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DOW > SEC Filings for DOW > Form 10-Q on 29-Apr-2014All Recent SEC Filings

Show all filings for DOW CHEMICAL CO /DE/

Form 10-Q for DOW CHEMICAL CO /DE/


29-Apr-2014

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 2014 of $14.5 billion, up 1 percent compared with $14.4 billion in the first quarter of 2013, driven by sales increases in Coatings and Infrastructure Solutions (up 5 percent), Performance Plastics (up 3 percent) and Agricultural Sciences (up 1 percent). Sales increased in Asia Pacific and Europe, Middle East and Africa ("EMEA"), decreased in Latin America and remained flat in North America.

Volume improved 1 percent compared with the first quarter of 2013, led by increases in Coatings and Infrastructure Solutions (up 6 percent) and Agricultural Sciences (up 2 percent), with gains reported in all geographic areas, except North America (down 3 percent). Excluding recent divestitures(1), volume in Performance Plastics improved 1 percent.

Price remained unchanged compared with the same period last year, as increases in Performance Plastics (up 4 percent) were offset by price declines in all other operating segments, except Performance Materials which remained flat. Price declined in all geographic areas, except North America (up 3 percent).

Purchased feedstock and energy costs, which account for more than one-third of Dow's total costs, increased $327 million (6 percent), compared with the first quarter of 2013, primarily due to increased propane, ethane and natural gas costs.

Research and development ("R&D") expenses decreased in the first quarter of 2014 compared with the same period last year, primarily due to cost saving initiatives and lower performance-based compensation costs. Selling, general and administrative ("SG&A") expenses increased in the first quarter of 2014 compared with the same period last year. SG&A was impacted by increased spending on growth initiatives in Agricultural Sciences and Performance Plastics, which was partially offset by lower performance-based compensation costs.

Equity earnings were $251 million in the first quarter of 2014, up $21 million from $230 million in the first quarter of 2013, led by higher earnings from Dow Corning Corporation ("Dow Corning").

The Company purchased 26 million shares of common stock at a cost of $1.25 billion during the first quarter of 2014.

In addition to the financial highlights listed above, the Company made the following announcements during the first quarter of 2014:

On January 29, 2014, the Board of Directors announced the declaration of a quarterly dividend of $0.37 per share, payable April 30, 2014, to stockholders of record on March 31, 2014. This 15 percent increase in the dividend in the first quarter demonstrates Dow's commitment to consistently and increasingly reward shareholders through ongoing earnings growth.

On January 29, 2014, the Board of Directors announced an expansion of the Company's share buy-back authorization, authorizing an additional amount not to exceed $3 billion to be spent on the repurchase of the Company's common stock over a period of time. As a result, the authorized amount of the ongoing share repurchase program increased to $4.5 billion. The Company expects the share repurchase program to be completed in 2014.

In the first quarter of 2014, the Company's joint venture membrane chlor-alkali facility with Mitsui & Co., Ltd., Dow-Mitsui Chlor-Alkali LLC, successfully initiated full-scale, commercial production. The new facility has a nameplate capacity of approximately 800 kilotons per annum (KTA) of chlorine. This new world scale facility will replace 800 KTA of older capacity at Dow's Freeport site. The joint venture is a variable interest entity and is included in Dow's consolidated financial statements.

Peter Holicki was elected Corporate Vice President, Manufacturing and Engineering, and Environment, Health and Safety Operations, effective February 13, 2014.

(1) Excludes sales related to Nippon Unicar Company Limited, divested on July 1, 2013, and sales of the Polypropylene Licensing and Catalysts business, divested on December 2, 2013.


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Selected Financial Data                         Three Months Ended
                                               Mar 31,      Mar 31,
In millions, except per share amounts             2014         2013
Net sales                                    $  14,461     $ 14,383

Cost of sales                                $  11,733     $ 11,707
Percent of net sales                              81.1 %       81.4 %

Research and development expenses            $     391     $    435
Percent of net sales                               2.7 %        3.0 %

Selling, general and administrative expenses $     779     $    772
Percent of net sales                               5.4 %        5.4 %

Effective tax rate                                28.5 %       47.8 %

Net income available for common stockholders $     964     $    550

Earnings per common share - basic            $    0.80     $   0.46
Earnings per common share - diluted          $    0.79     $   0.46

