DOW Dow Inc

The Dow Chemical Company (DOW) earned 69 cents per share in the third quarter of 2011, ahead of the Zacks Consensus Estimate of 64 cents per share as well as last year’s 45 cents per share. However, including one-time charges, the company earned 62 cents per share compared with 54 cents per share in the year-ago quarter.

Quarterly revenues jumped 17% year over year to $15.1 billion and were above the Zacks Consensus Estimate of $14.7 billion, driven by double-digit gains in all operating segments and geographic areas, with the largest growth in Latin America (21%) and Europe, Middle East and Africa (EMEA) (19%). In emerging geographies, sales reached $5 billion, a new quarterly record for the company.

At the company level, volume was flat versus the same quarter last year, as demand gains in Latin America (7%) and Asia Pacific (5%) offset decreases in North America (3%) and EMEA (2%). Volume growth in emerging geographies was 7%, led by China (12%), India (11%) and Brazil (10%). Besides, across operating segments volume gains were reported in Agricultural Sciences (18%), Electronic and Functional Materials (3%) and Performance Plastics (1%).

At the company level, price rose 17%. Broad-based price gains were achieved in all geographic areas, led by EMEA (21%) and North America (17%). Double-digit price gains were reported in all operating segments, except Electronic and Functional Materials (up 8%) and Agricultural Sciences (up 9%). Price gains offset a $1.7 billion increase in purchased feedstock and energy costs.

EBITDA was $2.1 billion but excluding certain items was $2.0 billion, which is the highest third quarter result in Dow’s history. This contributed to record year-to-date EBITDA on the same basis of $6.8 billion, up 21% year over year.

Dow’s global operating rate was 83%, down 3% year over year and 1% sequentially.

Segment Review

Electronic and Functional Materials: Sales in the segment climbed 11% year over year to $1.2 billion, driven by 3% volume growth and price gains of 8%. Dow Electronic Materials reported the strongest demand growth in the Semiconductor Technologies and Display Technologies businesses, driven by new product introductions, positions in higher-growth advanced technology nodes and solid growth in organic light emitting diode (OLED) materials.

In Asia Pacific, Dow Electronic Materials reported demand growth across all business units. The business recorded several customer wins in the quarter involving chemical mechanical planarization pads and slurries, photoresist and display films.

Functional Materials reported a double-digit increase in sales versus the year-ago period, driven primarily by price. Dow Wolff Cellulosics reported double-digit volume growth in EMEA and demand gains in North America, driven by food and pharmaceuticals demand. Dow Microbial Control continued to see volume growth in North America, led by ongoing demand from energy end markets. Dow Home and Personal Care reported volume growth in all geographic areas excluding North America, with the largest gains in Latin America and Asia Pacific.

Equity earnings were $23 million, reflecting the contribution from Dow Corning. This result was flat with the same period last year. EBITDA for the segment was $306 million, which compares with EBITDA of $277 million in the year-ago period.

Coatings and Infrastructure: Sales were $1.9 billion, with volume down 4% and price up 14%. Double-digit price gains were reported in all businesses except Dow Water and Process Solutions, where price was up 5%.

DowBuildingand Construction reported a double-digit price gain overall, with increases in all geographic areas. Ongoing depressed demand conditions in North America and EMEA were offset by double-digit growth in the emerging regions.

Results for the business were partly impacted by ongoing investment in the DOW POWERHOUSE Solar Shingle, for which the business recently announced its commercial launch. Dow Coating Materials reported double-digit price gains across all geographic areas except EMEA, offsetting soft demand conditions. Dow Water and Process Solutions reported price and volume gains in EMEA, North America and Asia Pacific. The business wirtnessed double-digit demand growth in the emerging regions, fueled by strong gains in ion exchange resins, notably in Greater China.

Equity earnings were $72 million, largely reflecting the contribution from Dow Corning. This result is down slightly from the $75 million reported in the year-ago period. EBITDA for the segment was $372 million, which compares with EBITDA of $382 million in the same period last year.

Agricultural Sciences: This segment reported record sales of $1.2 billion, up 27% compared with the year-ago period. Volume increased 18% and price rose 9%. Double-digit sales and volume gains were reported in all geographic areas, led by Latin America. The business continues to benefit from solid industry fundamentals, with elevated income levels providing strong incentive for farmers to maximize yields.

