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

Show all filings for DOW CHEMICAL CO /DE/

Form 10-Q for DOW CHEMICAL CO /DE/


29-Jul-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 second quarter of 2014 of $14.9 billion, up 2 percent from $14.6 billion in the second quarter of 2013, with increases in all operating segments, led by Electronic and Functional Materials (up 5 percent) and Performance Plastics (up 2 percent). Agricultural Sciences sales increased 3 percent in the quarter, achieving a first-half sales record of $4 billion. Sales increases in Europe, Middle East and Africa ("EMEA") and North America were partially offset by sales declines in Asia Pacific and Latin America.

• Price increased 2 percent compared with the same period last year, as increases in Performance Plastics (up 7 percent), Performance Materials and Coatings and Infrastructure Solutions (each up 1 percent) were partially offset by a price decline in Feedstocks and Energy (down 1 percent). Price remained flat in Electronic and Functional Materials and Agricultural Sciences. Price increased in most geographic areas, led by EMEA (up 4 percent), while price in Latin America remained flat.

• Volume remained unchanged compared with the second quarter of 2013, as increases in Electronic and Functional Materials (up 5 percent), Agricultural Sciences (up 3 percent), Feedstocks and Energy (up 3 percent) and Coatings and Infrastructure Solutions (up 2 percent) were offset by a decline in Performance Plastics (down 5 percent). Performance Materials volume remained unchanged. Volume increases in EMEA and North America were offset by declines in Asia Pacific and Latin America. Excluding recent divestitures(1), volume was up 1 percent.

• Purchased feedstock and energy costs, which account for more than one-third of Dow's total costs, increased $356 million (7 percent) compared with the second quarter of 2013, primarily due to increased propane, naphtha, condensate and propylene costs.

• Research and development ("R&D") expenses were essentially flat in the second quarter of 2014 compared with the same period last year. Selling, general and administrative ("SG&A") expenses increased in the second quarter of 2014 compared with the same period last year, primarily due to growth initiatives, including commercial activities in Agricultural Sciences, and higher performance-based compensation costs.

• Equity earnings were $227 million in the second quarter of 2014, down $1 million from $228 million in the second quarter of 2013, as increased earnings from MEGlobal and Dow Corning Corporation ("Dow Corning") were more than offset by higher equity losses from Sadara Chemical Company ("Sadara") and lower earnings from Univation Technologies, LLC ("Univation").

• The Company purchased 16.8 million shares of common stock at a cost of $850 million during the second quarter of 2014.

In addition to the financial highlights, the following announcements were made during the second quarter of 2014:

• On June 30, 2014, the Company started construction of its world-scale ethylene production facility at Texas Operations in Freeport, Texas. The facility will have a nameplate capacity of approximately 1,500 KTA and will support market growth and expansions in Dow's industry-leading Performance Plastics franchise. The facility is expected to start up in the first half of 2017.

• During the week of April 20, 2014, the Company's Plaquemine, Louisiana, manufacturing site experienced two separate process incidents that resulted in the disruption of ethylene production at the Company's LA-2 and LA-3 ethylene production facilities. The LA-3 facility resumed production of ethylene on May 8, 2014 and the LA-2 facility resumed production of ethylene on May 16, 2014.

• On May 2, 2014, Idemitsu Kosan Co., Ltd. and Mitsui & Co., Ltd. of Tokyo, Japan, announced their decision to not move forward with a proposed joint venture to construct a linear alpha olefins facility on the U.S. Gulf Coast. Accordingly, the Company terminated its initial agreement for a long-term ethylene off-take arrangement with the proposed joint venture. The Company is evaluating several high-return, alternative uses for the ethylene that was included in this arrangement. Further, Dow will continue to access its existing supply network of linear alpha olefins.

