SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

Annual Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

 

FOR THE YEAR ENDED DECEMBER 31, 2002

 

Commission file number 1-3433

 

THE DOW CHEMICAL COMPANY

(Exact name of registrant as specified in its charter)

 

Delaware

 

38-1285128

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

 

2030 DOW CENTER, MIDLAND, MICHIGAN

48674

 

 

(Address of principal executive offices)

(Zip Code)

 

 

 

 

Registrant’s telephone number, including area code:  989-636-1000

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange
on which registered

 

 

 

Common Stock, par value $2.50 per share

 

Common Stock registered on the
New York, Chicago and Pacific
Stock Exchanges

 

 

 

Debentures, 6.85%, final maturity 2013

 

Debentures registered on the
New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes ý   No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes ý   No  o

 

The aggregate market value of voting stock held by nonaffiliates as of February 14, 2003 (based upon the closing price of $27.68 per common share as quoted on the New York Stock Exchange), is approximately $25.05 billion. For purposes of this computation, it is assumed that the shares of voting stock held by Directors, Officers and the Dow Employees’ Pension Plan Trust and the Retirement Program for Employees of Union Carbide Corporation and its Participating Subsidiary Companies would be deemed to be stock held by affiliates. Nonaffiliated common stock outstanding at February 14, 2003 numbered 904,947,892 shares. Total common stock outstanding at February 14, 2003 numbered 914,522,660.

 

Documents Incorporated by Reference

 

Part III:  Proxy Statement for the Annual Meeting of Stockholders to be held on May 8, 2003.

 

 



 

The Dow Chemical Company

 

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31, 2002

 

TABLE OF CONTENTS

 

 

Page

PART I

 

 

 

Item 1.

Business

3

Item 2.

Properties

9

Item 3.

Legal Proceedings

10

Item 4.

Submission of Matters to a Vote of Security Holders

15

 

Executive Officers of the Registrant

15

 

 

PART II

 

 

 

Item 5.

Market for Registrant’s Common Equity and Related Stockholder Matters

17

Item 6.

Selected Financial Data

18

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

40

Item 8.

Financial Statements and Supplementary Data

41

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

85

 

 

PART III

 

 

 

Item 10.

Directors and Executive Officers of the Registrant

85

Item 11.

Executive Compensation

85

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

85

Item 13.

Certain Relationships and Related Transactions

85

Item 14.

Controls and Procedures

85

 

 

PART IV

 

 

 

Item 15.

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

86

 

 

SIGNATURES

89

 

 

CERTIFICATIONS

90

 

2



 

PART I

 

ITEM 1.  BUSINESS

 

THE COMPANY

 

The Dow Chemical Company was incorporated in 1947 under Delaware law and is the successor to a Michigan corporation, of the same name, organized in 1897. On February 6, 2001, the merger of Union Carbide Corporation with a subsidiary of The Dow Chemical Company was completed, and Union Carbide became a wholly owned subsidiary of Dow. See Note C to the Consolidated Financial Statements for details regarding the merger, which was accounted for as a pooling of interests.

 

The Company is engaged in the manufacture and sale of chemicals, plastic materials, agricultural and other specialized products and services. Except as otherwise indicated by the context, the terms “Company” or “Dow” as used herein mean The Dow Chemical Company and its consolidated subsidiaries.

 

The Company’s principal executive offices are located at 2030 Dow Center, Midland, Michigan 48674, telephone 989–636-1000.  Its Internet website address is www.dow.com. All of the Company’s filings with the U.S. Securities and Exchange Commission are available free of charge through the Investor Relations page on this website, immediately upon filing.

 

BUSINESS AND PRODUCTS

 

Corporate Profile

Dow is a leading science and technology company that provides innovative chemical, plastic and agricultural products and services to many essential consumer markets. In 2002, Dow had annual sales of approximately $28 billion and employed approximately 50,000 people. The Company serves customers in 175 countries and a wide range of markets that are vital to human progress, including food, transportation, health and medicine, personal and home care, and building and construction, among others. The Company has 191 manufacturing sites in 38 countries and supplies more than 3,400 products grouped within the operating segments listed on the following pages. The Corporate Profile is an integral part of Note T to the Consolidated Financial Statements.

 

PERFORMANCE PLASTICS

Applications: automotive interiors, exteriors, chassis/powertrain and body engineered systems • building and construction, thermal and acoustic insulation, roofing • communications technology, telecommunication cables, electrical and electronic connectors • computer housings and accessories • footwear • home and office furnishings: appliance insulation, mattresses, carpeting, flooring, furniture padding, office furniture • packaging, food and beverage containers, protective packaging • sports and recreation equipment • wire and cable insulation and jacketing materials for power utility and telecommunications

 

Dow Automotive delivers innovative solutions for automotive interior, exterior, chassis/powertrain and body engineered systems applications. As a leading global supplier of resins, engineering plastic materials, fluids, adhesives, sealants, epoxy dampers, structural bonding and reinforcement products, and thermal and acoustical management solutions, Dow Automotive has been recognized for its automotive components and systems. It also provides research and development, design expertise and advanced engineering.

 

                  Products: BETABRACE reinforcing composites; BETADAMP acoustical damping systems; BETAFOAM NVH and structural foams; BETAGUARD sealers; BETAMATE structural adhesives; BETASEAL glass bonding systems; CALIBRE polycarbonate resins; DOW polypropylene resins and automotive components of DOW polypropylene; Injection-molded dashmats and underhood barriers; INSPIRE performance polymers; INTEGRAL adhesive film; MAGNUM ABS resins; PULSE engineering resins; QUESTRA crystalline polymers; RETAIN recycle content resins; SPECTRIM reaction moldable polymers; STRANDFOAM polypropylene foam

 

Engineering Plastics business offers one of the broadest ranges of engineering polymers and compounds of any global plastics supplier. Dow’s Engineering Plastics business complements its product portfolio with technical and commercial capabilities to develop solutions that deliver improved economics and performance to its customers.

 

                  Products: CALIBRE polycarbonate resins; EMERGE advanced resins; ISOPLAST engineering thermoplastic polyurethane resins; MAGNUM ABS resins; PELLETHANE thermoplastic polyurethane elastomers; PREVAIL engineering thermoplastic resins; PULSE engineering resins; QUESTRA crystalline polymers; TYRIL SAN resins

 

Epoxy Products and Intermediates business manufactures a variety of basic epoxy products, as well as intermediates used by other major epoxy producers. Dow is a leading global producer of basic epoxy products, supported by high-quality raw materials, technical service and production capabilities.

 

3



 

                  Products: Acetone; Acrylic monomers; Allyl chloride; Bisphenol A; D.E.H. epoxy catalyst resins; D.E.N. epoxy novolac resins; D.E.R. epoxy resins (liquids, solids and solutions); DERAKANE and DERAKANE MOMENTUM epoxy vinyl ester resins; Epichlorohydrin; Epoxy acrylates; OPTIM glycerine; Phenol; UV specialty epoxies

 

Fabricated Products business manufactures and markets an extensive line of plastic film and foam products. Fabricated Products sets the competitive standard by creating high-performance solutions in industries ranging from packaging and construction to telecommunications, automotive and medical.

 

                  Products: COVELLE HF weldable polyolefin film; DOW backing layer film; ENVISION custom foam laminates; ETHAFOAM polyethylene foam; IMMOTUS acoustic panels; INSTILL vacuum insulation core; INTEGRAL adhesive film; LAMDEX polyolefin foam; OPTICITE label film; Polypropylene foam; PROCITE window envelope film; QUASH sound management foam; SARANEX barrier medical film; STYROFOAM brand products (including WEATHERMATE Plus housewrap); SYNERGY soft touch foam; TANKLITE protective insulation; TRENCHCOAT protective film; TRYCITE polystyrene film; TRYMER polyisocyanurate foam; ZETABON coated metal cable armor

 

Polyurethanes and Polyurethane Systems businesses are leading global producers of polyurethane raw materials and polyurethane systems. Differentiated by their ability to globally supply a high-quality, consistent and complete product range, these businesses emphasize both existing and new business developments while facilitating customer success with a global market and technology network.

 

                  Products: Dispersions; THE ENHANCER and LIFESPAN carpet backings; FROTH-PAK polyurethane spray foam; GREAT STUFF polyurethane foam sealant; INSTA-STIK roof insulation adhesive; INTACTA performance polymers; INTACTA polyurethane gloves; ISONATE pure and modified methylene diphenyl diisocyanate (MDI); PAPI polymeric MDI; Propylene glycol; Propylene oxide; SYNTEGRA polyurethane; TILE BOND roof tile adhesive; VORACOR, VORALAST, VORALUX and VORASTAR polyurethane systems; VORANATE toluene diisocyanate; VORANOL and VORANOL VORACTIV polyether and copolymer polyols; WOODSTALK fiberboard products

 

Technology Licensing and Catalyst business includes licensing and supply of related catalysts for the UNIPOL polypropylene process, the METEOR process for ethylene oxide and ethylene glycol, the LP OXO process for oxo alcohols, and Dow’s bisphenol A process. In addition, licensing of the UNIPOL polyethylene process and related catalysts, including metallocene catalysts, is handled through Univation Technologies, LLC, a 50:50 joint venture. The business also includes UOP LLC, a 50:50 joint venture, which supplies process technology, catalysts, molecular sieves and adsorbents to the petroleum refining, petrochemical and gas processing industries.

 

                  Products: Bisphenol A process technology and catalyst; LP OXO process technology; METEOR EO/EG process technology and catalysts; SHAC and UCAT catalysts; UNIPOL process technology

 

Wire & Cable Compounds business is the leading global producer of a variety of performance polyolefin products that are marketed worldwide for wire and cable applications. Chief among these are polyolefin-based compounds for high-performance insulation, semiconductives and jacketing systems for power distribution, telecommunications and flame-retardant wire and cable.

 

                  Products: REDI-LINK polyethylene, SI-LINK crosslinkable polyethylene, UNIGARD high-performance flame-retardant compounds, UNIGARD reduced emissions flame-retardant compounds, UNIPURGE purging compounds, Wire and cable insulation and jacketing compounds

 

PERFORMANCE CHEMICALS

Applications: agricultural and pharmaceutical products and processing • building materials • chemical processing and intermediates • food processing and ingredients • household products • paints, coatings, inks, adhesives, lubricants • personal care products • pulp and paper manufacturing, coated paper and paperboard • textiles and carpet • water purification

 

Custom & Fine Chemicals business provides products and services to other specialty chemical, pharmaceutical, biopharmaceutical and agricultural chemical producers, and also produces fine chemicals for household paints and various other applications.

 

4



 

                  Products: Basic nitroparaffins and nitroparaffin-based specialty chemicals of ANGUS Chemical Company; Contract manufacturing services provided by Dowpharma and Dow Haltermann Custom Processing; Fine and specialty chemicals from Dow Haltermann Custom Processing, Chirotech Technology Limited and Mitchell Cotts; Test and reference fuels, printing ink distillates, pure hydrocarbons and esters, and derivatives of Haltermann Products

 

Emulsion Polymers business is the world’s largest supplier of synthetic latex, and the most globally diverse of the styrene-butadiene latex suppliers. Dow is the largest supplier of latex for coating paper and paperboard used in magazines, catalogues and food packaging. Dow is also the world’s largest supplier of latexes used in carpet production.

 

                  Products: Acrylic latex; Butadiene-vinylidene latex; Polystyrene latex; Styrene-acrylate latex; Styrene-butadiene latex

 

Industrial Chemicals business provides products used as functional ingredients or processing aids in the manufacture of a diverse range of products. Dow’s surfactants and biocides businesses provide value-added ingredients for household and personal care products.

 

                  Products: Biocides; CARBOWAX polyethylene glycols and methoxypolyethylene glycols; Diphenyloxide; DOW polypropylene glycols; DOWFAX, HAMPOSYL, TERGITOL and TRITON surfactants; DOWTHERM, SYLTHERM and UCARTHERM heat transfer fluids; UCAR deicing fluids; UCON fluids; VERSENE chelating agents

 

Oxide Derivatives business is the world’s largest supplier of glycol ethers and amines to a diverse set of market applications, including coatings, household products, gas treating and agricultural products.

 

                  Products: Alkyl alkanolamines; Ethanolamines; Ethylene oxide- and propylene oxide-based glycol ethers; Ethyleneamines; Isopropanolamines

 

Specialty Polymers business is a diverse portfolio serving numerous markets. The largest unit, Liquid Separations, uses several technologies to separate dissolved minerals and organics from water, making purer water for human and industrial uses.

 

                  Products: Acrolein derivatives; Acrylic acid/Acrylic esters; CYRACURE cycloaliphatic epoxides; DAXAD dispersants; DOWEX ion exchange resins; DRYTECH superabsorbent polymers; Epoxidized vegetable oils; FILMTEC membranes; Glycine; Peroxymerics; Polyvinyl acetate resins; Quaternaries; Redispersible polymer powders; Solution vinyl resins; Specialty monomers; Sulfur derivative compounds; Surface sizing polymers; TONE polyols, polymers and monomers

 

UCAR Emulsion Systems is a leading global supplier of water-based emulsions used as key components in decorative and industrial paints, adhesives, textile products, and construction products such as caulks and sealants. These products allow customers to formulate more environmentally friendly products that contain less or no solvent.

 

                  Products: NEOCAR branched vinyl ester latexes; POLYPHOBE rheology modifiers; UCAR all-acrylic, styrene-acrylic and vinyl acrylic latexes

 

Water Soluble Polymers business provides a portfolio of high-value, multi-functional ingredients used to enhance the physical and sensory properties of end products in a wide range of applications, including food, pharmaceuticals, oilfield, paints and coatings, personal care, building and construction, and many other specialty applications.

 

                  Products: CELLOSIZE hydroxyethyl cellulose; ETHOCEL ethylcellulose resins; METHOCEL cellulose ethers; POLYOX water-soluble resins; Products for hair/skin care from Amerchol Corporation

 

AGRICULTURAL SCIENCES

Applications: control of weeds, insects and diseases in plants • pest management • seeds • traits (genes) for crops and agriculture

 

Dow AgroSciences LLC is a global leader in providing pest management, agricultural and crop biotechnology products. The business develops, manufactures and markets products for crop production; weed, insect and plant disease management; and industrial and commercial pest management. Dow AgroSciences is building a leading plant genetics and biotechnology business in crop seeds and traits for seeds.

 

5



 

                  Products: Acetochlor herbicide products; CLINCHER herbicide; DITHANE fungicide; DURSBAN and LORSBAN insecticides; FIRSTRATE herbicide; FORTRESS fungicide; GARLON herbicide; GLYPHOMAX herbicide; GRANDSTAND herbicide; HERCULEX I Insect Protection; LONTREL herbicide; MUSTANG herbicide; MYCOGEN seeds; PHYTOGEN cottonseeds; SENTRICON Termite Colony Elimination System; SPIDER herbicide; STARANE herbicide; STINGER herbicide; STRONGARM herbicide; TELONE soil fumigant; TORDON herbicide; TRACER NATURALYTE insect control; TREFLAN herbicide; VIKANE structural fumigant

 

PLASTICS

Applications: appliances and appliance housings • agricultural films • automotive parts and trim • beverage bottles • building and construction • consumer and durable goods • consumer electronics • disposable diaper liners • fibers • films, bags and packaging for food and consumer products • flexible and rigid packaging • housewares • hygiene and medical films and nonwovens • industrial and consumer films and foams • information technology • oil tanks and road equipment • toys, playground equipment and recreational products • wire and cable compounds

 

Polyethylene business is the world’s leading supplier of polyethylene-based solutions through sustainable product differentiation. Through the use of multiple catalyst and process technologies, Dow offers one of the industry’s broadest ranges of polyethylene solutions for a wide variety of applications. DuPont Dow Elastomers LLC, a 50:50 joint venture, leverages INSITE Technology, Dow’s proprietary catalyst and process technology, into elastomeric products.

 

                  Products: AFFINITY polyolefin plastomers; ASPUN fiber grade resins; ATTANE ultra low density polyethylene resins; DOWLEX polyethylene resins; ELITE enhanced polyethylene resins; DOW XLA elastic fiber for the textile industry; FLEXOMER very low density polyethylene resins; High density polyethylene resins (HDPE), including UNIVAL HDPE; Low density polyethylene resins (LDPE); PRIMACOR copolymers; Saran barrier resins and films; TUFLIN linear low density polyethylene resins (LLDPE)

 

Polypropylene business, a major global polypropylene supplier, provides a broad range of products and solutions tailored to customer needs by leveraging Dow’s leading manufacturing and application technology, research and product development expertise, extensive market knowledge and strong customer relationships.

 

                  Products: Homopolymer polypropylene resins; Impact copolymer polypropylene resins; INSPIRE performance polymers; Random copolymer polypropylene resins

 

Polystyrene business, the global leader in the production of polystyrene resins, is uniquely positioned with geographic breadth and broad industry experience to meet a diverse range of customer needs. By implementing breakthrough proprietary technology, Dow continues to improve efficiencies and product performance.

 

                  Products: STYRON A-TECH advanced polystyrene resins; STYRON general purpose polystyrene resins; STYRON high-impact polystyrene resins; STYRON ignition-resistant polystyrene resins

 

The Plastics segment also includes polybutadiene rubber, polyethylene terephthalate (PET), purified terephthalic acid (PTA), styrene-butadiene rubber and several specialty resins.

 

CHEMICALS

Applications: agricultural products • alumina • automotive antifreeze, coolant systems • carpet and textiles • chemical processing • dry cleaning • dust control • household cleaners and plastic products • inks • metal cleaning • packaging, food and beverage containers, protective packaging • paints, coatings and adhesives • personal care products • petroleum refining • pharmaceuticals • plastic pipe • pulp and paper manufacturing • snow and ice control • soaps and detergents • water treatment

 

Core Chemicals business is a leading global producer of each of its basic chemical products, which are sold to many industries worldwide, and also serve as key raw materials in the production of a variety of Dow’s performance and plastics products.

 

                  Products: Acids; Alcohols; Aldehydes; Caustic soda; Chlorine; Chloroform; COMBOTHERM blended deicer; DOWFLAKE calcium chloride; DOWPER dry cleaning solvent; Esters; Ethylene dichloride (EDC); LIQUIDOW liquid calcium chloride; Magnesium hydroxide; MAXICHECK procedure for testing the strength of reagents; MAXISTAB stabilizers for chlorinated solvents; Methyl chloride; Methylene chloride; Oxo products; PELADOW calcium chloride pellets; Perchloroethylene; SAFE-TAINER closed-loop delivery system; Trichloroethylene; Vinyl acetate monomer (VAM); Vinyl chloride monomer (VCM)

 

6



 

Ethylene Oxide/Ethylene Glycol business is the world’s leading producer of ethylene oxide, used primarily for internal consumption, and ethylene glycol, which is sold for use in polyester fiber, PET for food and beverage applications, polyester film and antifreeze.

 

                  Products: Ethylene glycol (EG); Ethylene oxide (EO)

 

HYDROCARBONS AND ENERGY

Applications: polymer and chemical production • power

 

Hydrocarbons and Energy business encompasses the procurement of fuels, natural gas liquids and crude oil-based raw materials, as well as the supply of monomers, power and steam for use in Dow’s global operations. Dow is the world leader in the production of olefins and styrene.

 

                  Products: Benzene; Butadiene; Butylene; Cumene; Ethylene; Propylene; Styrene; Power, steam and other utilities

 

New Business Growth includes Industrial Biotechnology, Pharmaceutical Technologies, and new developments with a focus on identifying and pursuing commercial opportunities. The results of Advanced Electronic Materials; New Business Growth; Venture Capital; the Company’s insurance operations; as well as Cargill Dow LLC and Dow Corning Corporation, both of which are 50:50 joint ventures, are included in Unallocated and Other.

 

Industry Segments and Geographic Area Results

See Note T to the Consolidated Financial Statements for disclosure of information by operating segment and geographic area.

 

Number of Products

Dow manufactures and supplies more than 3,400 products and services, and no single one accounted for more than 5 percent of the Company’s consolidated sales in 2002.

 

Competition

The Company experiences substantial competition in each of its industry segments. During 2002, the Company was the largest U.S. producer of chemicals and plastics, in terms of sales. The chemical industry has been historically competitive and this condition is expected to continue. The chemical divisions of the major international oil companies also provide substantial competition both in the United States and abroad. The Company competes worldwide on the basis of quality, price and customer service.

 

Raw Materials

The Company operates in an integrated manufacturing environment. Basic raw materials are processed through many stages to produce a number of products that are sold as finished goods at various points in those processes.

 

The two major raw material streams that feed the integrated production of the Company’s finished goods are chlorine-based and hydrocarbon-based raw materials.

