Dow Reports Record Sales and Record Earnings

Outstanding Year Ends with Strongest Ever Fourth Quarter
Fourth Quarter of 2005 Highlights

Sales for the fourth quarter set a new Company record, rising 9 percent from the same period last year to $11.9 billion.

Earnings per share were $1.12, up from $1.06 per share a year ago. These amounts include unusual items in both periods which had net favorable impacts of $0.10 per share in the current quarter and $0.21 per share in 2004. Excluding unusual items in both periods, earnings per share for the fourth quarter increased 20 percent from $0.85 per share in 2004 to $1.02 per share in 2005.

Strong cash flow allowed a further reduction in net debt(1) of more than $800 million during the fourth quarter of 2005, lowering the Company’s net debt to capital ratio to 29 percent - down from 41 percent at the end of the same period in 2004.
2005 Highlights

2005 sales climbed 15 percent compared with 2004, setting a new record for the Company of $46.3 billion.

Despite feedstock and energy cost increases of $4 billion in 2005 compared with 2004, Dow achieved record earnings of $4.62 per share, up from $2.93 per share a year earlier. These amounts include unusual items in both periods which had net favorable impacts of $0.25 per share in 2005 and $0.22 per share in 2004. Excluding unusual items, earnings per share were $4.37 in 2005, 61 percent higher than $2.71 per share in 2004.
Comment

Andrew N. Liveris, Dow’s president, chief executive officer and chairman-elect, stated:

“This was a tremendous quarter at the end of an outstanding year for Dow. In 2005, we realized record sales; we achieved record earnings; we reduced net debt by more than $2.5 billion; and for the third year in a row, with institutionalized financial discipline and operational excellence, we recovered lost margin. The fact that we did so in the face of high and volatile feedstock and energy costs bears testimony to the quality of our people and the strength and consistency of our strategy.”

Review of Fourth Quarter Results

The Dow Chemical Company (NYSE: DOW) reported record sales of $11.9 billion for the fourth quarter of 2005, a 9 percent increase compared with the same period in 2004. Price rose 10 percent, with strong gains in all operating segments, except for Agricultural Sciences, and in most geographic areas. Volume fell marginally against a very strong fourth quarter in 2004 due in part to the lingering effects of hurricanes Rita and Katrina in the United States.

Net income for the quarter climbed 7 percent to $1,096 million and earnings per share were $1.12, up from $1.06 in the same period last year. Excluding unusual items in both periods, earnings per share for the fourth quarter increased 20 percent from $0.85 per share in 2004 to $1.02 per share in 2005.

Net income for the fourth quarter included a net after-tax gain of $103 million, or $0.10 per share. This comprised a pretax gain of $637 million on the sale by Union Carbide Corporation of its 50 percent interest in UOP LLC, pretax charges of $114 million for restructuring activities related to plant closures and asset sales, a $100 million cash donation to The Dow Chemical Company Foundation, the impact of an unfavorable tax ruling of $137 million, and an after-tax accrual of $20 million for asset retirement obligations required under FIN 47. Earnings in the fourth quarter of 2004 included tax valuation adjustments and an after-tax gain from the sale of the DERAKANE resins business, totaling $0.21 per share.

Once again in the fourth quarter, the Company maintained a sharp focus on financial discipline. Net debt was reduced by more than $800 million during the quarter, cutting Dow’s net debt to capital ratio to just 29 percent by year-end, 12 percentage points lower than at the end of 2004. The Company’s gross debt to total capital ratio finished the year at 39 percent, down from 48 percent a year ago. Capital spending was held below $1.6 billion, significantly less than the rate of depreciation, without compromising the safety or the integrity of the Company’s manufacturing facilities. And Selling, Administrative and Research and Development (“SARD”) expenses as a percent of sales dropped to 5.7 percent for the fourth quarter, down from 5.9 percent in the same period in 2004.

“This was a tremendous quarter at the end of an outstanding year for Dow,” said Andrew N. Liveris, Dow’s president, chief executive officer and chairman-elect. "In 2005, we realized record sales; we achieved record earnings; we reduced net debt by more than $2.5 billion; and for the third year in a row, with institutionalized financial discipline and operational excellence, we recovered lost margin. The fact that we did so in the face of high and volatile feedstock and energy costs bears testimony to the quality of our people and the strength and consistency of our strategy.

