Dow Reports Second Quarter 2005 Results

MIDLAND, Mich., July 28 /PRNewswire-FirstCall/ --

Second Quarter of 2005 Highlights * Sales for the quarter were $11.5 billion, 16 percent higher than the same period last year and a new second quarter sales record. * Earnings per share were $1.30, an 81 percent improvement compared with the $0.72 per share reported a year ago. These amounts include unusual items in both periods which had favorable impacts of $0.10 per share in the current quarter and $0.01 per share in 2004. * The Company recorded its tenth consecutive quarter of year-over-year margin recovery despite an increase in feedstock and energy costs of almost $900 million compared with a year ago. * Strong cash flow contributed to a reduction in debt of more than $1 billion during the second quarter. Comment

"The fundamental strength of Dow's diverse business portfolio and the benefits of continuing to focus on margin management and financial discipline were clearly evident through the quarter, providing solid resilience in the face of significant headwinds," said J. Pedro Reinhard, executive vice president and chief financial officer.

3 Months Ended 6 Months Ended June 30 June 30 (In millions, except for per share amounts) 2005 2004 2005 2004 Net Sales $11,450 $9,844 $23,129 $19,153 Net Income $1,265 $685 $2,618 $1,154 Earnings per Common Share $1.30 $0.72 $2.69 $1.22 Review of Second Quarter Results

The Dow Chemical Company reported sales of $11.5 billion for the second quarter of 2005, a 16 percent increase compared with the same period in 2004. Net income rose 85 percent to $1,265 million, and earnings per share were $1.30, an increase of 81 percent compared with $0.72 per share in the second quarter last year.

Net income for the second quarter included an after-tax benefit of $113 million, equivalent to $0.12 per share, related to the plan to repatriate foreign earnings in 2005, and a pretax charge of $31 million, or $0.02 per share, associated with the Company's early redemption of debt. In the second quarter of 2004, Dow recorded a net pretax gain of $20 million, or $0.01 per share, comprising gains of $563 million from asset divestitures associated with the formation of MEGlobal and Equipolymers, as well as restructuring charges totaling $543 million.

Price improved 20 percent compared with the second quarter of 2004, with double-digit increases in all geographic areas and across most businesses. This enabled the Company to record its tenth consecutive quarter of year-over- year margin recovery despite an increase of almost $900 million in feedstock and energy costs compared with a year ago. Volume was down 4 percent, principally due to the negative impact of divestitures of certain businesses during 2004. Excluding those divestitures, volume dipped less than 1 percent from a very strong quarter in 2004, reflecting reduced demand early in the quarter and the Company's continued focus on price/volume management.

With significantly improved cash flow and a continued focus on financial discipline, Dow was able to reduce debt by more than $1 billion during the second quarter. By the end of the quarter, the Company's gross debt to total capital ratio was approximately 43 percent, 10 percentage points lower than at the end of the same period in 2004. The Company's net debt to capital ratio is now less than 35 percent.

"The Company's strong financial performance continues," said J. Pedro Reinhard, Dow's executive vice president and chief financial officer. "The fundamental strength of Dow's diverse business portfolio and the benefits of continuing to focus on margin management and financial discipline were clearly evident through the quarter, providing solid resilience in the face of significant headwinds, including capacity additions and industry de-stocking through the value chain. While these industry factors were most pronounced in the ethylene chain, they also impacted other products.

"Earnings increased significantly compared with a year ago -- despite a number of unplanned outages during the quarter, both at Dow facilities and at some of our joint venture operations," said Reinhard.

In the Performance Plastics segment, second quarter sales of $2.8 billion were 22 percent higher than the same period last year, with a strong increase in revenue across most businesses. Volume fell 2 percent, negatively impacted by the divestiture of the DERAKANE(TM) business in the fourth quarter of 2004, while price increased 24 percent, led by Polyurethanes, Engineering Plastics, and Epoxy Products and Intermediates. Solid volume growth was reported by the Thermoset Systems business, driven by strong demand for construction, adhesive and sealant applications. Engineering Plastics also saw increased volume, with continued demand for polycarbonate across a range of applications, most notably for optical media, sheet and security products. And in the Epoxy Products and Intermediates business, sales increased significantly across all geographic areas, as the Company maintained its sharp focus on price/volume management. EBIT(1) for the Performance Plastics segment was $436 million, an increase of 63 percent compared with the same quarter of 2004.