 

Salt, limestone and natural brine are the base raw materials used in the production of chlor-alkali products and derivatives. The Company owns salt deposits in Louisiana, Michigan and Texas; Alberta, Canada; Brazil; and Germany. The Company also owns natural brine deposits in Michigan and limestone deposits in Texas.

 

Hydrocarbon raw materials include liquefied petroleum gases, crude oil, naphtha, natural gas and condensate. These raw materials are used in the production of both saleable products and energy. The Company also purchases electric power, benzene, ethylene and styrene to supplement internal production. Expenditures for hydrocarbons and energy accounted for 29 percent of the Company’s production costs and operating expenses for the year ended December 31, 2002. The Company purchases these raw materials on both short- and long-term contracts.

 

Other significant raw materials include acrylic acid, acrylonitrile, aniline, bisphenol, cellulose, octene, toluene diamine, and methanol. The Company purchases these raw materials on both short- and long-term contracts.

 

The Company has, and expects to continue to have, adequate supplies of raw materials during 2003 and subsequent years.

 

Method of Distribution

All products and services are marketed primarily through the Company’s sales force, although in some instances more emphasis is placed on sales through distributors. No significant portion of the business of any operating segment is dependent upon a single customer.

 

7



 

Research and Development

The Company is engaged in a continuous program of basic and applied research to develop new products and processes, to improve and refine existing products and processes and to develop new applications for existing products. Research and Development expenses were $1,066 million in 2002 compared with $1,072 million in 2001 and $1,119 million in 2000. At December 31, 2002, the Company employed approximately 6,600 people in various research and development activities.

 

Patents, Licenses and Trademarks

The Company continually applies for and obtains United States and foreign patents. At December 31, 2002, the Company owned 3,443 active United States patents and 11,561 active foreign patents as follows:

 

Patents Owned at December 31, 2002

 

United States

 

Foreign

 

Performance Plastics

 

1,451

 

4,373

 

Performance Chemicals

 

465

 

1,109

 

Agricultural Sciences

 

575

 

2,205

 

Chemicals

 

217

 

610

 

Plastics

 

494

 

2,064

 

Hydrocarbons and Energy

 

20

 

157

 

Other

221

 

1,043

 

Total

3,443

 

11,561

 

 

Dow’s primary purpose in obtaining patents is to protect the results of its research for use in operations and licensing. Dow is also party to a substantial number of patent licenses and other technology agreements. The Company had revenue related to patent and technology royalties totaling $129 million in 2002, $185 million in 2001 and $278 million in 2000, and incurred royalties to others of $34 million in 2002, $26 million in 2001 and $24 million in 2000. Dow also has a substantial number of trademarks and trademark registrations in the United States and in other countries, including the “Dow in Diamond” trademark. Although the Company considers that, in the aggregate, its patents, licenses and trademarks constitute a valuable asset, it does not regard its business as being materially dependent upon any single patent, license or trademark.

 

Principal Partly Owned Companies

Dow’s principal nonconsolidated affiliates at December 31, 2002, including direct or indirect ownership interest for each, are listed below:

 

                  Dow Corning Corporation – 50 percent – manufacturer of silicone and silicone products. Dow Corning has voluntarily filed for protection under Chapter 11 of the United States Bankruptcy Code (see Item 3. Legal Proceedings and Note J to the Consolidated Financial Statements).

                  DuPont Dow Elastomers L.L.C. – 50 percent – manufactures and markets thermoset and thermoplastic elastomer products.

                  EQUATE Petrochemical Company K.S.C. – 45 percent – a Kuwait-based company that manufactures ethylene, polyethylene and ethylene glycol.

                  Nippon Unicar Company Limited – 50 percent – a Japan-based manufacturer of polyethylene and specialty polyethylene compounds and specialty silicone products.

                  Siam Styrene Monomer Co., Ltd. – 49 percent – a manufacturer of styrene, located in Thailand, that provides raw materials to Dow’s Thailand-based joint ventures that produce latex and polystyrene.

                  TOTAL Raffinaderij Nederland N.V. – 45 percent – provides feedstocks for Dow’s major petrochemical site at Terneuzen, The Netherlands, and also services the Benelux and nearby countries.

                  UOP LLC – 50 percent – a U.S. company that supplies process technology, catalysts, molecular sieves and adsorbents to the petrochemical and gas-processing industries worldwide.

 

See Note G to the Consolidated Financial Statements for additional information on the Company’s principal nonconsolidated affilitates.

 

8



 

Financial Information About Foreign and Domestic Operations and Export Sales

In 2002, the Company derived 59 percent of its sales and had 43 percent of its property investment outside the United States. While the Company’s international operations may be subject to a number of additional risks, such as changes in currency exchange rates, the Company does not regard its foreign operations, on the whole, as carrying any greater risk than its operations in the United States. Information on sales and long-lived assets by geographic area for each of the last three years appears in Note T to the Consolidated Financial Statements, and discussions of the Company’s risk management program for foreign exchange and interest rate risk management appear in Item 7A. Quantitative and Qualitative Disclosures about Market Risk and Note H to the Consolidated Financial Statements.

 

Protection of the Environment

Matters pertaining to the environment are discussed in Item 3. Legal Proceedings, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Notes A and J to the Consolidated Financial Statements.

 

Employees

Personnel count was 49,959 at December 31, 2002; 52,689 at December 31, 2001; and 53,289 at the end of 2000. Headcount declined in 2002 primarily due to the Company’s merger-related workforce reduction program.

 

Other Activities

Dow engages in the property and casualty insurance and reinsurance business primarily through its Liana Limited subsidiaries.

 

ITEM 2.  PROPERTIES

 

The Company operates 191 manufacturing sites in 38 countries. Properties of Dow include facilities which, in the opinion of management, are suitable and adequate for the manufacture and distribution of Dow’s products. During 2002, the Company’s chemicals and plastics production facilities and plants operated at approximately 78 percent of capacity. The Company’s major production sites are as follows:

 

United States:

 

Plaquemine, Louisiana; Taft, Louisiana; Midland, Michigan; Freeport, Texas; Seadrift, Texas; Texas City, Texas; South Charleston, West Virginia.

Canada:

 

Fort Saskatchewan, Alberta; Prentiss, Alberta; Sarnia, Ontario.

Germany:

 

Boehlen; Leuna; Rheinmuenster; Schkopau; Stade.

France:

 

Drusenheim.

The Netherlands:

 

Terneuzen.

Spain:

 

Tarragona.

Argentina:

 

Bahia Blanca.

Brazil:

 

Aratu.

 

Including the major production sites, the Company has plants and holdings in the following geographic areas:

 

United States:

 

61 manufacturing locations in 20 states; 1 manufacturing location in Puerto Rico.

Canada:

 

9 manufacturing locations in 4 provinces.

Europe:

 

65 manufacturing locations in 19 countries.

Latin America:

 

29 manufacturing locations in 6 countries.

Pacific:

 

26 manufacturing locations in 11 countries.

 

All of Dow’s plants are owned or leased, subject to certain easements of other persons which, in the opinion of management, do not substantially interfere with the continued use of such properties or materially affect their value. Dow leases an ethylene plant and a polyethylene plant at Bahia Blanca, Argentina; an ethylene plant at Fort Saskatchewan, Alberta, Canada; and an ethylene plant in Terneuzen, The Netherlands.

 

A summary of properties, classified by type, is contained in Note E to the Consolidated Financial Statements. Additional information regarding leased properties can be found in Note M to the Consolidated Financial Statements.

 

9



 

ITEM 3.  LEGAL PROCEEDINGS

 

Breast Implant Matters

The Company and Corning Incorporated (“Corning”) are each 50 percent stockholders in Dow Corning Corporation (Dow Corning).  Dow Corning, the Company and/or Corning have been sued in a number of individual and class actions by plaintiffs seeking damages, punitive damages and injunctive relief in connection with injuries purportedly resulting from alleged defects in silicone breast implants. In addition, certain stockholders of the Company have filed separate consolidated class action complaints in the federal district court for the Southern District of New York alleging that the Company, Dow Corning or some of their respective Directors violated duties imposed by the federal securities laws regarding disclosure of alleged defects in silicone breast implants. All individual defendants in this case have been dismissed without prejudice.

 

On May 15, 1995, Dow Corning announced that it had voluntarily filed for protection under Chapter 11 of the United States Bankruptcy Code. Under Chapter 11, all claims against Dow Corning (although not against its co-defendants) are automatically stayed.  As a consequence of that action and prior charges taken by Dow Corning, the Company fully reserved its investment in Dow Corning and reserved its 50 percent share of equity earnings through the third quarter of 2000.

 

It is impossible to predict the outcome of each of the above-described legal actions.  However, it is the opinion of the Company’s management that the possibility that these actions will have a material adverse impact on the Company’s consolidated financial statements is remote, except as described below.

 

The Company’s financial statement exposure for breast implant product liability claims against Dow Corning is limited to its investment in Dow Corning which, after fully reserving its investment in Dow Corning and reserving its share of equity earnings through the third quarter of 2000, is not material. 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 a material adverse impact on the Company’s consolidated financial statements.

 

The Company is separately named as a defendant in more than 14,000 breast implant product liability cases.  In these situations, plaintiffs have alleged that the Company should be liable for Dow Corning’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 Corning’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 Sam C. Pointer of the U. S. District Court for the Northern District of Alabama was appointed by the Federal Judicial Panel on Multidistrict Litigation to oversee all of the product liability 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 judgment, finding that there was no basis on which a jury could conclude that the Company was liable for any claimed defects in the breast implants manufactured by Dow Corning. In an interlocutory opinion issued on April 25, 1995, Judge Pointer affirmed his earlier ruling as to plaintiffs’ corporate control claims but vacated that ruling as to plaintiffs’ direct participation claims.

 

In his opinion, Judge Pointer reaffirmed the view he had expressed in his December 1993 ruling that the Company is a separate, independent entity from Dow Corning and therefore has no legal responsibility as a result of its ownership of Dow Corning stock for Dow Corning’s breast implant business. However, Judge Pointer stated that, under the law of at least some states (although not necessarily all states), actions allegedly taken by the Company independent of its role as a stockholder in Dow Corning could give rise to liability under a negligence theory. Judge Pointer declined to address plaintiffs’ other legal theories, including strict liability, fraud, aiding and abetting, conspiracy and concert of action.  It is impossible to predict the outcome or to estimate the cost to the Company of resolving any of the federal product liability cases. The Company has filed claims with insurance carriers to recover in the event it is held liable in the federal (or any other) breast implant litigation.

 

After Judge Pointer’s initial ruling in December 1993, summary judgment was granted to the Company in approximately 4,000 breast implant cases pending in state courts in California, Indiana, Michigan, New Jersey and New York, and over 100 actions in Pennsylvania were dismissed. Of these rulings, the California ruling was final and was appealed. On September 25, 1996, the California Court of Appeal for the 4th District affirmed the trial court’s order granting summary judgment to the Company. On July 9, 1998, the California Supreme Court affirmed the decision of the Court of Appeal, and the California summary judgment order in favor of the Company is now final. The Michigan ruling was made final on March 20, 1997. On September 14, 1999, the Michigan Court of Appeals affirmed summary judgment in Maples v. The Dow Chemical Company, a case determinative of all cases pending in Michigan state court. The time for filing a petition for leave to appeal to the Michigan Supreme Court has passed with no petition having been filed. Pursuant to a stipulated order, all cases that were pending on the state court docket will now be dismissed with prejudice. Since federal courts in diversity cases are bound to apply state court interpretations of state law questions, the Maples affirmance should also result in dismissal of all claims against the Company pending in federal court and governed by Michigan law. The New Jersey ruling has been reconsidered and all claims were again dismissed, except the negligence claim. Plaintiffs in New York filed a motion to reconsider based on Judge Pointer’s April 25, 1995 ruling. On September 22, 1995, Judge Lobis, presiding over the consolidated New York breast implant litigation, dismissed all counts of all cases filed against the Company in New York on the ground that no reasonable jury could find against the Company.  On May 28, 1996, the New York Supreme Court Appellate Division

 

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affirmed the lower court’s dismissal of all claims against the Company. New York’s highest court subsequently denied plaintiffs’ petition for review, and the order dismissing all claims against the Company is now final. Other rulings that are not final decisions are also subject to reconsideration. On October 20, 1996, in a Louisiana state court breast implant case styled Spitzfaden v. Dow Corning, et al., the court entered an order maintaining certification of a class of Louisiana plaintiffs consisting of recipients of Dow Corning breast implants who, as of January 15, 1997, (i) are residents of Louisiana, (ii) are former residents of Louisiana who are represented by Louisiana counsel, or (iii) received their implants in Louisiana and are represented by Louisiana counsel, together with the spouses and children of such plaintiffs, and representatives of the estates of class members who are deceased. On August 18, 1997, at the conclusion of the first of four phases of this case, the jury found in part that the Company had been negligent in the testing and/or research of silicone, had misrepresented and concealed unspecified hazards associated with using silicone in the human body and had conspired with Dow Corning to misrepresent or conceal such hazards. The Company appealed the jury’s verdict. On December 1, 1997, the trial court decertified the class. On December 5, 2002, the Court of Appeal for the 4th Circuit in Louisiana reversed the lower court’s judgment on liability. Plaintiffs have sought appellate review by the Louisiana Supreme Court. The parties had entered into a confidential settlement, the terms of which were dependent on the outcome of the appeal and are reflected, in part, in the Joint Plan (defined below). Any settlement amounts paid by the Company will be reimbursed by Dow Corning in accordance with the terms of the Joint Plan if the Joint Plan becomes effective. The Company remains a defendant in other breast implant product liability cases originally brought in state courts and continues to be named as a defendant as cases are filed in various courts which are then transferred to the United States District Court, Eastern District of Michigan. It is impossible to predict the outcome or to estimate the cost to the Company of resolving any of the product liability cases described above.

 

On November 3, 1994, Judge Michael Schneider, presiding in the consolidated breast implant cases in Harris County, Texas, granted in part and denied in part the Company’s motion for summary judgment. Judge Schneider granted the Company’s motion as to (i) all claims based on the Company’s stockholder status in Dow Corning, (ii) the claim that the Company was liable in negligence for failing to supervise Dow Corning, and (iii) plaintiffs’ licensor-licensee claim. Judge Schneider denied the Company’s motion with regard to plaintiffs’ claims sounding in fraud, aiding and abetting, conspiracy, certain negligence claims and a claim brought under the Texas Deceptive Trade Practices Act. As a result, the Company remains a defendant as to such claims in the Harris County product liability cases. In those cases (and in cases brought in certain other jurisdictions including those before Judge Pointer), the Company has filed cross-claims against Dow Corning on the ground that if the Company and Dow Corning are found jointly and severally liable, Dow Corning should bear appropriate responsibility for the injuries judged to be caused by its product. In certain jurisdictions, the Company has also filed cross-claims and/or third party claims against Corning.  It is impossible to predict the outcome or to estimate the cost to the Company of resolving any of the Harris County product liability cases.

 

In an order dated December 1, 1994, Judge Frank Andrews, presiding in the consolidated breast implant cases in Dallas County, Texas, granted the Company’s motion for summary judgment “in all respects except as to theories of conspiracy and strict liability as a component supplier.” As a result, the Company remains a defendant as to such claims in the Dallas County product liability cases. It is impossible to predict the outcome or to estimate the cost to the Company of resolving any of these actions.

 

In addition to the jury findings in the first phase of the Louisiana state case noted above (now reversed on appeal), three breast implant product liability cases brought against the Company have now been tried to judgment. In February 1995, a Harris County jury exonerated the Company in one case and found the Company jointly and severally liable with Dow Corning for $5.23 million on a single count in a second case. After the verdict, however, the Court overturned the jury’s verdict and entered judgment for the Company. On October 30, 1995, a state court jury in Reno, Nevada found the Company liable for $4.15 million in compensatory damages and $10 million in punitive damages. On December 31, 1998, the Nevada Supreme Court reversed and vacated the $10 million punitive damages award and affirmed the $4.15 million compensatory damages award. The Company filed a motion asking the Court to reconsider that portion of its opinion affirming the compensatory damages award. On February 12, 1999, that motion was denied. Subsequently, the parties negotiated a confidential settlement and the case has been dismissed with prejudice. The Company will be reimbursed by Dow Corning for all settlement amounts paid, in accordance with the terms of the Joint Plan if the Joint Plan becomes effective.

 

On May 13, 1997, United States District Court Judge Denise Page Hood ordered that all breast implant claims currently pending against the Company as to which judgment had not been entered, whether pending in state or federal courts, be transferred to the United States District Court, Eastern District of Michigan pursuant to a decision issued by the United States Court of Appeals for the Sixth Circuit on May 8, 1997. On August 1, 1997, Judge Hood issued her case management order with respect to the transferred claims, and ordered that all implant claims later filed in federal or state courts against the Company should likewise be transferred. On August 5, 1997, the Tort Committee in Dow Corning’s bankruptcy case filed a petition for a writ of certiorari with the United States Supreme Court seeking review of the May 8, 1997 decision of the Sixth Circuit. On November 10, 1997, the Supreme Court denied the Tort Committee’s petition.

 

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On July 7, 1998, Dow Corning, the Company and Corning, on the one hand, and the Tort Claimants’ Committee in Dow Corning’s bankruptcy on the other, agreed on a binding Term Sheet to resolve all tort claims involving Dow Corning’s silicone medical products, including the claims against Corning and the Company (collectively, the Shareholders). The agreement set forth in the Term Sheet was memorialized in a Joint Plan of Reorganization (the Joint Plan) filed by Dow Corning and the Tort Claimants’ Committee (collectively, the Proponents) on November 9, 1998. On February 4, 1999, the Bankruptcy Court approved the disclosure statement describing the Joint Plan. Before the Joint Plan could become effective, however, it was subject to a vote by the claimants, a confirmation hearing and all relevant provisions of the Bankruptcy Code. Voting was completed on May 14, 1999, and the confirmation hearing concluded on July 30, 1999.

 

On November 30, 1999, the Bankruptcy Court issued an Order confirming the Joint Plan, but then issued an Opinion on December 21, 1999 that, in the view of the Proponents and the Shareholders, improperly interpreted or attempted to modify certain provisions of the Joint Plan affecting the resolution of tort claims involving Dow Corning’s silicone medical products against various entities, including the Shareholders. Many of the parties in interest, including the Shareholders, filed various motions and appeals seeking, among other things, a clarification of the December 21, 1999 Opinion. These motions and appeals were heard by U.S. District Court Judge Denise Page Hood on April 12 and 13, 2000, and on November 13, 2000, Judge Hood affirmed the Bankruptcy Court’s November 30, 1999 Order confirming the Joint Plan and reversed, in part, the Bankruptcy Court’s December 21, 1999 Opinion, including that portion of the Opinion the Shareholders had appealed. In turn, various parties in interest appealed Judge Hood’s decision to the United States Court of Appeals for the Sixth Circuit which heard oral arguments in the matter on October 23, 2001.  On January 29, 2002, the Sixth Circuit issued its opinion which, among other things, affirmed Judge Hood’s determination that claims against various entities, including the Shareholders, may be enjoined where “unusual circumstances” exist, and remanded the case to the District Court for certain factual determinations. On December 11, 2002, Judge Hood found that the release and injunction provisions of the Plan were appropriate based on the factual determination that “unusual circumstances” do exist in this case. The effectiveness of the Joint Plan remains subject to any subsequent appellate action. Accordingly, there can be no assurance at this time that the Joint Plan will become effective.

 

It is the opinion of the Company’s management that the possibility 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 Corning’s silicone products because of the Company’s alleged direct participation 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, 1995 ruling, it is possible that a resolution of plaintiffs’ 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.

 

Environmental Matters

On October 16, 2001, the Louisiana Department of Environmental Quality (“LDEQ”) initiated an administrative enforcement action against the Company seeking a civil penalty of $1,617,998. The LDEQ has alleged that the Company failed to monitor valves at its Plaquemine, Louisiana benzene plant for fugitive emissions for two separate time periods. The Company has requested an adjudicatory hearing regarding the alleged violations and the proposed penalty. While the Company expects the penalty will ultimately be significantly reduced, it is likely the final penalty will be greater than $100,000.

 

On September 27, 2002, the United States Environmental Protection Agency (“EPA”), Region 6, filed an administrative complaint against Union Carbide, a wholly owned subsidiary of the Company, charging civil fines of $185,458 for certain alleged violations of the Clean Air Act and the Resource Conservation and Recovery Act (“RCRA”) at Union Carbide’s Texas City Operations. The EPA has proposed to settle these civil fines for $129,818 plus an additional civil fine of $130,753 for other alleged Clean Air Act violations at Texas City Operations that were voluntarily disclosed by Union Carbide.

