The Dow Chemical Company : Dow Reports Third Quarter Results

The Dow Chemical Company (NYSE: DOW):

Third Quarter 2013 Highlights

• Dow reported earnings of $0.49 per share or $0.50 per share on an adjusted basis⁽¹⁾. This compares with earnings of $0.42 per share in the same quarter last year. This represents the fourth consecutive quarter of year-over-year adjusted earnings growth.
• The Company generated more than $1.4 billion in cash flow from operations in the quarter, representing a nearly $300 million, or 27 percent, increase versus the year-ago period. Year to date, Dow has generated $5.6 billion in cash flow from operations, representing an improvement of nearly $3.1 billion compared with the prior year.
• Sales were $13.7 billion, up 1 percent, or up 2 percent on an adjusted basis⁽²⁾, with increases led by Agricultural Sciences (up 8 percent), and Coatings and Infrastructure Solutions and Performance Plastics (each up 6 percent). Sales also increased in most geographic areas, with emerging geographies delivering sales growth of 5 percent, led by Latin America.
• Volume declined 2 percent, or 1 percent excluding the impact of divestitures. Gains were reported in Electronic and Functional Materials (up 6 percent), as well as Coatings and Infrastructure Solutions and Agricultural Sciences (each up 5 percent). This was offset by lower volume in hydrocarbon-sensitive operating segments, led by Feedstocks and Energy.
• Price increased 3 percent with gains achieved in most operating segments, led by Performance Plastics (up 9 percent) and Agricultural Sciences (up 3 percent).
• EBITDA⁽³⁾ was $1.8 billion, led by Performance Plastics (up 32 percent). Increases were also reported in Coatings and Infrastructure Solutions and Electronic and Functional Materials, up 15 percent and 5 percent, respectively.
• Equity earnings were $322 million, versus $175 million in the year-ago period, led by the Company's joint ventures in Kuwait.
• Dow reduced gross debt by $200 million in the quarter and $2.4 billion year to date, resulting in a nearly $120 million decline in interest expense year to date. Since 2010, Dow has reduced its debt by $5.2 billion, and its interest expense by more than $300 million. The Company's net debt⁽⁴⁾ to total capitalization now stands at 34.7 percent.

Comment

Andrew N. Liveris, Dow's chairman and chief executive officer, stated:

"Dow continued to demonstrate positive momentum with our drive to execute self-help measures in a slow-growth world, achieving strong cash flow, as well as year-over-year earnings growth for the fourth consecutive quarter. Through our integrated value chains and the diversity of our targeted end markets, we continue to demonstrate strong performance - particularly in emerging geographies, in our equity earnings, and in key downstream businesses such as Electronics, Coatings and Infrastructure, and Packaging. We continue to prioritize our resources to focus on these and other high-growth markets.

"Over the last 12 months, using return on capital as our lens, we have pruned non-strategic businesses such as the recently announced divestiture of our Polypropylene Licensing and Catalysts business, and deemphasized low-growth, commoditizing businesses, such as the announcements we have made on the chlorine value chain. We have identified targets and are moving forward with defined divestiture plans - actions valued at a minimum of $3 - $4 billion. The proceeds of these divestitures will create further capacity for the Company to generate returns to shareholders.

"Our cash priorities remain intact: rewarding our shareholders, reducing interest payments from our debt structure and funding organic growth."

Review of Third Quarter Results

The Dow Chemical Company (NYSE: DOW) reported sales of $13.7 billion, up 1 percent, or 2 percent on an adjusted basis versus the prior year. Sales increases in Agricultural Sciences (up 8 percent), as well as Coatings and Infrastructure Solutions and Performance Plastics (each up 6 percent) drove sales gains at a segment level. Sales also rose in most geographic areas, with a 5 percent increase reported in emerging geographies.

Volume declined 2 percent, or 1 percent excluding the impact of divestitures. Volume gains were reported in Electronic and Functional Materials (up 6 percent) and Coatings and Infrastructure Solutions and Agricultural Sciences (each up 5 percent). This growth was offset by lower volume in other operating segments, led by Feedstocks and Energy.

