PART I – FINANCIAL INFORMATION, Item 2. Management’s Discussion and
(Unaudited) Analysis of Financial Condition and Results of Operations
OVERVIEW
The Company reported sales in the third quarter of 2014 of $14.4 billion, up
5 percent from $13.7 billion in the third quarter of 2013, with increases in
all operating segments, except Coatings and Infrastructure Solutions and
Agricultural Sciences which remained flat. Sales increased in all geographic
areas, led by North America (up 7 percent) and Latin America (up 6 percent).
Price was up 3 percent compared with the same period last year. Price
increased in all operating segments, except Electronic and Functional
Materials and Coatings and Infrastructure Solutions which remained flat.
Price increased in all geographic areas, led by North America (up 4 percent).
Volume increased 2 percent compared with the third quarter of 2013, as
increases in Performance Materials (up 6 percent), Electronic and Functional
Materials (up 3 percent) and Performance Plastics (up 2 percent) more than
offset volume declines in Agricultural Sciences (down 2 percent) and
Feedstocks and Energy (down 1 percent). Coatings and Infrastructure Solutions
volume remained flat. Volume increased in all geographic areas, except
Europe, Middle East and Africa (“EMEA”) which remained flat. Excluding recent
divestitures(1), Performance Plastics volume was up 3 percent.
Purchased feedstock and energy costs, which account for more than one-third
of Dow’s total costs, were essentially flat compared with the third quarter
of 2013, as increased monomer costs were nearly offset by lower propane and
naphtha costs.
Research and development (“R&D”) expenses were down slightly in the third
quarter of 2014 compared with the same period last year. Selling, general and
administrative (“SG&A”) expenses increased in the third quarter of 2014
compared with the same period last year, primarily due to growth initiatives,
including commercial activities in Agricultural Sciences, and higher
performance-based compensation costs.
Equity earnings were $229 million in the third quarter of 2014, down $93
million from $322 million in the third quarter of 2013, primarily due to
higher equity losses from Sadara Chemical Company (“Sadara”) and lower
earnings from EQUATE Petrochemical Company K.S.C. (“EQUATE”) and MEGlobal.
On September 16, 2014, the Company issued $2 billion of debt with 10-, 20-
and 30-year tenor at low coupons.
The Company purchased 18.8 million shares of common stock at a cost of $1.0
billion during the third quarter of 2014.
In addition to the financial highlights, the following announcements were made
during or subsequent to the third quarter of 2014:
On September 8, 2014, the Company announced that William H. Weideman, Chief
Financial Officer and Executive Vice President; and David E. Kepler,
Executive Vice President, Chief Sustainability Officer and Chief Information
Officer, have elected to retire from the Company at the end of 2014.
The Board of Directors elected Howard I. Ungerleider Chief Financial Officer,
effective October 1, 2014.
On September 8, 2014, the Company announced that James (Jim) R. Fitterling
was named Vice Chairman, Business Operations and Joe E. Harlan was named
Chief Commercial Officer and Vice Chairman, Market Businesses, effective
October 1, 2014.
On October 2, 2014, the Company announced ANGUS Chemical Company, the sodium
borohydride business and the AgroFresh business are being marketed for
divestment, in line with the Company’s plans to divest non-strategic
businesses and assets that are expected to generated $4.5 billion to $6
billion in proceeds.
(1) Excludes sales related to Nippon Unicar Company Limited, divested on July 1,
2013, and sales of the Polypropylene Licensing and Catalysts business,
divested on December 2, 2013.
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On October 2, 2014, the Company announced it has signed a definitive
agreement with ExxonMobil Chemical Company for an ownership restructure of
Univation Technologies, LLC (“Univation”), which will result in Univation
becoming a wholly owned subsidiary of Dow. The transaction is expected to
close in the first quarter of 2015, pending regulatory approval.
On July 22, 2014, the Company’s Fort Saskatchewan manufacturing site in
Alberta, Canada experienced an unplanned outage of its ethylene production
facility. On July 29, 2014, the facility resumed ethylene production at a
significantly reduced rate. The facility returned to normal operations in
September.
On September 17, 2014, the U.S. Department of Agriculture issued deregulation
decisions for Dow AgroSciences LLC’s Enlist corn and soybean events. On
October 15, 2014, the Company announced it received registration from the
U.S. Environmental Protection Agency for Enlist Duo herbicide, the companion
herbicide for use with Enlist corn and soybeans, with respect to six states.