 

On December 3, 2002, the LDEQ initiated an administrative enforcement action against the Company seeking a civil penalty of $1,388,780. The LDEQ has alleged that the Company violated certain RCRA Boiler and Industrial Furnaces regulations. The Company has requested an adjudicatory hearing regarding the alleged violations and the proposed penalty. It is expected that the penalty will be significantly reduced, but it is likely that the final penalty assessed will be in excess of $100,000.

 

On December 20, 2002, the LDEQ and the Company verbally agreed to settle over 50 alleged violations of the Company’s water permit (including some alleged unauthorized discharges) at its Plaquemine, Louisiana manufacturing site. These alleged violations cover a time period from September 1996 to September 2002. The settlement also covers an alleged unauthorized discharge of brine on May 1, 1998, at the Company’s Grand Bayou facility. If the settlement is approved by the State of Louisiana, the Company would pay a civil penalty of $161,300 and spend $200,000 to fund an LDEQ sponsored project implementing electronic Discharge Monitoring Reports in Louisiana.

 

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Asbestos-Related Matters of Union Carbide Corporation

Union Carbide Corporation (“Union Carbide”), a wholly owned subsidiary of the Company, is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages, often in very large amounts. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to Union Carbide’s products.

 

The rate at which plaintiffs filed asbestos-related suits against various companies, including Union Carbide and Amchem, increased in both 2001 and 2002, influenced by the bankruptcy filings of numerous defendants in asbestos-related litigation. Union Carbide expects more asbestos-related suits to be filed against Union Carbide and Amchem in the future. Union Carbide will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.

 

Typically, Union Carbide is only one of many named defendants, many of which, including Union Carbide and Amchem, were members of the Center for Claims Resolution (“CCR”), an entity that defended and resolved asbestos cases on behalf of its members. As members of the CCR, Union Carbide’s and Amchem’s strategy was to resolve the claims against them at the relatively small percentage allocated to them pursuant to the CCR’s collective defense. The CCR ceased operating in February 2001, except to administer certain settlements. Union Carbide then began using Peterson Asbestos Claims Enterprise, but only for claims processing and insurance invoicing.

 

Certain members of Dow’s legal department and certain Dow management personnel have been retained to provide their experience in mass tort litigation to assist Union Carbide in responding to asbestos-related matters. In early 2002, Union Carbide hired new outside counsel to serve as national trial counsel. In connection with these actions, aggressive defense strategies were designed to reduce the cost of resolving all asbestos-related claims, including the elimination of claims that lack demonstrated illness or causality.

 

At the end of 2001 and through the third quarter of 2002, Union Carbide had concluded it was not possible to estimate its cost of disposing of asbestos-related claims that might be filed against Union Carbide and Amchem in the future due to a number of reasons, including its lack of sufficient comparable loss history from which to assess either the number or value of future asbestos-related claims. During the third and fourth quarters of 2002, Union Carbide worked with Analysis, Research & Planning Corporation (“ARPC”), a consulting firm with broad experience in estimating resolution costs associated with mass tort litigation, including asbestos, to explore whether it would be possible to estimate the cost of disposing of pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against Union Carbide and Amchem.

 

Union Carbide provided ARPC with all relevant data regarding asbestos-related claims filed against Union Carbide and Amchem through November 6, 2002. ARPC concluded that it was not possible to estimate the full range of the cost of resolving future asbestos-related claims against Union Carbide and Amchem, because of various uncertainties associated with the litigation of those claims. These uncertainties, which hindered Union Carbide’s ability to project future claim volumes and resolution costs, included the following:

 

                  Until a series of bankruptcies led to the CCR ceasing operations in early 2001, Union Carbide and Amchem generally settled claims filed against CCR members according to a sharing formula that would not necessarily reflect the cost of resolving those claims had they been separately litigated against Union Carbide or Amchem.

                  The bankruptcies in the years 2000 to 2002 of other companies facing large asbestos liability were a likely contributing cause of a sharp increase in filings against many defendants, including Union Carbide and Amchem.

                  It was not until the CCR ceased operating in early 2001 that Union Carbide took direct responsibility for the defense of claims against itself and Amchem.

                  New defense counsel for Union Carbide and Amchem implemented more aggressive defense strategies in mid-2002.

 

Despite its inability to estimate the full range of the cost of resolving future asbestos-related claims, ARPC advised Union Carbide that it would be possible to determine an estimate of a reasonable forecast of the cost of resolving pending and future asbestos-related claims likely to face Union Carbide and Amchem, if certain assumptions were made. Specifically, ARPC advised Union Carbide that for purposes of determining an estimate it is reasonable to assume that in the near term asbestos-related claims filed against Union Carbide and Amchem are unlikely to return to levels below those experienced prior to 2001 - when the recent spike in filings commenced - and that average claim values are unlikely to return to levels below those experienced in 2001-2002, the years immediately following CCR’s cessation of operations. ARPC advised Union Carbide that, by assuming that future filings were unlikely to exceed the levels experienced prior to 2001 and extrapolating from 2001 and 2002 average claim values, ARPC could make a reasonable forecast of the cost of resolving asbestos-related claims facing Union Carbide and Amchem. ARPC also advised Union Carbide that forecasts of resolution costs for a 10 to 15 year period from the date of the forecast are likely to be more accurate than forecasts for longer periods of time.

 

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In projecting Union Carbide’s resolution costs for future asbestos-related claims, ARPC applied two methodologies that have been widely used for forecasting purposes. Applying these methodologies, ARPC forecast the number and allocation by disease category of those potential future claims on a year-by-year basis through 2049. ARPC then calculated the percentage of claims in each disease category that had been closed with payments in 2001 and 2002. Using those percentages, ARPC calculated the number of future claims by disease category that would likely require payment by Union Carbide and Amchem and multiplied the number of such claims by the mean values paid by Union Carbide and Amchem, respectively, to dispose of such claims in 2001 and 2002. In estimating Union Carbide’s cost of resolving pending claims, ARPC used a process similar to that used for calculating the cost of resolving future claims.

 

As of December 31, 2002, ARPC estimated the undiscounted cost of resolving pending and future asbestos-related claims against Union Carbide and Amchem, excluding future defense and processing costs, for the 15-year period from the present through 2017 to be between approximately $2.2 billion and $2.4 billion, depending on which of the two accepted methodologies was used.

 

Although ARPC provided estimates for a longer period of time, based on ARPC’s advice that forecasts for shorter periods of time are more accurate and in light of the uncertainties inherent in making long-term projections, Union Carbide determined that the 15-year period through 2017 is the reasonable time period for projecting the cost of disposing of its future asbestos-related claims. Union Carbide concluded that it is probable that the undiscounted cost of disposing of asbestos-related pending and future claims ranges from $2.2 billion to $2.4 billion, which is the range for the 15-year period ending in 2017 as estimated by ARPC using both methodologies. Accordingly, Union Carbide increased its asbestos-related liability for pending and future claims at December 31, 2002 to $2.2 billion, excluding future defense and processing costs. For pending claims, Union Carbide had an asbestos-related liability of $233 million at December 31, 2001.

 

Union Carbide also increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion at December 31, 2002, substantially exhausting its asbestos product liability coverage. This resulted in a net income statement impact to Union Carbide of $828 million, $522 million on an after-tax basis, in the fourth quarter of 2002. Union Carbide’s receivable for insurance recoveries related to its asbestos liability was $223 million at December 31, 2001. The insurance receivable related to the asbestos liability was determined by Union Carbide after a thorough review of applicable insurance policies and the 1985 Wellington Agreement, to which Union Carbide and many of its liability insurers are signatory parties, as well as other insurance settlements, with due consideration given to applicable deductibles, retentions and policy limits, and taking into account the solvency and historical payment experience of various insurance carriers.

 

In addition, Union Carbide had receivables for insurance recoveries for defense and resolution costs of $219 million at December 31, 2002 and $35 million at December 31, 2001. Defense and resolution costs for Union Carbide’s asbestos-related litigation were $247 million in 2002, $53 million in 2001 and $53 million in 2000. The $247 million in 2002 included $92 million for defense costs (which included significant costs for the development and implementation of Union Carbide’s new and more aggressive defense strategies) and $63 million for bulk settlements with multiple claimants. To date, substantially all of these defense and resolution costs were covered by insurance. Insurance coverage for future asbestos-related defense costs will exist, but to a lesser extent. The pretax impact to Union Carbide for these defense and resolution costs, net of insurance, was $9 million in 2002, $9 million in 2001 and $4 million in 2000, and was reflected in “Cost of sales.”

 

The amounts recorded by Union Carbide for the asbestos-related liability and related insurance receivable described above were based upon currently known facts. However, projecting future events, such as the number of new claims to be filed each year, the average cost of disposing of each such claim, coverage issues among insurers, and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries for Union Carbide to be higher or lower than those projected or those recorded. Union Carbide expenses defense and processing costs as incurred. Accordingly, defense and processing costs incurred by Union Carbide in the future for asbestos-related litigation, net of insurance, will impact Union Carbide’s results of operations in future periods.

 

Because of the uncertainties described above, Union Carbide’s management cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing Union Carbide and Amchem. Union Carbide’s management believes that it is reasonably possible that the cost of disposing of Union Carbide’s asbestos-related claims, including future defense and processing costs, could have a material adverse impact on Union Carbide’s results of operations and cash flows for a particular period and on the consolidated financial position of Union Carbide.

 

It is the opinion of Dow’s management that it is reasonably possible that the cost of Union Carbide disposing of its asbestos-related claims, including future defense and processing costs, could have a material adverse impact on the Company’s results of operations and cash flows for a particular period and on the consolidated financial position of the Company.

 

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ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matter was submitted to a vote of security holders during the fourth quarter of 2002.

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

Set forth below is information related to the Company’s executive officers as of February 14, 2003.

 

ARNOLD A. ALLEMANG, 60. DOW EXECUTIVE VICE PRESIDENT. DIRECTOR SINCE 1996. Employee of Dow since 1965. Manufacturing General Manager, Dow Benelux N.V.* 1992-93. Regional Vice President, Manufacturing and Administration, Dow Benelux N.V.* 1993. Vice President, Manufacturing Operations, Dow Europe S.A.* 1993-95. Dow Vice President and Director of Manufacturing and Engineering 1996-97. Dow Vice President, Operations 1997-2000. Executive Vice President 2000 to date. Director of Dow Corning Corporation,* Liana Limited* and Dorinco Reinsurance Company.* Representative, Members Committee of DuPont Dow Elastomers L.L.C.* and Cargill Dow LLC.* Director of the National Association of Manufacturers. Member of the American Chemical Society; the Advisory Board, Center for Chemical Process Safety, American Institute of Chemical Engineers; College of Engineering Advisory Council, Kansas State University; the Corporate Executive Board’s Operations Management Roundtable and the National Academy of Engineering’s Action Forum on Diversity.

 

FRANK H. BROD, 48. DOW VICE PRESIDENT AND CONTROLLER. Employee of Dow since 1975.  Controller, Essex Chemical Corporation* 1988-91.  Financial Controller and Information Systems Director for Dow Chemical Company Limited* 1991-93.  Financial & Statutory Controller 1993-95.  Controller, Dow Europe S.A.* and Finance Director for Dow’s Global Fabricated Products Business 1995-98.  Global Accounting Director 1998-2000.  Vice President and Controller, The Dow Chemical Company 2000 to date.  Director of Dow Credit Corporation;* Dow Financial Holdings, Inc.;* Diamond Capital Management, Inc.;* Dow Hydrocarbons Resources, Inc.;*  Liana Limited* and Dow Global Technologies, Inc.*  Board member, UOP LLC.*  Chairman of the Committee on Corporate Reporting of Financial Executives International and a member of FEI’s Executive Committee.  Member of American Institute of Certified Public Accountants and Texas Society of CPAs.  Member of Accounting Advisory Boards of both Michigan State University and Northwood University.  Director of Wolverine Bank, FSB.  Member of Financial Accounting Standards Board’s Emerging Issues Task Force.

 

RICHARD M. GROSS, 55. DOW CORPORATE VICE PRESIDENT OF RESEARCH AND DEVELOPMENT AND NEW BUSINESS GROWTH. Employee of Dow since 1974.  Research and Development Director, North American Chemicals and Metals/Hydrocarbons 1992-95.  Vice President and Director of Global Core Technologies Research and Development 1995-98.  Vice President and Director of Continental Operations 1995-97.  Vice President and Director of Michigan Operations 1997-98.  Vice President and Director of Research and Development 1998-2001.  Corporate Vice President of Research and Development 2001-2002.  Corporate Vice President of Research & Development and New Business Growth 2002 to date.  Recipient of 1996 Genesis Award for Excellence in People Development.  Member of the Council for Chemical Research serving on the Governing Board Executive Committee as past Chair, Chemical & Engineering News Advisory Board, Michigan Life Sciences Corridor Board, National Institute of Standards & Technology Visiting Committee on Advanced Technology, Advisory Board of the National Science Resources Center, National Research Council’s Board on Chemical Sciences & Technology, Michigan Molecular Institute Board, Advisory Board for the College of Chemistry at the University of California-Berkeley, Engineering National Advisory Council for the University of Utah, and College of Engineering National Advisory Committee for the University of Michigan.

 

DAVID E. KEPLER, 50. DOW CORPORATE VICE PRESIDENT AND CHIEF INFORMATION OFFICER. Employee of Dow since 1975.  Computer Services Manager of Dow U.S.A. Eastern Division 1984-88.  Commercial Director of Dow Canada Performance Products 1989-91.  Director of Pacific Area Information Systems 1991-93.  Manager of Information Technology for Chemicals and Plastics 1993-94.  Director of Global Information Systems Services 1994-95.  Director of Global Information Application 1995-98.  Vice President 1998-2000.  Chief Information Officer 1998 to date.  Corporate Vice President and responsible for eBusiness 2000 to date.  Responsibility for Advanced Electronic Material business 2002 to date. Member of U.S. Chamber of Commerce Board of Directors, the American Chemical Society, and the American Institute of Chemical Engineers.  Leads the Chemicals Sector Cyber-Security Information Sharing Forum.

 

RICHARD L. MANETTA, 58. DOW CORPORATE VICE PRESIDENT AND GENERAL COUNSEL. Employee since 2001. Corporate Vice President and General Counsel 2001 to date.  Ford Motor Company - Assistant General Counsel for Automotive Safety and Product Litigation 1989-94, Assistant General Counsel for Discovery 1994-99, Associate General Counsel for Litigation 1999-2000, Deputy General Counsel & Director of Regulatory Compliance 2000-July 2001.  Member

 

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of the American Bar Association, Michigan State Bar, General Counsel Committee, The National Center for State Courts,

Civil Justice Reform Group, and the Michigan General Counsel Association.  Lifetime member of The Fellows of the Michigan State Bar Foundation.

 

J. PEDRO REINHARD, 57. DOW EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER. DIRECTOR SINCE 1995. Employee of Dow since 1970. Dow Brazil Area Finance Director 1978-81. Dow Europe S.A.* Finance Director 1981-85. Managing Director, Dow Italy 1985-88. Dow Treasurer 1988-96, Vice President 1990-95, Financial Vice President 1995-96, Chief Financial Officer 1995 to date, Executive Vice President 1996 to date. Chairman of the Board of Liana Limited* and Dorinco Reinsurance Company.* Chairman of the Members Committee, Dow AgroSciences LLC.* Director of Dow Corning Corporation* and Royal Bank of Canada and Sigma–Aldrich Corporation. Advisory Board member of America Swiss Re Holding Corporation.  Member of Financial Executives International and The Conference Board’s Council of Financial Executives.

 

FERNANDO RUIZ, 47. DOW VICE PRESIDENT AND TREASURER.  Employee of Dow since 1980.  Treasurer, Ecuador Region 1982-84.  Treasurer, Mexico Region 1984-88.  Financial Operations Manager, Corporate Treasury 1988-91.  Assistant Treasurer, USA Area 1991-92.  Senior Finance Manager, Corporate Treasury 1992-96.  Assistant Treasurer, The Dow Chemical Company 1996-2001.  Corporate Director of Insurance and Risk Management 2001.  President and Chief Executive Officer, Liana Limited* and Dorinco Reinsurance Company* 2001 to date.  Vice President and Treasurer, The Dow Chemical Company, 2001 to date.  President of Dow Credit Corporation* 2001 to date.  Director of Dow Financial Services Inc.* and EQUATE Petrochemical Company K.S.C.*  Member of Financial Executives International and the Midland Economic Development Council.

 

WILLIAM S. STAVROPOULOS, 63. DOW CHAIRMAN, PRESIDENT AND CEO. DIRECTOR SINCE 1990. Employee of Dow since 1967. President, Dow Latin America 1984-85. Dow U.S.A. Commercial Vice President, Basics and Hydrocarbons 1985-87. Group Vice President, Plastics and Hydrocarbons, 1987-90. President, Dow U.S.A. 1990-93. Dow Vice President 1990-91, Senior Vice President 1991-93, Chief Operating Officer 1993-95, President 1993-2000, Chief Executive Officer 1995-2000, Chairman 2000 to date, President and CEO December 2002 to date. Director of BellSouth Corporation, Chemical Financial Corporation, Maersk Inc. and NCR Corporation. Board member of American Enterprise Institute for Public Policy Research, Fordham University, J. P. Morgan International Council and a Trustee of the Fidelity Group of Funds. Member of the University of Notre Dame Advisory Council for the College of Science.

 

TINA S. VAN DAM, 56. DOW CORPORATE SECRETARY. Employee of Dow since 1987.  Assistant Secretary 1993-2001.  Director of the Office of the Corporate Secretary 1996-2001.  Corporate Secretary June 2001 to date.  Senior Managing Counsel, Corporate and Securities Law 2002 to date.  American Society of Corporate Secretaries Director 2001 to date, Executive Steering Committee 2002 to date.  American Arbitration Association Roster of Arbitrators and Mediators 2002 to date.  Chair of the Michigan Commission on Asia in the Schools 2002.  Northwood University’s Distinguished Woman Award 2001.  Mitten Bay Girl Scout Council Woman of Distinction 1996.  Member of the Securities and Exchange Commission Historical Society, Saginaw Valley State University Foundation, American Bar Association, State Bar of Michigan and the Midland County Bar Association.

 

LAWRENCE J. WASHINGTON, JR., 57. DOW CORPORATE VICE PRESIDENT, ENVIRONMENT, HEALTH & SAFETY, HUMAN RESOURCES AND PUBLIC AFFAIRS. Employee of Dow since 1969.  General Manager, Western Division 1987-90.  Vice President, Dow North America, and General Manager of the Michigan Division 1990-94.  Vice President, Human Resources 1994 to date.  Vice President, Environment, Health & Safety and Public Affairs 1997 to date.  Director of Chemical Bank and Trust Company and Liana Limited.* Member of the National Advisory Board for Michigan Technological University and the Advisory Council, College of Engineering and Science, University of Detroit Mercy.

 


* A number of Company entities are referenced in the biographies and are defined as follows.  (Some of these entities have had various names over the years.  The names and relationships to the Company, unless otherwise indicated, are stated in this footnote as they existed as of February 14, 2003.)  EQUATE Petrochemical Company K.S.C. - company ultimately 45 percent owned by Dow.  Cargill Dow LLC; Dow Corning Corporation; DuPont Dow Elastomers L.L.C. and UOP LLC - companies ultimately 50 percent owned by Dow.  Diamond Capital Management, Inc.; Dorinco Reinsurance Company; Dow AgroSciences LLC; Dow Benelux N.V.; Dow Chemical Company Limited; Dow Credit Corporation; Dow Europe S.A.; Dow Financial Holdings, Inc.; Dow Financial Services Inc.; Dow Hydrocarbons and Resources, Inc.; Dow Global Technologies, Inc.; Essex Chemical Corporation; and Liana Limited- all ultimately wholly owned subsidiaries of Dow.  Ownership by Dow described above may be either direct or indirect.

 

16



 

PART II

 

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

The principal market for the Company’s common stock is the New York Stock Exchange. On February 13, 2003, the Board of Directors announced a quarterly dividend of $0.335 per share, payable April 30, 2003, to stockholders of record on March 28, 2003. Since 1912, the Company has paid a dividend every quarter and in each instance Dow has maintained or increased the quarterly dividend. The Company declared dividends of $1.34 per share in 2002, $1.295 per share in 2001 and $1.16 per share in 2000.

 

At February 14, 2003, there were 121,632 registered common stockholders. The Company estimates that there were an additional 300,000 stockholders whose shares were held in nominee names at December 31, 2002.

