primarily as raw materials in the manufacture of customer products and services. Industries served by the Company include aerospace, appliances, automotive, agriculture, building and construction, chemical processing, consumer products, electronics, environmental services, furniture, housewares, insurance and finance, metalworking, oil and gas, packaging, processed foods, pulp and paper, utilities and water treatment. The Company operates 94 manufacturing sites in 30 coun tries. The Company conducts its worldwide operations through 15 global businesses which represent the aggregation of products on the basis of process technology, end-use markets and channels of distribution. To improve stockholders' ability to evaluate the Company's performance, external industry segments have been revised to better reflect market conditions and the Company's business strategies. Results have been restated to align with the new reporting segments. Chemicals and Metals contains a wide range of products that are used primarily as raw materials in the manufacture of customer products, or which aid in the processing of customer products and services. Performance Chemicals includes ingredients in many formu lated products and processing aids, as well as end-use products. This segment covers the Company's specialty chemicals, emulsion polymers and agricultural chemicals. Plastics encompasses the product ranges of polyethylene, polystyrene, polypropylene and polyethylene terephthalate polyester (PET). These are used in a wide variety of applications in markets which include electronics, food service, health care, packaging and recreation. Performance Plastics consists of a broad range of engineering thermoplastic and thermoset materials. The product ranges are polyurethanes; epoxy products and intermediates; engineering plastics; adhesives, sealants and coatings; Insite technology lic^H ing; and fabricated products. Hydrocarbons and Energy encompasses procurement of fuels and petroleum-based raw materials as well as the production of olefins, aromatics, styrene and cogenerated power and steam for use in the Company's manufacturing operations. Destec Energy, Inc. is also recorded in this segment. Diversified Businesses and Unallocated includes household consumer products; a joint venture providing environmental, information technology and strategic chemical management services to industry and government; New Businesses such as advanced electronics materials, advanced structural materials, technology licensing, and catalysts; and the consolidated insurance and finance companies. Unallocated includes activities and overhead cost variances not allocated to other segments. Transfers between area and industry segments are generally valued at cost. The exception is that movements between die agri cultural chemicals and consumer products businesses and the other businesses are generally valued at market-based prices. THE DOW CHEMICAL COMPANY AND SUBSIDIARIES In millions, exceptfor share amounts S Industry Segments and Geographic Areas (continued') Industry Segment Results 1995 Sales to unaffiliated customers Intersegment transfers Operating income (loss)1 Identifiable assets Depreciation Capital expenditures 1994 Sales to unaffiliated customers Intersegment transfers Operating income (loss)1 Identifiable assets Depreciation Capital expenditures 1993 Sales to unaffiliated customers Intersegment transfers Operating income1 Identifiable assets Depreciation Capital expenditures Chemicals & Metals Performance Chemicals $3,322 710 1,136 2,660 280 516 $4,240 26 670 4,066 320 274 $2,471 680 337 2,705 241 152 $3,672 28 514 3,842 273 253 $2,301 683 154 2,519 246 215 $3,390 42 403 3,631 279 204 Plastics Performance Hydrocarbons Plastics & Energy Diversified Bus. and Unallocated Corporatef Elim. & Disc. Oper. Consolidated $3,932 106 1,475 3,422 327 81 $5,369 19 1,056 3,962 294 175 $2,371 2,247 (S3) 2,743 104 342 $ 966 - (363) 717 44 29 $(3,108) - 6,012 - $20,200 _ 3,891 23,582 1,369 1,417 $3,064 104 531 3,785 311 83 $4,538 18 611 3,834 263 134 $2,044 2,365 74 2,108 92 388 $ 953 - (247) 699 44 64 $(3,195) - 9,572 109 $16,742 1,820 26,545 1,224 1,183 $2,510 85 89 3,525 318 126 $4,116 17 304 3,570 269 173 $1,808 2,338 46 1,933 94 426 $ 927 78 692 46 60 $(3,165) -- 9,635 - 193 $15,052 -- 1,074 25,505 1,252 1,397 Geographic Area Results 1995 Sales to unaffiliated customers Intersegment transfers Operating income1 Identifiable assets Cross plant properties Capital expenditures 1994 Sales to unaffiliated customers Intersegment transfers Operating income1 Identifiable assets Cross plant properties Capital expenditures 1993 Sales to unaffiliated customers Intersegment transfers Operating income (loss)1 Identifiable assets Cross plant properties Capital expenditures I The reconciliation betueen "Operating Income"cmd Income before Provisionfor Taxes on Income and Minority interests "consists of"Other Income (Expense) items and can be found in the Consolidated Statements ofIncome on Page 25. United States $9,035 1,728 1,603 10,127 12,416 1,008 $8,093 1,424 1,024 9,399 11,729 692 $7,486 1,042 795 9,475 11,326 762 Europe Rest ofWorld Discontinued Operations & Eliminations Consolidated $6,411 515 1,112 6,914 7,466 295 $4,754 454 1,176 6,541 3,336 114 $(2,697) -- "" $20,200 -- 3,891 `23,582 23,218 1,417 $4,809 447 237 5,516 6,725 234 $3,840 341 559 4,867 3,337 148 $(2,212) 6,763 1,419 109 $16,742 -- 1,820 26,545 23,210 1,183 $4,299 325 (23) 5,010 5,901 266 $3,267 304 302 4,034 3,165 176 $(1,671) - 6,986 1,216 193 $15,052 1,074 25,o0o 21,608 1,397 THE DOW CHEMICAL COMPANY A N 0 SUBSIDIARIES Quarterly Statistics In millions, exceptfor per share amounts 1995 Net sales Operating income Income before taxes on income and minority interests Income from continuing operations Net income available for common stockholders Earnings per common share from continuing operations Earnings per common share Common stock dividends declared per share Market price range of common stock: High Low (Unaudited) 1st Restated $5,205 1,075 1,048 564 582 2.03 2,10 0.65 74.63 61.38 1994 (Restated) Net sales Operating income Income before taxes on income and minority interests Income from continuing operations Net income available for common stockholders Earnings per common share from continuing operations Earnings per common share Common stock dividends declared per share Market price range of common stock: High Low 1st $3,788 411 335 141 171 0.51 0.62 0.65 66.50 56.50 See Notes to FinancialStatements, 2nd $5,517 1,207 832 334 503 1.22 1.84 0.75 75.00 68.00 2nd $4,126 458 457 206 250 0.75 0.91 0.65 70.13 58.75 3rd $4,884 946 955 571 571 2.15 2.15 0.75 78.00 71.63 3rd $4,216 433 454 237 288 0.86 1.04 0.65 79.25 64.88 4th $4,594 663 694 415 415 1.63 1.63 0.75 74.38 65.50 Yea, $20,20^^ 3,891 3,529 1,884 2,071 7.03 7.72 2.90 78.00 61.38 4th $4,612 518 380 181 222 0.65 0.80 0.65 78.13 60.75 Year $16,742 1,820 1,626 765 931 2.77 3.3^ w 79.25 56.50 T E DOW CHEMICAL COMPANY AND SUBSIDIARIES to Eleven-Year Review ofMarket Priceper Share of Common Stock' 1 Adjustedfor stock split in 1989. In dollars___________________________________________ 19SS 1986 3987 1988 1989 1990 1991 1992 1993 1994 1995 High Close on December 31 Low $27.92 27.33 18.00 $41.17 39.00 26.59 $73.08 60.00 39.17 $62,.67 58,,50 51. 