(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         Six Months Ended
                                                Jun 30,      Jun 30,      Jun 30,      Jun 30,
In millions, except per share amounts              2014         2013         2014         2013
Net sales                                     $  14,917     $ 14,577     $ 29,378     $ 28,960

Cost of sales                                 $  12,344     $ 12,103     $ 24,077     $ 23,810
Percent of net sales                               82.8 %       83.0 %       82.0 %       82.2 %

Research and development expenses             $     419     $    417     $    810     $    852
Percent of net sales                                2.8 %        2.9 %        2.8 %        2.9 %

Selling, general and administrative expenses  $     751     $    716     $  1,530     $  1,488
Percent of net sales                                5.0 %        4.9 %        5.2 %        5.1 %

Effective tax rate                                 26.2 %       24.6 %       27.4 %       31.1 %

Net income available for common stockholders  $     882     $  2,340     $  1,846     $  2,890

Earnings per common share - basic             $    0.74     $   1.96     $   1.54     $   2.42
Earnings per common share - diluted           $    0.73     $   1.87     $   1.52     $   2.36

Operating rate percentage                            82 %         78 %         83 %         80 %

RESULTS OF OPERATIONS
Net Sales
Net sales in the second quarter of 2014 were $14.9 billion, up 2 percent from $14.6 billion in the second quarter of last year, with price up 2 percent and volume flat. Price was favorably impacted by currency, which contributed to nearly half of the price increase. Price increases in Performance Plastics (up 7 percent), Performance Materials and Coatings and Infrastructure Solutions (each up 1 percent) were partially offset by a price decline in Feedstocks and Energy (down 1 percent). Price remained flat in Electronic and Functional Materials and Agricultural Sciences. Price increased in most geographic areas, led by EMEA (up 4 percent), while Latin America price remained flat. Volume was flat, reflecting the impact of recent divestitures. Excluding these divestitures, volume was up 1 percent. Volume increases in Electronic and Functional Materials (up 5 percent), Agricultural Sciences (up 3 percent), Feedstocks and Energy (up 3 percent) and Coatings and Infrastructure Solutions (up 2 percent) were partially offset by a decline in Performance Plastics (down 3 percent). Volume in Performance Materials remained flat. Volume increases in EMEA (up 2 percent) and North America (up 1 percent) were partially offset by a volume decline in Latin America (down 2 percent). Volume in Asia Pacific remained flat.

Net sales for the first six months of 2014 were $29.4 billion, up 1 percent from $29.0 billion in the same period last year, with price up 1 percent and volume flat. Price was favorably impacted by currency, which contributed to one-third of the price increase. Price increases in Performance Plastics (up 6 percent) and Performance Materials (up 1 percent) were partially offset by price declines in Feedstocks and Energy (down 3 percent) and Agricultural Sciences (down 1 percent). Price remained flat in Electronic and Functional Materials and Coatings and Infrastructure Solutions. Price increases in North America and EMEA (each up 2 percent) were partially offset by a decline in Latin America (down 1 percent). Price in Asia Pacific remained flat. Volume was flat, reflecting the impact of recent divestitures. Excluding these divestitures, volume increased 1 percent. Volume declines in Performance Plastics and Performance Materials (each down 1 percent) partially offset gains in all other operating segments. Volume increased in Asia Pacific (up 3 percent) and EMEA (up 2 percent) and declined in North America and Latin America (each down 1 percent).

Gross Margin
Gross margin was $2.6 billion in the second quarter of 2014, up slightly from $2.5 billion in the second quarter of last year, as increased selling prices and higher operating rates were partially offset by higher feedstock and energy costs, the impact from unplanned outages at the Company's Plaquemine, Louisiana, ethylene production facilities, and higher performance-based compensation costs. Gross margin was also negatively impacted by $12 million of restructuring plan implementation costs in the second quarter of 2013. Year to date, gross margin was $5.3 billion, compared with nearly $5.2 billion in the first six months of 2013. The increase in gross margin was due to higher selling prices and higher operating rates which more than


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offset higher feedstock and energy costs. Gross margin was also negatively impacted by $23 million of restructuring plan implementation costs in the first six months of 2013.