 

Quarterly market and dividend information can be found in Part II, Item 8 (Financial Statements & Supplementary Data) on page 84.

 

17



 

ITEM 6.  SELECTED FINANCIAL DATA

 

The Dow Chemical Company and Subsidiaries

Five-Year Summary of Selected Financial Data

 

In millions, except as noted    (Unaudited)

 

2002

 

2001

 

2000

 

1999

 

1998

 

Summary of Operations

 

 

 

 

 

 

 

 

 

 

 

Net sales (1)

 

$

27,609

 

$

28,075

 

$

29,798

 

$

26,131

 

$

25,396

 

Cost of sales (1)

 

23,780

 

23,892

 

24,310

 

20,422

 

19,566

 

Research and development expenses

 

1,066

 

1,072

 

1,119

 

1,075

 

1,026

 

Selling, general and administrative expenses

 

1,598

 

1,765

 

1,825

 

1,776

 

1,964

 

Amortization of intangibles

 

65

 

178

 

139

 

160

 

106

 

Purchased in-process research and development charges

 

 

69

 

6

 

6

 

349

 

Special charges and merger-related expenses and restructuring

 

280

 

1,487

 

 

94

 

458

 

Asbestos-related charge

 

828

 

 

 

 

 

Other income

 

94

 

423

 

706

 

424

 

1,166

 

Earnings before interest, income taxes and minority interests

 

86

 

35

 

3,105

 

3,022

 

3,093

 

Interest expense - net

 

708

 

648

 

519

 

432

 

458

 

Income (Loss) before income taxes and minority interests

 

(622

)

(613

)

2,586

 

2,590

 

2,635

 

Provision (Credit) for income taxes

 

(280

)

(228

)

839

 

874

 

902

 

Minority interests’ share in income

 

63

 

32

 

72

 

74

 

20

 

Preferred stock dividends

 

 

 

 

5

 

6

 

Income (Loss) from continuing operations

 

(405

)

(417

)

1,675

 

1,637

 

1,707

 

Cumulative effect of changes in accounting principles

 

67

 

32

 

 

(20

)

 

Net income (loss) available for common stockholders

 

$

(338

)

$

(385

)

$

1,675

 

$

1,617

 

$

1,707

 

Per share data (dollars)

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) before cumulative effect of changes in accounting principles per common share - basic

 

$

(0.44

)

$

(0.46

)

$

1.88

 

$

1.87

 

$

1.92

 

Earnings (Loss) per common share - basic

 

(0.37

)

(0.43

)

1.88

 

1.85

 

1.92

 

Earnings (Loss) before cumulative effect of changes in accounting principles per common share - diluted

 

(0.44

)

(0.46

)

1.85

 

1.84

 

1.89

 

Earnings (Loss) per common share - diluted

 

(0.37

)

(0.43

)

1.85

 

1.82

 

1.89

 

Cash dividends declared per share of common stock

 

1.34

 

1.295

 

1.16

 

1.16

 

1.16

 

Cash dividends paid per share of common stock

 

1.34

 

1.25

 

1.16

 

1.16

 

1.16

 

Book value per share of common stock

 

$

8.36

 

$

11.04

 

$

13.22

 

$

12.40

 

$

11.34

 

Weighted-average common shares outstanding - basic

 

910.5

 

901.8

 

893.2

 

874.9

 

888.1

 

Weighted-average common shares outstanding - diluted

 

910.5

 

901.8

 

904.5

 

893.5

 

904.8

 

Convertible preferred shares outstanding

 

 

 

 

1.3

 

1.4

 

Year-end Financial Position

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

39,562

 

$

35,515

 

$

35,991

 

$

33,456

 

$

31,121

 

Working capital

 

2,825

 

2,183

 

1,150

 

2,848

 

1,570

 

Property - gross

 

37,934

 

35,890

 

34,852

 

33,333

 

32,844

 

Property - net

 

13,797

 

13,579

 

13,711

 

13,011

 

12,628

 

Long-term debt and redeemable preferred stock

 

11,659

 

9,266

 

6,613

 

6,941

 

5,890

 

Total debt

 

13,036

 

10,883

 

9,450

 

8,708

 

8,099

 

Net stockholders’ equity

 

7,626

 

9,993

 

11,840

 

10,940

 

9,878

 

Financial Ratios

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses as percent of net sales (1)

 

3.9

%

3.8

%

3.8

%

4.1

%

4.0

%

Income (Loss) before income taxes and minority interests as percent of net sales (1)

 

(2.3

)%

(2.2

)%

8.7

%

9.9

%

10.4

%

Return on stockholders’ equity (2)

 

(4.4

)%

(3.9

)%

14.1

%

14.7

%

17.2

%

Debt as a percent of total capitalization

 

59.2

%

48.9

%

42.5

%

42.2

%

43.6

%

General

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

1,623

 

$

1,587

 

$

1,808

 

$

2,176

 

$

2,328

 

Depreciation

 

1,680

 

1,595

 

1,554

 

1,516

 

1,559

 

Salaries and wages paid

 

3,202

 

3,215

 

3,395

 

3,536

 

3,579

 

Cost of employee benefits

 

611

 

540

 

486

 

653

 

798

 

Number of employees at year-end (thousands)

 

50.0

 

52.7

 

53.3

 

51.0

 

50.7

 

Number of Dow stockholders of record at year-end (thousands)(3)

 

122.5

 

125.1

 

87.9

 

87.7

 

93.0

 

 

(1)   Adjusted for reclassification of freight on sales in 2000 and insurance operations in 2002.

(2)   Included Temporary Equity in 1998-1999.

(3)   Stockholders of record as reported by the transfer agent. The Company estimates that there were an additional 300,000 stockholders whose shares were held in nominee names at December 31, 2002.

 

18



 

The Dow Chemical Company and Subsidiaries

Item 7. Management’s Discussion and Analysis of Financial Condition

and Results of Operations

 

FORWARD-LOOKING INFORMATION

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of The Dow Chemical Company and its subsidiaries (“Dow” or the “Company”). This section covers the current performance and outlook of the Company and each of its operating segments. The forward-looking statements contained in this section and in other parts of this document involve risks and uncertainties that may affect the Company’s operations, markets, products, services, prices and other factors as more fully discussed elsewhere and in filings with the U.S. Securities and Exchange Commission (“SEC”). These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental and technological factors. Accordingly, there is no assurance that the Company’s expectations will be realized. The Company assumes no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws.

 

INTRODUCTORY NOTES TO READERS

The accompanying consolidated financial statements of The Dow Chemical Company and its subsidiaries give retroactive effect to the Union Carbide merger, which was completed on February 6, 2001, and accounted for as a pooling of interests. Accordingly, the consolidated financial statements include the combined accounts of the two companies for all periods presented. See Note C to the Consolidated Financial Statements for additional information.

 

Prior to this annual report, the net results of the Company’s insurance operations were presented on a separate line entitled “Insurance company operations, pretax income” on the income statement. The consolidated financial statements in this annual report reflect a reclassification of these results to “Net sales” and “Cost of sales” for all periods presented.

 

RESULTS OF OPERATIONS

The year 2002 was a difficult year for the chemical industry and Dow. Neither the general economy nor industry fundamentals offered much relief from the difficult conditions the Company faced in 2001. On the positive side, the Company completed the integration of Union Carbide and other recent acquisitions, including Ascot Plc (“Ascot”), Rohm and Haas’ agricultural chemicals business, the remaining 50 percent of Gurit-Essex AG (“Gurit-Essex”), and EniChem’s polyurethanes business. With the Union Carbide integration alone, the Company achieved cost synergies of $1.2 billion, exceeding its ambitious targets.

 

Dow’s sales for 2002 were $27.6 billion, compared with $28.1 billion in 2001 and $29.8 billion in 2000. Sales declined slightly in 2002 as selling prices fell 6 percent and volume increased 4 percent (see Sales Price and Volume table on page 25). Prices were lower in all operating segments and across all geographic areas, reflecting the difficult economic environment. Volume growth was strongest in Asia Pacific and Latin America, with Plastics showing the greatest improvement in both regions. Volume also improved in Europe, aided by the acquisitions in mid-2001 of Ascot, EniChem’s polyurethanes business, and Rohm and Haas’ agricultural chemicals business. Volume declined in the United States, principally in Performance Plastics and Performance Chemicals. Excluding the impact of the 2001 acquisitions, overall volume improved 3 percent in 2002.

 

Sales in the United States accounted for 41 percent of total sales in 2002, compared with 43 percent in 2001 and 44 percent in 2000. Sales and other information by operating segment and geographic area are provided in Note T to the Consolidated Financial Statements.

 

The Company expects 2003 to be another challenging year. The global economy is expected to improve gradually, with global GDP increasing 2 to 2.5 percent. The Company expects some improvement in most regions of the world. However, with the extreme volatility in feedstock and energy prices caused by geopolitical factors, the Company expects its raw material costs to be substantially higher, at least for the first half of the year. To mitigate the effects of the challenging environment, the Company has announced plans to control discretionary spending, reduce capital expenditures, and sell or shut down non-strategic or under-performing assets in order to improve overall financial performance.

 

SEGMENT RESULTS

The Company uses “Earnings before Interest, Income Taxes and Minority Interests” (“EBIT”) as its measure of profit/loss for segment reporting purposes. The reconciliation between EBIT and “Income (Loss) before Income Taxes and Minority Interests” is shown below:

 

In millions

 

2002

 

2001

 

2000

 

EBIT

 

$

86

 

$

35

 

$

3,105

 

Interest income

 

66

 

85

 

146

 

Interest expense and amortization of debt discount

 

774

 

733

 

665

 

Income (Loss) before Income Taxes and Minority Interests

 

$

(622

)

$

(613

)

$

2,586

 

 

19



 

PERFORMANCE PLASTICS

Performance Plastics sales decreased 3 percent to $7.1 billion in 2002, compared with $7.3 billion in 2001. Sales were $7.7 billion in 2000. Volume increased 3 percent over 2001, while prices decreased 6 percent. Excluding 2001 acquisitions, volume in 2002 was up just 1 percent, reflecting weak industry demand in many of the segment’s businesses. Sales in 2001 reflected a 1 percent volume decline while prices decreased 4 percent versus 2000.

 

EBIT for the segment was $612 million in 2002, compared with $643 million in 2001 and $1.0 billion in 2000. EBIT in 2002 decreased as the impact of continued competitive price pressure more than offset the realization of acquisition-related cost synergies and lower feedstock costs. EBIT in 2002 also included the impact of a $10 million restructuring charge (Dow’s share) recorded by UOP LLC, a joint venture between Union Carbide and Honeywell International Inc., in the second quarter. EBIT in 2001 decreased from 2000 due to soft demand and lower prices. Results for 2000 included an unusual charge of $31 million recorded by UOP LLC, related primarily to losses associated with certain customer contracts coupled with restructuring charges.

 

Dow Automotive sales were up 1 percent versus 2001. Prices declined 2 percent in 2002 due to an intensely competitive environment within the automotive industry. Volume was up 3 percent as Dow Automotive continued to expand its new product offerings, including the start-up of a parts manufacturing facility in Brazil. EBIT increased as a result of improved margins from higher-value products and the realization of cost synergies related to the acquisition of the remaining 50 percent interest in Gurit-Essex in 2001.

 

Engineering Plastics sales were down 14 percent compared with 2001. Prices declined 15 percent, as low industry operating rates caused competitive price reductions. Sales of polycarbonate to Asia Pacific declined in 2002, as LG Dow Polycarbonate Ltd., a 50:50 joint venture with LG Chemical Ltd., now sources customers in that region. Sales volume was also impacted as Dow exited its nylon alliance with Solutia Inc. Despite these changes, volume was up 1 percent. During 2002, Dow successfully completed the start-up of a new ABS manufacturing facility in Terneuzen, The Netherlands. EBIT in 2002 was down, reflecting the dramatic drop in prices.

 

Epoxy Products and Intermediates sales decreased 7 percent compared with 2001. Volume was flat to 2001, as the electronics industry in Asia Pacific failed to recover from the dramatic market decline in 2001. Intense competitive activity continued, resulting in a 7 percent price decline. As a result, Dow temporarily idled one of its epichlorohydrin manufacturing plants in Freeport, Texas, in 2002. Despite the decline in sales, EBIT improved due primarily to cost reductions and lower feedstock costs.

 

Fabricated Products sales increased 2 percent in 2002. Volume was up 4 percent compared with last year reflecting the first full year of sales of polyisocyanurate insulation products acquired in the third quarter of 2001 from Celotex Corporation. Excluding the addition of these products, volume declined 3 percent due to weakness in the electronics packaging and fiber optic telecommunications industries. Dow experienced strong sales growth in China and Russia in 2002, as construction and infrastructure spending increased. Prices decreased 2 percent, predominantly due to industry overcapacity for engineered films and laminates. Capacity optimization improved late in 2002 with the addition of a new production facility for STYROFOAM insulation in Estarreja, Portugal. EBIT was lower in 2002, reflecting the impact of lower selling prices and higher raw material costs.

 

Technology Licensing and Catalyst sales were down 8 percent from 2001 due to reduced volume. Reduced production rates among polyethylene and polypropylene licensees lowered catalyst sales and royalties. While ethylene oxide/ethylene glycol (“EO/EG”) technology licensing was also slow, EO/EG catalyst sales were robust due to the start-up of new facilities in Malaysia in 2002. EBIT in 2002 was lower due to reduced volumes.

 

Polyurethanes sales were up 1 percent versus last year. Volume increased 6 percent reflecting the acquisition of EniChem’s polyurethanes business in April 2001. Excluding this acquisition, volume increased 3 percent, led by growth within polyurethanes systems. Compared with last year, prices declined 5 percent, hitting ten-year lows in the first half of the year for several product lines. Prices began to recover in the second half of the year. EBIT in 2002 declined due to lower selling prices and increased raw material costs.

 

Wire and Cable sales in 2002 were down 17 percent as demand from the telecommunications industry dropped 30 percent versus 2001. Prices were stable in 2002, but EBIT declined due to lower volumes.

 

Performance Plastics Outlook for 2003

The Performance Plastics segment expects some improvement in 2003 market conditions, resulting in an increase in sales from 2002. Competition is expected to remain aggressive while industry capacity utilization remains low, but prices are not expected to return to the low levels of 2002. Profitability is expected to improve with increased focus on higher-margin products and cost control initiatives.

 

20



 

Dow Automotive anticipates that the continued launch of new product offerings will result in expanded market participation. Engineering Plastics expects price competition to continue as competitors aggressively invest in Asia Pacific. Volume is expected to grow due to ABS capacity added in 2002 in Terneuzen, The Netherlands.

 

Epoxy Products and Intermediates anticipates improved sales, as volumes are expected to return to long-term trend line growth rates with higher volumes in Asia Pacific due to some improvement in the electronics industry from its low 2002 levels. Prices are expected to remain highly competitive due to industry oversupply. Start-up of a new epoxy resin manufacturing facility in Zhangjiagang, The People’s Republic of China, is scheduled for the second quarter of 2003.

 

Fabricated Products expects volume growth in the building materials industry. The Technology Licensing and Catalyst business expects the competitive environment for polypropylene catalysts to continue in 2003, since new suppliers have entered the market with competitive offerings using technologies from recently expired patents.

 

Polyurethanes’ results are expected to improve from very difficult industry conditions in 2001 and 2002. Dow announced several strategic actions designed to improve profitability, including a review of manufacturing assets, initiatives to reduce operating costs and an increased emphasis on accelerating growth for higher-margin new products. The business also expects continued growth of polyurethanes systems into new emerging geographic markets.

 

PERFORMANCE CHEMICALS

Performance Chemicals sales were $5.1 billion in 2002 and 2001, and $5.3 billion in 2000. Prices declined 2 percent versus last year due to weak economic conditions, while volume increased 3 percent. The increase in volume was primarily due to the acquisition of Ascot in the second quarter of 2001 and stronger sales of emulsion polymers into the coated paper and carpet industries. Volume grew in Europe and Asia Pacific, partially offset by declines in North America. Sales in 2001 declined from 2000 due to divestitures of businesses required for regulatory approval of the Union Carbide merger and softening demand in the automotive, steel, and pulp and paper industries.

 

EBIT in 2002 was $650 million versus $611 million in 2001 and $536 million in 2000. The improvement in EBIT in 2002 reflects the combined impact of higher sales volume, cost synergies from the Union Carbide merger and the Ascot acquisition, and a continued focus on productivity improvements. EBIT in 2001 increased from 2000 due to price increases, lower feedstock and energy costs, realization of cost synergies from recent acquisitions, and productivity improvements.

 

Custom and Fine Chemicals sales increased 25 percent compared with 2001 due to the acquisition of Ascot in the second quarter of 2001. EBIT improved in 2002 due to an increase in volume and the realization of cost synergies associated with the acquisition of Ascot.

 

Emulsion Polymers increased sales 7 percent versus last year. Volume, up in all geographic areas, increased 11 percent. This volume improvement was driven by stronger demand for coated paper and the acquisition of the carpet and paper latex businesses of Reichhold, Inc.  Prices declined 4 percent due to competitive pressures in North America and Europe. Price increases implemented late in 2002 restored margins back to the levels of the fourth quarter of 2001. Despite the increase in sales, EBIT in 2002 declined due to higher styrene monomer costs.

 

Industrial Chemicals sales were down 6 percent compared with 2001. Both volume and prices declined 3 percent due to competitive pressures in polyglycols and surfactants and weaker demand in the heavy industrial markets. EBIT in 2002 declined slightly versus 2001, as the decline in prices and volume offset the realization of merger-related cost synergies and the impact of productivity improvements.

 

Oxide Derivatives sales were down 4 percent in 2002 compared with 2001. Volume declined 3 percent due to the divestiture of certain businesses related to the Union Carbide merger in mid-2001 and a decision to eliminate lower-margin business in North America and Europe. Prices declined 1 percent. Despite lower sales, EBIT increased substantially in 2002 due to the realization of merger-related cost synergies and savings achieved through a continued focus on productivity.

 

Specialty Polymers sales were down 1 percent versus last year, as prices declined 2 percent, offset by a 1 percent improvement in volume. Prices declined due to excess global industry capacity in acrylic acid, which created a difficult, competitive environment. EBIT declined in 2002, as margins were compressed due to lower selling prices.

 

UCAR Emulsion Systems (“UES”) sales were down slightly versus last year, as a 2 percent decline in prices was partially offset by a 1 percent increase in volume. EBIT improved in 2002 due to the combined favorable impact of higher volume and the realization of merger-related cost synergies.

 

Water Soluble Polymers sales were up 1 percent versus 2001 due to increased demand in the construction industry driven by lower interest rates. Prices were relatively flat versus 2001. EBIT improved in 2002 due to higher volume, the realization of merger-related cost synergies and improved manufacturing operations.

 

21



 

Performance Chemicals Outlook for 2003

Performance Chemicals anticipates improving demand in selected markets. Sales volume is expected to grow through continued integration of recent acquisitions and net capacity additions at a number of Dow facilities. Prices are also expected to improve slightly as supply/demand balances tighten in several businesses. EBIT is expected to improve in 2003 due to the continued realization of cost synergies from recent acquisitions, cost reductions, productivity improvements, and asset and supply chain optimization. Production facilities will be temporarily idled in Edison, New Jersey, by Amerchol Corporation, a wholly owned subsidiary of Dow, and by UES in Bayamon, Puerto Rico, in early 2003. Customers will be supplied from other facilities.

 

Capacity for METHOCEL cellulose ethers and styrene-butadiene latex will start up in Stade, Germany, and Terneuzen, The Netherlands, respectively, to meet growing demand. Custom and Fine Chemicals will complete the construction of a new facility in Midland, Michigan, to manufacture oligonucleotides, a new class of breakthrough pharmaceutical therapeutics.

 

AGRICULTURAL SCIENCES

Agricultural Sciences sales were $2.7 billion in 2002, compared with $2.6 billion in 2001 and $2.3 billion in 2000. Volume increased 6 percent versus 2001, while prices declined 2 percent. The addition of Rohm and Haas’ agricultural chemicals business, acquired in June of 2001, was the key driver behind the 2002 volume increase. Excluding the impact of this acquisition, volume declined 2 percent. Volume growth in 2002 was hampered by drought and reduced demand for insecticides in key geographic areas. The competitive environment remained challenging in 2002 with continued industry consolidation and an increasing presence of generic products. Sales in 2001 improved versus 2000, as a 15 percent increase in volume, primarily due to acquisitions, was partially offset by a 4 percent decline in prices.

