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Dow Reports Third Quarter 2005 Results; Strong Sales and Earnings Growth in Face of Significant Challenges

Published on 2005-10-31. Author : SpecialChem

Third Quarter of 2005 Highlights

  • Sales for the three months ended September 30 set a new third quarter record of $11.3 billion, 12 percent higher than the same period last year.
  • Earnings per share were $0.82, a 26 percent improvement over the $0.65 per share reported a year ago and the Company's 10th consecutive quarter of year-over-year earnings growth.
  • Strong cash flow allowed the Company to further reduce debt by $500 million, bringing its net debt(1) to capital ratio to 32 percent - down 14 percentage points from 46 percent at the end of the third quarter of last year.

Comment

Geoffery E. Merszei, Dow's executive vice president and chief financial officer, stated "This was a tough quarter for Dow; feedstock and energy costs soared to new highs and our U.S. Gulf Coast operations were disrupted by two severe hurricanes. But Dow's response to these challenges was both swift and effective, delivering another very good quarter for the Company and demonstrating the commitment and the professionalism of Dow people throughout our organization."

Review of Third Quarter Results

The Dow Chemical Company (NYSE: DOW) reported sales of $11.3 billion for the third quarter of 2005, a 12 percent increase compared with the same period of 2004. Net income rose 30 percent to $801 million, while earnings per share were $0.82, up 26 percent from the third quarter of last year.

Price improved 12 percent year-over-year, with increases in all geographic areas and across virtually every business, while volume held steady compared with a very strong third quarter in 2004, despite the impact of the two hurricanes that hit the U.S. Gulf Coast.

Although Dow's feedstock and energy costs were almost $850 million higher than a year ago, the Company recorded its 11th consecutive quarter of year-over-year margin recovery and was able to further reduce debt by $500 million. At the end of the quarter, Dow's net debt to capital ratio was 32 percent, 14 percentage points lower than at the end of the same quarter in 2004. The Company's gross debt to total capital ratio was 41 percent.

"This was a tough quarter for Dow; feedstock and energy costs soared to new highs and our U.S. Gulf Coast operations were disrupted by two severe hurricanes," said Geoffery E. Merszei, Dow's executive vice president and chief financial officer. "But Dow's response to these challenges was both swift and effective, delivering another very good quarter for the Company and demonstrating the commitment and the professionalism of Dow people throughout our organization.

"This was also a quarter that underscored the value of Dow's strategic direction. Our Performance Plastics and Performance Chemicals businesses each had a strong quarter compared with a year ago – reinforcing the benefit of our diversified business portfolio. Increased demand for Dow's products in Europe offset declines in other parts of the world - demonstrating the merit of geographic balance. Our nonconsolidated joint ventures once again added substantially to our bottom line, with equity earnings for the quarter rising compared with last year. And our commitment to financial discipline enabled us to significantly reduce debt, while also ensuring continued cost constraint - with the Company's Selling, Administrative and Research and Development expenses as a percent of sales remaining below 6 percent."

In the Performance Plastics segment, sales for the third quarter were $2.9 billion, an increase of 22 percent compared with the same period in 2004, with volume up 5 percent and price up 17 percent. Sales improved across all businesses and in all geographic areas, leading to particularly strong earnings growth in Polyurethanes, Engineering Plastics and Epoxy Products and Intermediates. Dow Automotive reported a healthy year-over-year volume improvement, outpacing the industry by securing higher content with its traditional global OEM customer base and continuing to capture opportunities with new customers. Volume was also up in Dow's Building and Construction business, with strong demand growth for STYROFOAM™ brand products in both Europe and North America. Results for the segment in the third quarter were bolstered by the successful integration of ENGAGE™, NORDEL™ and TYRIN™ elastomers, acquired in connection with the dissolution of the DuPont Dow Elastomers joint venture. Third quarter EBIT(2) for the Performance Plastics segment was $580 million, almost two and a half times the $238 million reported in the same quarter of 2004.