The Company reported price increases of 3 percent. Pricing gains were led by Performance Plastics (up 9 percent) and Agricultural Sciences (up 3 percent), with increases achieved in most operating segments.

Dow reported EBITDA of $1.8 billion, up 2 percent versus the prior year. Performance Plastics drove the EBITDA increase, with a 32 percent gain compared with the year-ago period. Coatings and Infrastructure Solutions and Electronic and Functional Materials also reported increases, up 15 percent and 5 percent, respectively.

Earnings for the quarter were $0.49 per share or $0.50 per share on an adjusted basis. This compares with prior-year earnings per share of $0.42 and represents year-over-year growth of 17 percent.

Certain Items in the current quarter included a charge for implementation costs related to the Company's restructuring programs. (See Supplemental Information at the end of the release for a description of Certain Items affecting results.)

Research and Development (R&D) expenses decreased 4 percent versus the same period last year. Selling, General and Administrative (SG&A) expenses also decreased, down 6 percent versus the prior year.

Equity earnings were $322 million, versus $175 million in the year-ago period, with increases primarily due to the Company's joint ventures in Kuwait.

Net debt to total capitalization and interest expense both declined in the quarter, reflecting Dow's ongoing debt-reduction actions. Net debt to total capitalization was 34.7 percent. In addition, Dow's interest expense declined more than $50 million versus the same quarter last year, and is down nearly $120 million year to date.

Electronic and Functional Materials

Electronic and Functional Materials sales were $1.2 billion, up 5 percent compared with the same quarter last year, as volume growth of 6 percent more than offset a 1 percent price decline. Dow Electronic Materials delivered healthy volume gains due to ongoing strong demand for OLED materials in mobile devices, as well as share gains in functional films. This more than offset the impact of a weaker Japanese yen. Functional Materials delivered sales gains as stronger demand in energy and home care sectors grew volume in Dow Microbial Control and Consumer and Industrial Solutions, respectively. This more than offset volume declines due to soft demand in the cellulosics chain, which impacted Dow Pharma and Food Solutions.

Equity earnings for the segment were $36 million, up $9 million from the third quarter of last year, driven primarily by Dow Corning. EBITDA increased to $287 million, up $14 million or 5 percent over the same quarter last year, due to sales growth, as well as healthy margins resulting from tight cost controls.

Coatings and Infrastructure Solutions

Coatings and Infrastructure Solutions reported sales of $1.8 billion, up 6 percent versus the prior year, as volume grew 5 percent and price increased 1 percent. Sales gains were broad based, with increases across all businesses and geographic areas. Dow Building and Construction grew sales as a result of volume gains in all regions. Strong sales increases in architectural coatings drove growth in Dow Coating Materials. Performance Monomers delivered double-digit sales gains in North America and Asia Pacific. Sales rose in Dow Water and Process Solutions, due to healthy demand in reverse osmosis technologies in Asia Pacific.

Equity earnings for the segment increased to $32 million from $29 million the same quarter last year. EBITDA was $283 million, an increase of $37 million or 15 percent versus the same quarter last year, reflecting the benefits of cost controls as a result of restructuring efforts, coupled with improving demand.

Agricultural Sciences

Agricultural Sciences reported record third quarter sales of $1.4 billion, up 8 percent versus the year-ago period. Volume increased 5 percent and price rose 3 percent. Volume gains were driven by double-digit growth in Latin America.

Third quarter Crop Protection sales rose 10 percent, driven by higher sales of herbicides in North America and Latin America, and higher sales of insecticides in Latin America. Year to date, sales of new Crop Protection products are up 12 percent led by pyroxsulam herbicide.

Seeds, Traits and Oils (ST&O) sales were down 4 percent in the quarter versus the year-ago period with higher return activity in North America driven by a late, wet planting season more than offsetting double-digit gains in Latin America. Year to date, ST&O sales are up 18 percent driven by strong farmer demand for SmartStax^® corn hybrids and growth in most major crops.

EBITDA for the segment was $18 million, down from $63 million in the same quarter last year. Third quarter EBITDA margins reflect the impact of higher seed return activity in North America and increased spending on growth investments in the seasonally lowest sales quarter.

