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Charges Clobber Dow Chemical in 4Q

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Dow Chemical slipped to a bigger loss in fourth-quarter 2012, thumped by a sizable restructuring charge and loss on goodwill impairment in its Formulated Systems business. Weakness across end markets, especially in China, and weak pricing also hurt the results. 

The U.S. chemical kingpin, whose products are used across a broad spectrum of industries, posted a loss of $716 million or 61 cents a share, significantly higher than a loss of $20 million or 2 cents a share recorded a year ago.
Pressed by a challenging global economic environment, Dow announced a major restructuring program in Oct 2012 which is expected to deliver annual cost savings of roughly $500 million by end-2014. As part of the program, the company is slashing roughly 2,400 jobs and shuttering around 20 of its plants. Charges (of $990 million) associated with the move crimped its bottom line in the fourth quarter. 
Barring one-time items (including restructuring and goodwill impairment charges), the company earned 33 cents a share in the quarter, up from 25 cents a year ago. That, however, missed the Zacks Consensus Estimate by a penny.
For full-year 2012, Dow posted a profit of $842 million or 70 cents per share, down 65% from $2,402 million or $2.05 per share logged a year ago. Excluding items, earnings were $1.90 a share, in line with the Zacks Consensus Estimate. 
The Michigan-based company’s shares fell 3.4% in pre-market trading. 
Revenue, Volume and Pricing
Dow raked in revenues of $13,917 million in the reported quarter, down 1% year over year, as gains across agricultural sciences, performance plastics, electronic and functional materials and coatings businesses were eclipsed by declines in feedstocks and energy and performance materials. Sales, however, beat the Zacks Consensus Estimate of $13,667 million. 
Sales fell narrowly in North America while were essentially flat in the Asia Pacific. Latin America registered modest improvement while Europe saw a 3% decline. Price edged down 1% year over year while volume was flat in the quarter.  
For the full year, sales fell 5% year over year to $56,786 million, but managed to squeak past the Zacks Consensus Estimate of $56,456 million. 
Segment Review
Electronic and Functional Materials
Revenues rose 3% year over year to $1.1 billion in the reported quarter as higher volume offset lower pricing. Electronic materials recorded modest gain in the quarter. Semiconductor technologies business saw higher demand driven by an increase in utilization in Korea and Taiwan.
Functional materials sales rose across the board as higher volume more than offset lower pricing. Healthy demand was witnessed across energy, water, pharmaceutical, personal care and food sectors. 
Coatings and Infrastructure Solutions
Sales crept up 1% to $1.6 billion in the quarter as an increase in volume was neutralized by lower pricing. Sales rose in the coating materials business as higher demand in industrial and architectural coatings led to volume gains. Building and construction business saw lower sales as volumes fell. The company’s water and process solutions business reported lower sales largely due to a decline in volumes.
Agricultural Sciences
The segment recorded the biggest gain with sales climbing 17% year over year to a record $1.6 billion, benefiting from higher volume and pricing. Crop protection products revenues jumped 10% riding on gains across all geographic regions. New crop protection revenues leapt 11%. 
Performance Materials
Revenues slipped 5% to $3.4 billion as both volume and price declined in the quarter. Propylene oxide/propylene glycol sales fell on lower pricing. Polyurethanes sales fell while lower volume in Europe and Asia Pacific led to a decline polyglycols, surfactants and fluids revenues. 
Performance Plastics
Sales edged up 1% to $3.7 billion in the quarter as higher pricing was offset by lower volume. Sales fell across elastomers and electrical and telecommunications businesses. Performance packaging registered higher sales on gains across North America and Latin America. 
Feedstocks and Energy
The segment recorded a 9% decline in sales to $2.6 billion. Lower sales of olefins contributed to a decline in hydrocarbons sales. The chlor-alkali/chlor-vinyl business gained from higher caustic soda pricing. Sales fell in ethylene oxide and ethylene glycol business on lower volume.
Financial Health
Dow ended 2012 with cash and cash equivalents of roughly $4.3 billion, down 21% year over year. Total long-term debt declined roughly 2% year over year to around $20.6 billion. The company generated operating cash flows of $4.1 billion during 2012 including $1.6 billion in the fourth quarter.
Moving ahead, Dow noted that it will focus on driving earnings leveraging its feedstock strength and strong momentum in the agricultural sciences business. The company will continue to pursue its cost reduction and efficiency programs while maximizing shareholder returns.
Dow, under its restructuring program, is reducing its global headcount by 5% and closing some of its manufacturing facilities. The company targets aggregate cost savings of $2.5 billion with $1 billion expected this year. 
Our View
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, it contends with weakness in the electronics and construction end-markets. Building and construction sales remain under pressure due to lower volume in Europe.
Dow currently retains a short-term Zacks Rank #3 (Hold). 
Dow’s results shed light on the end market scenario and demand trend for chemical products. Among the other big chemical names, DuPont , which reported on Dec 22, delivered better-than-expected fourth quarter revenues and earnings on strength in its agriculture and food businesses and synergies of Danisco acquisition. However, higher costs and weakness across titanium dioxide and photovoltaic markets led to a steep fall in its profit.
Celanese (CE - Free Report) reported a mixed fourth quarter on Jan 29 with earnings beating expectations while sales missing the same. Eastman Chemical (EMN - Free Report) will report its fourth quarter results after the closing gong today.

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