3rd Quarter Results

October 24, 2002 Dow Reports Third Quarter Earnings Third Quarter of 2002 Highlights · Sales grew 5 percent from a year ago to $7 billion, with a 3 percent increase in volume and a 2 percent increase in price. · Excluding unusual items in both periods, earnings per share were $0.16, flat with last year, and EBIT rose 12 percent to $433 million. · The Company experienced slight margin contraction in the quarter, primarily due to increased purchased feedstock and energy costs, which were up more than $120 million from a year ago. · Dow announces additional steps to improve earnings and cash flow. 3 Months Ended 9 Months Ended (In millions, except for per September 30 September 30 share amounts) 2002 2001 2002 2001 $ 7,041 $ 6,729 $ 20,520 $ 21,459 Net Sales Earnings (Loss) Before Interest, Income 401 253 1,183 (71) Taxes and Minority Interests ("EBIT") Earnings (Loss) Per Common $ 0.14 $ 0.06 $ 0.51 $ (0.39) Share Excluding Unusual Items: EBIT $ 433 $ 385 $ 1,264 $ 1,203 Earnings Per Common Share $ 0.16 $ 0.16 $ 0.51 $ 0.53 Review of Third Quarter Results The Dow Chemical Company today reported third quarter sales of $7 billion, compared with $6.7 billion a year ago, an increase of 5 percent. Reported net income was $128 million, or $0.14 per share. Excluding unusual items, earnings before interest, income taxes and minority interests ("EBIT") were $433 million, net income was $148 million and earnings per share were $0.16. For a description of unusual items that impacted third quarter results in 2002 and 2001, see "Supplemental Information" at the end of this release. "Dow's results this quarter fell below our earlier expectations. Although there was margin improvement in some of the basics businesses, it was not as much as anticipated primarily because of higher feedstock and energy costs," said J. Pedro Reinhard, executive vice president and chief financial officer. He also cited slower than expected improvement in September demand as a factor affecting the Company's performance relative to expectations. Purchased feedstock and energy costs in the third quarter were up 6 percent, more than $120 million, compared with the third quarter of 2001 and the second quarter of 2002, contrary to expectations in July that these costs would be relatively flat. The increase was more pronounced in Europe than in the United States. The 5 percent increase in sales in the quarter, compared with a year ago, was due to a 3 percent increase in volume and a 2 percent increase in price. The Agricultural Sciences segment recorded strong volume gains, due in part to higher sales of acquired products and late season sales in North America. Volume in the remaining segments, excluding Hydrocarbons & Energy, was up about 1 percent compared with last year. Prices were up in the basics segments, with Plastics showing the first year-over-year gain since the third quarter of 2000. Prices in the Performance businesses were flat to slightly down. On a geographic basis, prices increased in the U.S. and Europe, but declined in the rest of the world, primarily due to weaker economic conditions in Latin America. Overall, price increases were more than offset by higher feedstock and energy costs, resulting in overall margin compression. EBIT increased 12 percent from a year ago to $433 million, excluding unusual items in both periods. The Agricultural Sciences segment posted improved EBIT, excluding unusuals, due to increased volume and improved productivity. In Performance Plastics and Performance Chemicals, EBIT declined 28 percent, as these businesses were not able to offset the higher feedstock and energy costs. The Plastics segment achieved substantial EBIT gains on higher margins, as prices moved up from the historically low levels of early 2002. In the Chemicals segment, EBIT declined by $19 million from the same quarter last year, with strong gains in ethylene oxide/ethylene glycol being more than offset by lower results in key chlor-alkali products and other chemicals. According to Reinhard, the outlook for the fourth quarter is challenging because of current geopolitical uncertainty and its impact on the volatility of feedstock and energy costs. "Fourth quarter results will depend on whether improved volumes can offset anticipated margin contraction, primarily in the basics," he said. Dow expects that earnings in the fourth quarter of 2002 will be better than the fourth quarter of last year. "The lack of market momentum in September highlighted the challenges Dow faces for the rest of this year and into 2003," said Reinhard. "Therefore, Dow's Corporate Operating Board is announcing significant steps to improve Dow's earnings and cash flow." Effective immediately, Dow