Operating rate percentage                           83 %         82 %

RESULTS OF OPERATIONS
Net Sales
Net sales in the first quarter of 2014 were $14.5 billion, up 1 percent from $14.4 billion in the first quarter of last year, with volume up 1 percent and price flat. Volume increases in Coatings and Infrastructure Solutions (up 6 percent) and Agricultural Sciences (up 2 percent) more than offset volume declines in Performance Materials and Performance Plastics (both down 1 percent). Volume in Electronic and Functional Materials and Feedstocks and Energy remained flat. The volume decline in Performance Plastics reflects the impact of recent divestitures(1). Excluding these divestitures, volume in Performance Plastics increased 1 percent. Volume increased in all geographic areas, except North America (down 3 percent). Price increases in Performance Plastics (up 4 percent) were offset by price declines in all other operating segments, except Performance Materials which remained flat. Price declined in all geographic areas, except North America (up 3 percent).

Gross Margin
Gross margin was $2,728 million in the first quarter of 2014, up slightly from $2,676 million in the first quarter of last year, as increased sales volume, higher operating rates, lower costs as a result of restructuring actions and lower performance-based compensation costs were partially offset by higher feedstock and energy costs. In the first quarter of 2013, gross margin was negatively impacted by $11 million of restructuring plan implementation costs.

Operating Rate
The Company's global plant operating rate was 83 percent of capacity in the first quarter of 2014, up from 82 percent in the first quarter of 2013.

Personnel Count
Personnel count was 52,743 at March 31, 2014, up slightly from 52,731 at December 31, 2013 and down from 53,444 at March 31, 2013. Headcount was essentially flat from December 31, 2013 as the impact of the Company's 2012 restructuring programs, which are expected to be completed primarily by March 31, 2015, and the reduction of seasonal employees in the Agricultural Sciences operating segment were offset by increased hiring for the Company's growth initiatives. Headcount decreased from March 31, 2013 primarily due to the Company's 2012 restructuring programs.

Research and Development Expenses
R&D expenses totaled $391 million in the first quarter of 2014, down 10 percent from $435 million in the first quarter of last year, primarily due to cost saving initiatives and lower performance-based compensation costs.


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Selling, General and Administrative Expenses SG&A expenses totaled $779 million in the first quarter of 2014, up $7 million (1 percent) from $772 million in the first quarter of last year. SG&A was impacted by increased spending on growth initiatives in Agricultural Sciences and Performance Plastics, which was partially offset by lower performance-based compensation costs.

Amortization of Intangibles
Amortization of intangibles was $114 million in the first quarter of 2014, down slightly from $115 million in the first quarter of 2013. See Note 5 to the Consolidated Financial Statements for additional information on intangible assets.

Equity in Earnings of Nonconsolidated Affiliates Dow's share of the earnings of nonconsolidated affiliates was $251 million in the first quarter of 2014, up from $230 million in the first quarter of 2013, primarily due to increased earnings from Dow Corning which was partially offset by lower earnings from EQUATE Petrochemical Company K.S.C. and MEGlobal.

Sundry Income (Expense) - Net
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 2014 was income of $29 million, an increase of $61 million compared with expense of $32 million in the first quarter of 2013. The first quarter of 2014 included a gain related to the termination of an off-take agreement, partially offset by foreign currency exchange losses. 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. See Note 10 to the Consolidated Financial Statements for additional information related to the early extinguishment of debt.

Net Interest Expense
Net interest expense (interest expense less capitalized interest and interest income) was $233 million in the first quarter of 2014, compared with $288 million in the first quarter of last year. The decline reflects the effect of the Company's deleveraging activities in 2013 and lower debt financing costs. Interest income was $13 million in the first quarter of 2014, compared with $8 million in the first quarter of 2013.

Provision for Income Taxes
The effective tax rate for the first quarter of 2014 was 28.5 percent compared with 47.8 percent for the first quarter of 2013. 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 method investments are taxed at the joint venture level. The decrease in the first quarter of 2014 tax rate compared with the first quarter of 2013 tax rate was primarily due to the first quarter of 2013 being negatively impacted by 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 Net income attributable to noncontrolling interests was $17 million in the first quarter of 2014 compared with $25 million in the first quarter of 2013.

Preferred Stock Dividends
Preferred stock dividends of $85 million were recognized in the first quarters of 2014 and 2013, related to the Company's Cumulative Convertible Perpetual Preferred Stock, Series A.