“Our commitment to maintaining a diversified business portfolio allowed our Performance businesses to report exceptional earnings growth compared with 2004, outpacing strong gains in our Basics businesses and accounting for more than 50 percent of Dow’s profits in 2005. Financial discipline also played a strong part in a successful 2005, helping reduce our net debt to capital ratio to below 30 percent and cutting SARD to a new low of 5.7 percent of sales for the year, down from 6.1 percent in 2004. And our drive to grow the Company through strategic joint ventures contributed substantially to Dow’s financial performance in 2005, with our nonconsolidated affiliates adding almost a billion dollars in earnings during the year.”

In the Performance Plastics segment, sales for the fourth quarter were $2.9 billion, an increase of 12 percent compared with the same period in 2004. Price was up 10 percent while volume climbed 2 percent, bolstered in part by the successful integration of ENGAGE™, NORDEL™ and TYRIN™ elastomers, businesses acquired by the Company in connection with the dissolution of the DuPont Dow Elastomers joint venture. Dow Automotive had an excellent quarter, increasing price and volume globally and underscoring the value of the Company’s geographic balance, as strength in Latin America and Asia Pacific more than offset dampened demand in North America and Europe. Epoxy Products and Intermediates also had a healthy quarter, particularly in Asia Pacific where demand for electrical laminates in flat panel television displays mitigated softer volumes in other geographic areas. And Building and Construction reported solid sales growth, capturing an increased share of U.S. demand for insulation and weather barrier products. Fourth quarter EBIT(2) for the Performance Plastics segment was $973 million, including a gain of $637 million related to the UOP sale, partly offset by restructuring charges totaling $28 million. Excluding this net gain and the gain on the sale of the DERAKANE resins business in 2004, EBIT was $364 million, an increase of 39 percent compared with $261 million in the same quarter last year.

Sales in Performance Chemicals rose to $1.9 billion for the fourth quarter of 2005, an increase of 7 percent compared with $1.8 billion posted in the same period last year. This improvement was driven by an 8 percent increase in price, while volume was down 1 percent from the robust levels of a year ago. Dow Latex had a strong quarter with Emulsion Polymers reporting good volume growth, driven by healthy demand from the coated paper industry in Europe and the successful start-up of the Company’s second styrene-butadiene latex line at Zhangjiagang, China. Specialty Polymers reported an increase in volume compared with the fourth quarter of 2004, with particular strength in pharmaceuticals, personal care and water treatment applications. During the quarter the business also began production at its expanded FILMTEC™ membrane manufacturing facility in Minneapolis, U.S.A., to meet growing demand from the water treatment industry. Performance Chemicals reported EBIT of $177 million for the fourth quarter, which included restructuring charges totaling $14 million. Excluding these charges, EBIT was $191 million, an increase of 4 percent compared with $183 million in the same period last year.

The Agricultural Sciences segment posted quarterly sales of $729 million, 4 percent lower than the $758 million achieved in the fourth quarter of 2004. Plant Genetics and Biotechnology benefited from a marked improvement in the North American seeds and traits business, led by strong demand for HERCULEX™ I insect protection and NEXERA™ seed for NATREON™ canola oil. In Agricultural Chemicals, although sales benefited from solid demand for cereal herbicide mixtures and for a renewed product line of herbicides for range and pasture, overall volume was down as the business exited a number of low margin products in its on-going effort to focus resources on more profitable proprietary molecules. Fourth quarter EBIT for Agricultural Sciences was $74 million, which included restructuring charges totaling $9 million. Excluding these charges, EBIT was $83 million, double the $41 million reported in the same period a year ago.

