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DOW > SEC Filings for DOW > Form 10-Q on 30-Apr-2013All Recent SEC Filings

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Form 10-Q for DOW CHEMICAL CO /DE/


30-Apr-2013

Quarterly Report

PART I - FINANCIAL INFORMATION, Item 2. Management's Discussion and
(Unaudited) Analysis of Financial Condition and Results of Operations

OVERVIEW
The Company reported sales in the first quarter of 2013 of $14.4 billion, down 2 percent from $14.7 billion in the first quarter of 2012, despite a quarterly sales record in Agricultural Sciences (up 14 percent). The sales decline was led by Feedstocks and Energy (down 13 percent).

Price was up 1 percent compared with the same period last year, driven by price increases in Agricultural Sciences (up 3 percent), Performance Materials and Feedstocks and Energy (both up 1 percent). Price increased in all geographic areas, except Asia Pacific (down 2 percent), primarily due to the impact of currency.

Volume declined 3 percent compared with the same quarter last year with the most pronounced decrease in Feedstocks and Energy (down 14 percent). Agricultural Sciences reported a double-digit volume increase (up 11 percent). Volume declines in Europe, Middle East and Africa ("EMEA") (down 10 percent) more than offset an increase in Latin America (up 6 percent). Volume remained flat in North America and Asia Pacific.

Purchased feedstock and energy costs, which account for more than one-third of Dow's total costs, decreased 5 percent or $289 million compared with the first quarter of 2012. The decrease in these costs was primarily due to lower feedstock prices in the United States resulting from increased supply of shale gas and natural gas liquids as well as lower naphtha prices in Europe.

Research and development expenses and selling, general and administrative expenses increased in the first quarter of 2013 compared with the same period last year, primarily due to growth initiatives in the Agricultural Sciences operating segment.

Equity earnings were $230 million in the first quarter of 2013, up $61 million from $169 million in the first quarter of 2012, primarily due to higher earnings from The Kuwait Olefins Company K.S.C., EQUATE Petrochemical Company K.S.C., MEGlobal and Univation Technologies, LLC.

In addition to the financial highlights listed above, the Company also made the following announcements during the first quarter of 2013:

On February 13, 2013, the Board of Directors approved a share buy-back program, authorizing up to $1.5 billion to be spent on the repurchase of the Company's common stock over a period of time.

On March 4, 2013, the International Court of Arbitration of the International Chamber of Commerce released the Final Award in the arbitration case between the Company and Petrochemical Industries Company (K.S.C.) related to the K-Dow transaction. The final interest and costs awarded to the Company is $318 million, as of February 28, 2013, and is in addition to the Partial Award of $2.16 billion announced in May 2012. As of March 31, 2013, the total amount owed to the Company, including interest, is $2.49 billion. See Gain Contingency-Matters Involving the Formation of K-Dow Petrochemicals in Note 8 to the Consolidated Financial Statements; and Other Matters in Management's Discussion and Analysis of Financial Condition and Results of Operations for additional information on the K-Dow Matter.

On March 14, 2013, the Company announced the Dow Plastics Additives and Dow Polypropylene Licensing and Catalysts business units are being marketed for divestment, as part of the Company's ongoing commitment to portfolio management.

On March 18, 2013, the Company announced it intends to build several new Performance Plastics production units on the U.S. Gulf Coast, further connecting the Company's U.S. manufacturing operations with cost-advantaged feedstocks resulting from increasing supplies of shale gas in North America. The Company is currently exploring specific location options on the U.S. Gulf Coast, with final investment locations to be determined at a later date.

On March 18, 2013, the Company entered into an initial agreement for a long-term ethylene off-take arrangement with a new joint venture to be formed between Idemitsu Kosan Co., Ltd. and Mitsui & Co., Ltd., of Tokyo, Japan. The joint venture will produce linear alpha olefins which are used as comonomers throughout Dow's Performance Plastics businesses.