intends to implement the following steps: · Decrease 2003 capital spending by 20 percent from 2002 levels; · Intensify efforts on supply chain optimization, improving cash flow through inventory reduction, reduced logistics costs, and savings in raw material purchases; and · Cut other costs and expenses through reinforced efforts on cost reduction. "Through these measures, Dow expects to improve cash flow by more than $1 billion as we continue to focus on ways to enhance our competitive position and maximize long-term shareholder value," said Reinhard. The Company will host a live audio Webcast of its earnings conference call with investors to discuss its business results and outlook at 10 a.m. Eastern Time today on www.dow.com. A replay of the Webcast will be available on Dow's Web site until mid-November. Dow is a leading science and technology company that provides innovative chemical, plastic and agricultural products and services to many essential consumer markets. With annual sales of $28 billion, Dow serves customers in more than 170 countries and a wide range of markets that are vital to human progress, including food, transportation, health and medicine, personal and home care, and building and construction, among others. Committed to the principles of sustainable development, Dow and its approximately 50,000 employees seek to balance economic, environmental and social responsibilities. Supplemental Information The following tables show the impact of the unusual items recorded in the three-month and nine-month periods ended September 30, 2002 and 2001 on earnings (loss) before interest, income taxes and minority interests ("EBIT"); net income (loss); and earnings (loss) per common share - diluted. Description of Unusual Items - Third Quarter of 2002 and 2001 Results in the third quarter of 2002 were unfavorably impacted by additional merger-related integration costs of $6 million, additional merger-related severance of $21 million, and severance related to a workforce reduction program at Dow AgroSciences of $5 million. These costs are shown on the income statement as "Merger-related expenses and restructuring." In the third quarter of 2001, earnings were impacted by additional merger-related expenses of $46 million, a charge of $69 million for purchased in-process research and development costs associated with the acquisition of Rohm and Haas' agricultural chemicals business, a $6 million reinsurance Company loss on the World Trade Center ("WTC"), and an $11 million restructuring charge (Dow's share) recorded by Dow Corning. EBIT Net Income Earnings Per Share Three Months Ended Three Months Ended Three Months Ended Sept. Sept. Sept. Sept. Sept. Sept. In millions, except per 30, 30, 30, 30, 30, 30, share amounts 2002 2001 2002 2001 2002 2001 Unusual items: Merger-related expenses and restructuring $ (32) $ (46) $ (20) $ (34) $(0.02) $(0.03 ) Purchased in-process - (69) - (43) - (0.05) R&D Reinsurance Company - (6) - (5) - (0.01) loss on WTC Dow Corning - (11) - (11) - (0.01) restructuring Total unusual items $ (32) $(132) $ (20) $ (93) $(0.02) $(0.10 ) As reported $401 $ 253 $128 $ 57 $ 0.14 $ 0.06 Excluding unusual items $433 $ 385 $148 $150 $ 0.16 $ 0.16 Description of Unusual Items - Year-to-Date 2002 and 2001 Results in the first three quarters of 2002 were unfavorably impacted by: additional merger-related expenses and restructuring of $55 million, a $10 million restructuring charge (Dow's share) recorded by UOP LLC, goodwill impairment losses of $16 million related to investments in nonconsolidated affiliates, and a net after-tax gain of $67 million related to the adoption of two new accounting standards (SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets"). In the first nine months of 2001, earnings were impacted by: a special charge of $1,454 million for costs related to the Union Carbide merger, a charge of $69 million for purchased in-process research and development costs associated with the acquisition of Rohm and Haas' agricultural chemicals business, a $6 million reinsurance Company loss on the WTC, an $11 million restructuring charge (Dow's share) recorded by Dow Corning, a gain of $266 million on the sale of stock in Schlumberger Ltd, and an after-tax transition adjustment gain of $32 million related to the adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." EBIT Net Income Earnings Per Share Nine Months Ended Nine Months Nine Months Ended Ended Sept. Sept. 30, Sept.30 Sept. Sept. Sept. In millions, except 30, 2001 , 30, 30, 30, per share amounts 2002 2002 2001 2002 2001 Unusual items: Merger-related expenses and $ (55) $(1,454) $ (35) $(970) $(0.04) $(1.07) restructuring Purchased in-process - (69) - (43) - (0.05) R&D