 

EBIT in 2002 was $154 million versus $104 million in 2001 and $212 million in 2000. There was a strong focus on cost reductions to improve profitability in 2002. These improvements, however, were offset by seed plant write-offs, the impact of a new import tax and currency weakness in Argentina, and severance of $5 million related to a workforce reduction program. EBIT in 2001 was reduced by a $69 million charge for purchased in-process research and development (“IPR&D”) associated with the Rohm and Haas acquisition (See Note B to the Consolidated Financial Statements). EBIT in 2001 included the impact of goodwill amortization of $72 million; goodwill amortization in 2000 was $54 million. The Company ceased amortizing goodwill upon adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” on January 1, 2002 (see Notes A, F and T to the Consolidated Financial Statements).

 

Agricultural Sciences Outlook for 2003

Agricultural Sciences sales for 2003 are expected to increase, with improvements in both price and volume. The agricultural chemicals industry is expected to stabilize from the decline experienced in recent years. The trend toward genetically modified crop plantings will continue to transform the demand for insecticides and selective herbicides to biotechnology-derived products. In the near term, this trend will result in continued pressure on the Company’s traditional agricultural chemicals business. Growth is anticipated through line extensions of spinosad insect control products and florasulam, a post emergent broadleaf cereal herbicide that provides outstanding control of a wide spectrum of broadleaf weeds. In 2003, Dow AgroSciences expects to launch HERCULEX I insect protection, a genetically engineered trait in corn that provides resistance to certain insects. Japanese regulatory agencies approved HERCULEX I for full food and feed use in 2002.

 

PLASTICS

Sales for the Plastics segment were $6.5 billion in 2002 and 2001, and $7.1 billion in 2000. Prices declined 8 percent in 2002 compared with 2001, while volume increased 8 percent. The significant erosion of selling prices during the second half of 2001 continued through the first quarter of 2002 before improving. Volume increased 12 percent during the first half of the year compared with 2001; however, demand growth slowed during the second half of the year. Sales in 2001 were down 9 percent from 2000, as prices declined 10 percent and volume improved 1 percent.

 

EBIT for the year was $151 million, up from $125 million in 2001. EBIT in 2002 improved as increased volume and lower feedstock and energy costs more than offset the impact of lower selling prices. Also contributing to the improvement in EBIT was the continued realization of merger-related cost synergies, the impact of productivity improvements, and higher equity earnings. Equity earnings were up 20 percent, primarily due to improved earnings from DuPont Dow Elastomers L.L.C., despite a restructuring charge of $8 million (Dow’s share). EBIT in 2002 includes a $20 million write-down of

 

22



 

ethylene styrene interpolymers market development assets located in Sarnia, Ontario, Canada. EBIT in 2001 was down sharply from $945 million in 2000, due to significantly lower selling prices and equity earnings.

 

Polyethylene sales decreased 4 percent in 2002, as a decline in prices exceeded volume growth. Prices were down 11 percent in 2002, with significant declines reported in all geographic areas. Early in the year, prices continued the decline that began in 2001. Prices improved during the middle of the year but moved lower at year-end. Certain production capacity remained idle during the year due to low margins. Volume grew 7 percent versus 2001 with significant increases for most products in Latin America and Asia Pacific. AFFINITY polyolefin plastomers and Saran resins both saw significant volume growth during the year. EBIT for the business was flat compared with 2001, as the significant decline in selling prices offset the favorable impact of lower feedstock and energy costs, productivity improvements, and the continued realization of merger-related cost synergies.

 

Polypropylene sales increased 25 percent in 2002, as volume increased 21 percent and prices increased 4 percent. Increased demand was met with capacity that started up at the end of 2000 and a polypropylene plant purchased from Basell in 2001. Demand for INSPIRE performance polymers, introduced in mid-2000, continued to grow at a strong pace. EBIT improved significantly from 2001 due to strong volume, improved prices and the realization of merger-related cost synergies.

 

Polystyrene sales grew 8 percent during 2002. Volume increased 11 percent, returning volume to levels above those experienced in 2000. Prices declined 3 percent in 2002, reaching historically low levels in the first quarter of 2002. Increased demand and tight styrene monomer supply moved prices upward in the second half of the year, though margins remained under pressure. EBIT declined significantly in 2002 due to lower prices and higher feedstock costs.

 

Plastics Outlook for 2003

Anticipated increases in feedstock and energy costs in 2003 and continued low operating rates will make 2003 another challenging year for Plastics.

 

Polyethylene volumes are expected to increase in most geographic areas, with improvements in price driven by increases in feedstock costs. The anticipated start-up of a new polyethylene production facility in Terneuzen, The Netherlands, will better position Dow to serve customers in Europe. New industry capacity in the Middle East will impact markets in Asia Pacific and keep capacity utilization rates under pressure.

 

Polypropylene volume is expected to decline in 2003 primarily due to the temporary shutdown of Dow manufacturing facilities in Germany for required maintenance. New capacity within the industry is expected to start up in the first half of 2003, keeping supply and demand balanced in spite of expected demand growth.

 

New styrene capacity starting up in 2003 in Europe is not expected to match the anticipated increase in demand, which should result in higher global styrene operating rates and some improvement in polystyrene profitability. In October 2002, Styron Asia Limited, a joint venture between Dow and Asahi Kasei, began operations in Zhangjiagang, The People’s Republic of China. Polystyrene expects improvement in equity earnings, resulting from a full year of operations at Styron Asia Limited.

 

CHEMICALS

Chemicals sales were $3.4 billion in 2002, compared with $3.6 billion in 2001 and $4.1 billion in 2000. Prices decreased 11 percent versus 2001, primarily due to decreases in organic intermediates, solvents and monomers (“OISM”), caustic soda, and chloromethanes, somewhat offset by higher vinyl chloride monomer (“VCM”) and ethylene dichloride (“EDC”) prices. Volume was up 6 percent from 2001, with increases in ethylene glycol (“EG”), chlorinated organics and VCM. In 2001, prices declined 5 percent and volumes declined 9 percent versus 2000.

 

EBIT was a loss of $78 million in 2002, down from income of $111 million in 2001, principally due to declining prices that were only partially offset by lower feedstock and energy costs. EBIT was also impacted by costs related to the start-up of new VCM facilities in Freeport, Texas, and chlor-alkali facilities in Stade, Germany; and a $13 million charge for the write-down of assets related to the shutdown of a chlor-alkali facility in Fort Saskatchewan, Alberta, Canada. EBIT in 2001 was down from $422 million in 2000, principally due to declining prices and volumes.

 

VCM pricing in the fourth quarter of 2002 increased over 60 percent from the trough-level prices of the fourth quarter of 2001, due to favorable polyvinyl chloride (“PVC”) supply/demand balances in North America and Europe. Industry demand for PVC, the largest end-use product for VCM, was 6 percent higher in North America in 2002 versus 2001. During the first half of 2002, caustic soda pricing continued the decline that began in the second half of 2001. Prices began to improve in the second half of 2002. Caustic soda volume in 2002 was up 4 percent compared with 2001. Additional chlor-alkali capacity was brought on-line in 2002 in Stade, Germany, while older capacity in Plaquemine, Louisiana, and Fort Saskatchewan,

 

23



 

Alberta, Canada, was idled. Late in 2002, the Company made the decision to permanently shut down the chlor-alkali facility at Fort Saskatchewan in early 2003, resulting in a charge of $13 million for the write-down of the assets. A VCM manufacturing unit in Freeport, Texas, was restarted after a 40 percent expansion project.

 

EG prices were down in 2002, compared with 2001, while volume was up. During 2002, a plant in Louisiana was idled for the full year, and a plant in Prentiss, Alberta, Canada, was idled for two months due to slow demand. In the second half of 2002, demand began to recover and some upward price movement was achieved.

 

OISM prices declined in 2002 while volume increased. OISM continued to operate in a highly competitive market. Industry oversupply of oxo alcohols weakened prices in 2002. Global demand for vinyl acetate monomers remained weak.

 

Chemicals Outlook for 2003

Caustic soda pricing is expected to continue improving as a result of global production shutdowns within the industry, improvement in underlying demand and higher energy costs. Global chlor-alkali industry operating rates are expected to significantly improve due to recent plant shutdowns combined with no planned capacity expansions through 2005. However, increased energy costs, and the resulting compressed margins, are expected in early 2003.

 

PVC demand is expected to improve slightly in 2003, reflecting the anticipated gradual economic recovery in North America and Europe. VCM prices are expected to recover in the first half of 2003 with increased activity in the construction industry, the largest end-user of PVC.

 

Both price and volume for EG are expected to improve in 2003, as the supply/demand balance begins to tighten. Polyethylene terephthalate (“PET”) and polyester, two major end-uses of EG, are expected to recover to historical market growth rates after two years of growth significantly below the trend line. New EG capacity was started up in 2002 by OPTIMAL Glycols (Malaysia) Sdn Bhd, Union Carbide’s joint venture in Malaysia. No significant industry capacity for ethylene oxide or ethylene glycol is expected to be added until late 2004.

 

OISM volume is expected to slowly trend upward during 2003, as some improvement in global market conditions is anticipated. Prices are also expected to rise in the first half of 2003, driven by higher hydrocarbon and energy costs. Equity earnings are expected to improve in 2003 following the start-up of new butanol and butyl acetate capacity in 2002 by Union Carbide’s joint venture in Malaysia.

 

HYDROCARBONS AND ENERGY

Hydrocarbons and Energy sales were $2.4 billion in 2002, compared with $2.5 billion in 2001 and $2.6 billion in 2000. Prices decreased 7 percent while volume grew 4 percent versus last year. In 2001, this segment experienced a 14 percent decrease in prices and a 10 percent increase in volume versus 2000.

 

The Hydrocarbons and Energy business transfers materials to Dow’s derivative businesses at cost. EBIT was income of $96 million in 2002 versus a loss of $22 million in 2001 and income of $136 million in 2000. EBIT in 2002 included a gain of $63 million on the sale of the Company’s share in the Oasis Pipe Line Company, and a loss of $44 million reflecting the impairment of the ethylene production facility in Texas City, Texas, which will be shut down in the first half of 2003. EBIT in 2000 included a gain of $98 million on the sale of the Cochin pipeline system (see Note C to the Consolidated Financial Statements).

 

Compared with 2001, the Company’s cost of purchased feedstocks and energy in 2002 decreased approximately $850 million, or 10 percent, due to price, led by significant declines in feedstock and natural gas costs in North America. This decline primarily impacted the ethylene-based businesses within Dow. Monomer costs for styrene- and propylene-based businesses were generally higher in 2002 than in 2001. While there was substantial price volatility during the year, on average for 2002, crude oil prices were 45 cents per barrel above 2001 levels. Oil-based feedstocks hit a low point in the first quarter of 2002 as crude oil prices averaged $21.10 per barrel and rose to an average of $26.90 per barrel for the third and fourth quarters. North American natural gas prices started the year below $2.50 per million Btu and ended the fourth quarter at over $4.00 per million Btu.

 

Major expansions in ethylene and cumene began operating in 2002 at the Company’s site in Terneuzen, The Netherlands.

 

24



 

Hydrocarbons and Energy Outlook for 2003

Crude oil and feedstock prices are expected to be very volatile during the year, particularly in the first half of the year, with the full year up from 2002 levels. Natural gas prices in North America are also expected to be very volatile and average above 2002 levels, thereby increasing Dow’s overall energy costs for 2003. Monomer prices are expected to respond to underlying feedstock costs in the first part of the year, tempered by continuing weak demand. Price movement in the second half of the year will largely depend on the pace of the global economic recovery.

 

In addition to the shutdown of Union Carbide’s ethylene production facility in Texas City, Texas, in the first half of 2003, the Company announced in late January 2003 that it plans to shut down Union Carbide’s Seadrift, Texas, ethylene facilities by year-end 2003. The shutdown of this plant is expected to have an immaterial impact on the Company’s results of operations.

 

UNALLOCATED AND OTHER

Sales were $395 million in 2002, compared with $546 million in 2001 and $589 million in 2000. Sales in 2002 were down primarily due to divestitures of Sentrachem businesses in 2001 and lower revenue from insurance operations. Sales in 2001 were down versus 2000 due to two small divestitures of Sentrachem businesses.

 

Included in the results for Unallocated and Other are:

                  expenses related to new business development activities,

                  overhead and cost recovery variances not allocated to the operating segments,

                  results of insurance operations,

                  gains and losses on sales of financial assets,

                  foreign exchange hedging results,

                  Dow’s share of the earnings/losses of Dow Corning Corporation (“Dow Corning”) and Cargill Dow Polymers LLC, and

                  the results of several small diversified businesses acquired in Dow’s acquisition of Sentrachem Limited.

 

EBIT was a loss of $1.5 billion in 2002 and 2001, and a loss of $175 million in 2000. Results for 2002 were negatively impacted by several unusual items, including an asbestos-related charge of $828 million, merger-related integration costs of $41 million, additional merger-related severance of $66 million, restructuring severance of $37 million, and the write-down of Sentrachem assets of $54 million (see Note B to the Consolidated Financial Statements). Results for 2002 were also negatively impacted by Dow’s share of Cargill Dow Polymers LLC losses and lower results from insurance operations. EBIT in 2001 was negatively impacted by several unusual items: a special charge of $1.5 billion for costs related to the Union Carbide merger (see Note B to the Consolidated Financial Statements); Dow’s $11 million share of a restructuring charge recorded by Dow Corning, which reduced equity earnings; and an $11 million reinsurance loss on the World Trade Center (reflected in “Cost of sales”); offset by a $266 million gain on the sale of stock in Schlumberger Ltd. (reflected in “Sundry income – net”).

 

Sales Price and Volume

 

 

2002

 

2001

 

2000

 

Percent change from prior year

 

Price

 

Volume

 

Total

 

Price

 

Volume

 

Total

 

Price

 

Volume

 

Total

 

Operating Segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Plastics

 

(6

)%

3

%

(3

)%

(4

)%

(1

)%

(5

)%

1

%

8

%

9

%

Performance Chemicals

 

(2

)

3

 

1

 

1

 

(6

)

(5

)

 

6

 

6

 

Agricultural Sciences

 

(2

)

6

 

4

 

(4

)

15

 

11

 

(4

)

5

 

1

 

Plastics

 

(8

)

8

 

 

(10

)

1

 

(9

)

15

 

8

 

23

 

Chemicals

 

(11

)

6

 

(5

)

(5

)

(9

)

(14

)

18

 

(4

)

14

 

Hydrocarbons and Energy

 

(7

)

4

 

(3

)

(14

)

10

 

(4

)

46

 

6

 

52

 

Total

 

(6

)%

4

%

(2

)%

(6

)%

 

(6

)%

9

%

5

%

14

%

Geographic Areas:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

(4

)%

(2

)%

(6

)%

(3

)%

(5

)%

(8

)%

9

%

3

%

12

%

Europe

 

(4

)

8

 

4

 

(8

)

10

 

2

 

8

 

6

 

14

 

Rest of World

 

(11

)

10

 

(1

)

(8

)

(2

)

(10

)

11

 

7

 

18

 

Total

 

(6

)%

4

%

(2

)%

(6

)%

 

(6

)%

9

%

5

%

14

%

Price includes the impact of currency.

 

25



 

COMPANY SUMMARY

 

Earnings before Interest, Income Taxes and Minority Interests (“EBIT”)

EBIT for the Company was $86 million in 2002, compared with $35 million in 2001 and $3.1 billion in 2000. In 2002, selling prices declined $1.7 billion, exceeding the favorable impact of lower feedstock and energy costs of approximately $850 million and the realization of merger- and acquisition-related cost synergies. EBIT for the year was further reduced by the net impact of several unusual items: integration costs of $41 million and additional severance of $66 million related to the Union Carbide merger; severance of $5 million related to a workforce reduction program at Dow AgroSciences; asset write-downs and impairments of $131 million and severance of $37 million related to restructuring activities undertaken late in the year, following the appointment of a new President and CEO (see Note B to the Consolidated Financial Statements for additional information regarding the preceding charges and Note T to the Consolidated Financial Statements for the impact of these charges by operating segment); a charge of $828 million for asbestos-related expenses, reflected in Unallocated and Other (see Asbestos-Related Matters of Union Carbide Corporation); Dow’s $10 million share of a restructuring charge recorded by UOP LLC (reflected in “Equity in earnings of nonconsolidated affiliates” in the Performance Plastics segment); Dow’s $8 million share of a restructuring charge recorded by DuPont Dow Elastomers L.L.C. (reflected in “Equity in earnings of nonconsolidated affiliates” in the Plastics segment); goodwill impairment losses of $16 million related to investments in nonconsolidated affiliates (reflected in “Equity in earnings of nonconsolidated affiliates” in Unallocated and Other); and a $63 million gain on the sale of Oasis Pipe Line Company in the fourth quarter (reflected in “Sundry income — net” in the Hydrocarbons and Energy segment).

 

EBIT for 2001 declined as the favorable impact of lower feedstock and energy costs of approximately $750 million was more than offset by the negative impact of lower selling prices of $1.6 billion and lower equity earnings from joint ventures around the world. EBIT was further reduced in 2001 by the net impact of several unusual items: merger-related expenses and restructuring totaling $1.5 billion related to the Union Carbide merger, reflected in Unallocated and Other (see Note B to the Consolidated Financial Statements); a charge for IPR&D of $69 million associated with the acquisition of Rohm and Haas’ agricultural chemicals business, reflected in the Agricultural Sciences segment (see Note C to the Consolidated Financial Statements); an $11 million reinsurance loss on the World Trade Center (reflected in “Cost of sales” in Unallocated and Other); Dow’s $11 million share of a restructuring charge recorded by Dow Corning (reflected in “Equity in earnings of nonconsolidated affiliates” in Unallocated and Other); and a $266 million gain on the sale of stock in Schlumberger Ltd. (reflected in “Sundry income — net” in Unallocated and Other). EBIT in 2001 included the impact of goodwill amortization of $141 million. The Company ceased amortizing goodwill upon adoption of SFAS No. 142 on January 1, 2002 (see Notes A, F and T to the Consolidated Financial Statements).

 

EBIT in 2000 was reduced $20 million by the net impact of several unusual items. These items included a gain of $98 million on the sale of the Cochin pipeline system (reflected in “Sundry income — net” in the Hydrocarbons and Energy segment), offset by IPR&D costs of $6 million in the Performance Plastics segment related to the acquisition of Flexible Products, recognition of the anticipated $81 million loss on the disposition of certain businesses required for regulatory approval of the Union Carbide merger (reflected in “Sundry income — net” in Unallocated and Other), and a nonrecurring charge of $31 million from UOP related primarily to losses associated with certain customer contracts coupled with restructuring charges (reflected in “Equity in earnings of nonconsolidated affiliates” in the Performance Plastics segment). EBIT in 2000 included the impact of goodwill amortization of $114 million.

 

Gross margin for 2002 decreased $354 million versus 2001, as a $1.7 billion decline in selling prices more than offset the favorable impact of lower feedstock and energy costs of approximately $850 million. Higher volume, cost control efforts and the realization of merger- and acquisition-related cost synergies reduced the negative impact of this margin compression. Gross margin for 2001 decreased $1.3 billion compared with 2000. While feedstock and energy costs in 2001 were down approximately $750 million versus 2000, selling prices fell $1.6 billion, drastically compressing margins. Gross margin in 2001 was also negatively impacted by lower operating rates.

 

Dow’s global plant operating rate for its chemicals and plastics businesses was 78 percent of capacity in 2002, compared with 76 percent in 2001 and 86 percent in 2000. The lower operating rates of the past two years reflect reduced run rates at several of the Company’s plants in an effort to manage inventory levels. Depreciation expense was $1,680 million in 2002, compared with $1,595 million in 2001 and $1,554 million in 2000.

 

Operating expenses (research and development, and selling, general and administrative expenses) totaled $2,664 million in 2002, down 6 percent from $2,837 million in 2001, and down almost 10 percent from $2,944 million in 2000, due to continued cost control efforts and the realization of merger- and acquisition-related cost synergies.

 

Research and development (“R&D”) expenses were $1,066 million in 2002, compared with $1,072 million in 2001 and $1,119 million in 2000. R&D expenses declined over the past two years as merger-related cost synergies were realized and spending on growth initiatives was intensely focused on those opportunities with the greatest potential for value creation.

 

26



 

Selling, general and administrative (“SG&A”) expenses were $1,598 million in 2002, down from $1,765 million in 2001 and $1,825 million in 2000. SG&A expenses represented 6 percent of sales in all three years.

 

The following table illustrates the relative size of the primary components of total production costs and operating expenses of Dow. More information about each of these components can be found in other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations, Notes to the Consolidated Financial Statements, and Eleven-Year Summary of Selected Financial Data.