The Plastics segment had a solid fourth quarter, with sales climbing 9 percent from $2.9 billion in 2004 to $3.1 billion in 2005. Price increased 10 percent compared with the same period last year, while volume was marginally lower. Polyethylene volume was down from a very strong fourth quarter in 2004, principally the result of constrained ethylene supply on the U.S. Gulf Coast caused by the hurricanes. Polyethylene volume in all other regions continued to be solid, with particular strength in Asia Pacific. The Polystyrene business reported a healthy increase in volume compared with the same period last year, with solid demand in Asia Pacific and in Europe. Polystyrene continued to recover margin as increased volume and lower benzene costs more than offset lower prices. Fourth quarter EBIT for the Plastics segment of $610 million included restructuring charges totaling $12 million. Excluding these charges, EBIT for the quarter was $622 million, 5 percent higher than the $591 million posted for the same period in 2004.

Fourth quarter sales in the Chemicals segment increased slightly in 2005 compared with a year ago, rising 4 percent to $1.5 billion. Price was up 13 percent, while volume was down 9 percent. Much of this reduction was attributed to the Ethylene Glycol business, which reported a significant reduction in U.S. sales due to the limited availability of ethylene caused by the hurricanes. In addition, revenues in the fourth quarter of 2004 included sales of ethylene glycol sold by Dow into Asia Pacific; these sales now flow through the MEGlobal joint venture. The Chlor-Vinyl business reported a significant increase in price compared with the same period last year, essentially covering escalating natural gas prices in the United States. Chlor-Vinyl volume was down slightly, with increased demand in Europe and Latin America not quite offsetting lower volumes in North America and Asia Pacific. The Chemicals segment reported EBIT for the fourth quarter of $269 million, including a $3 million restructuring charge. Excluding this charge, EBIT of $272 million was 34 percent lower than $411 million for the same period a year ago.

Review of Results for 2005

Dow reported a new annual sales record of $46.3 billion in 2005, 15 percent higher than last year’s previous record of $40.2 billion. Price rose 17 percent, with substantial increases in all operating segments and all geographic areas. Volume declined 2 percent from last year’s strong levels, in large part because customers reduced the inventories that they had built during 2004, but also due to the disruption caused by two major hurricanes, which temporarily reduced demand in the United States.

Net income was $4.5 billion, an increase of 61 percent compared with $2.8 billion in 2004. Earnings per share were $4.62, including gains related to the sale of UOP, the sale of a 2.5 percent interest in the EQUATE joint venture and a tax benefit associated with the repatriation of foreign earnings under the American Jobs Creation Act of 2004, partially offset by various restructuring charges, a cash donation to The Dow Chemical Company Foundation, a loss on the early retirement of debt, the impact of an unfavorable tax ruling and an accrual for asset retirement obligations required under FIN 47. In 2004, the Company reported earnings per share of $2.93, including tax valuation adjustments, the gain from the sale of the DERAKANE resins business and the net favorable impact of restructuring. Excluding unusual items in both periods, earnings per share were $4.37 in 2005, an increase of 61 percent compared with $2.71 in 2004.

Commenting on the Company’s outlook, Liveris said: “Our outlook for 2006 is positive, both for the chemical industry and for our company, despite the uncertainty and volatility in feedstock and energy costs. We expect that worldwide demand for chemical and plastic products will continue to grow, led by Asia Pacific, Latin America and other emerging geographies, with solid contributions from North America and Europe. We will continue to focus on the implementation of our strategy, retaining our financial discipline and controlling the things we can control. As we have been saying for some time, we believe that 2006 will be an even better year for Dow than 2005.”

(1) Net debt equals total debt (“Notes payable” plus “Long-term debt due within one year” plus “Long-Term Debt”) minus “Cash and cash equivalents” and “Marketable securities and interest-bearing deposits.”

(2) 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.

™ ENGAGE, NORDEL, TYRIN and FILMTEC are Trademarks of The Dow Chemical Company or an affiliate of the Company.

™ HERCULEX, NEXERA and NATREON are Trademarks of Dow AgroSciences LLC

Upcoming Webcasts

Dow will host a live Webcast of its fourth quarter earnings conference call with investors to discuss its results, business outlook and other matters today at 10:00 a.m. EDT on www.dow.com.

About Dow

Dow is a diversified chemical company that harnesses the power of science and technology to improve living daily. The Company offers a broad range of innovative 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 $46 billion and employs 42,000 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.

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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Terri McNeill

Corporate Media Relations

Dow Chemical Company

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