Reinsurance Company - (6) - (5) - (0.01) loss on WTC Dow Corning - (11) - (11) - (0.01) restructuring UOP restructuring (10) - (7) - (0.01) - Goodwill impairment - losses in non- (16) - (16) - (0.02) consolidated affiliates Gain on sale of - 266 - 168 - 0.18 Schlumberger stock Cumulative effect of changes in accounting - - 67 32 0.07 0.04 principles Total unusual items $ (81) $(1,274) $ 9 $(829) - $(0.92) As reported $1,183 $ (71) $471 $(348) $ 0.51 $(0.39) Excluding unusual $1,264 $ 1,203 $462 $ 481 $ 0.51 $ 0.53 items 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. THE DOW CHEMICAL COMPANY - 3Q02 EARNINGS FINANCIAL STATEMENTS (Note A) The Dow Chemical Company and Subsidiaries Consolidated Statements of Income Three Months Ended Nine Months Ended Sept. 30, Sept. Sept. Sept. 30, 30, 30, In millions, except per share 2002 2001 2002 2001 amounts (Unaudited) Net Sales $7,041 $6,729 $20,52 $21,459 0 Cost of sales 6,008 5,639 17,319 18,232 Research and development 262 261 784 804 expenses Selling, general and 389 433 1,185 1,341 administrative expenses Amortization of intangibles 16 50 49 118 Purchased in-process research - 69 - 69 and development charges (Note B) Merger-related expenses and 32 46 55 1,454 restructuring (Note C) Insurance company operations, 2 (5) 12 20 pretax income (loss) Equity in earnings of 47 11 42 84 nonconsolidated affiliates Sundry income - net 18 16 1 384 Interest income 13 21 43 61 Interest expense and 194 194 571 555 amortization of debt discount Income (Loss) before Income 220 80 655 (565) Taxes and Minority Interests Provision (Credit) for income 67 20 202 (200) taxes Minority interests' share in 25 3 49 15 income Income (Loss) before Cumulative 128 57 404 (380) Effect of Changes in Accounting Principles Cumulative effect of changes in - - 67 32 accounting principles (Note D) Net Income (Loss) Available for $128 $57 $471 $(348) Common Stockholders Share Data Earnings (Loss) before $0.14 $0.06 $0.44 $(0.42) cumulative effect of changes in accounting principles per common share - basic Earnings (Loss) per common share $0.14 $0.06 $0.52 $(0.39) - basic Earnings (Loss) before $0.14 $0.06 $0.44 $(0.42) cumulative effect of changes in accounting principles per common share - diluted Earnings (Loss) per common share $0.14 $0.06 $0.51 $(0.39) - diluted Common stock dividends declared $0.335 $0.335 $1.005 $0.96 per share of common stock Weighted-average common shares 911.7 902.8 909.9 900.6 outstanding - basic Weighted-average common shares 917.9 913.6 917.3 900.6 outstanding - diluted Depreciation 417 402 1,207 1,174 Capital Expenditures 398 349 1,086 998 Notes to the Consolidated Financial Statements: Note A: The unaudited interim consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are considered necessary for a fair presentation of the results for the periods covered. Certain reclassifications of prior year amounts have been made to conform to current year presentation. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K filed on March 20, 2002, for the year ended December 31, 2001. Except as otherwise indicated by the context, the terms "Company" and "Dow" as used herein mean The Dow Chemical Company and its consolidated subsidiaries. Note B: During the third quarter of 2001, a pretax charge of $69 million was recorded for purchased in-process research and development costs associated with the acquisition on June 1, 2001 of Rohm and Haas' agricultural chemicals business. Note C: In the first nine months of 2001, pretax costs of $1,454 million were recorded for merger-related expenses and restructuring. These costs included transaction costs, employee severance, the write-down of duplicate assets and facilities, and other merger-related expenses. In the first nine months of 2002, the Company recorded one-time merger and integration costs of $29 million. Other costs recorded in the third quarter of 2002 included additional merger-related severance of $21 million and severance related to a workforce reduction program at Dow AgroSciences of $5 million. Note D: On January 1, 2001, the Company recorded a cumulative transition adjustment gain of $32 million (net of related income tax of $19 million), upon adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." On January 1, 2002, the Company adopted SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". The cumulative effect of adoption was a net gain of $67 million and was primarily due to the write-off of negative goodwill related to BSL, partially offset by the write-off of unrelated goodwill impairments. Total goodwill amortization expense, including equity method goodwill, was $45 million in the third quarter of 2001 and $99 million in the first nine months of 