Performance Materials

Sales in Performance Materials were $3.3 billion, down 3 percent versus the year-ago period. Volume decreased 4 percent, while price rose 1 percent compared with the same quarter last year.

Dow Automotive Systems delivered volume gains due primarily to ongoing strength in North American transportation fundamentals. Volume also rose in Propylene Oxide/Propylene Glycol on continued healthy fundamentals in home and personal care products in North America. These gains were more than offset by declines in Epoxy, driven by ongoing industry competitive dynamics. In Polyglycols, Surfactants and Fluids volume also declined due to fewer projects this quarter in concentrated solar power applications.

Price rose 1 percent with gains in most businesses, and increases in North America and Europe, Middle East and Africa (EMEA). Rising raw material costs, coupled with unfavorable supply and demand dynamics, more than offset this increase, leading to margin contraction - particularly in Epoxy, Chlorinated Organics, Polyurethanes and Propylene Oxide/Propylene Glycol.

Equity losses for the quarter were $11 million versus losses of $30 million in the same quarter last year. The segment reported EBITDA of $314 million. This compares with EBITDA of $491 million in the year-ago period.

Performance Plastics

Sales in Performance Plastics were $3.6 billion, up 3 percent versus the year-ago period. Excluding the impact of divestures, sales were up 6 percent, with double-digit increases achieved in North America and Asia Pacific, and strong sales gains in Latin America.

Dow Packaging & Specialty Plastics improved sales in North America, Asia Pacific and Latin America, more than offsetting lower sales in Europe that were primarily impacted by the previously announced shutdown of a facility in Tessenderlo, Belgium. Gains in flexible food and specialty packaging delivered the largest increase over the year-ago period.

Sales were down in Dow Elastomers driven by pricing pressure relative to year-ago levels. Solid demand in transportation markets and hot melt adhesives for carton sealing and nonwoven markets fueled higher sales of ENGAGE ^TM and AFFINITY ^TM. Dow Electrical and Telecommunications had lower sales on softer demand from power markets, partially offset by improved pricing in North America, EMEA and Asia Pacific.

Equity earnings for the segment were $134 million, up from $28 million in the year-ago period. EBITDA for the segment was $970 million, up 32 percent from the same period last year. Segment EBITDA margin expansion was driven by broad-based pricing gains across all geographies.

Feedstocks and Energy

Sales in Feedstocks and Energy were $2.3 billion, down 7 percent versus the same period last year. Price was flat while volume declined by 7 percent. The decrease in volume was largely driven by Hydrocarbons in Europe due to lower operating rates and a lighter ethylene cracker feedslate. Caustic soda was also a contributing factor to the year-over-year volume decrease, primarily due to limited product availability associated with turnarounds.

Equity earnings were $135 million, up from $123 million in the same quarter last year. EBITDA for the segment was $187 million, a decrease from $200 million in the year-ago period.

Outlook

Commenting on the Company's outlook, Liveris said:

"In an unpredictable global business environment, Dow has proven its agility and focus - actively managing every aspect of our enterprise to deliver ongoing earnings momentum. Our focus on self-help continues unabated: prioritizing our portfolio through a sharp ROC lens, maintaining the momentum of our cost and cash actions, liberating cash and deploying it to our capital structure and our shareholders.

"We will continue to go deeper into attractive end-use markets, as well as de-emphasizing our participation in commoditizing, non-strategic markets. The world continues to show hesitant growth at best, particularly in the near term. Therefore, an unrelenting focus on targeted growth - with strategic investments in market-driven innovation and assets with low-cost positions - remains our pathway to expanded earnings and increasing shareholder returns."

Dow will host a live Webcast of its third quarter earnings conference call with investors to discuss its results, business outlook and other matters today at 9:00 a.m. ET on www.dow.com.

^®SmartStax multi-event technology developed by Dow AgroSciences LLC and Monsanto. SmartStax is a trademark of Monsanto Technology LLC.

^TM Trademark of The Dow Chemical Company ("Dow") or an affiliated company of Dow.