With these decisions, Dow AgroSciences has now obtained all of the federal
approvals necessary for commercialization of the Enlist Weed Control System
in six key states in the United States.
Selected Financial Data Three Months Ended Nine Months Ended Sep 30, Sep 30, Sep 30, Sep 30, In millions, except per share amounts 2014 2013 2014 2013 Net sales $ 14,405 $ 13,734 $ 43,783 $ 42,694 Cost of sales $ 11,776 $ 11,716 $ 35,853 $ 35,526 Percent of net sales 81.7 % 85.3 % 81.9 % 83.2 % Research and development expenses $ 409 $ 418 $ 1,219 $ 1,270 Percent of net sales 2.8 % 3.0 % 2.8 % 3.0 % Selling, general and administrative expenses $ 753 $ 698 $ 2,283 $ 2,186 Percent of net sales 5.2 % 5.1 % 5.2 % 5.1 % Effective tax rate 28.2 % 25.2 % 27.7 % 30.1 % Net income available for common stockholders $ 852 $ 594 $ 2,698 $ 3,484 Earnings per common share - basic $ 0.72 $ 0.50 $ 2.27 $ 2.92 Earnings per common share - diluted $ 0.71 $ 0.49 $ 2.24 $ 2.88 Operating rate percentage 88 % 82 % 85 % 81 % |
RESULTS OF OPERATIONS
Net Sales
Net sales in the third quarter of 2014 were $14.4 billion, up 5 percent from
$13.7 billion in the third quarter of last year, with price up 3 percent and
volume up 2 percent. Price increased in all operating segments, except
Electronic and Functional Materials and Coatings and Infrastructure Solutions
which remained flat. Price increased in all geographic areas, led by North
America (up 4 percent). Volume was up 2 percent as increases in Performance
Materials (up 6 percent), Electronic and Functional Materials (up 3 percent) and
Performance Plastics (up 2 percent) more than offset volume declines in
Agricultural Sciences (down 2 percent) and Feedstocks and Energy (down 1
percent). Coatings and Infrastructure Solutions volume remained flat. Volume in
Performance Plastics was impacted by recent divestitures. Excluding these
divestitures, volume in Performance Plastics was up 3 percent. Volume increased
in all geographic areas, except EMEA which remained flat.
Net sales for the first nine months of 2014 were $43.8 billion, up 3 percent
from $42.7 billion in the same period last year, with price up 2 percent and
volume up 1 percent. Price increases in Performance Plastics (up 6 percent) and
Performance Materials (up 1 percent) more than offset price declines in
Electronic and Functional Materials and Feedstocks and Energy (each down
1 percent). Price remained flat in Coatings and Infrastructure Solutions and
Agricultural Sciences. Price increased in all geographic areas, led by North
America (up 3 percent). Volume was up 1 percent with increases in all operating
segments, except Performance Plastics (down 2 percent) which reflects the impact
of recent divestitures. Excluding these divestitures,
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volume in Performance Plastics was flat. Volume increased in EMEA and Asia
Pacific (each up 2 percent) and remained flat in North America and Latin
America.
Gross Margin
Gross margin was $2.6 billion in the third quarter of 2014, up from $2.0 billion
in the third quarter of last year. The increase in gross margin was primarily
due to higher selling prices, increased sales volume and higher operating rates
which were partially offset by higher performance-based compensation costs.
Gross margin was negatively impacted by $7 million of restructuring plan
implementation costs in the third quarter of 2013. Year to date, gross margin
was $7.9 billion, compared with $7.2 billion in the first nine months of 2013.
The increase in gross margin was primarily due to higher selling prices,
increased sales volume and higher operating rates which more than offset higher
feedstock and energy costs. Gross margin was negatively impacted by $30 million
of restructuring plan implementation costs in the first nine months of 2013.
Operating Rate
The Company’s global plant operating rate was 88 percent of capacity in the
third quarter of 2014, up from 82 percent in the third quarter of 2013,
reflecting increased demand and productivity improvements. For the first nine
months of 2014, the Company’s global plant operating rate was 85 percent, up
from 81 percent in the first nine months of 2013.
Personnel Count
Personnel count was 52,186 at September 30, 2014, down from 52,731 at
December 31, 2013 and up from 52,030 at September 30, 2013. Headcount decreased
from December 31, 2013 due to the reduction of seasonal employees in the
Agricultural Sciences operating segment and the impact of the Company’s 2012
restructuring programs, which more than offset increased hiring for the
Company’s growth initiatives.
