The Dow Chemical Company (DOW) earned 25 cents per share in the fourth quarter of 2011, missing the Zacks Consensus Estimate of 32 cents per share as well as earnings of 47 cents per share in the prior-year quarter. However, including one-time charges, the company reported a loss of 2 cents per share compared with earnings of 37 cents per share in the year-ago quarter.
For the full-year 2011, earnings were $2.54 per share, up 29% compared with $1.97 per share in 2010. Full-year earnings also missed the Zacks Consensus Estimate of $2.83 per share.
Though quarterly revenues inched up 2% to $14.1 billion, but were below the Zacks Consensus Estimate of $14.4 billion. Sales increased across all operating segments and geographic areas, except Electronic and Functional Materials. Volumes declined 3% year over year, but were flat excluding the impact of divestitures. For the full-year 2011, sales increased 12% to $60 billion.
Excluding the impact of certain items, the company reported EBITDA of $1.6 billion in the quarter. Agricultural Sciences reported record EBITDA of $145 million, almost double from the year-ago quarter.
Segment Review
Electronic and Functional Materials: Sales in the segment were $1.1 billion for the quarter, which was flat compared with the year-ago level. Sales were driven by a 3% increase in price, which were partially offset by a 3% decline in volumes.
Dow Electronic Materials witnessed a modest decline in sales in the quarter due to lower demand in Interconnect Technologies and Semiconductor Technologies. However, the businesses also witnessed significant volume increases in Display Technologies due to newer products in the markets.
Sales of Functional Materials grew modestly versus the same period last year as price increases were offset by decreasing demand. The decrease in demand was due to inventory destocking by customers and the largest decline was seen in Europe, Middle East and Africa (EMEA).
Equity earnings were $32 million compared with $30 million reported in the same period last year, primarily reflecting the contribution from Dow Corning. EBITDA for the segment was $234 million, which compares with $277 million in the year-ago quarter.
Coatings and Infrastructure: Sales were $1.6 billion in the fourth quarter, down 1% from the year-ago quarter. Volumes went down 5% while price went up 6%.
The company’s Water and Process Solutions reported double-digit volume growth, with increases in all geographic areas, especially in emerging geographies, led by gains in ion exchange resins and ultra filtration.
Sales in Dow Building and Construction also increased in all geographic areas, particularly Latin America and Asia Pacific. The business faced weak demand in construction end-markets, especially in developed regions. However, demand increased in Dow Construction Chemicals, driven by acrylic products in North America.
Both Dow Coating Materials and Performance Monomers business faced declining sales due to lower demand, partly offset by pricing gains.
Equity earnings were $102 million in the quarter compared with $96 million in the year- ago period, largely reflecting the contribution from Dow Corning. EBITDA for the segment was $177 million, which compares with EBITDA of $251 million in the same period last year.
Agricultural Sciences: This segment reported record sales of more than $1.3 billion, up 5% compared with the year-ago period. Volume inched up 1% and price rose 4%. Sales of Agricultural Chemicals increased in the quarter driven by a 17% growth in demand.
Seeds, Traits and Oils (STO) reported a 22% sales gain in the quarter versus the year-ago period, driven by a strong growing season in Latin America and increased demand for healthy oils. The corn business continued to report strong demand from farmers of SmartStax hybrids in North America and increased adoption of Herculex technology in America.
The segment posted record EBITDA of $145 million in the quarter, which was double compared with $72 million reported in the year-ago period.
Performance Materials: Sales in the segment increased 4% to $3.6 billion, led by price increases. Volumes were flat compared with the prior-year quarter as gains in Asia-Pacific and EMEA were offset by declines in Latin America and North America.
There was a double-digit growth in sales in the Polyurethanes business driven by double-digit increased volume gains in all geographic areas, except Latin America. Dow Formulated Systems also reported an increase in sales in all geographic areas, except Asia-Pacific, which continued to experience weak demand in the wind energy segment.
In EMEA, the business reported double-digit sales growth in energy efficiency applications. Epoxy sales contracted in the quarter due to continued softness in phenolics and allylics demand.
Dow Automotive Systems reported price increases that partially offset volume declines across all geographic areas. The business secured several customer wins due to its technology-differentiated products used in glass bonding applications.
EBITDA for the segment was $225 million or $449 million, excluding certain items compared with $337 million in the year-ago period. In the reported quarter, Dow incurred a $77 million charge for asset impairments and related costs and a $42 million loss on the sale of a contract manufacturing business, which pulled down the EBITDA.
Performance Plastics: Sales declined 6% to $3.7 billion. However, after excluding the impact of divestitures, sales increased 5%, with a 3% gain in volume and a 2% increase in price.
Dow Elastomers delivered strong results due to stable demand in consumer goods, as well as adhesives demand in Europe and recovery from the earthquake in Japan.
A new capacity, which led to strong volume growth in Polyethylene business in Asia-Pacific, was added in Thailand. This also led to a modest volume growth in Dow Packaging and Converting business. Volumes, however, declined in the Electrical and Telecommunications business due to decreased infrastructure investments by state-owned utilities, particularly in the Asia-Pacific region.
Equity earnings for the segment were $32 million versus $72 million in the year-ago quarter. EBITDA for the segment was $667 million compared with $942 million in the same period last year, or $947 million, excluding certain items.
Feedstocks and Energy: Sales in Feedstocks and Energy were $2.8 billion, up 14% from the same period last year. Volumes increased 3% and price rose 11%.
The Chlor-Alkali/Chlor-Vinyl business was beneficial due to limited supply and strong demand for alumina and pulp and paper industries. However, the business witnessed a decline in the vinyl chloride monomer volume due to the shutdown of an asset earlier in the year, along with soft demand in the construction end markets. Ethylene Oxide/Ethylene Glycol (EO/EG) sales increased versus the year-ago period, driven by double-digit volume gains.
Equity earnings were $115 million for the quarter, which compared with $113 million in the year-ago period, driven by strong results from MEGlobal and The Kuwait Olefins Company. EBITDA for the segment was $175 million compared with $152 million in the same period last year.
Balance Sheet
As of December 31, 2011, cash and cash equivalent amounted to $5.4 billion versus $7.0 billion as of December 31, 2010. The company generated nearly $4 billion of cash from operating activities in 2011, and its net debt-to-capitalization ratio reduced by 180 basis points.
Outlook
Dow did not provide any financial guidance. However, the company anticipates that it will have to continue facing challenges from Western Europe in the near term.
The company did not forecast much improvement in market conditions for the first quarter of the year, but it has projected that economic recovery will gain momentum into the second quarter and the remainder of the year. The company expects to meet its short and long term targets irrespective of the economic conditions.
The company expects its downstream, market-driven businesses to continue to capture value from improving North American feedstock dynamics. Dow expects ethylene industry operating rates to tighten over the next several years, driving margin expansion. The company will keep its focus on generating enough cash flow and repay its shareholders as well as fund organic growth.
DOW faces stiff competition from EI DuPont de Nemours & Co. (DD). DuPont also released its fourth quarter 2011 results on January 24, 2012 delivering earnings of 35 cents per share in the fourth quarter of 2011 compared with 50 cents in the year-ago quarter.
Currently, DOW has a Zacks #2 Rank on its shares which translates to a short-term (1 to 3 months) “Buy” rating, but we maintain a long- term (more than 6 months) “Neutral” recommendation on the shares of the company.
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