Dow Reports Fourth Quarter Results
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Fourth Quarter of 2006 Highlights
2006 Highlights
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Comment |
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Andrew N. Liveris, Dow’s chairman and chief executive officer, stated: “This was another very strong quarter for Dow, ending a tremendous year for the Company … our second highest year for earnings and a year that demonstrated the true value of our strategy to drive earnings growth and consistency. The diversity we have created across several different dimensions – geographic regions, businesses, end‑use markets and technologies, as well as our stream of equity earnings – overcame the ups and downs of a volatile year and brought significant benefits to the Company in 2006.” |
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Review of Fourth Quarter Results |
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The Dow Chemical Company (NYSE: DOW) reported sales of $12.2 billion for the fourth quarter of 2006, 3 percent higher than in the same period last year, and a new fourth quarter record. |
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Year over year, volume was up 2 percent, as solid growth in the Performance segments and in Basic Plastics more than offset declines in Basic Chemicals and Hydrocarbons and Energy. Strong demand outside North America, most notably in Asia Pacific, more than offset continued weakness in both Canada and the United States. Price edged 1 percent higher, reflecting healthy gains across most of the Company’s Performance businesses, dampened by negative price momentum in Basic Plastics and Basic Chemicals. |
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Net income for the quarter was $975 million, 11 percent lower than a year ago, while earnings per share were $1.00, down from $1.12 in the same period last year. Excluding certain items in both periods, earnings per share were down slightly year over year, from $1.02 per share in 2005 to $0.98 per share in 2006 (see supplemental table at the end of the release for a description of these items). |
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After 17 consecutive quarters of year‑over‑year increases, feedstock and energy costs declined slightly in the fourth quarter of 2006, down 6 percent from the same period in 2005, supporting margin recovery. Equity earnings were again strong, contributing $242 million in the quarter, with significant increases from Dow Corning, MEGlobal, OPTIMAL and Siam Polyethylene more than offsetting declines from Petromont and Equipolymers and the absence of earnings from UOP LLC, which was sold in the fourth quarter of 2005. |
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During the quarter, the Company continued to focus on financial discipline. Debt was reduced by more than $650 million, bringing Dow’s debt to capital ratio to 34 percent by year-end 2006, which is five percentage points lower than the 39 percent reported at the end of 2005. Capital spending was $1.78 billion, inside the Company’s full year target of $1.8 billion, and 7 percent below depreciation of $1.9 billion. Selling, Administrative and Research and Development expenses rose compared with the same quarter last year, reflecting a disciplined investment strategy focused on building markets, expanding product offerings and establishing brands in several of Dow’s high-value, market‑facing businesses and in key geographies. |
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“This was another very strong quarter for Dow, ending a tremendous year for the Company … our second highest year for earnings and a year that demonstrated the true value of our strategy to drive earnings growth and consistency. The diversity we have created across several different dimensions – geographic regions, businesses, end‑use markets and technologies, as well as our stream of equity earnings – overcame the ups and downs of a volatile year and brought significant benefits to the Company in 2006,” said Andrew N. Liveris, Dow’s chairman and chief executive officer. |
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“As we predicted, in the fourth quarter we saw strong results from Performance Chemicals and Performance Plastics. The benefits of our geographic balance were also apparent, with strength in Asia Pacific, Europe and Latin America offsetting a slowdown in the North American economies. And results for the quarter again underscore the value of our investment in joint ventures,” he said. |
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Performance PlasticsIn the Performance Plastics segment, fourth quarter sales of $3.55 billion set a new quarterly record, up 11 percent from the same period in 2005. Price rose 8 percent and volume increased 3 percent, with strong gains in every geographic region except North America, where the housing and automotive sectors showed particular weakness. Dow Epoxy set another quarterly sales record, driven by strong demand for functional coatings as product differentiation enabled the business to maintain strong customer support in higher value applications. The business saw positive price momentum and solid demand growth across all geographic regions, with double‑digit volume increases in every region, except North America. The Specialty Plastics and Elastomers business also reported stronger pricing and volume growth, with the Wire and Cable business seeing healthy demand from the high voltage power distribution industries in Europe and Asia Pacific, and fiber optic applications. Equity earnings for the Performance Plastics segment fell in the fourth quarter compared with the same period last year, largely reflecting the impact of the sale of Union Carbide’s interest in UOP in the fourth quarter of 2005. Fourth quarter EBIT(1) for the Performance Plastics segment was $347 million, including a charge of $85 million related to a contingent liability for a fine imposed by the European Commission associated with synthetic rubber industry matters. EBIT for the fourth quarter of 2005 was $960 million, including a net gain of $637 million related to the sale of UOP, partly offset by restructuring charges totaling $28 million. |