Research and Development Expenses
R&D expenses totaled $409 million in the third quarter of 2014, down slightly
from $418 million in the third quarter of last year. For the first nine months
of 2014, R&D expenses totaled $1,219 million, down from $1,270 million in the
first nine months of 2013.
Selling, General and Administrative Expenses
SG&A expenses totaled $753 million in the third quarter of 2014, up $55 million
(8 percent) from $698 million in the third quarter of last year, driven
primarily by growth initiatives, including commercial activities in Agricultural
Sciences, and higher performance-based compensation costs. For the first nine
months of 2014, SG&A expenses totaled $2,283 million, up from $2,186 million in
the first nine months of 2013.
Amortization of Intangibles
Amortization of intangibles was $108 million in the third quarter of 2014, down
from $114 million in the third quarter of 2013. In the first nine months of
2014, amortization of intangibles was $330 million, down from $344 million in
the same period last year. See Note 5 to the Consolidated Financial Statements
for additional information on intangible assets.
Equity in Earnings of Nonconsolidated Affiliates
Dow’s share of the earnings of nonconsolidated affiliates was $229 million in
the third quarter of 2014, down from $322 million in the third quarter of 2013,
primarily due to higher equity losses from Sadara and lower equity earnings from
EQUATE and MEGlobal. For the first nine months of 2014, Dow’s share of the
earnings of nonconsolidated affiliates was $707 million, down from $780 million
in the same period last year, as increased earnings from Dow Corning Corporation
(“Dow Corning”) were more than offset by lower earnings from EQUATE, MEGlobal
and Univation and increased equity losses from Sadara.
Sundry Income (Expense) – Net
Sundry income (expense) – net includes a variety of income and expense items
such as the gain or loss on foreign currency exchange, dividends from
investments and gains and losses on sales of investments and assets. Sundry
income (expense) – net in the third quarter of 2014 was net expense of $23
million, a decrease of $82 million compared with net income of $59 million in
the third quarter of 2013. The third quarter of 2014 included gains on asset
sales which were more than offset by foreign currency exchange losses and
$12 million of transaction expenses related to the planned separation of the
Company’s chlorine value chain (reflected in Corporate). The third quarter of
2013 included gains on sales of assets and an equity method investment. Year to
date, sundry income (expense) – net was net income of $31 million, a decrease of
$2,049 million compared with net income of $2,080 million in the same period
last year. The first nine months of 2014 included a gain related to the
termination of an off-take agreement and gains on asset sales partially offset
by foreign currency exchange losses and $30 million of transaction expenses
related to the planned separation of the Company’s chlorine value chain
(reflected in Corporate). The first nine months of 2013 included a gain of
$2.161 billion related to damages awarded to the Company in the
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K-Dow arbitration proceeding (reflected in Corporate), gains on sales of assets
and equity method investments and a $173 million loss on the early
extinguishment of debt (reflected in Corporate). See Note 8 to the Consolidated
Financial Statements for additional information related to the K-Dow arbitration
proceedings and Note 10 to the Consolidated Financial Statements for additional
information related to the early extinguishment of debt.
Net Interest Expense
Net interest expense (interest expense less capitalized interest and interest
income) was $223 million in the third quarter of 2014 compared with $253 million
in the third quarter of last year. Year to date, net interest expense was $689
million compared with $810 million in the first nine months of 2013. The decline
in net interest expense reflects the effect of the Company’s deleveraging
activities in 2013 and lower debt financing costs. Interest income was $10
million in the third quarter of 2014 compared with $11 million in the third
quarter of 2013, and $32 million for the first nine months of 2014 compared with
$29 million in the first nine months of 2013.