Second quarter sales in the Performance Chemicals segment were $1.9 billion, 19 percent higher than the same period in 2004. This improvement was driven by a 23 percent increase in price, while volume was down 4 percent from the particularly strong levels of a year ago. Dow Latex had a strong second quarter, with UCAR(TM) Emulsion Systems reporting increases in volume and price across most geographic areas, led by particularly robust demand in Europe and North America. Emulsion Polymers also posted healthy revenue growth, despite the negative impact on latex sales caused by a seven-week strike in the Finnish paper industry. During the quarter, the business completed the successful start-up of its second styrene-butadiene latex line at Zhangjiagang in China. Specialty Polymers reported another solid quarter, posting record sales, with volume rebounding soundly after a slow start. Notable contributors to that success were Amerchol personal care products and FILMTEC(TM) membranes for liquid separation applications. Performance Chemicals reported EBIT of $343 million for the second quarter 2005, compared with $113 million posted in the same period last year, which included restructuring charges of $89 million. Excluding the 2004 restructuring charges, EBIT for the second quarter of 2005 increased 70 percent year-over- year.

The Agricultural Sciences segment posted sales of $1 billion for the second quarter of 2005, marginally higher than the same period a year ago, with price increases roughly offsetting a 4 percent decline in volume. Dry conditions in Europe and North America restricted the normal seasonal demand for herbicide products, while difficult industry conditions in Brazil also impacted revenues for the quarter. Nevertheless, the business reported the successful introduction of its penoxsulam rice herbicide in the United States and Europe and the continued growth of new formulations of existing herbicides, particularly related to small grain applications. Sales of herbicides for range and pasture applications also increased compared with the second quarter of 2004, supported by higher cattle prices in the United States and Latin America. Agricultural Sciences EBIT for the quarter declined 12 percent compared with the same period a year ago, down from $271 million in 2004 to $238 million in 2005.

The Plastics segment had a good second quarter, with sales climbing 19 percent from $2.3 billion in 2004 to $2.8 billion in 2005. Price increased 22 percent compared with the same period last year, while volume was 3 percent lower, due to the divestiture of the Company's PET/PTA business related to the formation of the Equipolymers joint venture in 2004. Excluding the divestiture, year-over-year volume was flat. Polyethylene volume was up 2 percent, as the business overcame industry inventory de-stocking through a strong focus on price/volume management. The Polystyrene and Polypropylene businesses each reported a slight downturn in volume, but demand for both polymers saw a marked improvement in June. Price and volume trends are now favorable across all three major polymers. The Plastics segment reported EBIT of $575 million for the second quarter, compared with $399 million in the same period in 2004, which included a gain of $124 million from asset divestitures associated with the formation of Equipolymers. Excluding this 2004 gain, EBIT in the second quarter of 2005 was more than double EBIT in the same period last year.

Sales in the Chemicals segment declined slightly in the second quarter of 2005 compared with the same period in 2004, dropping 1 percent to $1.4 billion. Price was up 18 percent, but volume was down 19 percent due to asset divestitures associated with the formation of the MEGlobal joint venture a year ago. Excluding these divestitures, year-over-year volume was down 3 percent. Demand for caustic soda in Europe and the United States picked up significantly late in the quarter, after a slow start. Vinyl chloride monomer reported an atypical quarter, with softer than normal demand for PVC in seasonal housing construction applications. To an extent, this was offset by an increased demand for PVC pipe in water infrastructure projects. Ethylene glycol volume was down year-over-year as a consequence of the formation of MEGlobal, while price was roughly flat compared with the same quarter of 2004, but showed strong signs of recovery at the close of the quarter. That momentum has carried through July. The Chemicals segment reported EBIT of $267 million for the second quarter, compared with $726 million reported in the same period in 2004, which included a gain of $439 million from asset divestitures. Excluding this 2004 gain, EBIT in the second quarter of 2005 was down 7 percent year-over-year.

"The Company made tremendous progress in the quarter, despite the negative impact of the industry inventory corrections, achieving further margin restoration while retaining its competitive edge in both the basics and performance businesses," said Reinhard.

