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Dow's 3Q Mixed, Snipping Jobs

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U.S. chemical kingpin The Dow Chemical Company’s profit slid in third-quarter 2012, bludgeoned by lower pricing across all regions. The Michigan-based chemical titan, whose products are used across a broad spectrum of industries, earned 42 cents a share in the quarter, down from 69 cents (or 62 cents excluding items) posted a year ago. That, however, topped the Zacks Consensus Estimate of 37 cents.
Dow’s profit tumbled 39% year over year to $497 million as lower pricing dragged down its sales in the quarter. The company also saw weak demand for its products in the quarter, largely stemming from the recessionary conditions in Europe.  
Dow, which has been hit by the global economic slowdown, separately announced a major restructuring program which is expected to deliver annual cost savings of roughly $500 million by end-2014. As part of the move, the company will slash roughly 2,400 jobs and shut around 20 of its plants.  
Dow’s peer EI DuPont de Nemours & Co. , which reported before the opening bell yesterday, delivered lower-than-expected third quarter results and also announced that it is eliminating 1,500 jobs as part of a new restructuring program. Lower demand across titanium dioxide and photovoltaic markets led to the decline in its profit in the quarter.
Dow, which was originally scheduled to report its third quarter results on October 25, announced the results late yesterday due to an accidental early release of its restructuring program. The company’s shares, which fell $1.19 (or 4%) to $28.55 in regular trading yesterday, further slipped 35 cents in after-hours trading. 
Revenue, Volume and Pricing
Revenues slipped 9.7% (or 7% on an adjusted basis) year over year to $13,637 million in the quarter, missing the Zacks Consensus Estimate of $14,130 million. Sales fell across all segments except Agricultural Sciences, which was the only bright spot in the quarter. Revenues in Europe slid 10%, largely due to unfavorable currency translation. 
Volumes edged down 1% year over year (up 2% on an adjusted basis) in the quarter. On an adjusted basis, the company saw volume gains across all geographic regions. Price dipped 9% in the quarter with declines witnessed across the globe, especially in Europe and China where price fell 12% and 11% on an adjusted basis, respectively.
Segment Review
Electronic and Functional Materials
Revenues from this segment fell 8% year over year to $1.1 billion on account of lower price and volume. Dow Electronic Materials continues to record lower sales given a soft electronics industry. Semiconductor Technologies business saw modest volume gain and flat revenues.
Functional Materials and Dow Home and Personal Care businesses posted lower sales in the quarter. Dow Microbial Control recorded higher volume on strength in the energy sector.
Coatings and Infrastructure Solutions
Sales clipped 9% to $1.7 billion in the quarter as price fell 10% and volume increased just 1%. Sales fell in the Dow Coating Materials business as lower price more than offset volume gains driven by higher demand in Industrial Coatings. Dow Building and Construction business saw lower volume due to a decline in Europe. The company’s Water and Process Solutions business reported lower sales largely due to weak sales in China.
Agricultural Sciences
Revenues from this segment jumped 8% year over year to a record $1.3 billion, benefiting from double-digit gains across both North America and Latin America. Volumes climbed 7% while prices crept up 1%. Crop Protection products revenues jumped 6% riding on solid growth in Latin America and sustained traction of new products.
Revenues from Seeds, Traits and Oils business cruised 21%, driven by new seed technologies. Corn business continues to see strong demand from farmers for SmartStax hybrids.
Performance Materials
Revenues slipped 8% to $3.4 billion as an 11% price decline more than offset a 4% growth in volume. Volumes rose across all geographies except Latin America.
Polyurethanes saw improved demand and higher volume in Asia Pacific, offset by lower pricing. Polyglycols, Surfactants and Fluids business recorded price and volume declines in the quarter. Dow Oil and Gas delivered double-digit growth driven by strong industry fundamentals. Dow Formulated Systems saw higher volume and lower pricing in the quarter. 
Performance Plastics
Sales slid 15% to $3.5 billion in the quarter as a 10% price decline more than offset a 5% volume gain. Dow Elastomers delivered higher sales and registered double-digit volume growth. Electrical and Telecommunications business saw higher sales with healthy volume gain in Asia-Pacific. Performance Packaging registered volume gains across the board. 
Feedstocks and Energy
The division recorded a 13% year-over-year decline in sales to $2.5 billion on account of lower volume and price. The Chlor-Alkali/Chlor-Vinyl business posted lower sales, hurt by a weak polyvinyl chloride market and price declines. Ethylene Oxide and Ethylene Glycol recorded volume growth, but Ethylene Glycol revenues fell due to soft demand. Strong demand for Caustic soda was witnessed in the quarter.
Financial Condition
Dow ended the third quarter with cash and cash equivalents of roughly $3.9 billion, up 76% year over year. Total long-term debt increased 7% year over year to nearly $20 billion. Net debt-to-capitalization ratio reduced to 39.7% from 40.9% a year ago.
Outlook and Restructuring Actions
Looking ahead, Dow noted that it will focus on maximizing value to its shareholders and invest in areas which can deliver incremental margins. The company will continue to pursue its cost reduction and efficiency programs to deal with the sluggish macroeconomic environment.
The company, under a newly announced restructuring program, is reducing its global headcount by 5% and closing some of its manufacturing facilities including a high density polyethylene facility in Belgium, a sodium borhidrate plant in the Netherlands and an automotive systems diesel particulate filters manufacturing facility in Michigan. Charges (including impairment and severance costs) associated with these moves are expected to dilute its fourth quarter earnings by 50 cents to 60 cents a share. 
The company further plans to cut capital spending and investment on certain growth programs that have low priority. These actions are expected to fetch an additional $500 million in savings in addition to the cost savings anticipated from headcount reductions and plant closures. When combined with the $1.5 billion existing cost-cutting measures, the company’s new actions are expected to cumulatively deliver cost savings of $2.5 billion.
Our Recommendation
Dow is benefiting from strong fundamentals in agriculture and food markets. A string of innovative products in its pipeline also adds to its strength. However, Dow contends with soft electronics and construction end-markets and is exposed to currency headwinds.
Dow retains a Zacks #3 Rank, indicating a short-term Hold rating. We currently have a long-term Underperform recommendation on the stock.

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