Provision for Income Taxes
The effective tax rate for the third quarter of 2014 was 28.2 percent compared
with 25.2 percent for the third quarter of 2013. For the first nine months of
2014, the effective tax rate was 27.7 percent compared with 30.1 percent for the
first nine months of 2013. The Company’s effective tax rate fluctuates based on,
among other factors, where income is earned, reinvestment assertions regarding
foreign income and the level of income relative to tax credits available. For
example, as the percentage of foreign sourced income increases, the Company’s
effective tax rate declines. The Company’s tax rate is also influenced by the
level of equity earnings, since most of the earnings from the Company’s equity
method investments are taxed at the joint venture level. The increase in the tax
rate in the third quarter of 2014 compared with the same period last year was
primarily due to a change in the geographic mix of earnings. The decrease in the
tax rate in the first nine months of 2014 compared with 2013 was primarily due
to a change in the geographic mix of earnings and a $223 million tax charge
recorded in the first nine months of 2013 related to the adjustment of uncertain
tax positions, which was partially offset by the level of taxation related to
the K-Dow arbitration award. See Note 15 to the Consolidated Financial
Statements for additional information on income taxes.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests was $27 million in the third
quarter of 2014, up from $6 million in the third quarter of 2013. For the first
nine months of 2014, net income attributable to noncontrolling interests was $47
million, down slightly compared with $49 million in the same period last year.
Preferred Stock Dividends
Preferred stock dividends of $85 million were recognized in the third quarters
of 2014 and 2013 ($255 million in the first nine months of 2014 and 2013),
related to the Company’s Cumulative Convertible Perpetual Preferred Stock,
Series A.
Net Income Available for Common Stockholders
Net income available for common stockholders was $852 million, or $0.71 per
share, in the third quarter of 2014, compared with $594 million, or $0.49 per
share, in the third quarter of 2013. Net income available for common
stockholders for the first nine months of 2014 was $2,698 million, or $2.24 per
share, compared with $3,484 million, or $2.88 per share for the same period of
2013. During the second quarter of 2013, the Company recorded a gain related to
the K-Dow arbitration which significantly increased “Net Income” for the
nine-month period ended September 30, 2013. As a result of this increase, the
assumed conversion of the Company’s Cumulative Convertible Perpetual Preferred
Stock, Series A into potential shares of the Company’s common stock was
dilutive. See Note 14 to the Consolidated Financial Statements for details on
the Company’s earnings per share calculations.
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Certain Items Impacting Results The following tables summarize the impact of certain items recorded in the three- and nine-month periods ended September 30, 2014 and September 30, 2013, and previously described in this section: Certain Items Impacting Results Pretax Impact (1) Net Income (2) EPS - Diluted (3) Three Months Ended Three Months Ended Three Months Ended In millions, except per share Sep 30, Sep 30, Sep 30, Sep 30, Sep 30, Sep 30, amounts (Unaudited) 2014 2013 2014 2013 2014 2013 Adjusted to exclude certain items (non-GAAP measures) $ 860 $ 599 $ 0.72 $ 0.50 Certain items: Cost of sales: Restructuring plan implementation costs $ - $ (7 ) - (5 ) - (0.01 ) Sundry income (expense) - net: Chlorine value chain separation costs (12 ) - (8 ) - (0.01 ) - Total certain items $ (12 ) $ (7 ) $ (8 ) $ (5 ) $ (0.01 ) $ (0.01 ) Reported GAAP Amounts $ 852 $ 594 $ 0.71 $ 0.49 Certain Items Impacting Results Pretax Impact (1) Net Income (2) EPS - Diluted (3) (4) Nine Months Ended Nine Months Ended Nine Months Ended In millions, except per share amounts (Unaudited) Sep 30, 2014 Sep 30, 2013 Sep 30, 2014 Sep 30, 2013 Sep 30, 2014 Sep 30, 2013 Adjusted to exclude certain items (non-GAAP measures) $ 2,717 $ 2,188 $ 2.26 $ 1.83 Certain items: Cost of sales: Restructuring plan implementation costs $ - $ (30 ) - (20 ) - (0.02 ) Selling, general and administrative expenses: Restructuring plan implementation costs - (1 ) - (1 ) - - Sundry income (expense) - net: Chlorine value chain separation costs (30 ) - (19 ) - (0.02 ) - Loss on early extinguishment of debt - (170 ) - (107 ) - (0.09 ) Gain from K-Dow arbitration - 2,161 - 1,647 - 1.37 Provision for income taxes: Uncertain tax position adjustments - - - (223 ) - (0.19 ) Total certain items $ (30 ) $ 1,960 $ (19 ) $ 1,296 $ (0.02 ) $ 1.07 Dilutive effect of assumed preferred stock conversion into shares of common stock $ (0.02 ) Reported GAAP Amounts (5) (6) $ 2,698 $ 3,484 $ 2.24 $ 2.88 |
(1) Impact on “Income Before Income Taxes.”