"As the Company moves into the third quarter, price and volume trends have once again turned favorable across virtually all operating segments. The industry has passed through an inflection point in the up-cycle from a supply-demand perspective. And although feedstock and energy costs remain high and volatile, Dow expects to continue to report year-over-year earnings improvements through the remainder of the year, achieving record earnings in 2005, and further earnings growth in 2006," he concluded.

(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 and Geographic Areas table. Upcoming Webcasts

Dow will host a live Webcast of its second quarter earnings conference call with investors to discuss its results, business outlook and other matters today at 10.00 a.m. EDT on http://www.dow.com/.

About Dow

Dow is a leader in science and technology, providing innovative chemical, plastic and agricultural products and services to many essential consumer markets. With annual sales of $40 billion, Dow serves customers in 175 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 43,000 employees seek to balance economic, environmental and social responsibilities. References to "Dow" or the "Company" mean The Dow Chemical Company and its consolidated subsidiaries unless otherwise expressly noted.

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.

Supplemental Information

The following tables summarize the impact of certain items recorded in the three-month and six-month periods ended June 30, 2005 and 2004:

Description of Certain Items Affecting Results: Three-month periods ended June 30, 2005 and 2004

Results in the second quarter of 2005 were favorably impacted by an after- tax benefit of $113 million, equivalent to $0.12 per share, related to the plan to repatriate foreign earnings in 2005 under the American Jobs Creation Act of 2004 ("AJCA"). This was reflected in "Provision for income taxes." The gain was partially offset by a pretax charge of $31 million, or $0.02 per share, associated with the Company's early redemption of debt, reflected in Unallocated and Other.

In the second quarter of 2004, the Company recorded a net pretax gain from restructuring of $20 million -- equivalent to $0.01 per share. The net gain included: gains of $563 million from asset divestitures associated with the formation of two new joint ventures, MEGlobal ($439 million gain in the Chemicals segment) and Equipolymers ($124 million gain in the Plastics segment); charges totaling $99 million for asset impairments related to the future sale or shutdown of facilities ($89 million charge in the Performance Chemicals segment, $10 million charge in Unallocated and Other); a charge of $148 million (in Unallocated and Other) in recognition of a liability associated with a loan guarantee for Cargill Dow LLC, a 50:50 joint venture; and employee-related restructuring charges of $296 million, reflected in Unallocated and Other.

In millions, except per share amounts Pretax Impact on Impact on Impact (1) Net Income (2) EPS (3) Three Months Ended Three Months Ended Three Months Ended June 30, June 30, June 30, June 30, June 30, June 30, 2005 2004 2005 2004 2005 2004 Loss on early extinguishment of debt $(31) - $(20) - $(0.02) - AJCA repatriation of foreign earnings - - 113 - 0.12 - Employee-related restructuring charges - $(296) - $(200) - $(0.21) Gains on divestitures of assets related to formation of MEGlobal and Equipolymers joint ventures - 563 - 379 - 0.40 Asset impairments - (99) - (69) - (0.08) Recognition of liability related to Cargill Dow loan guarantee - (148) - (93) - (0.10) Total $(31) $20 $93 $17 $ 0.10 $ 0.01 Six-month periods ended June 30, 2005 and 2004

In addition to the items described above for the second quarter of 2005, earnings for the six-month period ended June 30, 2005, were favorably impacted by a pretax gain of $70 million, or $0.05 per share, related to the sale of a 2.5 percent interest in the EQUATE joint venture, recorded in the first quarter of 2005. Of this gain, $29 million was reflected in the Plastics segment and $41 million was reflected in the Chemicals segment.

