DOW - 3Q12 Earnings Release

Third Quarter 2012 Highlights

• Dow reported earnings of $0.42 per share. This compares with earnings of $0.69 per share in the same quarter last year, or adjusted earnings of $0.62 per share(1).

• Sales were $13.6 billion, down 10 percent, or 7 percent on an adjusted sales(2) basis. The decline was led by Europe, which decreased 10 percent on the same basis driven by adverse currency conditions totaling more than $520 million.

• Volume declined 1 percent, or rose 2 percent on an adjusted basis. Volume was up in all geographic areas on the same basis, and increases were reported in Agricultural Sciences (up 7 percent), Performance Plastics (up 5 percent), Performance Materials (up 4 percent), and Coatings and Infrastructure Solutions (up 1 percent).

• Price declined 9 percent, with double-digit decreases in most businesses. Price was down in all geographic areas, led by Europe and Greater China, which declined 12 percent and 11 percent, respectively on an adjusted basis. Purchased feedstock and energy costs decreased by $1.2 billion versus the same quarter last year.

• The Company’s operating rate was 83 percent for the quarter, flat versus the year-ago period and up 5 percentage points versus the prior quarter.

• Equity earnings were $175 million, compared with $375 million in the year-ago period, or $289 million in the year-ago period excluding certain items. Dow Corning represented the largest driver of the decline, due to ongoing weakness in the polysilicon value chain.

• EBITDA(3) was $1.8 billion. Adjusted EBITDA margin(4) was essentially flat versus the year-ago period. Performance Plastics and Performance Materials both increased adjusted EBITDA margins versus the prior year, up 290 basis points and 150 basis points, respectively.

• Dow delivered $1.1 billion in cash flow from operations in the quarter. Year-to-date, Dow has increased cash flow from operations more than $650 million versus the year-ago period. In addition, the Company began to accelerate cost and cash interventions announced previously in the year, demonstrated by a $200 million sequential decline in operational expenses.

• The Company’s debt declined by nearly $250 million in the quarter, and its net debt(5) to total capitalization declined to 39.7 percent, in line with the Company’s previously stated target of less than 40 percent.

Comment

Andrew N. Liveris, Dow’s chairman and chief executive officer, stated:

"Dow’s results this quarter demonstrate the acceleration and delivery of our cost reduction actions. We focused on execution and intervened to protect our prioritized growth path. Our low-cost feedstock advantage enabled us to deliver volume growth – despite weakening demand. And we have delivered improvements in operating cash flow through our disciplined approach. The purposeful actions we announced earlier this year are gaining momentum, and will be bolstered by our new, streamlined operating model. Further, with today’s restructuring announcement, we now have a full array of aggressive cash generation measures in place, with tight controls on working capital, and reductions in costs and capital expenditures – particularly in Europe – and by strict and firm prioritization of our growth projects. Moving forward, Dow is squarely focused on driving cost efficiencies, generating cash and earnings growth."

Review of Third Quarter Results

The Dow Chemical Company (NYSE: DOW) reported sales of $13.6 billion, down 10 percent, or 7 percent on an adjusted sales basis. The decline was led by Europe, which decreased 10 percent on the same basis driven by adverse currency conditions totaling more than $520 million.

Volume declined 1 percent, or rose 2 percent on an adjusted basis. On the same basis, volume was up in all geographic areas, and increases were reported in Agricultural Sciences (up 7 percent), Performance Plastics (up 5 percent), Performance Materials (up 4 percent), and Coatings and Infrastructure Solutions (up 1 percent).

Price declined 9 percent, and purchased feedstock and energy costs decreased by $1.2 billion versus the same quarter last year. Price declined in all geographic areas, led by Europe (down 12 percent) and Greater China (down 11 percent), on an adjusted basis.

The Company reported EBITDA of $1.8 billion. On an adjusted basis, EBITDA margins were essentially flat versus the year-ago period. On the same basis, Performance Plastics and Performance Materials both increased EBITDA margins versus the prior period, up 290 basis points and 150 basis points, respectively.

Earnings for the quarter were $0.42 per share. This compares with earnings of $0.69 per share in the same quarter last year, or adjusted earnings of $0.62 per share. Certain items in the prior-year period consisted of a pretax $86 million gain related to cash collected on a previously impaired note receivable related to Equipolymers, a nonconsolidated affiliate. (See Supplemental Information at the end of the release for a description of certain items affecting results in all periods presented.)

