Dow Chemical Company reports preliminary financial results for the quarter ended December 31, 2014.
Although Dow Chemical Company’s (DOW) fourth quarter earnings exceeded analysts’ expectations, profits fell compared to the same quarter last year. This was due to a $500 million charge from its abandonment of a Tennessee facility by its joint venture Dow Corning. As a result, Q4 2014 profits of $734 million were a 24 percent drop from Q4 2013 profits of $963 million.
Net sales of $14.3 B in the quarter were largely unchanged year-over-year, as lower volume in Europe was offset by higher volume in other international markets. The company reported higher EBITDA margins than the previous year across all segments.
Dow Chemical Co. came under pressure early in 2014 when activist investor Dan Loeb of hedge fund Third Point bought a stake in the company. He pushed it to divest its petrochemical business and focus on its higher growth, higher margin businesses. Third Point and the company reached agreement in November, whereby Dow agreed to add four new independent directors at its annual meeting in 2015, including two suggested by Third Point, thus avoiding a proxy fight.
This earnings release follows the earnings announcements from the following peers of Dow Chemical Company – E. I. du Pont de Nemours and Company, PPG Industries, Inc. and Ashland Inc. (DD-US, PPG-US and ASH-US).
- Summary numbers: Revenues of USD 14.38 billion, Net Earnings of USD 819 million, and Earnings per Share (EPS) of USD 0.63.
- Gross margins widened from 20.49% to 23.92% compared to the same quarter last year, operating (EBITDA) margins now 15.22% from 11.37%.
- Earnings declined although operating margins improved from 6.59% to 10.70%.
- Earnings per Share (EPS) growth exceeded earnings growth
The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:
|Relevant Numbers (Quarterly)|
|Revenue Growth (%YOY)||3.54||0.86||2.29||4.94||-0.18|
|Earnings Growth (%YOY)||265.34||65.24||-60.04||37.98||-21.25|
|Net Margin (%)||7.22||7.18||6.44||6.45||5.69|
|Return on Equity (%)||14.35||13.66||12.55||12.33||11.64|
|Return on Assets (%)||5.96||6||5.57||5.38||4.74|
Market Share Versus Profits
Companies sometimes focus on market share at the expense of profits or earnings growth.
Compared to the same quarter last year, DOW-US’s change in revenue of -0.18% surpassed its change in earnings, which was -21.25%. This suggests perhaps that DOW-US’s focus is on market share at the expense of bottom-line earnings. However, this change in revenue is better than its peer average, pointing to perhaps some longer lasting success at wrestling market share from its competitors, and helping Capital Cube look past its weaker earnings performance this period. Also, for comparison purposes, revenues changed by -0.20% and earnings by -11.94% in the quarter ended September 30, 2014.
Earnings Growth Analysis
The company’s year-on-year earnings decline did not come as a result of a contraction in gross margins or because of any cost control issues. Both gross margins and operating margins (EBITDA) margins actually improved over this time frame. Gross margins went from 20.49% to 23.92%, while operating margins improved from 11.37% to 15.22% over this period. For comparison, gross margins were 22.67% and EBITDA margins 14.60% in the immediate last quarter.
Gross Margin Trend
Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.
DOW-US’s improvement in gross margins have been accompanied by a deterioration in the management of working capital. This leads Capital Cube to conclude that the improvements in gross margins are likely accounting trade-offs with the balance sheet and not strictly from operating decisions. Its working capital days have risen to 83.25 days from last year’s levels of 82.17 days.
Cash Versus Earnings – Sustainable Performance?
Despite an overall improvement in operating (EBIT) margins, the company’s earnings fell. EBIT margins went from 6.59% to 10.70%. The decline in earnings appears to be largely because of one-time items. Pretax margins declined from 9.62% to 7.77%.
EPS Growth Versus Earnings Growth
DOW-US’s change in Earnings per Share (EPS) of -20.25% compared to the same quarter last year is better than its change in earnings of -21.25%. At the same time, this change in earnings is less than the peer average among the results announced by its peer group, suggesting that the company is losing ground in generating profits from its competitors.
The Dow Chemical Co. manufactures and supplies products used primarily as raw materials in the manufacture of customer products and services. The company serves the industries, including appliance; automotive; agricultural; building and construction; chemical processing; electronics; furniture; housewares; oil and gas; packaging; paints, coatings and adhesives; personal care; pharmaceutical; processed foods; pulp and paper; textile and carpet; utilities; and water treatment. It operates through six segments: Electronic and Functional Materials, Coatings and Infrastructure Solutions, Agricultural Sciences, Performance Materials, Performance Plastics and Feedstocks and Energy. The Electronic and Functional Materials segment consists of two businesses: Dow Electronic Materials and Functional Materials. Dow Electronic Materials supplies materials for chemical mechanical planarization; materials used in the production of electronic displays, including brightness films, diffusers, metalorganic light emitting diode precursors and organic light emitting diode materials; products and technologies that drive leading edge semiconductor design; materials used in the fabrication of printed circuit boards; and integrated metallization processes critical for interconnection, corrosion resistance, metal finishing and decorative applications. Dow Functional Materials is a portfolio of businesses characterized by a vast global footprint, a broad array of unique chemistries, multi-functional ingredients and technology capabilities, combined with key positions in pharmaceuticals; food, home and personal care; and industrial specialties. The Coatings and Infrastructure Solutions segment consists of Dow Building and Construction, Dow Coating Materials, Dow Water and Process Solutions, and Performance Monomers which produce a wide variety of products with a broad range of applications, including adhesives and sealants, construction materials, cellulosic-based construction additives, raw materials for architectural paints and industrial coatings, and technologies used for water purification. The Agricultural Sciences segment provides crop protection and plant biotechnology products, urban pest management solutions and healthy oils; and it also invents, develops, manufactures and markets products for use in agriculture, industrial and commercial pest management, and food service Performance Materials segment consists of Amines; Chlorinated Organics; Dow Automotive Systems; Dow Formulated Systems; Dow Oil and Gas; Dow Plastic Additives; Epoxy; Oxygenated Solvents; Polyglycols, Surfactants and Fluids; Polyurethanes; and Propylene Oxide/Propylene Glycol which produce a wide variety of products with a broad range of applications, including adhesives, aircraft and runway deicing fluids, automotive interiors and exteriors, carpeting, footwear, home furnishings, mattresses, personal care products, transportation, waterproofing membranes and wind turbines. The Performance Plastics segment is a solutions-oriented portfolio comprised of Dow Elastomers; Dow Electrical and Telecommunications; Dow Hygiene and Medical; and Dow Performance Packaging. The Feedstocks and Energy segment consists the businesses, including Chlor-Alkali/Chlor-Vinyl; Energy; Ethylene Oxide/Ethylene Glycol; and Hydrocarbons. The Chlor-Alkali/Chlor-Vinyl business focuses on the production of chlorine for consumption by downstream Dow derivatives, as well as production, marketing and supply of ethylene dichloride, vinyl chloride monomer and caustic soda. The Energy business supplies power, steam and other utilities, principally for use in Dow’s global operations. The Ethylene Oxide/Ethylene Glycol business produces purified ethylene oxide, principally used in Dow’s downstream performance derivatives. The Hydrocarbons business encompasses the procurement of natural gas liquids and crude oil-based raw materials, as well as the supply of monomers, principally for use in Dow’s global operations. The company was founded in 1947 and is headquartered in Midland, MI.
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