Net Income Available for Common Stockholders Net income available for common stockholders was $964 million, or $0.79 per share, in the first quarter of 2014, compared with $550 million, or $0.46 per share, in the first quarter of 2013. See Note 14 to the Consolidated Financial Statements for details on the Company's earnings per share calculations.


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Certain Items Impacting Results
The following table summarizes the impact of certain items recorded in the
three-month periods ended March 31, 2014 and March 31, 2013, and previously
described in this section. There were no certain items for the three-month
period ended March 31, 2014.

Certain Items Impacting Results      Pretax Impact (1)               Net Income (2)               EPS - Diluted (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 (Unaudited)                    2014          2013           2014            2013          2014            2013
Adjusted to exclude certain
items (non-GAAP measures)                                     $      964       $     819     $    0.79        $   0.69
Certain items:
Cost of Sales:
Restructuring plan
implementation costs             $        -     $     (11 )            -              (7 )           -           (0.01 )
Selling, general and
administrative expenses:
Restructuring plan
implementation costs                      -            (1 )            -              (1 )           -               -
Sundry income (expense) - net:
Loss on early extinguishment of
debt                                      -           (60 )            -             (38 )           -           (0.03 )
Provision for income taxes:
Uncertain tax position
adjustments                               -             -              -            (223 )           -           (0.19 )
Total certain items              $        -     $     (72 )   $        -       $    (269 )   $       -        $  (0.23 )
Reported GAAP Amounts                                         $      964       $     550     $    0.79        $   0.46

(1) Impact on "Income Before Income Taxes"

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

(3) "Earnings per common share - diluted"

The Company'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 ("U.S. GAAP") and should not be viewed as an alternative to U.S. GAAP financial measures of performance.

OUTLOOK
The Company expects a global operating environment of continued slow growth and volatility. Against this backdrop, Dow continues to drive Company-specific actions focused on improving core operational performance, business by business. Productivity actions are underway, becoming institutionalized in the organization and delivering results. Strategic investments in the U.S. Gulf Coast and the Middle East are progressing as planned, on time and on budget. Prioritized innovation continues to be a source of differentiation for the Company. Further, the monetization of non-strategic businesses is expected to generate $4.5 billion to $6 billion in pretax proceeds.

Dow is determined to improve return on capital, drive earnings higher and generate cash. All of these cumulative actions are gaining momentum and, together with the completion of the Company's $4.5 billion share buy-back authorization by year-end, Dow is positioned well to continue rewarding shareholders.

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; 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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SALES VOLUME AND PRICE BY OPERATING SEGMENT AND GEOGRAPHIC AREA
Sales Volume and Price by Operating Segment and
Geographic Area                                          Three Months Ended
                                                            Mar 31, 2014
Percentage change from prior year                    Volume      Price     Total
Operating segments
Electronic and Functional Materials                    -  %       (1 )%     (1 )%
Coatings and Infrastructure Solutions                  6          (1 )       5
Agricultural Sciences                                  2          (1 )       1
Performance Materials                                 (1 )         -        (1 )
Performance Plastics                                  (1 )         4         3
Feedstocks and Energy                                  -          (4 )      (4 )
Total                                                  1  %        -  %      1  %
Geographic areas
United States                                         (3 )%        3  %      -  %
Europe, Middle East and Africa                         2          (1 )       1
Rest of World                                          2          (1 )       1
Total                                                  1  %        -  %      1  %

Sales Volume and Price by Operating Segment and

Geographic Area,                                         Three Months Ended
Excluding Divestitures (1)                                  Mar 31, 2014
Percentage change from prior year                    Volume      Price     Total
Operating segments
Electronic and Functional Materials                    -  %       (1 )%     (1 )%
Coatings and Infrastructure Solutions                  6          (1 )       5
Agricultural Sciences                                  2          (1 )       1
Performance Materials                                 (1 )         -        (1 )
Performance Plastics                                   1           5         6
Feedstocks and Energy                                  -          (4 )      (4 )
Total                                                  1  %        -  %      1  %
Geographic areas
United States                                         (3 )%        3  %      -  %
Europe, Middle East and Africa                         2          (1 )       1
Rest of World                                          4          (1 )       3
Total                                                  1  %        -  %      1  %

(1) Excludes sales related to Nippon Unicar Company Limited, divested on July 1, 2013, and sales of the Polypropylene Licensing and Catalysts business, divested on December 2, 2013.


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