Dow Inc. 2023 Third-Quarter Form 10-Q Summary
Business context and reporting period
Dow Inc. and The Dow Chemical Company filed a combined unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. Dow operates through Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, Performance Materials & Coatings, and Corporate activities. Results were affected by slower global macroeconomic activity, lower selling prices, weaker demand, industry supply additions, and lower energy and feedstock costs.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net sales | $10.730 billion | $14.115 billion | $34.001 billion | $45.043 billion |
| Net income attributable to Dow Inc. common stockholders | $302 million | $739 million | $694 million | $3.969 billion |
| Diluted EPS | $0.42 | $1.02 | $0.97 | $5.41 |
| Operating EBIT | $626 million | $1.195 billion | $2.219 billion | $5.989 billion |
| Cash from operating activities | $1.658 billion from continuing operations | $1.940 billion from continuing operations | $3.536 billion from continuing operations | $5.408 billion from continuing operations |
| Capital expenditures | $597 million | $452 million | $1.598 billion | $1.224 billion |
| Free cash flow | Not separately provided | Not separately provided | $1.938 billion | $4.184 billion |
Cost of sales was 89.4% of net sales in the third quarter, compared with 87.7% in the prior-year quarter. For the first nine months, cost of sales was 88.5% of net sales versus 83.7% in 2022. Operating EBIT margin was approximately 5.8% in Q3 2023 versus 8.5% in Q3 2022, and approximately 6.5% for the first nine months versus 13.3% in the prior-year period.
- Q3 net sales declined 24%, reflecting an 18% decrease in local price and product mix and a 6% volume decline; currency was flat.
- Nine-month net sales declined 25%, with local price and product mix down 16%, volume down 8%, and currency unfavorable by 1%.
- Q3 segment net sales and Operating EBIT were $5.454 billion and $476 million for Packaging & Specialty Plastics, $3.035 billion and $21 million for Industrial Intermediates & Infrastructure, and $2.130 billion and $179 million for Performance Materials & Coatings.
- Cash and cash equivalents were $3.080 billion at September 30, 2023, down from $3.886 billion at December 31, 2022.
- Gross debt was $14.925 billion, versus $15.422 billion at year-end 2022. Net debt, as defined by Dow, was $10.931 billion versus $10.597 billion.
- Total liquidity, including cash and committed available sources, was $12.9 billion. Committed credit facilities were undrawn and available, and no substantive long-term debt maturities were due until 2027.
- The current ratio was 1.79:1 at September 30, 2023, compared with 1.81:1 at December 31, 2022.
- Dow paid $1.481 billion in common-stock dividends and repurchased $500 million of common stock during the first nine months. Approximately $1.550 billion remained available under the repurchase authorization at September 30, 2023.
Material changes versus the prior comparable period
- Revenue fell materially across all operating segments and geographic regions. The largest nine-month Operating EBIT declines were in Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, and Performance Materials & Coatings.
- Net income attributable to Dow Inc. common stockholders fell 59% in Q3 and 83% for the first nine months. The decline reflected lower prices and demand, reduced equity earnings, higher interest expense, and significant restructuring and litigation-related items.
- Equity in earnings of nonconsolidated affiliates changed from $311 million of earnings in the first nine months of 2022 to $112 million of losses in 2023. Q3 losses improved to $7 million from $58 million.
- Operating cash flow from continuing operations decreased from $5.408 billion to $3.536 billion for the first nine months, while free cash flow declined from $4.184 billion to $1.938 billion.
- Interest expense increased to $549 million for the first nine months from $487 million, primarily due to $1.5 billion of senior unsecured notes issued in the fourth quarter of 2022 and local-country borrowings.
- Inventory declined to $6.211 billion from $6.988 billion at year-end 2022, while accounts payable declined to $4.293 billion from $4.940 billion.
Guidance, outlook, commentary, risks and unusual items
- Management expects to benefit from rising oil prices that favor Dow’s cost-advantaged asset footprint and remains focused on operational and financial discipline.
- Dow’s 2030 Decarbonize and Grow and Transform the Waste strategies are expected to deliver more than $3 billion in underlying earnings, reduce greenhouse gas emissions by 5 million metric tons, and commercialize 3 million metric tons of circular and renewable solutions annually.
- Full-year 2023 capital spending is expected to be approximately $2.2 billion, subject to economic conditions.
- The 2023 Restructuring Program generated $549 million of pretax charges through September 30, including workforce-reduction costs and asset write-downs. It involves approximately 2,000 employee separations and is expected to be substantially complete by the end of 2024.
- Additional restructuring severance cash expenditures of approximately $163 million and implementation and efficiency cash expenditures of approximately $280 million are expected, primarily through 2024.
- A July 2023 explosion and fire at the Glycol-2 unit in Plaquemine, Louisiana caused no reported injuries and limited disruption to other site operations. Dow estimates a pretax earnings impact of approximately $100 million per quarter, with operations expected to resume in the second quarter of 2024.
- Dow recorded a $177 million pretax charge for legacy groundwater-contamination matters related to historic agricultural chemical products. The related liability was $234 million at September 30, 2023.
- Environmental remediation liabilities were $1.228 billion, with ultimate costs for accrued matters reasonably possible to reach approximately twice the accrued amount.
- Union Carbide’s asbestos-related liability was $884 million at September 30, 2023. Management determined that no adjustment to the accrual was required during the quarter.
- Dow may pursue pension de-risking transactions in the fourth quarter of 2023, which could result in a non-operating, non-cash settlement charge of $500 million to $1 billion.
- Credit ratings were BBB+/F1 from Fitch, Baa1/P-2 from Moody’s, and BBB/A-2 from Standard & Poor’s, all with stable outlooks at September 30, 2023.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether pricing, demand, and operating rates stabilize after the 2023 declines and whether rising oil prices improve margins.
- The timing and cost of restoring the Glycol-2 unit and whether the estimated $100 million quarterly pretax impact changes.
- The remaining restructuring, implementation, severance, and facility-shutdown costs through 2024.
- The potential size and timing of the proposed pension de-risking charge.
- Developments in environmental, groundwater-contamination, asbestos, indemnification, and other litigation contingencies.
- Whether operating cash flow and free cash flow can support capital spending, dividends, share repurchases, debt service, and other obligations.
- Progress toward the company’s 2030 decarbonization, circular-solutions, and underlying-earnings targets.