 

Production Costs and Operating Expenses

Cost components as a percent of total

 

2002

 

2001

 

2000

 

Hydrocarbons and energy

 

29

%

31

%

34

%

Salaries, wages and employee benefits

 

14

 

13

 

14

 

Maintenance

 

4

 

4

 

4

 

Depreciation

 

6

 

6

 

6

 

Merger-related expenses and restructuring, IPR&D and asbestos-related charge

 

4

 

5

 

 

Supplies, services and other raw materials

 

43

 

41

 

42

 

Total

 

100

%

100

%

100

%

 

During 2001, the Company completed the appraisal of the technology acquired with the purchase of Rohm and Haas’ agricultural chemicals business and recorded an IPR&D charge of $69 million in the Agricultural Sciences segment. See Notes B and C to the Consolidated Financial Statements for further details regarding the acquisition and IPR&D charge.

 

During 2002, the Company recorded one-time merger and integration costs of $41 million and additional merger-related severance of $66 million. “Merger-related expenses and restructuring” also included the following charges in 2002: severance of $5 million related to a workforce reduction at Dow AgroSciences; and asset write-downs and impairments of $131 million and severance of $37 million related to restructuring activities undertaken by the Company following the appointment of a new President and CEO. Additional decisions on businesses and facilities are expected in 2003. See Note B to the Consolidated Financial Statements for additional information.

 

During 2001, a special charge of $1.5 billion was recorded for merger-related expenses and restructuring, which included transaction costs, employee severance, the write-down of duplicate assets and facilities, and other merger-related expenses. At the time of the merger, the Company expected its integration plans and synergy activities to result in annual cost savings of $1.1 billion by the end of the first quarter of 2003. By the end of 2002, the Company had taken actions that will result in annual cost savings of $1.2 billion, exceeding the original target. The cost reductions will affect cost of sales, research and development expenses, and selling, general and administrative expenses. These actions are not expected to have an impact on future revenues. For further details, see Note B to the Consolidated Financial Statements.

 

In the fourth quarter of 2002, following the completion of a study to estimate the cost of resolving pending and potential future asbestos-related claims filed against Union Carbide and Amchem Products, Inc., the amount recorded for asbestos-related liabilities was increased to $2.2 billion, resulting in a charge of $828 million after recording related insurance receivables. See Critical Accounting Policies, Asbestos-Related Matters of Union Carbide Corporation, and Note J to the Consolidated Financial Statements for additional information.

 

Dow’s share of the earnings of nonconsolidated affiliates in 2002 amounted to $40 million, up modestly from $29 million in 2001, but down significantly from $354 million in 2000. Current year equity earnings were higher than last year primarily due to improved earnings by Dow Corning and DuPont Dow Elastomers L.L.C., and the addition of earnings from Dow Reichhold Specialty Latex LLC, a newly formed joint venture between Dow and Reichhold, Inc.  Equity earnings in 2001 were lower as a result of the consolidations of Gurit-Essex in the first quarter of 2001 and BSL in 2000, and the April 2001 divestiture of Union Carbide’s interest in Polimeri Europa S.r.l., which was required for regulatory approval of the merger (see Note C to the Consolidated Financial Statements). Equity earnings in 2000 reflected improved earnings in several of the Company’s joint ventures around the world, including strong performance by several plastics joint ventures in Asia Pacific and Latin America, improved results from several hydrocarbons joint ventures in North America, final resolution of BSL matters related to the reconstruction period, and significantly better performance by Union Carbide’s joint ventures in Kuwait and Europe.

 

Through May 2000, equity earnings included the Company’s share of the financial results of BSL during the reconstruction period. On June 1, 2000, BSL became a wholly owned subsidiary of the Company, after which the financial results of BSL were fully consolidated (see Note C to the Consolidated Financial Statements). From the first quarter of 1995

 

27



 

through the third quarter of 2000, the Company recorded and reserved its share of equity earnings in Dow Corning due to Dow Corning’s filing for bankruptcy protection under Chapter 11 and the uncertainty of the recovery of that asset. Following Judge Denise Page Hood’s November 13, 2000 affirmation of the Bankruptcy Court’s order confirming the Joint Plan of Reorganization, the Company reviewed the value of its investment in Dow Corning and revised its assessment of the recoverability of its investment. In the fourth quarter of 2000, the Company resumed recording its share of Dow Corning’s earnings. See Notes G and J to the Consolidated Financial Statements for additional information on this matter.

 

Sundry income includes a variety of income and expense items such as the gain or loss on foreign currency exchange, dividends from investments, and gains and losses on sales of investments and assets. Sundry income for 2002 was $54 million, compared with $394 million in 2001 and $352 million in 2000. Sundry income in 2002 included a gain of $63 million on the sale of Oasis Pipe Line Company in the fourth quarter. Sundry income in 2001 included a gain of $266 million on the sale of stock in Schlumberger Ltd.

 

Personnel count was 49,959 at December 31, 2002; 52,689 at the end of 2001 and 53,289 at the end of 2000. Headcount decreased primarily due to the Company’s merger-related workforce reduction program.

 

Net Income

“Net income (loss) available for common stockholders” in 2002 was a net loss of $338 million, a loss of $0.37 per share, compared with a net loss of $385 million, a loss of $0.43 per share in 2001, and net income of $1.7 billion, earnings of $1.85 per share in 2000. Results for 2002 were negatively impacted by a $1.7 billion decline in selling prices that exceeded the favorable impact of lower feedstock and energy costs of approximately $850 million and the realization of merger- and acquisition-related cost synergies. Results for 2001 were negatively impacted by lower selling prices of $1.6 billion, which far exceeded the favorable impact of lower feedstock and energy costs of approximately $750 million, and several unusual items. In addition to the unusual items for 2002 and 2001 discussed in the preceding section, the net losses for 2002 and 2001 were impacted by changes in accounting principles. In 2002, an after-tax transition adjustment gain of $67 million was recognized related to the adoptions of SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” In 2001, an after-tax transition adjustment gain of $32 million was recognized related to the adoption of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” See Note A to the Consolidated Financial Statements for additional information regarding changes in accounting principles.

 

The following table summarizes the impact of unusual items on EBIT and net income (loss):

 

 

 

EBIT

 

Net Income (Loss)

 

In millions

 

2002

 

2001

 

2000

 

2002

 

2001

 

2000

 

Unusual items:

 

 

 

 

 

 

 

 

 

 

 

 

 

Merger-related expenses and restructuring

 

$    (280

)

$ (1,487

)

 

$ (182

)

$ (992

)

 

Asbestos-related charge

 

(828

)

 

 

(522

)

 

 

Purchased in-process R&D

 

 

(69

)

$        (6

)

 

(43

)

$      (6

)

Reinsurance loss on WTC

 

 

(11

)

 

 

(8

)

 

Dow Corning restructuring

 

 

(11

)

 

 

(11

)

 

UOP restructuring

 

(10

)

 

(31

)

(7

)

 

(23

)

DuPont Dow Elastomers restructuring

 

(8

)

 

 

(8

)

 

 

Goodwill impairment losses in nonconsolidated affiliates

 

(16

)

 

 

(16

)

 

 

Gain on sale of Schlumberger stock

 

 

266

 

 

 

168

 

 

Gain on sale of Oasis Pipe Line

 

63

 

 

 

40

 

 

 

Gain on sale of Cochin Pipeline

 

 

 

98

 

 

 

62

 

Recognition of anticipated loss on disposition of merger-related businesses

 

 

 

(81

)

 

 

(55

)

Cumulative effect of changes in accounting principles

 

 

 

 

67

 

32

 

 

Total unusual items

 

$ (1,079

)

$ (1,312

)

$     (20

)

$ (628

)

$ (854

)

$     (22

)

As reported

 

$       86

 

$       35

 

$ 3,105

 

$ (338

)

$ (385

)

$ 1,675

 

Excluding unusual items

 

$  1,165

 

$  1,347

 

$ 3,125

 

$  290

 

$  469

 

$ 1,697

 

 

28



 

Interest income in 2002 was $66 million, compared with $85 million in 2001 and $146 million in 2000. The decline in interest income reflects a decrease in short-term investment activity.

 

Interest expense (net of capitalized interest) and amortization of debt discount totaled $774 million in 2002, compared with $733 million in 2001 and $665 million in 2000. Interest expense was up versus 2001 due to an increase in total debt partially offset by lower interest rates. Interest expense was lower in 2000 due principally to lower average levels of borrowing.

 

The credit for income taxes was $280 million in 2002 versus a credit of $228 million in 2001 and provision of $839 million in 2000. Dow’s overall effective tax rate was 45 percent in 2002, compared with 37.2 percent for 2001 and 32.4 percent for 2000. U.S. and other tax law and rate changes during 2002 did not have a material impact on Dow. The underlying factors affecting Dow’s overall effective tax rates are summarized in Note S to the Consolidated Financial Statements.

 

Minority interests’ share of net income in 2002 was $63 million, up from $32 million in 2001, and down from $72 million in 2000. The increase in minority interest was primarily due to improved results at PBBPolisur S.A., which had lower results in 2001 that corresponded with the lower results in Dow’s Plastics businesses.

 

Liquidity and Capital Resources

The Company’s cash flows from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows, are summarized in the following table:

 

In millions

 

2002

 

2001

 

2000

 

Cash provided by (used in):

 

 

 

 

 

 

 

Operating activities

 

$

2,108

 

$

1,789

 

$

1,691

 

Investing activities

 

(1,626

)

(2,674

)

(1,094

)

Financing activities

 

787

 

831

 

(857

)

Effect of exchange rate changes on cash

 

(5

)

(4

)

(9

)

Net change in cash and cash equivalents

 

$

1,264

 

$

(58

)

$

(269

)

 

Cash provided by operating activities in 2002 increased versus 2001 due to a number of factors. Accounts payable increased and inventories decreased due to the Company’s efforts to optimize working capital. Trade accounts receivable balances increased due to improved sales in the fourth quarter of 2002 compared with the fourth quarter of 2001. Cash provided by operating activities in 2001 increased versus 2000 as the impact of lower receivables and inventories offset the impact of lower earnings for the year. Accounts receivable balances decreased in 2001 due to lower net trade sales and increased sales of U.S. trade receivables. Inventory balances at December 31, 2001, (excluding the impact of acquisitions and divestitures) decreased due to lower feedstock costs compared with year-end 2000.

 

Cash used in investing activities decreased in 2002 compared with 2001 due to a number of factors. Cash used for acquisitions decreased, but was partially offset by an increase in cash used for purchases of available-for-sale securities in excess of sales of similar securities. Cash used in investing activities increased in 2001 compared with 2000, principally due to $2.3 billion invested in acquisitions, including Rohm and Haas’ agricultural chemicals business, Ascot, Gurit-Essex, and EniChem’s polyurethanes business, offset by lower capital expenditures and investments in nonconsolidated affiliates.

 

Cash provided by financing activities decreased in 2002 compared with 2001. An increase in net cash generated from short- and long-term borrowings was partially offset by an increase in dividends paid in 2002. In addition, cash was generated in 2001 from the issuance of preferred securities by a new subsidiary. Cash provided by financing activities in 2001 increased compared with 2000 also due to an increase in net cash generated from short- and long-term borrowings. Cash used in financing activities in 2000 related principally to the payment of dividends.

 

Working Capital at December 31

In millions

 

2002

 

2001

 

Current assets

 

$

11,681

 

$

10,308

 

Current liabilities

 

8,856

 

8,125

 

Working capital

 

$

2,825

 

$

2,183

 

Current ratio

 

1.32:1

 

1.27:1

 

 

29



 

Cash, cash equivalents, marketable securities and interest-bearing deposits increased $1.3 billion in 2002. At December 31, 2002, total inventories were $4.2 billion, down from $4.4 billion at December 31, 2001, primarily due to the Company’s supply chain optimization efforts. Days-sales-in-inventory at December 31, 2002 were 64 days versus 77 days at December 31, 2001. At December 31, 2002, trade receivables were $3.1 billion, up from $2.9 billion last year. Days-sales-outstanding-in-receivables (excluding the impact of sales of receivables) were 45 days at December 31, 2002 and 50 days at December 31, 2001.

 

Short-term borrowings of $580 million at December 31, 2002 were down from $1.2 billion at year-end 2001, primarily due to the issuance of long-term debt. Long-term debt due within one year was $797 million compared with $408 million at year-end 2001. Long-term debt at year-end was $11.7 billion, up from $9.3 billion at year-end 2001 due to the refinancing of short-term borrowings and new long-term debt that was used for general corporate purposes. During the year, $2.9 billion of new long-term debt was incurred and $472 million of long-term debt was retired. See the “Contractual Obligations” table presented later in this section for information regarding Dow’s annual installments on long-term debt.

 

Total debt was $13 billion at year-end compared with $10.9 billion at December 31, 2001. Net debt, which equals total debt less cash, cash equivalents, marketable securities and interest-bearing deposits, was $11.5 billion at December 31, 2002, up from $10.6 billion last year due to the use of funds for general corporate purposes. Gross debt as a percent of total capitalization was 59.2 percent at the end of 2002, compared with 48.9 percent at year-end 2001. Net debt as a percent of total capitalization was 56.0 percent at the end of 2002, compared with 48.3 percent at year-end 2001.

 

As part of its ongoing financing activities, Dow routinely issues promissory notes under its U.S. and Euromarket commercial paper programs. At December 31, 2002, there were no outstanding commercial paper borrowings. In the event Dow is unable to access these short-term markets, due to a systemic market disruption or other extraordinary events, Dow has the ability to access liquidity through its committed and available credit facilities which are in excess of $3 billion.

 

During the year, the Company completed two shelf registrations for the issuance of SEC registered securities. On September 12, 2002, a $1.5 billion registration became effective, and on December 18, 2002, a $2 billion registration became effective. At December 31, 2002, there was a total of $2.3 billion available in SEC registered securities, as well as Japanese yen 70 billion (approximately $583 million) available in yen-denominated securities through the Japanese Ministry of Finance, and Euro 900 million (approximately $942 million) available under the Company’s Euro Medium-Term Note Program. On June 21, 2002, the Company launched a retail Medium-Term Note Program. As of December 31, 2002, $460 million of notes had been issued under this program, with maturity dates ranging from 2005 through 2012.

 

At December 31, 2002, the Company had unused and committed credit facilities with various U.S. and foreign banks totaling $3.1 billion in support of its working capital requirements and commercial paper borrowings. These facilities include a $1.75 billion 364-day revolving credit facility agreement that matures in June 2003, a $1.25 billion 5-year revolving credit facility agreement that matures in June 2004, and a $75 million 364-day bilateral facility with a major financial institution that matures in June 2003. The Company intends to renew these facilities at their respective maturities. Additional unused and uncommitted credit facilities totaling $857 million were available for use by foreign subsidiaries.

 

Dow’s public debt instruments and documents for its private funding transactions contain, among other provisions, certain covenants and default provisions. See Note K to the Consolidated Financial Statements for information on such covenants and default provisions.

 

Dow leases real property, railcars, and certain manufacturing facilities from various special purpose entities. These entities are not owned directly or indirectly by the Company or any of its directors, officers or employees. Those transactions that meet the requirements for operating lease treatment under SFAS No. 13, “Accounting for Leases,” are recorded as such and are disclosed in Note M to the Consolidated Financial Statements, including information regarding future minimum lease commitments. Nine of the entities qualify as variable interest entities (“VIEs”) under FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities.” Based on the current terms of the lease agreements and the residual value guarantees Dow provides to the lessors, the Company expects to be the primary beneficiary of the VIEs. As a result, if the facts and circumstances remain the same, the Company would be required to consolidate the assets and liabilities held by these VIEs in the third quarter of 2003.

 

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The Company has not determined the carrying amount of the assets that will be included in the Consolidated Financial Statements. Accordingly, the Company has not yet determined the impact of adoption of FIN No. 46. The following table provides the approximate amount of debt of the VIEs described above at December 31, 2002 and 2001:

 

In millions

 

Lease Maturities

 

2002

 

2001

 

Manufacturing facilities

 

2006-2017

 

$

1,032

 

$

917

 

Railcars

 

2004-2008

 

418

 

402

 

Real property

 

2005

 

133

 

133

 

Total

 

 

 

$

1,583

 

$

1,452

 

 

Upon termination or expiration of each lease, Dow may return the assets to the lessor, renew the lease, or purchase the assets for an amount based on a fair market value determination. Dow had provided residual value guarantees totaling $1,694 million, which included $1,365 million related to VIEs, at December 31, 2002 and $1,566 million, which included $1,242 million related to VIEs, at December 31, 2001, to the various lessors. Given the productive nature of the assets, it is probable they will have continuing value to Dow or another manufacturer in excess of the residual value guarantees.

 

The following table summarizes the Company’s contractual obligations and commercial commitments at December 31, 2002. Additional information related to these obligations can be found in Notes J, K and M to the Consolidated Financial Statements.

 

Contractual Obligations at December 31, 2002

 

 

Payments Due by Year

 

 

 

In millions

 

2003

 

2004

 

2005

 

2006

 

2007

 

2008
and
beyond

 

Total

 

Annual installments on long-term debt (1)

 

$

797

 

$

1,102

 

$

598

 

$

1,134

 

$

1,177

 

$

7,648

 

$

12,456

 

Minimum operating lease commitments

 

260

 

235

 

206

 

150

 

80

 

816

 

1,747

 

Purchase commitments

 

556

 

511

 

472

 

408

 

407

 

2,041

 

4,395

 

Total

 

$

1,613

 

$

1,848

 

$

1,276

 

$

1,692

 

$

1,664

 

$

10,505

 

$

18,598

 

(1) Includes capital lease obligations of $42 million in “2008 and beyond”

 

The Company also had outstanding guarantees at December 31, 2002. Additional information related to these guarantees can be found in the “Guarantees” table provided in Note J to the Consolidated Financial Statements.

 

Outlook for 2003

During the second half of 2002, the Company took advantage of historically low interest rates by issuing additional long-term debt. Proceeds from the debt issuance were used to reduce short-term borrowings and prefund cash requirements for debt payments due in 2003. On January 31, 2003, Moody’s Investor Services reaffirmed the Company’s senior unsecured debt rating of “A3” and its short-term debt rating of “Prime-2,” but changed its ratings outlook to “negative.” On February 3, 2003, Fitch, Inc. lowered the Company’s senior unsecured debt rating from “A” to “A-” and its short-term debt rating from “F1” to “F2” and maintained its rating outlook as “negative.” The Company does not expect its ability to access credit facilities to be affected as a result of these changes, although the Company may incur higher borrowing costs.

 

In the fourth quarter of 2002, the Company announced a plan designed to reduce overall spending in 2003. The plan includes a 25 percent reduction in overall capital expenditures from 2002 levels, a reduction in structural costs of $400 million from 2002 levels, the divestiture of non-strategic and under-performing assets, and the shutdown of assets that are underutilized or noncompetitive. Other than those activities necessary to maintain the reliability and safety of plants, corporate initiatives have been delayed or canceled. This program is expected to improve overall cash flow by $1 billion through 2003. As a result, the Company expects to have overall positive cash flow in 2003, and expects to fund operations, capital expenditures and dividends from operating activities.

 

Capital Expenditures

Capital spending for the year was $1.6 billion, essentially flat with spending in 2001 and down 10 percent from $1.8 billion in 2000. The lower capital spending in 2002 and 2001 reflected the completion of a new ethylene facility built jointly with NOVA Chemicals Corporation and a polyethylene project, both of which started up in the second half of 2000, in Alberta, Canada. In 2002, approximately 43 percent of the Company’s capital expenditures was directed toward additional capacity for new and existing products, compared with 40 percent in 2001. Approximately 18 percent was committed to projects related to environmental protection, safety, loss prevention and industrial hygiene in 2002 and 2001. The remaining capital

 

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was utilized to maintain the Company’s existing asset base, including projects related to productivity improvements, energy conservation and facilities support.

 

Major projects underway during 2002 included expansion of production facilities for EDC and polymeric MDI in Freeport, Texas; chlorine and METHOCEL cellulose ethers in Stade, Germany; and ABS and latex in Terneuzen, The Netherlands. Additional major projects included installation of a brine pipeline in White Castle, Louisiana and a hazardous waste incineration kiln in Midland, Michigan. Because the Company designs and builds most of its capital projects in-house, it had no material capital commitments other than for the purchase of materials from fabricators.

 

Dividends

On February 13, 2003, the Board of Directors announced a quarterly dividend of $0.335 per share, payable April 30, 2003, to stockholders of record on March 28, 2003. Since 1912, the Company has paid a dividend every quarter and in each instance Dow has maintained or increased the quarterly dividend. The Company declared dividends of $1.34 per share in 2002, $1.295 per share in 2001 and $1.16 per share in 2000.