In millions, except per share amounts Pretax Impact on Impact on Impact (1) Net Income (2) EPS (3) Six Months Ended Six Months Ended Six Months Ended June 30, June 30, June 30, June 30, June 30, June 30, 2005 2004 2005 2004 2005 2004 Gain on sale of EQUATE shares $70 - $46 - $0.05 - Loss on early extinguishment of debt (31) - (20) - (0.02) - AJCA repatriation of foreign earnings - - 113 - 0.12 - Employee-related restructuring charges - $(296) - $(200) - $(0.21) Gains on divestitures of assets related to formation of MEGlobal and Equipolymers joint ventures - 563 - 379 - 0.40 Asset impairments - (99) - (69) - (0.08) Recognition of liability related to Cargill Dow loan guarantee - (148) - (93) - (0.10) Total $39 $20 $139 $17 $0.15 $0.01 (1) Impact on "Income before Income Taxes and Minority Interests" (2) Impact on "Net Income Available for Common Stockholders" (3) Impact on "Earnings per common share - diluted" Financial Statements (Note A) The Dow Chemical Company and Subsidiaries Consolidated Statements of Income Three Months Six Months Ended Ended June 30, June 30, June 30, June 30, In millions, except per share 2005 2004 2005 2004 amounts (Unaudited) Net Sales $11,450 $9,844 $23,129 $19,153 Cost of sales 9,300 8,345 18,637 16,252 Research and development expenses 271 262 526 513 Selling, general and administrative expenses 383 347 774 710 Amortization of intangibles 13 16 27 45 Restructuring net gain (Note B) - 20 - 20 Equity in earnings of nonconsolidated affiliates 224 254 499 394 Sundry income (expense) - net (Note C) 57 13 139 (15) Interest income 27 21 56 39 Interest expense and amortization of debt discount 188 182 375 368 Income before Income Taxes and Minority Interests 1,603 1,000 3,484 1,703 Provision for income taxes (Note D) 317 284 825 488 Minority interests' share in income 21 31 41 61 Net Income Available for Common Stockholders $1,265 $685 $2,618 $1,154 Share Data Earnings per common share - basic $1.31 $0.73 $2.73 $1.23 Earnings per common share - diluted $1.30 $0.72 $2.69 $1.22 Common stock dividends declared per share of common stock $0.335 $0.335 $0.67 $0.67 Weighted-average common shares outstanding - basic 964.1 938.0 960.5 934.9 Weighted-average common shares outstanding - diluted 976.2 947.9 974.7 945.8 Depreciation $451 $458 $924 $920 Capital Expenditures $364 $329 $650 $530 Notes to the Consolidated Financial Statements: Note A: The unaudited interim consolidated financial statements reflect all adjustments which, in the opinion of management, are considered necessary for a fair presentation of the results for the periods covered. 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 for the year ended December 31, 2004. 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: In the second quarter of 2004, the Company recorded a net pretax gain of $20 million related to restructuring activities. The net gain included gains totaling $563 million related to the divestitures of assets in conjunction with the formation of two new joint ventures, MEGlobal and Equipolymers; substantially offset by asset impairments of $99 million related to the future sale or shutdown of facilities; the recognition of a liability of $148 million associated with a loan guarantee for Cargill Dow LLC, a 50:50 joint venture; and employee-related restructuring charges of $296 million. The employee-related restructuring charges included severance of $225 million and curtailment costs of $71 million associated with Dow's defined benefit plans, and were the result of decisions management made in the second quarter relative to employment levels as the Company restructured its business organization and finalized plans for additional plant shutdowns and divestitures. Note C: In November 2004, Union Carbide Corporation sold a 2.5 percent interest in EQUATE to National Bank of Kuwait for $104 million. In March 2005, the resale of these shares to private Kuwaiti investors was completed, reducing Union Carbide's ownership interest from 45 percent to 42.5 percent and resulting in a pretax gain of $70 million in the first quarter of 2005. Note D: In the second quarter of 2005, the Company finalized its plan for the repatriation of foreign earnings subject to the requirements of the American Jobs Creation Act of 2004, resulting in a credit to the "Provision for income taxes" of $113 million. The Dow Chemical Company and Subsidiaries Consolidated Balance Sheets June 30, Dec. 31, In millions (Unaudited) 2005 2004 Assets Current Assets Cash and cash equivalents $3,162 $3,108 Marketable securities and interest-bearing deposits 39 84 Accounts and notes receivable: Trade (net of allowance for doubtful receivables - 2005: $167; 2004: $136) 4,758 4,753 Other 2,526 2,604 Inventories 5,203 4,957 Deferred income tax assets - current 385 384 Total current assets 16,073 15,890 Investments Investment in nonconsolidated affiliates 2,166 2,698 Other investments 2,201 2,141 Noncurrent receivables 169 189 Total investments 4,536 5,028 Property Property 41,177 41,898 Less accumulated depreciation 27,769 28,070 Net property 13,408 13,828 Other Assets Goodwill 3,140 3,152 Other intangible assets (net of accumulated amortization - 2005: $533; 2004: $507) 493 535 Deferred income tax assets - noncurrent 4,043 4,369 Asbestos-related insurance receivables - noncurrent 901 1,028 Deferred charges and other assets 2,293 2,055 Total other assets 10,870 11,139 Total Assets $44,887 $45,885 Liabilities and Stockholders' Equity Current Liabilities Notes payable $133 $104 Long-term debt due within one year 1,235 861 Accounts payable: Trade 3,409 3,701 Other 1,551 2,194 Income taxes payable 358 419 Deferred income tax liabilities - current 390 205 Dividends payable 346 342 Accrued and other current liabilities 2,144 2,680 Total current liabilities 9,566 10,506 Long-Term Debt 10,023 11,629 Other Noncurrent Liabilities Deferred income tax liabilities - noncurrent 1,318 1,301 Pension and other postretirement benefits - noncurrent 3,908 3,979 Asbestos-related liabilities - noncurrent 1,452 1,549 Other noncurrent obligations 3,243 3,202 Total other noncurrent liabilities 9,921 10,031 Minority Interest in Subsidiaries 334 449 Preferred Securities of Subsidiaries 1,000 1,000 Stockholders' Equity Common stock 2,453 2,453 Additional paid-in capital 507 274 Unearned ESOP shares (4) (12) Retained earnings 13,479 11,527 Accumulated other comprehensive loss (1,757) (977) Treasury stock at cost (635) (995) Net stockholders' equity 14,043 12,270 Total Liabilities and Stockholders' Equity $44,887 $45,885 See Notes to the Consolidated Financial Statements. The Dow Chemical Company and Subsidiaries Operating Segments and Geographic Areas Three Months Six Months Ended Ended June 30, June 30, June 30, June 30, In millions (Unaudited) 2005 2004 2005 2004 Operating segment sales Performance Plastics $2,796 $2,294 $5,528 $4,458 Performance Chemicals 1,938 1,624 3,910 3,200 Agricultural Sciences 1,031 1,029 2,020 1,953 Plastics 2,774 2,325 5,782 4,559 Chemicals 1,355 1,370 2,829 2,646 Hydrocarbons and Energy 1,468 1,127 2,902 2,186 Unallocated and Other 88 75 158 151 Total $11,450 $9,844 $23,129 $19,153 Operating segment EBIT (1) Performance Plastics $436 $268 $914 $459 Performance Chemicals 343 113 737 255 Agricultural Sciences 238 271 497 502 Plastics 575 399 1,375 706 Chemicals 267 726 695 899 Hydrocarbons and Energy - - - (1) Unallocated and Other (95) (616) (415) (788) Total $1,764 $1,161 $3,803 $2,032 Geographic area sales United States $4,368 $3,771 $8,745 $7,242 Europe 4,166 3,451 8,607 6,899 Rest of World 2,916 2,622 5,777 5,012 Total $11,450 $9,844 $23,129 $19,153 (1) The Company uses EBIT (which Dow defines as earnings before interest, income taxes and minority interests) as its measure of profit/loss for segment reporting purposes. EBIT includes all operating items related to the businesses and excludes items that principally apply to the Company as a whole. A reconciliation of EBIT to "Net Income Available for Common Stockholders" is provided below: Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2005 2004 2005 2004 EBIT $1,764 $1,161 $3,803 $2,032 + Interest income 27 21 56 39 - Interest expense and amortization of debt discount 188 182 375 368 - Provision for income taxes 317 284 825 488 - Minority interests' share in income 21 31 41 61 Net Income Available for Common Stockholders $1,265 $685 $2,618 $1,154 Sales Volume and Price by Operating Segment and Geographic Area Three Months Ended Six Months Ended June 30, 2005 June 30, 2005 Percentage change from prior year Volume Price Total Volume Price Total Operating segments Performance Plastics (2)% 24% 22% (1)% 25% 24% Performance Chemicals (4)% 23% 19% (2)% 24% 22% Agricultural Sciences (4)% 4% - - 3% 3% Plastics (3)% 22% 19% (2)% 29% 27% Chemicals (19)% 18% (1)% (17)% 24% 7% Hydrocarbons and Energy 7% 23% 30% 6% 27% 33% Total (4)% 20% 16% (3)% 24% 21% Geographic areas United States (2)% 18% 16% - 21% 21% Europe (2)% 23% 21% (1)% 26% 25% Rest of World (10)% 21% 11% (8)% 23% 15% Total (4)% 20% 16% (3)% 24% 21%