EBITDA for the segment was $75 million, which compares with a loss of $12 million in the year-ago period.

Performance Materials: Sales in this segment were $3.7 billion, with volume down 3% and price up 15%. Double-digit price gains were reported in all geographic areas and in most businesses in response to higher raw material costs. Volume growth in Latin America and North America was more than offset by declines in EMEA and Asia Pacific.

Amines reported price and volume gains globally, with notable demand growth in the emerging regions. The business continued to see solid fundamentals in agriculture and energy end-markets.

Dow Automotive Systems reported price and volume expansion in all geographic areas. The business reported double-digit demand growth globally for its adhesives platform, and recorded gains for technology-differentiated products in acoustical applications and polyurethane-based formulations.

Dow Formulated Systems reported price increases in all geographic areas. However, demand continued to be restrained by weak construction end-markets in developed regions, as well as a pause in wind energy investments in Asia Pacific.

Epoxy reported a modest sales gain versus the year-ago period, with double-digit price increases in all geographic areas. Demand grew in all geographic areas except EMEA, where the business chose to forego low-margin volume.

Oxygenated Solvents reported double-digit price gains in all geographic areas, while volume fell slightly as demand growth in emerging geographies were partially offset by declines in the developed regions.

Polyglycols, Surfactants and Fluids reported a double-digit price gain and modest volume growth globally. The business recorded demand growth in de-icing applications in anticipation of the winter season, and strong sales of high temperature heat transfer fluids used in solar applications in EMEA.

Polyurethanes reported strong price gains globally and a slight gain in volume. In North America, the business reported double-digit volume growth driven by demand in furniture and bedding applications. The business recently announced the successful start-up of its new joint venture propylene oxide facility in Thailand.

EBITDA was $478 million versus $513 million in the year-ago quarter.

Performance Plastics: Sales soared 16% to $4.1 billion, with a 1% gain on volume, and a 15% price increase. The division reported strong performance in Dow Elastomers, which had double-digit volume growth and price increases.

Equity earnings for the segment were $150 million versus $58 million in the year-ago period. Equity earnings in the quarter included a pre-tax $86 million gain related to cash collected on a previously impaired note receivable related to Equipolymers, a nonconsolidated affiliate. Excluding this certain item, equity earnings were $64 million. EBITDA for the segment was $834 million, or $748 million excluding certain items. This compares with EBITDA of $900 million in the same period last year, or $898 million excluding certain items.

Feedstocks and Energy: Sales in Feedstocks and Energy were $2.9 billion, up 34% from the same period last year. Volume inched down 2% and price rose 36%.

The Chlor-Alkali/Chlor-Vinyl business reported strong sales growth, with double-digit price increases in North America, Latin America and Europe. The largest price gains were reported in caustic soda, driven by tight supply and continued strong demand in the alumina and pulp and paper industries. Vinyl chloride monomer volume decreased due to the shutdown of an asset in Plaquemine, coupled with an ongoing weak outlook in construction end markets. Ethylene Oxide/Ethylene Glycol sales increased 23% from the year-ago period, driven by price.

Equity earnings were $153 million for the quarter versus $98 million in the year-ago period, driven by strong results in MEGlobal and Kuwait Olefins Company. EBITDA for the segment was $263 million compared with $154 million in the same period last year.

Balance Sheet View

As of September 30, 2011, cash and cash equivalent amounted to $2,206 million versus $7,039 million at the end of December 31, 2010. Net debt-to-capital was 40.9% versus 41.6% in the prior quarter.

Outlook

There was no financial guidance from Dow. However, Dow anticipates demand to improve further, especially in Asia with the global economic recovery. The US and European markets have also started showing signs of improvement. Dow is also optimistic on major consumer-markets, including electronics, coatings, automotive and packaging. However, construction markets are expected to remain weak.

DOW faces stiff competition from EI DuPont de Nemours & Co. (DD).

Currently, DOW has a short-term (1 to 3 months) Zacks #4 Rank (Sell) but a long- term Neutral recommendation.

 
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