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Performance ChemicalsSales in Performance Chemicals rose to $2.00 billion for the fourth quarter of 2006, an increase of 8 percent compared with $1.85 billion posted in the same period last year. Price was up 3 percent while volume increased 5 percent, with solid volume gains across all geographic regions and particular strength in both Asia Pacific and Latin America. Designed Polymers reported price gains and double‑digit volume improvement, reflecting recent growth investments in this business, including the acquisition of Zhejiang Omex Environmental Engineering last July and a new facility for the production of FILMTEC™ membranes in Minneapolis, Minnesota, U.S.A. The Specialty Chemicals business also reported healthy volume gains in all geographic regions, as tight industry supply conditions and strong demand for gas treating applications in the Middle East more than offset sliding demand for aircraft de‑icing fluids, the consequence of a mild winter in the northern hemisphere. Equity earnings in the Performance Chemicals segment rose significantly compared with the same quarter in 2005, bolstered by a record fourth quarter at Dow Corning and a stronger contribution from the specialty chemicals business of OPTIMAL. Performance Chemicals reported EBIT of $293 million for the fourth quarter, which included a restructuring charge of $1 million. In 2005, fourth quarter EBIT was $227 million, including restructuring charges totaling $14 million. |
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Agricultural SciencesThe Agricultural Sciences segment posted record fourth quarter sales of $814 million, 12 percent higher than the same period in 2005. This improvement was driven entirely by higher volume, with all geographic regions reporting year‑over‑year gains, and particular strength in Latin America and in Europe. New product launches and robust performance in the Plant Genetics and Biotechnology business, coupled with strong demand from the corn and sugar cane sectors in Brazil, bolstered growth in Latin America. Growth in Europe was primarily driven by demand for insecticides and by increased demand for herbicides for oil seed rape applications. Sales of spinosad insecticide products were particularly strong compared with the same quarter in 2005, reflecting recent registrations for new crops in several geographic regions. But despite these positives, fourth quarter EBIT for Agricultural Sciences fell from $74 million in 2005 to $38 million in 2006, principally the result of higher raw material costs and operating expenses, extremely competitive industry conditions in Brazil, and a change in product mix. EBIT in the fourth quarter 2005 included restructuring charges totaling $9 million. |
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Basic PlasticsBasic Plastics sales rose 1 percent in the fourth quarter, from $2.92 billion in 2005 to $2.94 billion in 2006. Volume increased 4 percent, with modest growth in Europe and double‑digit improvements in both Latin American and Asia Pacific more than offsetting some softness in North America. Price fell 3 percent, despite strong improvements in Europe and Asia Pacific, reflecting a marked decline in North America. This was particularly evident in the Polyethylene business, which reported increased demand in every geographic region, but saw North American prices decline by around 25 percent from the same period last year. Polyethylene price rose significantly year over year in both Europe and Asia Pacific, and was up slightly in Latin America. Despite reporting price improvements for Polystyrene in every geographic region compared with the same period last year, the overall double‑digit increase was not sufficient to keep pace with the escalating cost of benzene, which continues to present a significant challenge for the business. Equity earnings in the fourth quarter fell from the same period in 2005, as a stronger contribution from the Company’s polyethylene joint venture with Siam Cement largely offset a drop in earnings from Petromont. Fourth quarter EBIT for the Basic Plastics segment was $461 million. This was down from $624 million in the same period last year, which included a restructuring charge of $12 million. |
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Basic ChemicalsFourth quarter sales in the Basic Chemicals segment declined 14 percent in 2006 compared with a year ago, from $1.53 billion to $1.32 billion. Price fell 8 percent, while volume declined 6 percent, reflecting lower demand across all geographic regions. Much of this reduction was attributed to the Chlor‑Vinyl business, reflecting slower demand from the PVC industry in North America as fabricators drew down inventory in anticipation of lower prices. In Europe, volume was hit by an unplanned shutdown at the Schkopau plant in Germany. The plant is now back on stream. Caustic soda volume for the quarter increased slightly compared with the same period in 2005, with healthy demand from the alumina industry more than offsetting continued weakness in pulp and paper. Equity earnings in the Basic Chemicals segment increased markedly in the fourth quarter of 2006 compared with the same period a year ago, reflecting significant improvements in the earnings from MEGlobal, and the ethylene glycol businesses of EQUATE and OPTIMAL. The segment reported EBIT for the fourth quarter of $194 million, including restructuring charges of $19 million. This compares with $268 million in the fourth quarter 2005, which included a $3 million restructuring charge. |