2001. The Dow Chemical Company and Subsidiaries Consolidated Balance Sheets Sept. 30, Dec. 31, In millions (Unaudited) 2002 2001 Assets Current Assets Cash and cash equivalents $500 $220 Marketable securities and interest-bearing 48 44 deposits Accounts and notes receivable: Trade (net of allowance for doubtful 3,161 2,868 receivables - 2002: $106; 2001: $123) Other 2,050 2,230 Inventories 4,480 4,440 Deferred income tax assets - current 522 506 Total current assets 10,761 10,308 Investments Investment in nonconsolidated affiliates 1,649 1,581 Other investments 1,632 1,663 Noncurrent receivables 1,010 802 Total investments 4,291 4,046 Property Property 37,394 35,890 Less accumulated depreciation 23,706 22,311 Net property 13,688 13,579 Other Assets Goodwill 3,188 3,130 Other intangible assets (net of accumulated 602 607 amortization - 2002: $410; 2001: $346) Deferred income tax assets - noncurrent 2,336 2,248 Deferred charges and other assets 1,922 1,597 Total other assets 8,048 7,582 Total Assets $36,788 $35,515 Liabilities and Stockholders' Equity Current Liabilities Notes payable $903 $1,209 Long-term debt due within one year 725 408 Accounts payable: Trade 2,438 2,713 Other 1,388 926 Income taxes payable 182 190 Deferred income tax liabilities - current 206 236 Dividends payable 305 323 Accrued and other current liabilities 2,294 2,120 Total current liabilities 8,441 8,125 Long-Term Debt 10,360 9,266 Other Noncurrent Liabilities Deferred income tax liabilities - 922 760 noncurrent Pension and other postretirement benefits - 2,413 2,475 noncurrent Other noncurrent obligations 3,514 3,539 Total other noncurrent liabilities 6,849 6,774 Minority Interest in Subsidiaries 366 357 Preferred Securities of Subsidiaries 1,000 1,000 Stockholders' Equity Common stock 2,453 2,453 Additional paid-in capital - - Unearned ESOP shares (86) -90 Retained earnings 10,654 11,112 Accumulated other comprehensive loss (1,016) -1,070 Treasury stock at cost (2,233) -2,412 Net stockholders' equity 9,772 9,993 Total Liabilities and Stockholders' Equity $36,788 $35,515 See Notes to the Consolidated Financial Statements. The Dow Chemical Company and Subsidiaries Operating Segments and Geographic Areas Three Months Ended Nine Months Ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, In millions (Unaudited) 2002 2001 2002 2001 Operating segment sales Performance Plastics $1,815 $1,829 $5,369 $5,614 Performance Chemicals 1,316 1,306 3,877 3,856 Agricultural Sciences 551 477 2,082 1,891 Plastics 1,667 1,606 4,783 5,072 Chemicals 917 857 2,463 2,798 Hydrocarbons and Energy 711 578 1,779 2,005 Unallocated and Other 64 76 167 223 Total $7,041 $6,729 $20,520 $21,459 Operating segment EBIT (1) Performance Plastics $140 $214 $532 $571 Performance Chemicals 172 218 535 476 Agricultural Sciences -25 -150 190 69 Plastics 170 83 214 158 Chemicals 38 57 -30 95 Hydrocarbons and Energy 9 -11 50 -14 Unallocated and Other -103 -158 -308 -1,426 Total $401 $253 $1,183 $(71) Geographic area sales United States $2,800 $2,741 $8,339 $9,149 Europe 2,384 2,190 6,898 6,825 Rest of World 1,857 1,798 5,283 5,485 Total $7,041 $6,729 $20,520 $21,459 (1) The reconciliation between "Earnings (Loss) before interest, income taxes and minority interests ("EBIT")" and "Income (Loss) before income taxes and minority interests" is shown below: Three Nine Months Ended Months Ended Sept Sept Sept. 30, Sept. 30, . . 30, 30, 2002 2001 2002 2001 Earnings (Loss) before interest, $401 $253 $1,183 $(71) income taxes and minority interests ("EBIT") Interest income 13 21 43 61 Interest expense and 194 194 571 555 amortization of debt discount Income (Loss) before income $220 80 $655 $(565) taxes and minority interests The Dow Chemical Company and Subsidiaries Sales Volume and Price by Operating Segment and Geographic Area Three Months Ended Nine Months Ended Sept. 30, 2002 Sept. 30, 2002 Volume Price Total Volume Price Total Percentage change from prior year Operating segments Performance Plastics - (1)% (1)% 2% (6)% (4)% Performance 1% - 1% 4% (3)% 1% Chemicals Agricultural 18% (2)% 16% 12% (2)% 10% Sciences Plastics - 4% 4% 8% (14)% (6)% Chemicals 6% 1% 7% 4% (16)% (12)% Hydrocarbons and 14% 9% 23% 5% (16)% (11)% Energy Total 3% 2% 5% 5% (9)% (4)% Geographic areas United States - 2% 2% (1)% (8)% (9)% Europe 2% 7% 9% 9% (8)% 1% Rest of World 9% (6)% 3% 10% (14)% (4)% Total 3% 2% 5% 5% (9)% (4)% End of Dow Chemical 3Q02 Earnings Release FOR MORE INFORMATION: Cindy Newman The Dow Chemical Company 2030 Dow Center Midland, MI 48674 989-636-2876 ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.waymaker.net/bitonline/2002/10/24/20021024BIT00840/wkr0001.doc http://www.waymaker.net/bitonline/2002/10/24/20021024BIT00840/wkr0002.pdf