 

OTHER MATTERS

 

Accounting Changes

See Note A to the Consolidated Financial Statements for a discussion of accounting changes and recently issued accounting pronouncements.

 

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note A to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Following are the Company’s critical accounting policies impacted by judgments, assumptions and estimates:

 

Litigation

The Company is subject to legal proceedings and claims arising out of the normal course of business. The Company routinely assesses the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after thoughtful analysis of each known issue and an analysis of historical claims experience for incurred but not reported matters. Dow has an active risk management program consisting of numerous insurance policies secured from many carriers. These policies provide coverage that is utilized to minimize the impact, if any, of the legal proceedings. The required reserves may change in the future due to new developments in each matter. For further discussion, see Note J to the Consolidated Financial Statements.

 

Asbestos-Related Matters of Union Carbide Corporation

Union Carbide Corporation (“Union Carbide”), a wholly owned subsidiary of the Company, is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. At the end of 2001 and through the third quarter of 2002, Union Carbide had concluded it was not possible to estimate its cost of disposing of asbestos-related claims that might be filed against Union Carbide and Amchem Products, Inc. (“Amchem”) in the future due to a number of reasons, including its lack of sufficient comparable loss history from which to assess either the number or value of future asbestos-related claims. During the third and fourth quarters of 2002, Union Carbide worked with Analysis, Research & Planning Corporation (“ARPC”), a consulting firm with broad experience in estimating resolution costs associated with mass tort litigation including asbestos to explore whether it would be possible to estimate the cost of disposing of pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against Union Carbide and Amchem.

 

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In projecting Union Carbide’s resolution costs for future asbestos-related claims, ARPC applied two methodologies that have been widely used for forecasting purposes. As of December 31, 2002, ARPC estimated the undiscounted cost of resolving pending and future asbestos-related claims against Union Carbide and Amchem, excluding future defense and processing costs, for the 15-year period from the present through 2017 to be between approximately $2.2 billion and $2.4 billion, depending on which of the two accepted methodologies was used.

 

Although ARPC provided estimates for a longer period of time, based on ARPC’s advice that forecasts for shorter periods of time are more accurate and in light of the uncertainties inherent in making long-term projections, Union Carbide determined that the 15-year period through 2017 is the reasonable time period for projecting the cost of disposing of its future asbestos-related claims. Union Carbide concluded that it is probable that the undiscounted cost of disposing of asbestos-related pending and future claims ranges from $2.2 billion to $2.4 billion, which is the range for the 15-year period ending in 2017 as estimated by ARPC using both methodologies. Accordingly, Union Carbide increased its asbestos-related liability for pending and future claims at December 31, 2002 to $2.2 billion, excluding future defense and processing costs. For pending claims, Union Carbide had an asbestos-related liability of $233 million at December 31, 2001.

 

Union Carbide also increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion at December 31, 2002. Union Carbide’s receivable for insurance recoveries related to its asbestos liability was $223 million at December 31, 2001. In addition, Union Carbide had receivables for insurance recoveries for defense and resolution costs of $219 million at December 31, 2002 and $35 million at December 31, 2001. The amounts recorded by Union Carbide for the asbestos-related liability and related insurance receivable described above were based upon currently known facts. However, projecting future events, such as the number of new claims to be filed each year, the average cost of disposing of each such claim, coverage issues among insurers, and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries for Union Carbide to be higher or lower than those projected or those recorded. Union Carbide expenses defense and processing costs as incurred. Accordingly, defense and processing costs incurred by Union Carbide in the future for asbestos-related litigation, net of insurance, will impact Union Carbide’s results of operations in future periods. For additional information, see Legal Proceedings, Asbestos-Related Matters of Union Carbide Corporation in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note J to the Consolidated Financial Statements.

 

Environmental Matters

The Company determines the costs of environmental remediation of its facilities and formerly owned facilities based on evaluations of current law and existing technologies. Inherent uncertainties exist in such evaluations primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies. The recorded liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. The Company had accrued obligations of $444 million at December 31, 2001, for environmental remediation and restoration costs, including $47 million for the remediation of Superfund sites. At December 31, 2002, the Company had accrued obligations of $394 million for environmental remediation and restoration costs, including $43 million for the remediation of Superfund sites. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Company has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to twice that amount. For further discussion, see Environmental Matters in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note J to the Consolidated Financial Statements.

 

Merger-Related Expenses and Restructuring

On February 6, 2001, Union Carbide Corporation merged with a subsidiary of the Company and became a wholly owned subsidiary of Dow. On March 29, 2001, Dow’s management made certain decisions relative to employment levels, duplicate assets and facilities and excess capacity resulting from the Union Carbide merger. These decisions were based on management’s assessment of the actions necessary to achieve synergies as a result of the merger. The economic effects of these decisions, combined with merger-related transaction costs and certain asset impairments, resulted in a pretax special charge of $1,384 million in the first quarter of 2001. Subsequent periodic reviews of the Company’s integration plans resulted in minor revisions to the reserve. The planned merger-related program for workforce reductions was substantially completed in the third quarter of 2002, although during the fourth quarter of 2002, an additional charge was recorded for merger-related severance to be paid in the first quarter of 2003. Upon completion of

 

33



 

the program, the outstanding merger-related reserve for employee-related costs associated with pension and postretirement benefit plans became part of the Company’s regular pension and other postretirement obligations. The reserve related to the abandonment of leased facilities is included in “Other noncurrent obligations.”

 

In late 2002, immediately following the appointment of a new President and CEO, management began a series of studies to determine potential actions relative to under-performing assets and employment levels. Prior to the end of the year, certain studies were completed and management made decisions relative to certain assets. The economic effects of these decisions resulted in a pretax charge in the fourth quarter of 2002 of $168 million for severance and asset write-downs and impairments. The program for severance was based on plans communicated to employees, and is expected to be completed by the third quarter of 2003. The charge related to asset write-downs was based on the net book value of the manufacturing plants to be shut down. The charge related to asset impairments was determined using either discounted cash flows or a fair market value assessment.

 

Additional decisions on businesses and facilities are expected in 2003. The Company will account for future workforce reductions as they occur, in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” For further discussion and information regarding merger-related expenses and restructuring, see Note B to the Consolidated Financial Statements.

 

Pension and Other Postretirement Benefits

The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan assets, discount rates at which the liabilities could be settled at December 31, 2002, rate of increase in future compensation levels, mortality rates and health care cost trend rates. These assumptions are updated annually and are disclosed in Note L to the Consolidated Financial Statements. In accordance with GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, affect expense recognized and obligations recorded in future periods.

 

The expected long-term rate of return on assets is developed with input from the Company’s actuarial firm, which includes the actuary’s review of the asset class return expectations of several respected consultants and economists, based on broad equity and bond indices. The Company’s historical experience with the pension fund asset performance and comparisons to expected returns of peer companies with similar fund assets is also considered. The long-term rate of return assumption used for determining net periodic pension expense for 2002 was 9.25 percent. This assumption was reduced to 9 percent for determining 2003 net periodic pension expense. Lowering the expected long-term rate of return of the U.S. qualified plan assets by 0.25 percent (from 9.25 percent to 9 percent) would have reduced the pension income of the U.S. qualified plans for 2002 by approximately $25 million. The Company’s historical actual return averaged 9.1 percent for the ten-year period ending December 31, 2002. Future actual pension expense will depend on future investment performance, changes in future discount rates and various other factors related to the population of participants in the Company’s pension plans.

 

The Company bases the determination of pension expense or income on a market-related valuation of plan assets, which reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose represent the difference between the expected return calculated using the market-related value of plan assets and the actual return based on the market value of plan assets. Since the market-related value of plan assets recognizes gains or losses over a five-year period, the future value of plan assets will be impacted when previously deferred gains or losses are recorded. Over the life of the plan, both gains and losses have been recognized and amortized. For the year ending December 31, 2002, $1.2 billion of losses remain to be recognized by the U.S. qualified plans in the calculation of the market-related value of plan assets. These losses will result in decreases in future pension income as they are recognized.

 

The discount rate utilized for determining future pension obligations of the U.S. qualified plans is based on long-term bonds receiving an AA- or better rating by a recognized rating agency. The resulting discount rate decreased from 7 percent at December 31, 2001, to 6.75 percent at December 31, 2002.

 

For 2003, the Company left its assumption for the long-term rate of increase in compensation levels for the U.S. qualified plans unchanged at 5 percent.

 

Based on the revised pension assumptions and the actual investment performance of the plan assets in 2002, the Company expects to record $100 million of incremental expense for all pension and other postretirement benefits in 2003.

 

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The value of the U.S. qualified plan assets decreased from $9.3 billion at December 31, 2001, to $7.7 billion at December 31, 2002. The investment performance and declining discount rates reduced the funded status of the U.S. qualified plans, net of benefit obligations, by $2.2 billion from December 31, 2001 to December 31, 2002. The Company does not expect significant cash contributions to be required for the U.S. qualified plans in 2003.

 

Income Taxes

Deferred tax assets and liabilities are determined using enacted tax rates for the effects of net operating losses and temporary differences between the book and tax bases of assets and liabilities. The Company records a valuation allowance on deferred tax assets when appropriate to reflect the expected future tax benefits to be realized. In determining the appropriate valuation allowance, certain judgments are made relating to recoverability of deferred tax assets, use of tax loss carryforwards, level of expected future taxable income and available tax planning strategies. These judgments are routinely reviewed by management. At December 31, 2002, the Company had a net deferred tax asset balance of $2.9 billion, after valuation allowances of $645 million. For additional information, see Note S to the Consolidated Financial Statements.

 

Environmental Matters

Environmental Policies

Dow is committed to world-class environmental, health and safety (“EH&S”) performance, as demonstrated by a long-standing commitment to RESPONSIBLE CARE and progress made toward the Company’s EH&S Goals for 2005. In 1996, Dow publicly announced its voluntary global EH&S 2005 Goals – ambitious performance targets to measure progress toward sustainable development, including targets to reduce chemical emissions, waste and wastewater by 50 percent. Equally aggressive are Dow’s EH&S 2005 Goals to reduce leaks, spills, fires, explosions, work-related injuries and transportation incidents by 90 percent. Dow continues to work aggressively toward attainment of these goals and its “Vision of Zero.” More information on Dow’s performance regarding environmental matters can be found online in Dow’s 2001 Public Report.

 

To meet the Company’s public commitments, as well as the stringent laws and government regulations related to environmental protection and remediation to which its global operations are subject, Dow has well-defined policies, requirements and management systems. Dow’s EH&S Management System (“EMS”) defines for the businesses the “who, what, when and how” needed to achieve the Company’s policies, requirements, performance objectives, leadership expectations and public commitments. EMS is also designed to minimize the long-term cost of environmental protection and to comply with these laws and regulations. Furthermore, EMS is integrated into a company-wide Management System for EH&S, Operations, Quality and Human Resources, including implementation of the global EH&S Work Process to improve EH&S performance and to ensure ongoing compliance worldwide. It is Dow’s stated EH&S policy that all global operations and products meet Dow’s requirements or their country’s laws and regulations, whichever are more stringent.

 

It is also Dow’s policy to adhere to a waste management hierarchy that minimizes the impact of wastes and emissions on the environment. First, Dow works to eliminate or minimize the generation of waste and emissions at the source through research, process design, plant operations and maintenance. Second, Dow finds ways to reuse and recycle materials. Finally, unusable or non-recyclable hazardous waste is treated before disposal to eliminate or reduce the hazardous nature and volume of the waste. Treatment may include destruction by chemical, physical, biological or thermal means. Disposal of waste materials in landfills is considered only after all other options have been thoroughly evaluated. Dow has specific requirements for wastes that are transferred to non-Dow facilities.

 

Dow believes third-party verification is a cornerstone of world-class EH&S performance and building public trust. Over the last five years, numerous Dow sites in Europe, Latin America, Australia and North America have received third-party verification of Dow’s compliance with RESPONSIBLE CARE and with outside specifications such as ISO-14001. In 2002, Dow received the American Chemistry Council’s RESPONSIBLE CARE Employee Health & Safety Code Sustained Excellence Award. The annual Sustained Excellence Award recognizes companies that have demonstrated outstanding safety records over a three-year period. This is the first time that any company from the “large” size category has been eligible for the award. For the fourth year in a row, Dow was also added to the Dow Jones Sustainability Group Index.

 

Dow’s EMS and EH&S Goals are designed to minimize environmental risks and impacts, both past and future. The following paragraphs outline some of these potential risks and how they are managed to minimize environmental impact and overall costs.

 

35



 

Climate Change

There is growing political and scientific consensus that emissions of greenhouse gases (“GHG”) due to human activities continue to alter the composition of the global atmosphere in ways that are affecting the climate. Dow takes global climate change very seriously and is committed to reducing its GHG intensity (lbs. of GHG per lb. of product), developing climate-friendly products and processes, and, over the longer term, implementing technology solutions to achieve even greater climate change improvements. Since 1995, Dow has reduced GHG intensity by over 25 percent. Total direct emissions of GHG have also been significantly reduced. This trend could reverse, however, depending on business growth, capacity utilization and the pace of new technology development.

 

Given the uncertainties regarding implementation of the Kyoto Protocol and related climate change policies, it is speculative to engage in an assessment of either the potential liability or benefit associated with climate change issues. As noted in the 2001 Public Report, Dow is making progress toward its 2005 goal to improve energy efficiency by 20 percent. By the time Dow achieves this goal, it will have avoided the production of over 290 trillion Btus, thus contributing in a positive way to climate change. Dow also contributes to the climate change solution by producing products that help others reduce GHG emissions, such as lightweight plastics for automobiles and insulation for energy efficient homes and appliances. Dow does not currently engage in emissions trading but is studying this concept and engaging in dialogue with governments about the development of fair and effective mechanisms to achieve GHG reductions at the lowest possible cost.

 

Environmental Remediation

Dow accrues the costs of remediation of its facilities and formerly owned facilities based on current law and existing technologies. The nature of such remediation includes, for example, the management of soil and groundwater contamination and the closure of contaminated landfills and other waste management facilities. In the case of landfills and other active waste management facilities, Dow recognizes the costs over the useful life of the facility. The policies adopted to properly reflect the monetary impacts of environmental matters are discussed in Note A to the Consolidated Financial Statements. To assess the impact on the financial statements, environmental experts review currently available facts to evaluate the probability and scope of potential liabilities. Inherent uncertainties exist in such evaluations primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies. These liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. Dow had an accrued liability of $351 million at December 31, 2002, related to the remediation of current or former Dow-owned sites. The liability related to remediation at December 31, 2001 was $397 million. The Company has not recorded any third-party recovery related to these sites as a receivable. Dow filed a lawsuit in November 1999 against several of its insurers seeking recovery of remediation costs at certain current or former Dow-owned sites. Settlements have been reached with all carriers, except one.

 

In addition to current and former Dow-owned sites, under the Federal Comprehensive Environmental Response, Compensation and Liability Act and equivalent state laws (hereafter referred to collectively as “Superfund Law”), Dow is liable for remediation of other hazardous waste sites where Dow allegedly disposed of, or arranged for the treatment or disposal of, hazardous substances. Dow readily cooperates in the remediation of these sites where the Company’s liability is clear, thereby minimizing legal and administrative costs. Because Superfund Law imposes joint and several liability upon each party at a site, Dow has evaluated its potential liability in light of the number of other companies that also have been named potentially responsible parties (“PRPs”) at each site, the estimated apportionment of costs among all PRPs, and the financial ability and commitment of each to pay its expected share. Management’s estimate of the Company’s remaining liability for the remediation of Superfund sites at December 31, 2002 was $43 million, which has been accrued, although the ultimate cost with respect to these sites could exceed that amount. In addition, receivables of $12 million for probable recoveries from other PRPs have been recorded related to Superfund sites. At December 31, 2001, the Company’s liability for the remediation of Superfund sites was $47 million; the receivable for probable recoveries from other PRPs was $7 million.

 

In total, the Company’s accrued liability for probable environmental remediation and restoration costs was $394 million at December 31, 2002, compared with $444 million at the end of 2001. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Company has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to twice that amount. 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.

 

36



 

The amounts charged to income on a pretax basis related to environmental remediation totaled $52 million in 2002, $47 million in 2001 and $53 million in 2000. Capital expenditures for environmental protection were $147 million in 2002, $179 million in 2001 and $166 million in 2000.

 

Asbestos-Related Matters of Union Carbide Corporation

Union Carbide Corporation (“Union Carbide”), a wholly owned subsidiary of the Company, is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages, often in very large amounts. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to Union Carbide’s products.

 

The rate at which plaintiffs filed asbestos-related suits against various companies, including Union Carbide and Amchem, increased in both 2001 and 2002, influenced by the bankruptcy filings of numerous defendants in asbestos-related litigation. Union Carbide expects more asbestos-related suits to be filed against Union Carbide and Amchem in the future. Union Carbide will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.

 

Typically, Union Carbide is only one of many named defendants, many of which, including Union Carbide and Amchem, were members of the Center for Claims Resolution (“CCR”), an entity that defended and resolved asbestos cases on behalf of its members. As members of the CCR, Union Carbide’s and Amchem’s strategy was to resolve the claims against them at the relatively small percentage allocated to them pursuant to the CCR’s collective defense. The CCR ceased operating in February 2001, except to administer certain settlements. Union Carbide then began using Peterson Asbestos Claims Enterprise, but only for claims processing and insurance invoicing.

 

Certain members of Dow’s legal department and certain Dow management personnel have been retained to provide their experience in mass tort litigation to assist Union Carbide in responding to asbestos-related matters. In early 2002, Union Carbide hired new outside counsel to serve as national trial counsel. In connection with these actions, aggressive defense strategies were designed to reduce the cost of resolving all asbestos-related claims, including the elimination of claims that lack demonstrated illness or causality.

 

At the end of 2001 and through the third quarter of 2002, Union Carbide had concluded it was not possible to estimate its cost of disposing of asbestos-related claims that might be filed against Union Carbide and Amchem in the future due to a number of reasons, including its lack of sufficient comparable loss history from which to assess either the number or value of future asbestos-related claims. During the third and fourth quarters of 2002, Union Carbide worked with Analysis, Research & Planning Corporation (“ARPC”), a consulting firm with broad experience in estimating resolution costs associated with mass tort litigation, including asbestos, to explore whether it would be possible to estimate the cost of disposing of pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against Union Carbide and Amchem.

 

Union Carbide provided ARPC with all relevant data regarding asbestos-related claims filed against Union Carbide and Amchem through November 6, 2002. ARPC concluded that it was not possible to estimate the full range of the cost of resolving future asbestos-related claims against Union Carbide and Amchem, because of various uncertainties associated with the litigation of those claims. These uncertainties, which hindered Union Carbide’s ability to project future claim volumes and resolution costs, included the following:

 

                  Until a series of bankruptcies led to the CCR ceasing operations in early 2001, Union Carbide and Amchem generally settled claims filed against CCR members according to a sharing formula that would not necessarily reflect the cost of resolving those claims had they been separately litigated against Union Carbide or Amchem.

                  The bankruptcies in the years 2000 to 2002 of other companies facing large asbestos liability were a likely contributing cause of a sharp increase in filings against many defendants, including Union Carbide and Amchem.

                  It was not until the CCR ceased operating in early 2001 that Union Carbide took direct responsibility for the defense of claims against itself and Amchem.

                  New defense counsel for Union Carbide and Amchem implemented more aggressive defense strategies in mid-2002.

 

37



 

Despite its inability to estimate the full range of the cost of resolving future asbestos-related claims, ARPC advised Union Carbide that it would be possible to determine an estimate of a reasonable forecast of the cost of resolving pending and future asbestos-related claims likely to face Union Carbide and Amchem, if certain assumptions were made. Specifically, ARPC advised Union Carbide that for purposes of determining an estimate it is reasonable to assume that in the near term asbestos-related claims filed against Union Carbide and Amchem are unlikely to return to levels below those experienced prior to 2001 - when the recent spike in filings commenced - and that average claim values are unlikely to return to levels below those experienced in 2001-2002, the years immediately following CCR’s cessation of operations. ARPC advised Union Carbide that, by assuming that future filings were unlikely to exceed the levels experienced prior to 2001 and extrapolating from 2001 and 2002 average claim values, ARPC could make a reasonable forecast of the cost of resolving asbestos-related claims facing Union Carbide and Amchem. ARPC also advised Union Carbide that forecasts of resolution costs for a 10 to 15 year period from the date of the forecast are likely to be more accurate than forecasts for longer periods of time.

