Dow Chemical (DOW) Q2 Earnings & Revs Beat, Profit Slides

Dow Chemical (DOW) saw its profits tumble year over year in second-quarter 2014 as a hefty one-time gain boosted its bottom-line in the year-ago quarter.

Dow received a cash payment of $2.2 billion a year ago as damages from Petrochemical Industries Company of Kuwait ("PIC") as part of the final resolution of the K-Dow Petrochemicals joint venture arbitration case. PIC withdrew from the $17.4 billion joint venture in 2008.

The U.S. chemical giant recoded profit of $882 million or 73 cents per share in the reported quarter, a 62% plunge from $2.34 billion or $1.87 per share recorded a year ago.

Barring one-time items including costs associated with the separation of a major portion of the company’s chlorine business, earnings were 74 cents per share, beating the Zacks Consensus Estimate of 72 cents.

Dow recorded higher EBITDA margin (as adjusted) in the quarter as gains from productivity and growth actions more than offset a rise in feedstock and energy costs and unfavorable impact from outages at its Louisiana ethylene plant. The company also benefited from higher pricing.

Revenues were up 2.3% year over year to $14,917 million in the quarter on gains across all businesses, especially performance plastics and electronics. Sales, on an adjusted basis, rose across most geographic regions in the quarter. Revenues also beat the Zacks Consensus Estimate of $14,876 million.

Sales in the emerging markets moved up 2% on an adjusted basis in the quarter. Western Europe saw a 6% rise while the U.S. recorded a 5% gain.

The Michigan-based company’s shares gained roughly 2% in pre-market trading, reflecting the better-than-expected results. The stock is up around 20% so far this year.

Segment Review

Electronic and Functional Materials

Revenues rose 5% year over year to $1.2 billion in the reported quarter. Electronic Materials sales rose on strength in Asia Pacific. Sales of interconnect technologies rose on higher demand for printed circuit boards used in mobile devices while semiconductor technologies sales move up on higher foundry demand, offsetting declines in display technologies. Functional materials sales also rose in the quarter.

Coatings and Infrastructure Solutions

Sales rose 3% to $2 billion in the quarter with gains recorded across Europe, Middle East and Africa (EMEA), Asia Pacific and North America. Coating materials sales were boosted by strong demand in architectural and industrial coatings. Water and Process Solutions sales rose on higher demand for ion exchange and reverse osmosis technologies.

Agricultural Sciences

Sales moved up 3% year over year to $1.9 billion as gains in crop protection were offset by lower seeds sales. Crop protection revenues rose 3% on double-digit gains in insecticides. Higher sales of herbicides in North and Latin America were offset by declines in EMEA and Asia Pacific. Sales of seeds rose 3% on gains in both corn and soybeans across North and Latin America.

Performance Materials

Revenues edged up 1% to $3.4 billion in the quarter. Recovery in Europe, healthy demand in the consumer comfort market sector and sustained growth in the industrial market led to a rise in polyurethanes sales.

Propylene oxide/propylene glycol sales rose on strong demand in North America in detergents, food, pharmaceuticals and personal care sectors. Sales of polyglycols, surfactants and fluids, oxygenated solvents and amines were impacted by conclusion of marketing responsibilities associated with a former joint venture.

Performance Plastics

Sales went up 2% (or 4% on an adjusted basis) to $3.7 billion in the quarter. Packaging and specialty plastics recorded higher sales on growth in flexible food and specialty packaging and double-digit gains in the hygiene and medical and pipe market sectors.

Sales fell in the electrical and telecommunications and elastomers businesses in the quarter, impacted by feedstock disruptions and planned maintenance outages.

Feedstocks and Energy

Revenues went up 2% to $2.6 billion on higher operating rates in hydrocarbons in Europe that more than offset declines in caustic soda and ethylene glycol.

Financials and Shareholder Returns

Dow ended the quarter with cash and cash equivalents of roughly $3.8 billion, down 21% year over year. Total long-term debt decreased roughly 6% year over year to around $17.2 billion. Operating cash flow for the quarter was $1.4 billion.

Dow has returned $3 billion to its shareholders through dividends and share repurchases so far this year.

Outlook

Dow, a Zacks Rank #3 (Hold) stock, will remain focused on its operating priorities that are delivering healthy results amid a volatile global marketplace. CEO Andrew N. Liveris said that the company will continue to aggressively pursue actions to drive portfolio improvements and generate additional value by exiting non-strategic assets. The company will also continue to focus on maximizing shareholder returns.

Dow remains committed to its cost reduction and efficiency programs and will continue to invest in attractive regions through highly-accretive projects including the expansions in the U.S. Gulf Coast and Sadara joint venture in the Middle East. The company expects its strategic investments to deliver incremental earnings starting in 2015.

Dow also remains actively focused on seeking opportunities to optimize its portfolio by selectively spinning off or selling its underperforming assets and gradually shift focus to high growth businesses. The company targets $4.5 billion-$6 billion of proceeds from assets sale by end-2015.

Dow’s results shed light on demand trends for chemical products across a host of end-use markets. Among other big chemical names, DuPont (DD), which reported yesterday, saw its profit rise in the second quarter. But its adjusted earnings fell on weak results in its core agriculture business.

Celanese (CE), which reported on Jul 17, posted better-than-expected results in the second quarter. Eastman Chemical (EMN) will report after the close on Jul 28.