Chemical powerhouse The Dow Chemical Company (DOW) kickstarted the year with a mixed bag beating on earnings while falling short on the revenue front. The Michigan-based manufacturing giant, whose products are used across a broad spectrum of industries, earned 61 cents a share in first-quarter 2012, excluding specific one-time items. That trounced the Zacks Consensus Estimate of 59 cents. However, it was below the year-ago adjusted earnings of 82 cents.
On a reported basis, Dow clocked a profit of $412 million (or 35 cents a share) in the quarter, a roughly 34% year-over-year slump. The results were dragged down by restructuring charges of roughly $357 million associated with plant closures and headcount haircuts, a move which partly stemmed from weak demand of the company’s products, especially in Western Europe.
Dow’s compatriot EI DuPont de Nemours & Co. (DD) delivered healthy first quarter results last week despite weak demand in its consumer electronics business and softness in Europe. Strong performance by its agriculture, performance chemicals and food businesses drove earnings growth in the quarter.
Dow’s first quarter results were much awaited as the investors were hoping to get an insight on global economic trend. The company’s shares fell 5.35% in pre-market trading to reflect the lower profit and revenue miss.
Revenue and Volume
Revenues dropped marginally year over year to $14,719 million, lagging behind the Zacks Consensus Estimate of $15,342 billion. Double-digit growth across agricultural and feedstock/energy businesses were masked by declines in performance materials and performance plastics franchises.
Volumes declined 1% year over year, but were up 3% excluding the impact of divestitures. Adjusted volume crept up 2% in the U.S. On an adjusted basis, the company saw gains across Europe, Middle East and Africa (“EMEA”) and North America and declines in Latin America and Asia Pacific.
Segment Analysis
Electronic and Functional Materials
Revenues from this segment edged down 1% year over year to $1.1 billion as a 1% price increase was more than neutralized by a 2% decline in volumes.
Dow Electronic Materials witnessed lower sales in the quarter given a weak electronics industry. However, the business saw healthy demand in Display Technologies in the quarter. Functional Materials business posted record sales as price increases offset lower volume.
Coatings and Infrastructure
Sales fell 2% to $1.7 billion in the quarter as price fell 2% and volume remained flat year over year. Dow Building and Construction business posted higher sales across all geographies expect Europe. The business faced weak demand in construction end-markets in Europe.
The company’s Water and Process Solutions franchise reported strong sales on the back of price and volume gains. However, sales shrunk in the Dow Coating Materials business in the quarter due to lower price.
Agricultural Sciences
The segment registered record sales of $1.8 billion, a 14% year-over-year surge. Volumes jumped 12% while prices rose 2%. Sales of Agricultural Chemicals increased in the quarter driven by a 17% growth in demand. The division benefited from robust sales of new products.
Crop Protection products revenues soared 14% riding on double-digit growth across North America, Latin America, and Asia Pacific. Revenues from Seeds, Traits and Oils business spiked 16%, driven by new seed technologies. Corn business continues to see strong demand from farmers of SmartStax hybrids in North America and increased adoption of Herculex technology in Latin America.
Performance Materials
Revenues from this division dipped 2% to $3.5 billion, impacted by price declines. Volumes rose across all geographies except Latin America.
Polyurethanes sales rose narrowly, helped by improving demand in the U.S. Dow Formulated Systems reported double-digit growth in sales with volume increases in all regions other than Asia-Pacific, which continued to see weak demand in the wind energy segment. Higher price led to record sales in the Polyglycols, Surfactants and Fluids business while revenues from Chlorinated Organics fell in the quarter. Dow Oil and Gas delivered double-digit growth.
Performance Plastics
Sales tumbled 11% to $3.6 billion in the quarter. Dow Elastomers delivered record results and registered double-digit growth in volume and price in North America, Asia Pacific and Latin America.
Electrical and Telecommunications business posted higher sales with healthy volume gains in Asia Pacific. Revenues fell in Performance Packaging, in part, due to price decline in Europe.
Feedstocks and Energy
The division witnessed a 13% year-over-year growth in sales, aided by higher volume and price. The Chlor-Alkali/Chlor-Vinyl business benefited from strong demand for caustic soda. However, the business saw a decline in the vinyl chloride monomer volume due to the shutdown of an asset last year. Ethylene Oxide/Ethylene Glycol sales increased at a double-digit clip in the quarter.
Financial Condition
Dow exited the quarter with cash and cash equivalents of $3.6 billion, essentially flat year over year. The company de-leveraged its balance sheet in the quarter by snipping debt of more than $1 billion. Gross long-term debt amounted to roughly $20 billion, a decline from $20.7 million in the year-ago quarter. Net debt-to-capitalization ratio reduced to 41.2% from 42.8% a year ago.
Outlook and Recommendation
While Dow did not provide any specific financial guidance, it believes economic recovery will gain momentum in the second quarter and the remainder of the year. The company expects to meet its short and long-term targets irrespective of economic conditions. Moreover, Dow sees an improving U.S. economy citing tailwind from the nation’s rich access to low-cost natural gas.
Dow is benefiting from strong fundamentals in agriculture and food markets. However, weakness in the electronics and construction end-markets may sustain into the second quarter. Moreover, the company will continue facing challenges in Western Europe due to weak demand and the sovereign debt crisis.
We currently have a long-term Neutral recommendation on Dow Chemical. The stock retains a Zacks #3 Rank, indicating a short-term Hold rating.
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