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Restructuring, Debt Payoff Whack Dow Profits

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MIDLAND — Dow Chemical Co. (NYSE: DOW) Thursday reported net income of $714 million or 35 cents a share, down from $952 million or 54 cents a share a year earlier.

The company said earnings were hurt by restrucuring charges and charges related to the early payoff of debt.

Sales were $14.7 billion, unchanged from a year earlier.

“Dow again demonstrated the strength of its transformed portfolio, even as demand remained slow early in the quarter,” CEO Andrew Liveris said. “We have now delivered top-line growth for 10 consecutive quarters, and our Agricultural Sciences portfolio achieved record sales and (cash flow). The benefit of our balanced portfolio was again evident: We captured demand gains in developed regions — particularly in the U.S. and Germany — and posted a tenth consecutive quarter of volume increases in rapidly growing emerging economies. We exited the quarter with momentum, and looking forward we remain resolutely focused on our strategic priorities – capturing the benefits of new products and technologies, such as Powerhouse and Evoque, which will generate value in local markets for both our customers and our shareholders. In addition, we are capitalizing on our world-class feedstock advantage and balanced, integrated portfolio, as well as exhibiting diligent operating and capital efficiency. All of this places us in a unique position to drive earnings growth and continue our 100-year legacy of shareholder remuneration.”

Adjusted sales increased 4 percent versus the prior year, representing the tenth consecutive quarter of year-over-year sales growth. Sales in Agricultural Sciences increased double-digits, surpassing $1.8 billion and representing a new record.

Volume declined 1 percent, but was up 3 percent on an adjusted basis with increases in Agricultural Sciences (12 percent), Feedstocks and Energy (7 percent), and Performance Materials (2 percent).

On an adjusted, geographic basis, volume gains in Europe, Middle East and Africa (EMEA) (7 percent) and North America (2 percent) more than offset declines in Latin America and Asia Pacific.

Volume increases in Europe were primarily driven by sales of propylene, the result of a supply agreement from Dow’s divestiture of polypropylene. Volume in the United States grew 2 percent on an adjusted basis, reflecting improving economic conditions across several sectors and value chains. Emerging geographies posted a tenth consecutive quarter of year-over-year volume growth on an adjusted basis, led by gains this quarter in the Middle East, Africa, India, and Eastern Europe.

Price rose 1 percent, partially offsetting an increase of nearly $120 million in raw material costs, including feedstocks and energy. Price gains in North America (3 percent) and Latin America (2 percent) offset declines in EMEA and Asia Pacific. Price gains were reported in Feedstocks and Energy (6 percent), Agricultural Sciences (2 percent), and Electronic and Functional Materials (1 percent).

Dow’s global operating rate was 84 percent, up 12 percentage points from the fourth quarter and 1 percentage point versus the year-ago period.

Research and development expenses were up 1 percent vs. the same period last year. Selling, general and administrative expenses rose 1 percent versus the prior year, in part due to increased spending to support growth initiatives and new product launches in agricultural sciences.

Net debt to total capitalization was 41.2 percent, on target to reach the company’s year-end 2012 goal. The company reduced debt by more than $1 billion in the quarter, in line with its continuing capital management strategy. Total deleveraging actions taken over the last 12 months resulted in an interest expense reduction of nearly $50 million in the quarter versus the year-ago period.

Sales in Electronic and Functional Materials were $1.1 billion, down 1 percent from the same quarter last year, as a 2 percent decline in volume was partially offset by price gains of 1 percent. Dow Electronic Materials reported sales declines across most businesses, due largely to softness in the electronics industry. However, the business reported strong demand gains in Display Technologies, driven primarily by backlit film sales in Europe. Dow Electronic Materials recorded several customer wins in the quarter, including photoresist for leading edge memory production, films for consumer electronics and electroplating materials for mobile phone applications.

Functional Materials reported record first quarter sales, as price increases outpaced a modest contraction in volume. Broad-based demand gains in Performance Additives were more than offset by volume contraction in Dow Wolff Cellulosics.

Equity earnings were $19 million, down from $24 million versus the year-ago period. The decline was principally due to results at Dow Corning, which was adversely impacted by weakness in the silicon value chain. EBITDA for the segment was $243 million, which included a $17 million restructuring charge. This compares with EBITDA of $257 million in the same period last year. Functional Materials posted record quarterly EBITDA, driven largely by margin expansion and cost control efforts.

Coatings and Infrastructure Solutions sales were $1.7 billion, down 2 percent compared with the same period last year. Volume was flat versus the prior year, and price was down 2 percent.

Dow Building and Construction reported sales gains across all geographic areas, except Europe, where the construction industry continues to contract. Dow Water and Process Solutions reported record first quarter sales, with gains in both price and volume. Demand continued to be particularly strong in reverse osmosis membranes in industrial water applications. Dow Coating Materials reported a decrease in sales as price declines more than offset a modest increase in volume. In architectural coatings, volume declined in most geographic areas, driven in part by the lack of customer inventory restocking witnessed in the first quarter of 2011 as industry-wide supply issues abated in the latter part of 2010. Dow Coating Materials’ hiding platform recorded several wins with Evoque technology as customers continue to reformulate paints to enhance performance and improve the efficiency of titanium dioxide usage.