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Selected Financial Data                         Three Months Ended
                                               Mar 31,      Mar 31,
In millions, except per share amounts             2013         2012
Net sales                                    $  14,383     $ 14,719

Cost of sales                                $  11,707     $ 12,285
Percent of net sales                              81.4 %       83.5 %

Research and development expenses            $     435     $    405
Percent of net sales                               3.0 %        2.8 %

Selling, general and administrative expenses $     772     $    707
Percent of net sales                               5.4 %        4.8 %

Effective tax rate                                47.8 %       26.3 %

Net income available for common stockholders $     550     $    412

Earnings per common share - basic            $    0.46     $   0.35
Earnings per common share - diluted          $    0.46     $   0.35

Operating rate percentage                           82 %         83 %

RESULTS OF OPERATIONS
Net sales in the first quarter of 2013 were $14.4 billion, down 2 percent from $14.7 billion in the first quarter of last year, with price up 1 percent and volume down 3 percent. Price increased in Agricultural Sciences (up 3 percent) and Performance Materials and Feedstocks and Energy (each up 1 percent), remained flat in Coatings and Infrastructure Solutions and Performance Plastics, and declined in Electronic and Functional Materials (down 1 percent). Price increased in all geographic areas except Asia Pacific (down 2 percent, primarily due to currency). Volume declined in all operating segments except Agricultural Sciences (up 11 percent) and Electronic and Functional Materials (up 3 percent), with the most pronounced decrease in Feedstocks and Energy (down 14 percent). Volume declined in EMEA (down 10 percent), remained flat in North America and Asia Pacific, and increased in Latin America (up 6 percent).

Gross margin was $2.7 billion in the first quarter of 2013, up from $2.4 billion in the first quarter of last year. Gross margin increased primarily due to the impact of higher selling prices and lower purchased feedstock and energy costs which more than offset decreased sales volume. Gross margin was also negatively impacted by $11 million of restructuring plan implementation costs in the first quarter of 2013.

The Company's global plant operating rate was 82 percent of capacity in the first quarter of 2013, down from 83 percent in the first quarter of 2012.

Personnel count was 53,444 at March 31, 2013, down from 54,353 at December 31, 2012 and up from 51,528 at March 31, 2012. Headcount decreased from December 31, 2012 primarily due to restructuring programs, which are expected to be completed primarily by December 31, 2014. Headcount increased from March 31, 2012 primarily in the Agricultural Sciences operating segment due to growth initiatives and the inclusion of seasonal employees as part of the Company's personnel count.

Research and development ("R&D") expenses totaled $435 million in the first quarter of 2013, up 7 percent from $405 million in the first quarter of last year, primarily due to ongoing growth initiatives in the Agricultural Sciences operating segment.

Selling, general and administrative ("SG&A") expenses totaled $772 million in the first quarter of 2013, up $65 million (9 percent) from $707 million in the first quarter of last year, primarily due to ongoing growth initiatives in the Agricultural Sciences operating segment.

Amortization of intangibles was $115 million in the first quarter of 2013, down from $122 million in the first quarter of last year. See Note 5 to the Consolidated Financial Statements for additional information on intangible assets.


Table of Contents

On March 27, 2012, the Company's Board of Directors approved a restructuring plan ("1Q12 Restructuring") 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. As a result of the 1Q12 Restructuring activities, the Company recorded pretax restructuring charges of $357 million in the first quarter of 2012. See Note 3 to the Consolidated Financial Statements for details on the Company's restructuring activities.

Dow's share of the earnings of nonconsolidated affiliates was $230 million in the first quarter of 2013, up from $169 million in the same quarter last year primarily due to higher earnings from The Kuwait Olefins Company K.S.C., EQUATE Petrochemical Company K.S.C., MEGlobal and Univation Technologies, LLC.

Sundry income (expense) - net 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 (expense) - net in the first quarter of 2013 was net expense of $32 million, a decrease of $49 million compared with net income of $17 million in the same quarter last year. The first quarter of 2013 included a $60 million loss on the early extinguishment of debt (reflected in Corporate), offset by foreign currency exchange gains and a non-income tax related refund. In the first quarter of 2012, sundry income (expense) - net included gains related to a divestiture and asset sales, a $24 million loss on the early extinguishment of debt (reflected in Corporate) and foreign currency exchange losses. See Note 10 to the Consolidated Financial Statements for additional information related to the early extinguishment of debt.

Net interest expense (interest expense less capitalized interest and interest income) was $288 million in the first quarter of 2013, compared with $323 million in the first quarter of last year. The decline reflects the Company's ongoing deleveraging activities and lower debt financing costs. Interest income was $8 million in the first quarter of 2013, compared with $6 million in the first quarter of 2012.