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Review of Results for 2006Dow reported record annual sales of $49.1 billion in 2006, 6 percent higher than last year’s record of $46.3 billion. Price rose 5 percent, with increases in every operating segment except Agricultural Sciences, and in all geographic regions. Volume edged up 1 percent, with particular strength across the Performance portfolio and in Asia Pacific, which rose 7 percent and 10 percent respectively. Net income for the year was $3.7 billion, which included certain items with a net unfavorable impact of $417 million. This compares with net income for 2005 of $4.5 billion, which included a net favorable impact of $242 million from certain items during that year. Excluding these items in both periods, earnings per share were $4.25 in 2006, down slightly from $4.37 in 2005 (see supplemental table at the end of the release for a description of certain items). Commenting on the Company’s outlook, Liveris said: “The global economy remains strong and, as we begin 2007, feedstock and energy costs are trending lower … creating a positive macroeconomic backdrop that should help ensure healthy demand for our products and generate solid results through the year ahead. The strength and resilience of our portfolio will be particularly evident in our Performance segments, which now have revenues totaling more than $25 billion. “Our focus on financial discipline will continue as we invest for long-term growth, delivering innovative products and services to our customers and greater value to our shareholders. As we have been saying for some time, we believe that 2007 will be another very good year for Dow, and that our transformational strategy will continue to create an earnings ridge for some time to come.” |
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(1) Earnings before interest, income taxes and minority interests (“EBIT”). A reconciliation of EBIT to “Net Income Available for Common Stockholders” is provided following the Operating Segments table. ®™* Trademark of The Dow Chemical Company ("Dow") or an affiliated company of Dow |
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About Dow |
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Dow is a diversified chemical company that harnesses the power of innovation, science and technology to constantly improve what is essential to human progress. The Company offers a broad range of products and services to customers in more than 175 countries, helping them to provide everything from fresh water, food and pharmaceuticals to paints, packaging and personal care products. Built on a commitment to its principles of sustainability, Dow has annual sales of $49 billion and employs 43,000 people worldwide. References to “Dow” or the “Company” mean The Dow Chemical Company and its consolidated subsidiaries unless otherwise expressly noted. More information about Dow can be found at www.dow.com. Use of non-GAAP measures: Dow's management believes that measures of income excluding certain items ("non-GAAP" information) provide relevant and meaningful information to investors about the ongoing operating results of the Company. Such measurements are not recognized in accordance with accounting principles generally accepted in the United States of America ("GAAP") and should not be viewed as an alternative to GAAP measures of performance. Reconciliations of non-GAAP measures to GAAP measures are provided in the Supplemental Information tables. |
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Note: The forward‑looking statements contained in this document involve risks and uncertainties that may affect the Company’s operations, markets, products, services, prices and other factors as discussed in filings with the Securities and Exchange Commission. These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental and technological factors. Accordingly, there is no assurance that the Company’s expectations will be realized. The Company assumes no obligation to provide revisions to any forward‑looking statements should circumstances change, except as otherwise required by securities and other applicable laws. |
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Supplemental Information |
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Description of Certain Items Affecting Results and |
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Fourth Quarters of 2006 and 2005 In the fourth quarter of 2005, earnings were favorably impacted by a pretax gain of $637 million on the sale of Union Carbide’s 50 percent interest in UOP LLC (reflected in “Sundry income – net”). This gain was partially offset by pretax charges totaling $114 million for various restructuring activities. Earnings in the fourth quarter 2005 were further reduced by a cash donation of $100 million to The Dow Chemical Company Foundation (reflected in “Sundry income - net”); a charge to the “Provision for income taxes” of $137 million related to an unfavorable tax ruling; and an after-tax charge of $20 million related to asset retirement obligations required under FIN 47. A table showing the impact of these items by operating segment is included with the Operating Segments tables. |
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Years ended December 31, 2006 and 2005 In addition to the items described above for the fourth quarter of 2005, earnings for 2005 were favorably impacted by a pretax gain of $70 million related to the sale of a 2.5 percent interest in the EQUATE joint venture (included in “Sundry income - net”). Earnings for 2005 were also favorably impacted by a $113 million credit to the “Provision for income taxes” related to the repatriation of foreign earnings in 2005 under the American Jobs Creation Act (“AJCA”). Earnings for 2005 were negatively impacted by a loss of $31 million associated with the early extinguishment of debt (included in “Sundry income – net”). A table showing the impact of these items by operating segment is included with the Operating Segments tables. |
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| Download Fourth Quarter 2006 Financial Statements in PDF format (115KB PDF) |
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