Operating Rate
The Company's global plant operating rate was 82 percent of capacity in the second quarter of 2014, up from 78 percent in the second quarter of 2013. For the first six months of 2014, the Company's global plant operating rate was 83 percent, up from 80 percent in the first six months of 2013.

Personnel Count
Personnel count was 52,844 at June 30, 2014, up from 52,731 at December 31, 2013 and 52,714 at June 30, 2013. Headcount increased from December 31, 2013 and June 30, 2013 due to increased hiring for the Company's growth initiatives, which more than offset the impact of the Company's 2012 restructuring programs and the reduction of seasonal employees in the Agricultural Sciences operating segment.

Research and Development Expenses
R&D expenses totaled $419 million in the second quarter of 2014, essentially flat from $417 million in the second quarter of last year. For the first six months of 2014, R&D expenses totaled $810 million, down from $852 million in the first six months of 2013.

Selling, General and Administrative Expenses SG&A expenses totaled $751 million in the second quarter of 2014, up $35 million (5 percent) from $716 million in the second quarter of last year, driven primarily by growth initiatives, including commercial activities in Agricultural Sciences, and higher performance-based compensation costs. For the first six months of 2014, SG&A expenses totaled $1,530 million, up from $1,488 million in the first six months of 2013.

Amortization of Intangibles
Amortization of intangibles was $108 million in the second quarter of 2014, down from $115 million in the second quarter of 2013. In the first six months of 2014, amortization of intangibles was $222 million, down from $230 million in the same period last year. 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 $227 million in the second quarter of 2014, essentially flat from $228 million in the second quarter of 2013, with increased earnings from Dow Corning and MEGlobal offset by lower earnings from Univation and higher equity losses from Sadara. For the first six months of 2014, Dow's share of the earnings of nonconsolidated affiliates was $478 million, up from $458 million in the same period last year, primarily due to increased earnings from Dow Corning and The SCG-Dow Group, which were partially offset by lower earnings from Univation and increased equity losses from Sadara.

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 second quarter of 2014 was net income of $25 million, a decrease of $2,028 million compared with net income of $2,053 million in the second quarter of 2013. The second quarter of 2014 included gains on asset sales partially offset by $18 million of transaction expenses related to the planned separation of the Company's chlorine value chain (reflected in Corporate). The second quarter of 2013 included a gain of $2.161 billion related to damages awarded to the Company in the K-Dow arbitration proceeding (reflected in Corporate) and a $110 million loss on the early extinguishment of debt (reflected in Corporate). Year to date, sundry income (expense) - net was net income of $54 million, a decrease of $1,967 million compared with net income of $2,021 million in the same period last year. The first six months of 2014 included a gain related to the termination of an off-take agreement and gains on asset sales partially offset by foreign currency exchange losses and $18 million of transaction expenses related to the planned separation of the Company's chlorine value chain (reflected in Corporate). The first six months of 2013 included a gain of $2.161 billion related to damages awarded to the Company in the K-Dow arbitration proceeding (reflected in Corporate), foreign currency exchange gains and a $170 million loss on the early extinguishment of debt (reflected in Corporate). 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 second quarter of 2014, compared with $269 million in the second quarter of last year. Year to date, net interest expense was $466 million compared with $557 million in the first six months of 2013. The decline in net interest expense reflects the effect of the


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Company's deleveraging activities in 2013 and lower debt financing costs. Interest income was $9 million in the second quarter of 2014, compared with $10 million in the second quarter of 2013, and $22 million for the first six months of 2014, compared with $18 million in the first six months of 2013.

