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Dow Chemical's margins hit decade high on pre-merger cost-cutting

A sign is seen at an entrance to a Dow Chemical Co plant in Plaquemine, Louisiana December 12, 2015. REUTERS/Jonathan Bachman

By Amrutha Gayathri and Swetha Gopinath

(Reuters) - Dow Chemical Co (DOW.N), the No. 1 U.S. chemical maker by sales, reported a higher-than-expected adjusted profit as cost cutting ratcheted up margins to their highest in more than a decade.

Dow has been clearing the decks ahead of its $130 billion merger with traditional rival DuPont (DD.N) by slashing administration costs and laying off employees.

The deal, due to close later this year, is the first step toward breaking the businesses into three separate companies focused on agriculture, material science and specialty products.

The merger is expected to create cost synergies of about $3 billion, the companies have said.

However, Dow's chief financial officer, Howard Ungerleider, indicated on Thursday that further cost savings were likely.

"We feel very good that $3 billion in synergies we announced in December is a floor, not a ceiling," he told Reuters.

Dow plans to slash costs by $300 million this year. Of that, $90 million was cut in the first quarter, Ungerleider said.

Dow's strategy to focus on high-margin products by shedding volatile commodity businesses such as its century-old chlorine business has also been paying off.

"We see strong demand signals in North America, gradual recovery in Europe and ongoing sustainable urbanization in China," Chief Executive Andrew Liveris said in a statement announcing the company's first-quarter results.

Dow is seeing continued strength in the packaging, transportation and infrastructure markets, said Liveris, who plans to retire by mid-2017.

The company's operating margin expanded by 164 basis points to 21.1 percent on an EBITDA basis in quarter.

However, net income available to the company's common shareholders fell 87.9 percent, mainly due to a charge related to the settlement of a class action suit.

Dow agreed in February to pay $835 million to settle a decade-long lawsuit. Several companies, including Dow, were accused by customers in a 2005 lawsuit of conspiring to fix prices of urethane chemicals in the preceding six years.

The company's net income fell to $169 million, or 15 cents per share, in the quarter, from $1.39 billion, or $1.18 per share, a year earlier.

Excluding the legal charge and other items, Dow earned 89 cents per share, beating analysts' average estimate of 83 cents, according to Thomson Reuters I/B/E/S.

Net sales fell 13.5 percent to $10.70 billion, beating the average forecast of $10.66 billion.

Dow Chemical's shares were up 0.6 percent at $53.93 in premarket trading. Up to Wednesday's close, the stock had risen about 4 percent so far this year.

(Reporting by Amrutha Gayathri and Swetha Gopinath in Bengaluru; Editing by Maju Samuel and Ted Kerr)