Dow’s global operating rate was 83 percent for the quarter, flat versus the year-ago period, and up 5 percentage points versus the prior quarter.

Research and Development (R&D) expenses and Selling, General and Administrative (SG&A) expenses both increased versus the same period last year, as the Company continued to invest in growth programs. Moving forward, these expenses are expected to decline as Dow begins implementing restructuring actions announced October 23, 2012.

Equity earnings were $175 million, compared with $375 million in the year-ago period, or $289 million, excluding certain items. Ongoing weakness in the polysilicon value chain for Dow Corning represented the largest driver of the decline.

The Company’s debt declined by nearly $250 million in the quarter, and its net debt to total capitalization declined to 39.7 percent, in line with the Company’s previously stated target of less than 40 percent.

"Dow’s results this quarter demonstrate the acceleration and delivery of our cost reduction actions," said Andrew N. Liveris, Dow’s chairman and chief executive officer. "We focused on execution and intervened to protect our prioritized growth path. Our low-cost feedstock advantage enabled us to deliver volume growth – despite weakening demand. And we have delivered improvements in operating cash flow through our disciplined approach. The purposeful actions we announced earlier this year are gaining momentum, and will be bolstered by our new, streamlined operating model. Further, with today’s restructuring announcement, we now have a full array of aggressive cash generation measures in place, with tight controls on working capital, and reductions in costs and capital expenditures – particularly in Europe – and by strict and firm prioritization of our growth projects. Moving forward, Dow is squarely focused on driving cost efficiencies, generating cash and earnings growth."

Electronic and Functional Materials

Sales in Electronic and Functional Materials were $1.1 billion, down 8 percent from the same quarter last year as price declined 5 percent and volume declined 3 percent. The electronics sector continued to grow at a lower-than-forecasted rate, driving sales declines within Dow Electronic Materials. Semiconductor Technologies recorded flat sales, as a modest volume increase was offset by price declines. Interconnect Technologies sales decreased as a result of weak demand and pricing for metallization in all regions.

Functional Materials revenue declined overall as global uncertainty dampened sales. Dow Home and Personal Care reported sales decreases due to continued weakness with global brand owners. Strength in the energy sector drove volume gains in nearly all regions for Dow Microbial Control. However, these gains were offset by volume declines in North America due to lower rig counts, combined with overall price decline, which resulted in flat sales for the business.

Equity earnings for the segment were $27 million, up from $23 million versus the year-ago period. EBITDA was $273 million, compared with $306 million in the same period last year.

Coatings and Infrastructure Solutions

Coatings and Infrastructure Solutions sales were $1.7 billion, down 9 percent compared with the same period last year. Volume was up 1 percent versus the prior year, while price declined 10 percent.

Dow Coating Materials reported decreased sales as a result of declining prices. These declines were partially offset by volume gains in nearly all regions, boosted by demand growth in Industrial Coatings, with strength in traffic paint and paper coating applications. Weak pricing in epoxy-based products continued to hamper sales and profitability. Dow Building and Construction experienced volume declines as a result of actions taken within the quarter to improve profitability, particularly in Europe. The business commercialized an award-winning Polymeric Flame Retardant, an innovative response to local regulations. Dow Water and Process Solutions sales declined primarily due to weakening sales in Asia Pacific, particularly in China. In addition, the business posted a profitability decline due in part to higher comparables in the year-ago period associated with the realization of insurance claims for its operations in Soma, Japan.

Equity earnings were $29 million, down from $72 million in the same period last year. The decline was driven by Dow Corning as a result of ongoing weakness in the polysilicon value chain. EBITDA for the segment was $246 million. This compares with EBITDA of $372 million in the year-ago period.

Agricultural Sciences

Agricultural Sciences reported record third quarter sales of $1.3 billion, up 8 percent versus the same period last year. Volume increased 7 percent and price rose 1 percent. Double-digit sales and volume gains were reported in both North America and Latin America. The segment continues to benefit from solid industry fundamentals, with elevated farm income levels providing strong incentive for farmers to maximize yields.

Crop Protection reported sales growth of 6 percent, driven by significant volume and sales gains in Latin America, as well as continued adoption of new products. Seeds, Traits and Oils reported a 21 percent sales increase as a result of the introduction and ramp-up of new technologies.

Year to date, new Crop Protection molecules are up 21 percent, led by spinetoram insecticide, aminopyralid herbicide and pyroxsulam herbicide. Seeds, Traits and Oils has achieved strong growth through the third quarter in key crops, including corn, soybeans, healthy oils, and cotton. Strong customer and channel support fueled gains for SmartStax® corn hybrids.