17 $72.25 71.38 55.50 $75.75 47.50 37.00 $58.00 53.75 44.13 $62.88 57.25 51.25 $62.00 56.75 49.00 $79.25 67.25 56.50 $78.00 70.38 61.38 THE DOW CHEMICAL COMPANY AND S U B S I D I A A I E S Eleven-year Summary ofSelected Financial Data In millions, except as noted Summary ofOperations (Restated) (Unaudited) Net sales Cost of sales Insurance and finance company operations, pretax (income) expense Research and development expenses Promotion and advertising expenses Selling and administrative expenses Amortization of intangibles Special charge Operating income Investment and sundry income (expense) Interest expense-net 199i $20,200 H 808 416 1,771 38 - 3,891 (182) (180) Income (loss) before provision for taxes on income and minority interests Provision (credit) for taxes on income Minority interests' share in income Preferred stock dividends 3,529 1,442 196 7 Income (loss) from continuing operations Cumulative effect of accounting change Discontinued operations net of taxes on income 1,884 - 187 Net income (loss) available for common stockholders 2,071 Per share of common stock (dollars)1: Income (loss) from continuing operations Net income (loss) available for common stockholders2 Cash dividends declared Cash dividends paid Average common shares outstanding (thousands)1 Convertible preferred shares outstanding (thousands) 2.90 2.80 268,243 1,521 Year-endFinancial Position Total assets Working capital Plant properties-gross Plant properties-net Long-term obligations and redeemable preferred stock Total debt Net stockholders' equity $23,582 4,953 23,218 8,113 4,733 5,4<_'3 7,361 Financial Ratios Research and development expenses as percent of net sales (restated) 4.0% Income before provision for taxes and minority interests as percent of net sales (restated) 17.5% Return on average stockholders' equity2 26.9% Book value per share of common stock (dollars)1 $ 30.69 Debt as a percent of total capitalization 36.3% General I Adjustedfor Jfor 2 stock split in 1989. Capital expenditures Depreciation expenses (restated) Wages and salaries paid Cost of employee benefits Number of employees at year-end (thousands) Number of stockholders of record at year-end (thousands)3 ^ Before cumulative effect ofaccounting change m 1992. $ 1,417 1,369 2,784 % 111.1 THE DOW CHEMICAL COMPANY AND SUBSIDIARIES 1994 $16,742 12,131 (40) 783 411 1,594 43 - 1993 $ 15,052 11,370 (98) 786 367 1,485 68 - 1992 $15,493 11,862 (15) 799 381 1,583 45 433 1991 $15,822 11,874 (95) 773 366 1,551 44 370 1,820 77 (271) 1,074 462 (278) 405 145 (443) 939 450 (368) 1,626 654 200 7 1,258 514 171 7 107 1,021 67 269 120 56 77 765 566 (87) 689 -- - (765) - 166 71 356 246 931 637 (496) 935 1990 $17,151 12,309 (65) 757 374 1,528 56 - 1989 $16,182 10,040 (59) 665 360 1,396 43 - 1988 $15,409 9,448 (28) 610 291 1,305 40 - 2,192 259 (425) 3,737 249 (285) 3,743 92 (274) 2,026 773 44 6 3,701 1,350 11 1 3,561 1,340 6 - 1,203 ~ 175 2,339 - 147 2,215 - 183 1,378 2,486 2,398 1987 $12,263 8,304 20 523 222 1,123 25 - 1986 $10,179 7,424 (57) 477 217 945 25 - 1985 $ 9,794 7,769 (55) 440 248 782 16 592 2,046 119 (267) 1,148 101 (253) 2 268 (286) 1,898 787 5 -- 996 398 1 -- (16) (48) 3 -- 1,106 - 134 597 - 135 29 -- 29 1,240 732 58 2.77 3.37 2.60 2.60 276,094 1,549 2.07 2.33 2.60 2.60 273,620 1,567 (0.32) 0.99 2.60 2.60 271,647 1,586 2.55 3.46 2.60 2.60 270,477 1,592 4.46 5.10 2.60 2.60 269,899 1,602 8.66 9.20 2.37 2.18 270,243 1,602 7.86 8.51 1.73 1.63 281,891 - 3.85 4.31 1.43 1.40 287,504 - 2.08 2.55 1.27 1.23 287,088 " 0.10 0.20 1.20 1.20 285,579 -- $26,545 2,075 23,210 8,726 5,325 6,578 8,212 $25,505 2,001 21,608 8,580 5,918 6,944 8,034 $25,360 1,802 21,444 8,801 6,201 7,469 8,064 $24,727 1,584 20,663 8,775 6,083 7,652 9,441 $23,953 2,265 19,149 8,249 5,209 6,642 8,728 $22,008 909 16,700 7,080 3,855 6,141 7,957 $16,073 2,218 14,698 5,938 3,338 3,770 7,255 $14,230 2,307 13,502 5,551 3,779 3,958 5,769 $12,553 1,749 12,715 5,347 3,404 3,683 5,178 $14,405 1,281 11,875 5,127 3,198 3,661 4,806 4.7% 5.2% 5.2% 4.9% 9.7% 8.4% 0.7% 6.5% 11.3% 7.9% 3.3% 9.9% $ 29.63 $ 29.36 $ 29.69 $ 34.90 38.0% 39.9% 42.5% 42.3% 4.4% 4.1% 4.0% 11.8% 22.9% 23.1% 15.8% 31.2% 33.1% $ 32.33 $ 29.55 $ 26.35 41.3% 41.8% 34.0% 4.3% 4.7% 4.5% 15.5% 9.8% (0.2)% 21.5% 14.1% 1.2% $ 20.31 $ 18.05 $ 16.85 40.5% 41.4% 43.1% $ 1,183 1,224 3,239 832 53.7 114.5 $ 1,397 1,252 3,332 887 55.4 102.5 $ 1,595 1,260 3,263 938 61.4 105.9 $ 1,908 1,228 3,101 711 