Equity earnings were $22 million, down from $68 million in the same period last year, primarily due to lower results from Dow Corning. EBITDA for the segment was $204 million, which included a $41 million restructuring charge. This compares with EBITDA of $250 million in the year-ago period.

Agricultural Sciences posted its sixth consecutive quarter of year-over-year sales record with sales of $1.8 billion, up 14 percent versus the year-ago period. Volume increased 12 percent and price rose 2 percent. The gains were broad-based across products and geographic areas, driven by customer adoption of new products, healthy agricultural market fundamentals, and an early spring planting season in North America. Overall, sales of new products grew 41 percent compared with the year-ago period.

First quarter sales of Crop Protection products rose 14 percent versus the prior year, driven by double-digit sales growth in North America, Latin America, and Asia Pacific. Europe recorded sales growth with strong sales in Northern Europe partially offset by lower cereal portfolio sales in Southern Europe due to severe freeze conditions impacting crop plantings. Sales of new Crop Protection products grew 27 percent, led by gains in aminopyralid and penoxsulam herbicides and spinetoram insecticide. In addition, the business launched and secured first sales of sulfloxaflor sap-feeding insecticide in Korea.

Seeds, Traits and Oils reported a 16 percent sales gain versus the year-ago period, driven by continued introduction and adoption of new seed technologies, as well as an early spring in North America.

Increased corn sales were a key driver of growth, with increased penetration of SmartStax® hybrids and Refuge Advanced® in North America and further adoption of Herculex technology in Latin America.

EBITDA for the segment was $451 million. This represented a new quarterly record, and an 11 percent increase over the previous record of $406 million, which was reported in the year-ago period.

Sales in Performance Materials were $3.5 billion, down 2 percent compared with the same quarter last year. However, adjusted sales were flat as volume increases offset price declines. Volume rose in all geographic areas excluding Latin America, which reported a decline due to the shutdown of toluene diisocyanate capacity in Brazil.

Polyurethanes sales were up modestly primarily due to improvements in U.S. demand. Broad-based volume increases for Oxygenated Solvents more than offset price declines, as early weather patterns drove accelerated agricultural and construction buying patterns. Epoxy sales contracted in the quarter due to continued softness in allylics and phenolics, coupled with record-level comparables in the year-ago period. Dow Formulated Systems reported double-digit sales growth, with volume gains in all geographic areas except Asia Pacific, which continued to experience weak demand in the wind-energy sector.

Polyglycols, Surfactants and Fluids reported a quarterly sales record due to broad-based price gains, however volume was flat as unseasonably warmer weather in North America affected de-icing sales. Amines reported double-digit volume gains, led by sales in Asia Pacific. Sales in Chlorinated Organics declined as sales in the year-ago period were unseasonably high due to industry turnarounds. Dow Oil and Gas reported double-digit sales gains driven by strong sector fundamentals, particularly in North America due to the shale gas dynamic.

EBITDA for the segment was $332 million, which included $186 million in restructuring charges. This compares with EBITDA of $564 million in the year-ago period.

Sales in Performance Plastics were $3.6 billion, down 11 percent from the same quarter last year. Adjusted sales were flat as both volume and price were consistent with the year-ago period. Volume gains in Asia Pacific and pricing initiatives in North America offset sales declines in EMEA and Latin America.

Dow Elastomers posted new quarterly sales and EBITDA records. The business achieved double-digit volume and price growth in North America, Asia Pacific, and Latin America with strong results in transportation, infrastructure, and adhesive markets. This compensated for slower growth in Europe.

Dow Electrical and Telecommunications increased sales over the year-ago period, with double-digit sales and volume gains in Asia Pacific. Sales in Performance Packaging declined over the previous year as a result of lower pricing in Europe, combined with price and volume headwinds in both Asia Pacific and Latin America. These declines were partially offset by pricing momentum in North America.

Equity earnings were $34 million, down from $62 million in the year-ago period. EBITDA for the segment was $718 million, compared with $981 million in the same period last year, as naphtha-based margins in Europe and Asia Pacific more than offset the positive impact of favorable ethane-based margins on the U.S. Gulf Coast.

Sales in Feedstocks and Energy were $2.9 billion, up 13 percent from the same period last year. Volume increased 7 percent and price increased 6 percent. The Chlor-Alkali/Chlor-Vinyl business saw continued strong demand in caustic soda, particularly in the pulp and paper and water treatment industries. Vinyl chloride monomer volume declined, primarily due to the shutdown of assets on the U.S. Gulf Coast in 2011. Ethylene Oxide reported a double-digit volume increase, driven by tight market conditions in North America, while ethylene glycol sales declined modestly due to price decreases.

Equity earnings were $125 million, down from $155 million in the same quarter last year, as the Company’s joint ventures in Kuwait experienced margin contraction in ethylene glycol. EBITDA for the segment was $198 million compared with $248 million in the same period last year.

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