(2) “Net Income Available for The Dow Chemical Company Common Stockholders.”
(3) “Earnings per common share – diluted.”
(4) For the nine-month period ended September 30, 2013, conversion of the
Company’s Cumulative Convertible Perpetual Preferred Stock, Series A
(“Preferred Stock”) into shares of the Company’s common stock was excluded
from the calculation of “Diluted earnings per share adjusted to exclude
certain items” as well as the earnings per share impact of certain items
because the effect of including them would have been antidilutive.
(5) For the nine-month period ended September 30, 2013, an assumed conversion of
the Company’s Preferred Stock into shares of the Company’s common stock was
included in the calculation of diluted earnings per share (reported GAAP
amount).
(6) The Company used “Net Income Attributable to The Dow Chemical Company” when
calculating diluted earnings per share (reported GAAP amount) for the
nine-month period ended September 30, 2013, as it excludes preferred
dividends of $255 million.
The Company’s management believes that measures of income adjusted to exclude
certain items (“non-GAAP” financial measures) provide relevant and meaningful
information to investors about the ongoing operating results of the Company.
Such financial measures are not recognized in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) and
should not be viewed as an alternative to U.S. GAAP financial measures of
performance.
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OUTLOOK
Dow is focused on executing against its strategic priorities to improve return
on capital, increase cash flow, expand margins and create significant
shareholder value.
Against the backdrop of a slow and volatile global operating environment, Dow
remains committed to delivering on Company-specific actions and objectives.
Strategic investments in the U.S. Gulf Coast and the Middle East are progressing
as planned, on time and on budget. Commercialization of science-driven
innovations continues to be a source of differentiation for the Company.
Further, exiting non-strategic businesses and assets remains a priority. Dow
will continue leveraging its global reach, low-cost positions, integration and
industry-leading feedstock and operational flexibility to manage its portfolio
in the midst of volatile energy markets.
Together, with the expected completion of the Company’s $4.5 billion share
buy-back authorization by year-end, Dow is positioned well to continue rewarding
shareholders.
SEGMENT RESULTS
The Company uses EBITDA (which Dow defines as earnings (i.e., “Net Income”)
before interest, income taxes, depreciation and amortization) as its measure of
profit/loss for segment reporting purposes. EBITDA by operating segment includes
all operating items relating to the businesses; items that principally apply to
the Company as a whole are assigned to Corporate. Additional information
regarding the Company’s operating segments and a reconciliation of EBITDA to
“Income Before Income Taxes” can be found in Note 17 to the Consolidated
Financial Statements.
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SALES VOLUME AND PRICE BY OPERATING SEGMENT AND GEOGRAPHIC AREA Sales Volume and Price by Operating Segment and Three Months Ended Nine Months Ended Geographic Area Sep 30, 2014 Sep 30, 2014 Percentage change from prior year Volume Price Total Volume Price Total Operating segments Electronic and Functional Materials 3 % - % 3 % 3 % (1 )% 2 % Coatings and Infrastructure Solutions - - - 3 - 3 Agricultural Sciences (2 ) 2 - 1 - 1 Performance Materials 6 2 8 2 1 3 Performance Plastics 2 6 8 (2 ) 6 4 Feedstocks and Energy (1 ) 3 2 1 (1 ) - Total 2 % 3 % 5 % 1 % 2 % 3 % Geographic areas United States 4 % 5 % 9 % 1 % 3 % 4 % Europe, Middle East and Africa 1 2 3 1 2 3 Rest of World - 3 3 (1 ) 1 - Total 2 % 3 % 5 % 1 % 2 % 3 % Sales Volume and Price by Operating Segment and Three Months Ended Nine Months Ended Geographic Area, Excluding Divestitures (1) Sep 30, 2014 Sep 30, 2014 Percentage change from prior year Volume Price Total Volume Price Total Operating segments Electronic and Functional Materials 3 % - % 3 % 3 % (1 )% 2 % Coatings and Infrastructure Solutions - - - 3 - 3 Agricultural Sciences (2 ) 2 - 1 - 1 Performance Materials 6 2 8 2 1 3 Performance Plastics 3 6 9 - 6 6 Feedstocks and Energy (1 ) 3 2 1 (1 ) - Total 2 % 3 % 5 % 1 % 2 % 3 % Geographic areas United States 4 % 5 % 9 % 1 % 3 % 4 % . . . |