62.2 108.4 $ 2,119 1,096 3,104 690 62.1 109.4 $ 1,756 954 2,482 554 62.1 105.4 $ 1,264 899 2,314 518 55.5 105.8 $ 995 784 2,045 474 53.1 99.0 $ 890 717 1,800 464 51.3 106.3 $ 806 952 1,663 387 53.2 122.6 3 Stockholders ofrecord as reported by the transfer agent The Company estimates that there are an additional 152, CCO stockholders il hose shares are held in nominee names, or in dividend reinvestment accounts without underlying registeredshares. Board ofDirectors (As ofJanuary 1,1996) Jacqueline K. Barton, 45 Professor of Chemistry, California Institute of Technology Director since 1993 David T. Buzzelli, 54 Vice President and Corporate Director of Environment, Health Sc Safety, Public Affairs and Information Systems Director since 1995 Anthony J. Carbone, 54 Group Vice President Director since 1995 FredP. Corson, 54 Vice President and Director of Research <$c Development Director since 1994 Willie D. Davis, 61 President and Chief Executive Officer, All Pro Broadcasting, Inc. Director since 1988 MichaelL. Dow, 60 Chairman Michael L. Dow, Associates Director since 1988 Joseph L. Downey, 59 Senior Consultant; Chairman, DowElanco Director since 1989 Enrique C Falla, 56 Executive Vice President Director since 1985 * Barbara II. Franklin, 55 President and Chief Executive Officer, Barbara Franklin Enterprises; Former U.S. Secretary of Commerce Director since 1995. Previously Directorfrom 1980 to 1992 Allan D. Gilmour, 61 Retired Vice Chairman, Ford Motor Company Director since 1995 William J. Neely, 64 Senior Consultant Director since 1988 Michael D. Parker, 49 Group Vice President Director since 1995 Frank P. Popojf, 59 Chairman of the Board Director since 1982 J. Pedro Beinhard, 50 Financial Vice President, Treasurer and Chief Financial Officer Director since 1995 Harold T. Shapiro, 60 President, Princeton University Director since 1985 William S. Stavropoulos, 56 President and Chief Executive Officer Director since 1990 Paul G. Stem, 57 Partner, Thayer Capital Partners Director since 1992 Committees ofthe BoardofDirectors Audit Committee B. H. Franklin, Chairman A. D. Gilmour H. T. Shapiro P. G. Stern Committee on Directors W. D. Davis, Chairman F. P. Popoff H. T, Shapiro W. S. Stavropoulos P. G. Stern Compensation Committee H. T. Shapiro, Chairman W. D, Davis B. H. Franklin A. D. Gilmour P. G. Stem Environment, Health and Safety Committee W. J. Neely, Chairman J, K. Barton D. T. Buzzelli F. P. Corson M. L. Dow M. D. Parker P. D. Brink, ex-officio J. B. Martin, ex-officio R. J. Pingel, ex-officio J. Scriven, ex-officio Executive Committee W. S. Stavropoulos, Chairman A. J. Carbone M. D. Parker F. P. Popoff J. P. Reinhard Finance Committee J, P. Reinhard, Chairman A. J, Carbone J. L. Downey E. C. Falla M. D. Parker F. P. Popoff W. S. Stavropoulos C. J. Hahn, ex-officio R. L. Kesseler, ex-officio T. S. LeBeau, ex-officio J, Scriven, ex-officio Investment Policy Committee M. L. Dow, Chairman F. P. Corson J. L. Downey E. C. Falla J. P. Reinhard P, G. Stern W. J. Burroughs, ex-officio N. L. Camp, ex-officio Corporate Organization (As ofJanuary 1, 1996) Officers andAssistant Officers Chairman ofthe Board Frank P. Popoff President and ChiefExecutive Officer William S. Stavropoulos Financial lice President, Treasurer and ChiefFinancial Officer J. Pedro Reinhard Executive Pice President Enrique C. Falla Group Vice President Anthony J. Carbone Group Vice President Michael D. Parker lice President and Corporate Director ofEnvironment, Health & Safety, Public Affairs and Information Systems David T. Buzzelli l ice President andDirector if Research & Development Fred P. Corson Vice President tfHuman Resources Lawrence J. Washington, Jr. Vice President and General Counsel John Scriven Vice President and Controller Roger L. Kesseler Secretary Donna J. Roberts Assistant Controller William C. Schmidt Pttblic Interest Committee D. T. Buzzelli, Chairman J. K. Barton A. J. Carbone