Provision for Income Taxes
The effective tax rate for the second quarter of 2014 was 26.2 percent compared with 24.6 percent for the second quarter of 2013. For the first six months of 2014 the effective tax rate was 27.4 percent compared with 31.1 percent for the first six months 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 increase in the tax rate in the second quarter of 2014 compared with the same period last year was primarily due to the level of taxation related to the K-Dow arbitration award received in the second quarter of 2013. The decrease in the tax rate in the first six months of 2014 compared with the first six months of 2013 was primarily due to a$223 million tax charge recorded in the first six months of 2013 related to the adjustment of uncertain tax positions, which was partially offset by the level of taxation related to the K-Dow arbitration award. 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 $3 million in the second quarter of 2014 compared with $18 million in the second quarter of 2013. For the first six months of 2014, net income attributable to noncontrolling interests was $20 million compared with $43 million in the same period last year. The decline in net income attributable to noncontrolling interests in both the second quarter of 2014 and the first six months of 2014 is due to decreased earnings from certain Electronic and Functional Materials and Performance Materials affiliates.

Preferred Stock Dividends
Preferred stock dividends of $85 million were recognized in the second quarters of 2014 and 2013 ($170 million in the first six months 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 $882 million, or $0.73 per share, in the second quarter of 2014, compared with $2,340 million, or $1.87 per share, in the second quarter of 2013. Net income available for common stockholders for the first six months of 2014 was $1,846 million, or $1.52 per share, compared with $2,890 million, or $2.36 per share for the same period of 2013. During the second quarter of 2013, the Company recorded a gain related to the K-Dow arbitration which significantly increased "Net Income" for the quarter and year-to-date. As a result of this increase, the assumed conversion of the Company's Cumulative Convertible Perpetual Preferred Stock, Series A into potential shares of the Company's common stock was dilutive. 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- and six-month periods ended June 30, 2014 and June 30, 2013, and
previously described in this section:
Certain Items Impacting Results       Pretax Impact (1)              Net Income (2)             EPS - Diluted (3) (4)
                                     Three Months Ended            Three Months Ended            Three Months Ended
In millions, except per share       Jun 30,        Jun 30,        Jun 30,        Jun 30,        Jun 30,        Jun 30,
amounts (Unaudited)                    2014           2013           2014           2013           2014           2013
Adjusted to exclude certain
items (non-GAAP measures)                                      $      893       $    770     $     0.74       $   0.64
Certain items:
Cost of sales:
Restructuring plan
implementation costs             $        -       $    (12 )            -             (8 )            -              -
Sundry income (expense) - net:
Chlorine value chain separation
costs                                   (18 )            -            (11 )            -          (0.01 )            -
Loss on early extinguishment of
debt                                      -           (110 )            -            (69 )            -          (0.06 )
Gain from K-Dow arbitration               -          2,161              -          1,647              -           1.37
Total certain items              $      (18 )     $  2,039     $      (11 )     $  1,570     $    (0.01 )     $   1.31
Dilutive effect of assumed
preferred stock conversion into
shares of common stock                                                                                        $  (0.08 )
Reported GAAP Amounts (5) (6)                                  $      882       $  2,340     $     0.73       $   1.87



Certain Items Impacting Results           Pretax Impact (1)                      Net Income (2)                     EPS - Diluted (3) (4)
                                          Six Months Ended                      Six Months Ended                      Six Months Ended
In millions, except per share
amounts (Unaudited)               Jun 30, 2014        Jun 30, 2013       Jun 30, 2014      Jun 30, 2013       Jun 30, 2014         Jun 30, 2013
Adjusted to exclude certain
items (non-GAAP measures)                                              $        1,857     $       1,589     $         1.53       $         1.33
Certain items:
Cost of sales:
Restructuring plan
implementation costs             $           -       $         (23 )                -               (15 )                -                (0.01 )
Selling, general and
administrative expenses:
Restructuring plan
implementation costs                         -                  (1 )                -                (1 )                -                    -
Sundry income (expense) - net:
Chlorine value chain separation
costs                                      (18 )                 -                (11 )               -              (0.01 )                  -
Loss on early extinguishment of
debt                                         -                (170 )                -              (107 )                -                (0.09 )
Gain from K-Dow arbitration                  -               2,161                  -             1,647                  -                 1.37
Provision for income taxes:
Uncertain tax position
adjustments                                  -                   -                  -              (223 )                -                (0.19 )
Total certain items              $         (18 )     $       1,967     $          (11 )   $       1,301     $        (0.01 )     $         1.08
Dilutive effect of assumed
preferred stock conversion into
shares of common stock                                                                                                           $        (0.05 )
Reported GAAP Amounts (5) (6)                                          $        1,846     $       2,890     $         1.52       $         2.36