The effective tax rate for the first quarter of 2013 was 47.8 percent compared with 26.3 percent for the first quarter of 2012. The Company's effective tax rate fluctuates based on, among other factors, where income is earned, reinvestment assertions regarding earned income and the level of income relative to tax credits available. For example, as the percentage of foreign sourced income increases, the Company's effective tax rate declines. The Company's tax rate is also influenced by the level of equity earnings, since most of the earnings from the Company's equity company investments are taxed at the joint venture level. The increase in the first quarter of 2013 tax rate compared with the first quarter of 2012 tax rate was primarily due to a $223 million tax charge related to court rulings on two separate matters that resulted in the adjustment of uncertain tax positions. See Note 15 to the Consolidated Financial Statements for additional information on income taxes.

Net income attributable to noncontrolling interests was $25 million in the first quarter of 2013, up slightly from $23 million in the first quarter of 2012.

Preferred stock dividends of $85 million were recognized in the first quarters of 2013 and 2012, related to the Company's Cumulative Convertible Perpetual Preferred Stock, Series A.

Net income available for common stockholders was $550 million, or $0.46 per share, in the first quarter of 2013, compared with $412 million, or $0.35 per share, in the first quarter of 2012.


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The following table summarizes the impact of certain items recorded in the three months ended March 31, 2013 and March 31, 2012, and previously described in this section:

Certain Items Impacting Results             Pretax                       Impact on                    Impact on
                                          Impact (1)                  Net Income (2)                   EPS (3)
                                      Three Months Ended            Three Months Ended           Three Months Ended
In millions, except per share      Mar 31,          Mar 31,        Mar 31,        Mar 31,       Mar 31,       Mar 31,
amounts                               2013             2012           2013           2012          2013          2012
Cost of sales:
Restructuring plan
implementation costs             $     (11 )     $        -     $       (7 )    $       -     $   (0.01 )    $      -
Selling, general and
administrative expenses:
Restructuring plan
implementation costs                    (1 )              -             (1 )            -             -             -
Restructuring charges                    -             (357 )            -           (287 )           -         (0.25 )
Sundry income (expense) - net:
Loss on early extinguishment of
debt                                   (60 )            (24 )          (38 )          (15 )       (0.03 )       (0.01 )
Provision for income taxes:
Uncertain tax position
adjustments                              -                -           (223 )            -         (0.19 )           -
Total                            $     (72 )     $     (381 )   $     (269 )    $    (302 )   $   (0.23 )    $  (0.26 )

(1) Impact on "Income Before Income Taxes."

(2) Impact on "Net Income Available for The Dow Chemical Company Common Stockholders."

(3) Impact on "Earnings per common share - diluted."

OUTLOOK
The Company's focus remains on implementing specific plans to accelerate near-term value creation - organically growing attractive, high-growth businesses, while improving businesses where the return on capital is not meeting expectations, and leveraging the strength of its advantaged feedstock position and flexibility. Importantly, the Company continues to review its entire portfolio to identify other divestitures or strategic actions it can take to optimize value for shareholders.
Dow continues to benefit from the ongoing strength of its growth segments, such as Agricultural Sciences, Electronic and Functional Materials and Performance Plastics - where Dow's industry-leading technology positions, integrated portfolio and broad geographic presence are enabling steady growth. The Company's operating plans do not call for material macroeconomic improvements in 2013 compared with 2012. Given persistent volatility and uncertainty, this remains the right mindset for operating the Company. Modest improvements in the United States have been dampened by continuing uncertainty in China and Europe. These mixed conditions, coupled with ongoing feedstock volatility, are driving cautious customer purchasing patterns. Despite the lingering uncertainty in the operating environment, Dow will continue to execute on its near-term strategy - driving disciplined improvements in the portfolio. The Company's cost and cash flow measures continue to take hold, which are expected to gain momentum as the year progresses.

SEGMENT RESULTS
The Company uses EBITDA (which Dow defines as earnings (i.e., "Net Income") before interest, income taxes, depreciation and amortization) as its measure of profit/loss for segment reporting purposes. EBITDA by operating segment includes all operating items relating to the businesses, except depreciation and amortization; items that principally apply to the Company as a whole are assigned to Corporate. Additional information regarding the Company's operating segments and a reconciliation of EBITDA to "Income Before Income Taxes" can be found in Note 17 to the Consolidated Financial Statements.


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