About Dow

Dow (NYSE: DOW) combines the power of science and technology to passionately innovate what is essential to human progress. The Company connects chemistry and innovation with the principles of sustainability to help address many of the world's most challenging problems such as the need for clean water, renewable energy generation and conservation, and increasing agricultural productivity. Dow's diversified industry-leading portfolio of specialty chemical, advanced materials, agrosciences and plastics businesses delivers a broad range of technology-based products and solutions to customers in approximately 160 countries and in high growth sectors such as electronics, water, energy, coatings and agriculture. In 2012, Dow had annual sales of approximately $57 billion and employed approximately 54,000 people worldwide. The Company's more than 5,000 products are manufactured at 188 sites in 36 countries across the globe. References to "Dow" or the "Company" mean The Dow Chemical Company and its consolidated subsidiaries unless otherwise expressly noted. More information about Dow can be found at www.dow.com.

Use of non-GAAP financial measures: Dow's management believes that measures of income adjusted to exclude certain items ("non-GAAP" financial measures) provide relevant and meaningful information to investors about the ongoing operating results of the Company. Such financial measures are not recognized in accordance with accounting principles generally accepted in the United States of America ("GAAP") and should not be viewed as an alternative to GAAP financial measures of performance. Reconciliations of non-GAAP financial measures to GAAP financial measures are provided in the Supplemental Information tables.

Note: The forward-looking statements contained in this document involve risks and uncertainties that may affect the Company's operations, markets, products, services, prices and other factors as discussed in filings with the Securities and Exchange Commission. 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.

Supplemental Information

Description of Certain Items Affecting Results

The following tables summarize the impact of certain items recorded in the three- and nine-month periods ended September 30, 2013 and September 30, 2012:

The following table presents diluted share counts for the three- and nine-month periods ended September 30, 2013 and September 30, 2012, including the effect of an assumed conversion of the Company's Cumulative Convertible Perpetual Preferred Stock, Series A into shares of the Company's common stock:

Results in the third quarter of 2013 were impacted by one item:

• Pretax charges of $7 million for implementation costs related to the Company's restructuring programs. The charges were included in "Cost of sales" in the consolidated statements of income and reflected in Corporate.

In addition to the item described above for the third quarter of 2013, results for the nine-month period ended September 30, 2013 were impacted by the following items:

• Pretax charges of $24 million for implementation costs related to the Company's restructuring programs. The charges were included in "Cost of sales" ($23 million) and "Selling, general and administrative expenses" ($1 million) in the consolidated statements of income and reflected in Corporate.
• Pretax loss of $170 million on the early extinguishment of debt, included in "Sundry income (expense) - net" in the consolidated statements of income and reflected in Corporate.
• Pretax gain of $2.161 billion related to damages awarded to the Company in the K-Dow arbitration proceeding. The gain was included in "Sundry income (expense) - net" in the consolidated statements of income and reflected in Corporate.
• A tax charge of $223 million related to court rulings on two separate matters that resulted in the adjustment of uncertain tax positions.

The results for the nine-month period ended September 30, 2012 were impacted by the following items:

• Pretax restructuring charges of $357 million. On March 27, 2012, the Company's Board of Directors approved a restructuring plan as part of a series of actions to optimize its portfolio, respond to changing and volatile economic conditions, particularly in Western Europe, and to advance the Company's Efficiency for Growth program. The restructuring plan included the shutdown of a number of manufacturing facilities and a workforce reduction. As a result of these activities, the Company recorded pretax restructuring charges of $357 million in the first quarter of 2012 consisting of costs associated with exit and disposal activities of $150 million, severance costs of $113 million and costs associated with asset write-downs and write-offs of $94 million. The impact of the charges is shown as "Restructuring charges" in the consolidated statements of income and is reflected in the Company's segment results as follows: $17 million in Electronic and Functional Materials, $41 million in Coatings and Infrastructure Solutions, $186 million in Performance Materials and $113 million in Corporate.
• Pretax loss of $24 million on the early extinguishment of debt, included in "Sundry income (expense) - net" in the consolidated statements of income and reflected in Corporate.

The Dow Chemical Company
Rebecca Bentley
+1 989 638 8568
rmbentley@dow.com