(1) Impact on "Income Before Income Taxes"

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

(3) "Earnings per common share - diluted"

(4) For the three- and six-month periods ended June 30, 2013, conversion of the Company's Cumulative Convertible Perpetual Preferred Stock, Series A ("Preferred Stock") into shares of the Company's common stock was excluded from the calculation of "Diluted earnings per share adjusted to exclude certain items" as well as the earnings per share impact of certain items because the effect of including them would have been antidilutive.

(5) For the three- and six-month periods ended June 30, 2013, an assumed conversion of the Company's Preferred Stock into shares of the Company's common stock was included in the calculation of diluted earnings per share (reported GAAP amount).

(6) The Company used "Net Income Attributable to The Dow Chemical Company" when calculating diluted earnings per share (reported GAAP amounts) for the three- and six-month periods ended June 30, 2013, as it excludes preferred dividends of $85 million for the three months ended June 30, 2013 ($170 million for the six months ended June 30, 2013).

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.


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OUTLOOK
Dow continues to execute against its strategic and operating priorities to create significant shareholder value. In a global operating environment that is offering slow growth and volatility, Dow has taken actions to position the Company for continued earnings growth, driving productivity actions throughout the organization. Strategic investments in the U.S. Gulf Coast and the Middle East are accelerating as the Company remains committed to successfully completing construction, on time and on budget. Commercialization of science-driven, differentiated innovations - such as Enlist™ - aligned with attractive markets will continue to drive higher margins. Further, as previously committed, Dow maintains an active focus on exiting non-strategic businesses and assets.

Collectively, these priorities are driving higher earnings, return on capital improvements and margin expansion. Together, with the completion of the Company's $4.5 billion share buy-back authorization by year end, Dow is well positioned to continue rewarding shareholders.


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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.

SALES VOLUME AND PRICE BY OPERATING SEGMENT AND GEOGRAPHIC AREA
Sales Volume and Price by Operating Segment and      Three Months Ended               Six Months Ended
Geographic Area                                         Jun 30, 2014                    Jun 30, 2014
Percentage change from prior year                Volume      Price     Total     Volume     Price     Total
Operating segments
Electronic and Functional Materials                5  %        -  %      5  %      2  %       -  %      2  %
Coatings and Infrastructure Solutions              2           1         3         4          -         4
Agricultural Sciences                              3           -         3         3         (1 )       2
Performance Materials                              -           1         1        (1 )        1         -
Performance Plastics                              (5 )         7         2        (3 )        6         3
Feedstocks and Energy                              3          (1 )       2         2         (3 )      (1 )
Total                                              -  %        2  %      2  %      -  %       1  %      1  %
Geographic areas
United States                                      3  %        2  %      5  %      -  %       2  %      2  %
Europe, Middle East and Africa                     2           4         6         2          2         4
Rest of World                                     (3 )         -        (3 )      (1 )        -        (1 )
Total                                              -  %        2  %      2  %      -  %       1  %      1  %



Sales Volume and Price by Operating Segment and      Three Months Ended               Six Months Ended
Geographic Area, Excluding Divestitures (1)             Jun 30, 2014                    Jun 30, 2014
Percentage change from prior year                Volume      Price     Total     Volume     Price     Total
Operating segments
Electronic and Functional Materials                5  %        -  %      5  %      2  %       -  %      2  %
Coatings and Infrastructure Solutions              2           1         3         4          -         4
. . .
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