 

In projecting Union Carbide’s resolution costs for future asbestos-related claims, ARPC applied two methodologies that have been widely used for forecasting purposes. Applying these methodologies, ARPC forecast the number and allocation by disease category of those potential future claims on a year-by-year basis through 2049. ARPC then calculated the percentage of claims in each disease category that had been closed with payments in 2001 and 2002. Using those percentages, ARPC calculated the number of future claims by disease category that would likely require payment by Union Carbide and Amchem and multiplied the number of such claims by the mean values paid by Union Carbide and Amchem, respectively, to dispose of such claims in 2001 and 2002. In estimating Union Carbide’s cost of resolving pending claims, ARPC used a process similar to that used for calculating the cost of resolving future claims.

 

As of December 31, 2002, ARPC estimated the undiscounted cost of resolving pending and future asbestos-related claims against Union Carbide and Amchem, excluding future defense and processing costs, for the 15-year period from the present through 2017 to be between approximately $2.2 billion and $2.4 billion, depending on which of the two accepted methodologies was used.

 

Although ARPC provided estimates for a longer period of time, based on ARPC’s advice that forecasts for shorter periods of time are more accurate and in light of the uncertainties inherent in making long-term projections, Union Carbide determined that the 15-year period through 2017 is the reasonable time period for projecting the cost of disposing of its future asbestos-related claims. Union Carbide concluded that it is probable that the undiscounted cost of disposing of asbestos-related pending and future claims ranges from $2.2 billion to $2.4 billion, which is the range for the 15-year period ending in 2017 as estimated by ARPC using both methodologies. Accordingly, Union Carbide increased its asbestos-related liability for pending and future claims at December 31, 2002 to $2.2 billion, excluding future defense and processing costs. For pending claims, Union Carbide had an asbestos-related liability of $233 million at December 31, 2001.

 

Union Carbide also increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion at December 31, 2002, substantially exhausting its asbestos product liability coverage. This resulted in a net income statement impact to Union Carbide of $828 million, $522 million on an after-tax basis, in the fourth quarter of 2002. Union Carbide’s receivable for insurance recoveries related to its asbestos liability was $223 million at December 31, 2001. The insurance receivable related to the asbestos liability was determined by Union Carbide after a thorough review of applicable insurance policies and the 1985 Wellington Agreement, to which Union Carbide and many of its liability insurers are signatory parties, as well as other insurance settlements, with due consideration given to applicable deductibles, retentions and policy limits, and taking into account the solvency and historical payment experience of various insurance carriers.

 

In addition, Union Carbide had receivables for insurance recoveries for defense and resolution costs of $219 million at December 31, 2002 and $35 million at December 31, 2001. Defense and resolution costs for Union Carbide’s asbestos-related litigation were $247 million in 2002, $53 million in 2001 and $53 million in 2000. The $247 million in 2002 included $92 million for defense costs (which included significant costs for the development and implementation of Union Carbide’s new and more aggressive defense strategies) and $63 million for bulk settlements with multiple claimants. To date, substantially all of these defense and resolution costs were covered by insurance. Insurance coverage for future asbestos-related defense costs will exist, but to a lesser extent. The pretax impact to Union Carbide for these defense and resolution costs, net of insurance, was $9 million in 2002, $9 million in 2001 and $4 million in 2000, and was reflected in “Cost of sales.”

 

38



 

The amounts recorded by Union Carbide for the asbestos-related liability and related insurance receivable described above were based upon currently known facts. However, projecting future events, such as the number of new claims to be filed each year, the average cost of disposing of each such claim, coverage issues among insurers, and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries for Union Carbide to be higher or lower than those projected or those recorded. Union Carbide expenses defense and processing costs as incurred. Accordingly, defense and processing costs incurred by Union Carbide in the future for asbestos-related litigation, net of insurance, will impact Union Carbide’s results of operations in future periods.

 

Because of the uncertainties described above, Union Carbide’s management cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing Union Carbide and Amchem. Union Carbide’s management believes that it is reasonably possible that the cost of disposing of Union Carbide’s asbestos-related claims, including future defense and processing costs, could have a material adverse impact on Union Carbide’s results of operations and cash flows for a particular period and on the consolidated financial position of Union Carbide.

 

It is the opinion of Dow’s management that it is reasonably possible that the cost of Union Carbide disposing of its asbestos-related claims, including future defense and processing costs, could have a material adverse impact on the Company’s results of operations and cash flows for a particular period and on the consolidated financial position of the Company.

 

39



 

The Dow Chemical Company and Subsidiaries
Item 7AQuantitative and Qualitative Disclosures about Market Risk

 

Dow’s business operations give rise to market risk exposure due to changes in foreign exchange rates, interest rates, commodity prices and other market factors such as equity prices. To manage such risks effectively, the Company enters into hedging transactions, pursuant to established guidelines and policies, which enable it to mitigate the adverse effects of financial market risk. Derivatives used for this purpose are designated as hedges per SFAS No. 133, where appropriate. A secondary objective is to add value by creating additional non-specific exposure within established limits and policies; derivatives used for this purpose are not designated as hedges per SFAS No. 133. The potential impact of creating such additional exposures is not material to the Company’s results.

 

The global nature of Dow’s business requires active participation in the foreign exchange markets. As a result of investments, production facilities and other operations on a global basis, the Company has assets, liabilities and cash flows in currencies other than the U.S. dollar. The primary objective of the Company’s foreign exchange risk management is to optimize the U.S. dollar value of net assets and cash flows, keeping the adverse impact of currency movements to a minimum. To achieve this objective, the Company hedges on a net exposure basis using foreign currency forward contracts, over-the-counter option contracts, cross-currency swaps, and nonderivative instruments in foreign currencies. Main exposures are related to assets and liabilities denominated in the currencies of Europe, Asia Pacific and Canada; bonds denominated in foreign currencies – mainly the Euro and Japanese yen; and economic exposure derived from the risk that currency fluctuations could affect the U.S. dollar value of future cash flows. The majority of the foreign exchange exposure is related to European currencies and the Japanese yen.

 

The main objective of interest rate risk management is to reduce the total funding cost to the Company and to alter the interest rate exposure to the desired risk profile. Dow uses interest rate swaps, “swaptions,” and exchange-traded instruments to accomplish this objective. The Company’s primary exposure is to the U.S. dollar yield curve.

 

Inherent in Dow’s business is exposure to price changes for several commodities. Some exposures can be hedged effectively through liquid tradable financial instruments. Cracker feedstocks and natural gas constitute the main commodity exposures. Over-the-counter and exchange traded instruments are used to hedge these risks when feasible.

 

Dow has a portfolio of equity securities derived from its acquisition and divestiture activity. This exposure is managed in a manner consistent with the Company’s market risk policies and procedures.

 

Dow uses value at risk (“VAR”), stress testing and scenario analysis for risk measurement and control purposes. VAR estimates the potential gain or loss in fair market values, given a certain move in prices over a certain period of time, using specified confidence levels. On an ongoing basis, the Company estimates the maximum gain or loss that could arise in one day, given a two-standard-deviation move in the respective price levels. These amounts are relatively insignificant in comparison to the size of the equity of the Company. The VAR methodology used by Dow is based primarily on the variance/covariance statistical model. The year-end VAR and average quarterly VAR for the aggregate of non-trading and trading positions for 2002 and 2001 are shown below:

 

Total Daily VAR at December 31*

 

 

2002

 

2001

 

In millions

 

Year-end

 

Average

 

Year-end

 

Average

 

Foreign exchange

 

$  7

 

$ 10

 

$  21

 

$ 17

 

Interest rate

 

94

 

83

 

106

 

70

 

Equity exposures, net of hedges

 

3

 

4

 

7

 

9

 

Commodities

 

17

 

11

 

4

 

5

 

*Using a 95 percent confidence level

 

See Note H to the Consolidated Financial Statements for further disclosure regarding market risk.

 

40



 

The Dow Chemical Company and Subsidiaries
Item 8Financial Statements and Supplementary Data

 

Management Statement of Responsibility

 

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 statements were prepared in accordance with accounting principles generally accepted in the United States of America. The financial statements include amounts that are based on management’s best estimates 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 internal controls that provide reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the prevention and detection of fraudulent financial reporting.

 

Internal controls provide for appropriate division of responsibility and are documented by written policies and procedures that are communicated to employees with significant roles in the financial reporting process and updated as necessary. Management continually monitors internal controls for compliance. The Company maintains a strong internal auditing program that independently assesses the effectiveness of the internal controls and recommends possible improvements.

 

Deloitte & Touche LLP, independent auditors, with direct access to the Board of Directors through its Audit Committee, have audited the consolidated financial statements prepared by the Company, and their report follows.

 

Management has considered recommendations from the internal auditors and Deloitte & Touche LLP concerning internal controls and has taken actions that are cost-effective in the circumstances to respond appropriately to these recommendations. Management further believes the controls are adequate to accomplish the objectives discussed herein.

 

The undersigned have executed certifications dated February 28, 2003, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, and the Company has filed those certifications as part of, or as exhibits to, the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. In addition, William S. Stavropoulos, Chairman, President and Chief Executive Officer of the Company, has certified to the New York Stock Exchange (“NYSE”) that he is unaware of any violation by the Company of the NYSE corporate governance listing standards in effect as of February 28, 2003.

 

/s/ William S. Stavropoulos

 

/s/ J. Pedro Reinhard

 

William S. Stavropoulos
Chairman, President and Chief Executive Officer

 

J. Pedro Reinhard
Executive Vice President and Chief Financial Officer

 

41



 

Independent Auditors’ Report

To the Stockholders and Board of Directors 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, 2002 and 2001, and the related consolidated statements of income, stockholders’ equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2002.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on the financial statements based on our audits.  The consolidated financial statements give retroactive effect to the merger of The Dow Chemical Company and Union Carbide Corporation, which has been accounted for as a pooling of interests as described in Note C to the consolidated financial statements.  We did not audit the statements of income, stockholders’ equity and cash flows of Union Carbide Corporation for the period ended December 31, 2000, which consolidated statements reflect total revenues of $6,550 million.  Those consolidated statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Union Carbide Corporation for 2000, is based solely on the report of such other auditors.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

 

In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Dow Chemical Company and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Notes A and H to the consolidated financial statements, effective January 1, 2001, The Dow Chemical Company changed its method of accounting for derivative instruments and hedging activities to conform to Statement of Financial Accounting Standards No. 133.

 

As discussed in Notes A and F to the consolidated financial statements, effective January 1, 2002, The Dow Chemical Company changed its method of accounting for goodwill to conform to Statements of Financial Accounting Standards Nos. 141 and 142.

 

/s/ Deloitte & Touche LLP

 

Deloitte & Touche LLP
Midland, Michigan
January 30, 2003

(February 13, 2003 as to Note U)

 

42



 

Independent Auditors’ Report

To the Stockholders and Board of Directors of Union Carbide Corporation:

 

We have audited the consolidated statements of income, stockholders’ equity, and cash flows of Union Carbide Corporation and subsidiaries for the year ended December 31, 2000 (not presented separately herein). These consolidated financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above (not presented separately herein) present fairly, in all material respects, the results of operations of Union Carbide Corporation and subsidiaries and their cash flows for the year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ KPMG LLP

 

KPMG LLP
Stamford, CT

January 22, 2001, except as to Note 17, which is as of February 6, 2001

 

43



 

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Income

 

(In millions, except per share amounts) For the years ended December 31

 

2002

 

2001

 

2000

 

Net Sales

 

$

27,609

 

$

28,075

 

$

29,798

 

Cost of sales

 

23,780

 

23,892

 

24,310

 

Research and development expenses

 

1,066

 

1,072

 

1,119

 

Selling, general and administrative expenses

 

1,598

 

1,765

 

1,825

 

Amortization of intangibles

 

65

 

178

 

139

 

Purchased in-process research and development charges

 

 

69

 

6

 

Merger-related expenses and restructuring

 

280

 

1,487

 

 

Asbestos-related charge

 

828

 

 

 

Equity in earnings of nonconsolidated affiliates

 

40

 

29

 

354

 

Sundry income - net

 

54

 

394

 

352

 

Interest income

 

66

 

85

 

146

 

Interest expense and amortization of debt discount

 

774

 

733

 

665

 

Income (Loss) before Income Taxes and Minority Interests

 

(622

)

(613

)

2,586

 

Provision (Credit) for income taxes

 

(280

)

(228

)

839

 

Minority interests’ share in income

 

63

 

32

 

72

 

Income (Loss) before Cumulative Effect of Changes in Accounting Principles

 

(405

)

(417

)

1,675

 

Cumulative effect of changes in accounting principles

 

67

 

32

 

 

Net Income (Loss) Available for Common Stockholders

 

$

(338

)

$

(385

)

$

1,675

 

Share Data

 

 

 

 

 

 

 

Earnings (Loss) before cumulative effect of changes in accounting principles per common share - basic

 

$

(0.44

)

$

(0.46

)

$

1.88

 

Earnings (Loss) per common share - basic

 

$

(0.37

)

$

(0.43

)

$

1.88

 

Earnings (Loss) before cumulative effect of changes in accounting principles per common share - diluted

 

$

(0.44

)

$

(0.46

)

$

1.85

 

Earnings (Loss) per common share - diluted

 

$

(0.37

)

$

(0.43

)

$

1.85

 

Common stock dividends declared per share of Dow common stock

 

$

1.34

 

$

1.295

 

$

1.16

 

Weighted-average common shares outstanding - basic

 

910.5

 

901.8

 

893.2

 

Weighted-average common shares outstanding - diluted

 

910.5

 

901.8

 

904.5

 

 

See Notes to the Consolidated Financial Statements.

 

44



 

The Dow Chemical Company and Subsidiaries

Consolidated Balance Sheets

 

(In millions)  At December 31

 

2002

 

2001

 

Assets

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

1,484

 

$

220

 

Marketable securities and interest-bearing deposits

 

89

 

44

 

Accounts and notes receivable:

 

 

 

 

 

Trade (net of allowance for doubtful receivables - 2002: $127; 2001: $123)

 

3,116

 

2,868

 

Other

 

2,369

 

2,230

 

Inventories

 

4,208

 

4,440

 

Deferred income tax assets - current

 

415

 

506

 

Total current assets

 

11,681

 

10,308

 

Investments

 

 

 

 

 

Investment in nonconsolidated affiliates

 

1,565

 

1,581

 

Other investments

 

1,689

 

1,663

 

Noncurrent receivables

 

577

 

578

 

Total investments

 

3,831

 

3,822

 

Property

 

 

 

 

 

Property

 

37,934

 

35,890

 

Less accumulated depreciation

 

24,137

 

22,311

 

Net property

 

13,797

 

13,579

 

Other Assets

 

 

 

 

 

Goodwill

 

3,189

 

3,130

 

Other intangible assets (net of accumulated amortization - 2002: $349; 2001: $346)

 

613

 

607

 

Deferred income tax assets - noncurrent

 

3,470

 

2,248

 

Asbestos-related insurance receivables - noncurrent

 

1,489

 

224

 

Deferred charges and other assets

 

1,492

 

1,597

 

Total other assets

 

10,253

 

7,806

 

Total Assets

 

$

39,562

 

$

35,515

 

 

See Notes to the Consolidated Financial Statements.

 

45



 

The Dow Chemical Company and Subsidiaries

Consolidated Balance Sheets

 

(In millions, except share amounts) At December 31

 

2002

 

2001

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Notes payable

 

$

580

 

$

1,209

 

Long-term debt due within one year

 

797

 

408

 

Accounts payable:

 

 

 

 

 

Trade

 

2,834

 

2,713

 

Other

 

1,789

 

926

 

Income taxes payable

 

202

 

190

 

Deferred income tax liabilities - current

 

30

 

236

 

Dividends payable

 

326

 

323

 

Accrued and other current liabilities

 

2,298

 

2,120

 

Total current liabilities

 

8,856

 

8,125

 

Long-Term Debt

 

11,659

 

9,266

 

Other Noncurrent Liabilities

 

 

 

 

 

Deferred income tax liabilities - noncurrent

 

994

 

760

 

Pension and other postretirement benefits - noncurrent

 

3,775

 

2,475

 

Asbestos-related liabilities - noncurrent

 

2,072

 

233

 

Other noncurrent obligations

 

3,214

 

3,306

 

Total other noncurrent liabilities

 

10,055

 

6,774

 

Minority Interest in Subsidiaries

 

366

 

357

 

Preferred Securities of Subsidiaries

 

1,000

 

1,000

 

Stockholders’ Equity

 

 

 

 

 

Common stock (authorized 1,500,000,000 shares of $2.50 par value each; issued 981,377,562)

 

2,453

 

2,453

 

Additional paid-in capital

 

 

 

Unearned ESOP shares

 

(61

)

(90

)

Retained earnings

 

9,520

 

11,112

 

Accumulated other comprehensive loss

 

(2,097

)

(1,070

)

Treasury stock at cost (shares 2002: 68,721,252; 2001: 76,540,276)

 

(2,189

)

(2,412

)

Net stockholders’ equity

 

7,626

 

9,993

 

Total Liabilities and Stockholders’ Equity

 

$

39,562

 

$

35,515

 

 

See Notes to the Consolidated Financial Statements.

 

46



 

The Dow Chemical Company and Subsidiaries

Consolidated Statements of Cash Flows

 

(In millions)  For the years ended December 31

 

2002

 

2001

 

2000

 

Operating Activities

 

 

 

 

 

 

 

Income (Loss) before cumulative effect of changes in accounting principles

 

$

(405

)

$

(417

)

$

1,675

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

1,825

 

1,815

 

1,738

 

Purchased in-process research and development

 

 

69

 

6

 

Provision (Credit) for deferred income tax

 

(311

)

(391

)

143

 

Earnings/losses of nonconsolidated affiliates less than (in excess of) dividends received

 

53

 

25

 

(222

)

Minority interests’ share in income

 

63

 

32

 

72

 

Net gain on sales of consolidated companies

 

(4

)

 

 

Net (gain) loss on sales of nonconsolidated affiliates

 

(60

)

2

 

(13

)

Net gain on sales of property and businesses

 

(8

)

(49

)

(102

)

Other net gain

 

(65

)

(245

)

(340

)

Merger-related expenses and restructuring

 

202

 

906

 

 

Asbestos-related charge

 

828

 

 

 

Tax benefit - nonqualified stock option exercises

 

31

 

39

 

37

 

Changes in assets and liabilities that provided (used) cash:

 

 

 

 

 

 

 

Accounts and notes receivable

 

(299

)

1,340

 

(335

)

Inventories

 

223

 

34

 

(559

)

Accounts payable

 

474

 

(586

)

429

 

Other assets and liabilities

 

(439

)

(785

)

(838

)

Cash provided by operating activities

 

2,108

 

1,789

 

1,691

 

Investing Activities

 

 

 

 

 

 

 

Capital expenditures

 

(1,623

)

(1,587

)

(1,808

)

Proceeds from sales of property and businesses

 

79

 

153

 

166

 

Acquisitions of businesses, net of cash received

 

(1

)

(2,301

)

(678

)

Proceeds from sales of consolidated companies

 

39

 

 

 

Investments in nonconsolidated affiliates

 

(98

)

(92

)

(186

)

Advances to nonconsolidated affilitates, net of cash received

 

 

203

 

(179

)

Proceeds from sales of nonconsolidated affiliates

 

89

 

181

 

47

 

Purchases of investments

 

(1,799

)

(2,561

)

(3,074

)

Proceeds from sales and maturities of investments

 

1,688

 

3,330

 

4,618

 

Cash used in investing activities

 

(1,626

)

(2,674

)

(1,094

)

Financing Activities

 

 

 

 

 

 

 

Changes in short-term notes payable

 

(510

)

(1,573

)

136

 

Payments on long-term debt

 

(472

)

(259

)

(562

)

Proceeds from issuance of long-term debt

 

2,932

 

3,165

 

401

 

Purchases of treasury stock

 

(6

)

(5

)

(4

)

Proceeds from sales of common stock

 

138

 

146

 

150

 

Proceeds from issuance of preferred securities of subsidiary

 

 

500

 

 

Distributions to minority interests

 

(78

)

(80

)

(74

)

Dividends paid to stockholders

 

(1,217

)

(1,063

)

(904

)

Cash provided by (used in) financing activities

 

787

 

831

 

(857

)

Effect of Exchange Rate Changes on Cash

 

(5

)

(4

)

(9

)

Summary

 

 

 

 

 

 

 

Increase (Decrease) in cash and cash equivalents

 

1,264

 

(58

)

(269

)

Cash and cash equivalents at beginning of year

 

220

 

278

 

547

 

Cash and cash equivalents at end of year

 

$