Sales in Performance Chemicals rose to $1.9 billion for the third quarter of 2005, an increase of 13 percent compared with the same period last year. This improvement was driven by a 17 percent increase in price, while volume was down 4 percent from the robust levels of a year ago. Dow Latex had a strong quarter, with both Emulsion Polymers and UCAR™ Emulsion Systems reporting double-digit price increases in most geographic areas. Specialty Polymers also reported a good quarter, benefiting from the sale of FILMTEC™ membranes to the world's largest desalination plant in the Middle East. And Acrylics and Oxide Derivatives recorded a strong increase in both sales and earnings, as the business overcame the impact of higher feedstock costs and lower volume. Performance Chemicals reported EBIT of $298 million for the third quarter, an increase of 84 percent compared with $162 million in the same period last year.

The Agricultural Sciences segment had a disappointing third quarter, posting sales of $615 million, down 6 percent from $657 million in the same quarter a year ago. Volume was down 8 percent year-over-year, due in part to the absence of a soybean rust outbreak in the southern United States and difficult market conditions in Brazil. By contrast, the segment saw healthy growth in its Plant Genetics and Biotechnology business, driven by increased demand for sunflower and corn seeds. Third quarter EBIT for Agricultural Sciences fell by $71 million compared with the same period a year ago, resulting in a loss for the quarter of $28 million.

Plastics sales climbed to $2.9 billion for the third quarter, 11 percent higher than the same period last year, with volume rising 2 percent as demand continued to recover from customer inventory de-stocking earlier in the year. Price was up 9 percent year-over-year, all but offsetting the surge in feedstock and energy costs. The quarter was marked by a further improvement in polyethylene demand, with tightening global supply driving significant price increases across all geographic areas. Polystyrene also delivered good volume growth during the quarter, with a modest improvement in earnings. Third quarter EBIT for the Plastics segment of $420 million was slightly lower than the $428 million posted for the same period in 2004.

Sales in the Chemicals segment declined slightly in the third quarter compared with the same period a year ago, dropping 3 percent to $1.3 billion. Price was up 9 percent, but volume was down 12 percent, principally the consequence of hurricanes Katrina and Rita which impacted around half of Dow's global ethylene glycol, caustic soda and vinyl chloride monomer production. Year-over-year caustic soda prices were up significantly, but these increases were not sufficient to keep pace with the soaring cost of U.S. natural gas. Results for ethylene glycol were impacted by an outage at EQUATE early in the quarter - and by lower selling prices compared with the very high levels of a year ago. The Chemicals segment reported EBIT for the third quarter of $168 million, 42 percent lower than the same period last year.

"This was a significantly challenging quarter for Dow, but one in which we were able to report healthy earnings growth, further strengthening our balance sheet and taking us past Dow's previous record annual earnings, with one full quarter to spare," said Merszei.

"Looking ahead, global economic growth is set to continue, spurring higher demand for chemicals and plastics in the face of tightening supply/demand balances. Although feedstock and energy costs are expected to remain high and volatile, our continued focus on financial discipline and margin management should reap another year-over-year earnings improvement in the fourth quarter - and 2006 should exceed our performance in 2005."

(1) Net debt equals total debt ("Notes payable" plus "Long-term debt due within one year" plus "Long-Term Debt") minus "Cash and cash equivalents" and "Marketable securities and interest-bearing deposits."

(2) Earnings before interest, income taxes and minority interests ("EBIT").

About Dow

Dow is a leader in science and technology, providing innovative chemical, plastic and agricultural products and services to many essential consumer markets. With annual sales of $40 billion, Dow 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. Committed to the principles of sustainable development, Dow and its 43,000 employees seek to balance economic, environmental and social responsibilities. References to "Dow" or the "Company" mean The Dow Chemical Company and its consolidated subsidiaries unless otherwise expressly noted.

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.

Source: Dow


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