F. P Corson W. D. Davis M. L. Dow J. L. Downey B. H. Franklin W. J. Neely H. T. Shapiro W. S. Stavropoulos J. W. Tysse, ex-officio B, Woodhouse, ex-officio Assistant Secretary Charles J. Hahn Assistant Secretary Tina S. Van Dam Assistant Treasurer Henry Kahn Auditor James F. Hicks THE DOW CHEMICAL COMPANY AND SUBSIDIARIES n Stockholder Reference Information Stockholder Inquiries Inquiries about stock, changes in name or address and other stock-related questions may be directed to Dow's transfer agent: Boston EquiServe Limited Partnership P,0. Box 9155 Boston, MA 02205-9155 Telephone: 800-DOW-5606 (800-369-5606) in the U.S. or 617-575-3899. For the hearing impaired: 800-368-0328 (available only on TDD phones) Inquiries about Dow's business performance may be directed to: Investor Relations The Dow Chemical Company 2030 Dow Center Midland, MI, U.S.A. 48674 Telephone: 517-636-1463 or 800-422-8193 in the U.S. Annual Meeting The 1996 Annual Meeting of Stockholders will be conducted at 2 p.m. (EDT) Thursday, May 9, at the Midland Center for die Arts, Midland, MI. Stockholder Financial Reports Dow's annual report, quarterly earnings newsletter to stockhold ers and annual report on Form 10-K filed with the Securities and Exchange Commission will be provided without charge to those requesting diem in writing or by telephone. Please contact: Boston EquiServe Limited Partnership P.O. Box 9155 Boston, MA 02205-9155 Telephone: 800-DOW-5606 (800-369-5606) in the U.S. or 617-575-3899. For the hearing impaired: 800-368-0328 (available only on TDD phones) Cassette Tapes Available Audio cassette tapes of the 1995 Annual Report can be obtained for the blind by writing or calling: Investor Relations The Dow Chemical Company 2030 Dow Center Midland, MI, U.S.A. 48674 Telephone: 517-636-1463 or 800-422-8193 in die U.S. Transfer Agents Boston EquiServe Limited Partnership P.O. Box 9155 Boston, MA 02205-9155 Telephone: 800-DOW-5606 (800-369-5606) in the U.S. or 617-575-3899. For the hearing impaired: 800-368-0328 (available only on TDD phones) The R-M Trust Company 393 University Avenue, Fifth Floor Toronto, Ontario, Canada MSG 2M7 Telephone: 800-387-0825 (in North America) or 416-813-4600 Registrar Boston EquiServe Limited Partnership P.O. Box 9155 Boston, MA 02205-9155 Stock Exchange Listings and Trading Privileges NYSE Symbol: DOW Amsterdam, Antwerp, Basel, Berlin, Brussels, Dusseldorf, Frankfurt, Geneva, Hamburg, Hannover, London, Midwest, New York, Pacific, Paris, Tokyo, Toronto and Zurich. Dividend Reinvestment Plan and Direct Deposit ofDividends Automatic reinvestment and direct deposit of dividends are available to all Dow stockholders. For more information, call or write to: Boston EquiServe Limited Partnership P.O. Box 9155 Boston, MA 02205-9155 Telephone: 800-DOW-5606 (800-369-5606) in the U.S. or 617-575-3899. For the hearing impaired: 800-368-0328 (available only on TDD phones) Internet Address Additional information about Dow can be found on the World Wide Web at: www.dow.com. Thefollowing trademarks of The Dow Chemical Company appear in this report: Affinity, Aim, Calibre, Cyclotene, Derakane, Dowlex, Dowtherm, Doufax, Drytech, Engage, Etliocel, CAS/SPEC, Insite, Isoplast, Magnum, Methocel, Pulse, Saran Wrap, Styrofoam, Styron, Tiytner, Verscne and Voranol. Thefollowing trademarks ofDowBrands or an international affiliate appear in this report: Fantastik, Class Plus, Scrubbing Bubbles, Smart Cleanser, Spray'N Wash and Ziploc. Thefollowing trademarks ofDowElanco or its affiliates appear in this report: Broadstrike, Dursban, Lorsban, Sentricon, Tracer naturalyte. Thefollowing trademark ofEssex Specialty Products, Inc. appears in this report: Betaseal. Dow latex was used in the production ofthis recyclable paper. THE DOW CHEMICAL COMPANY AND SUBSIDIARIES The Doiv Chemical Company Midland, Michigan 48674 * Trademark of The Dow Chemical Company 162-01440-0296