EBITDA for the segment was $63 million, compared with $75 million in the year-ago period, due to continued investments in growth.

Performance Materials

Sales in Performance Materials were $3.4 billion, down 8 percent versus the year-ago period, or 7 percent on an adjusted basis. Volume increased 4 percent and price declined 11 percent on an adjusted basis compared to the same period last year. The segment reported volume growth in nearly all geographic areas, excluding Latin America, where declines were driven primarily by the shutdown of toluene diisocyanate capacity in Brazil.

Polyurethanes reported demand growth in Asia Pacific driven by new propylene oxide capacity in Thailand. These volume gains more than offset the price declines in Asia Pacific. Dow Oil and Gas reported double-digit sales gains fueled by strong sector fundamentals in both exploration and production, and refining and processing. Dow Formulated Systems experienced volume growth in nearly all geographic areas. However, this was offset by price declines primarily in Europe, Middle East and Africa (EMEA). Polyglycols, Surfactants and Fluids reported both price and volume declines, as sales growth in Asia Pacific and Latin America was more than offset by declines in North America and EMEA.

Equity losses were $30 million, versus a loss of $11 million in the same period last year. EBITDA for the segment was $491 million, compared with EBITDA of $478 million in the year-ago period. The increase was driven by volume growth and margin expansion.

Performance Plastics

Sales in Performance Plastics were $3.5 billion. Sales declined 15 percent, or 5 percent on an adjusted basis. The segment posted a 5 percent increase in volume on the same basis, with gains in all geographic areas. However, these gains were offset by a 10 percent decline in price.

Dow Elastomers reported sales gains driven by double-digit volume growth. NORDELTM achieved record volume in the quarter due to strong customer demand. Dow Performance Packaging recorded volume gains in all geographic areas led by Asia Pacific and North America. Despite achieving price increases throughout the quarter, the business reported overall price declines compared with the year-ago period.

Dow Electrical and Telecommunications sales were up versus the year-ago period, with large volume gains recorded in Asia-Pacific. Dow Hygiene and Medical sales rose, fueled by volume gains in EMEA, Asia Pacific, and Latin America, supported by strong customer demand for ASPUN™ Fiber Grade Resins.

Equity earnings were $28 million, compared with $150 million, or $64 million excluding certain items in the year-ago period. EBITDA for the segment was $737 million, compared with $834 million, or $748 million excluding certain items in the year-ago period. Lower-cost feedstocks continued to drive higher margins in North America and Latin America. This positive impact was partially offset by naphtha-based margin pressure in Europe and Asia Pacific.

Feedstocks and Energy

Sales in Feedstocks and Energy were $2.5 billion, down 13 percent versus the same period last year. Volume decreased 1 percent and price declined 12 percent. Lower sales in the Chlor-Alkali/Chlor-Vinyl business were driven by price declines resulting from weak polyvinyl chloride (PVC) market fundamentals. The year-ago shutdown of the Company’s vinyl chloride monomer (VCM) asset in Louisiana drove volume declines in the business. Caustic soda reported strong year-over-year demand growth for the fourth consecutive quarter. However, this was more than offset by price declines in all geographic areas. Ethylene Oxide/ Ethylene Glycol maximized asset utilization, resulting in volume growth, while weakening global ethylene glycol dynamics drove sales and price declines.

Equity Earnings were $123 million, down from $153 million from the same period last year. Equity earnings were unfavorably impacted by a production outage at EQUATE during the quarter. EBITDA for the segment was $200 million, compared with $263 million in the same period last year.

Outlook

Commenting on the Company’s outlook, Liveris said:

"Dow enters the fourth quarter and heads into 2013 on our front foot. We previously outlined $2.5 billion of levers we could pull to mitigate a slowing world economy. These actions are not only in motion, but are beginning to take hold, as we demonstrated this quarter.

"We recognize that these difficult conditions may have extended staying power, as the new reality is that we are operating in a slow-growth and volatile world. This requires an agile and efficient response. The task before us is straightforward: We must deliver value to our shareholders by a continuing focus on improving return on capital, increasing cash flow and growing earnings. And with our new, streamlined operating model and management structure, our entire organization is focused on delivering against these three objectives."

Dow will host a live Webcast of its third quarter earnings conference call with investors to discuss its results, business outlook and other matters tomorrow, October 24, at 9:00 a.m. ET on www.dow.com.

For more information visit: www.dow.com

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