Dow Inc. 2019 First-Quarter Form 10-Q Summary
Business context and reporting period
This combined Form 10-Q covers Dow Inc. and The Dow Chemical Company and Subsidiaries (TDCC) for the three months ended March 31, 2019. At March 31, Dow Inc. was a holding company without operations; the reported financial statements primarily represent TDCC. On April 1, 2019, DowDuPont completed the separation of its materials science business, Dow Inc. became TDCC’s direct parent, and Dow Inc. began trading on the NYSE under “DOW.”
Historical periods before April 1, 2019 will be recast for future Dow Inc. reporting to reflect the distribution of the agriculture and specialty products businesses and the receipt of certain DuPont ethylene and ethylene copolymers businesses. Accordingly, the reported first-quarter results are not directly representative of the post-separation Dow Inc. portfolio without adjustment.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $13.582 billion | $14.899 billion | Down 9% |
| Income before income taxes | $858 million | $1.740 billion | Down 51% |
| Net income | $586 million | $1.377 billion | Down 57% |
| Net income available to common stockholder | $541 million | $1.342 billion | Down 60% |
| Operating cash flow | $1.426 billion | $(158) million | Improved by $1.584 billion |
| Capital expenditures | $514 million | $423 million | Up $91 million |
| Effective tax rate | 31.7% | 20.9% | Up 10.8 percentage points |
Gross margin, calculated from reported net sales and cost of sales, was approximately 21.2% in Q1 2019 versus 22.5% in Q1 2018. Net margin attributable to the common stockholder was approximately 4.0% versus 9.0%.
Sales declined primarily because of lower local prices, unfavorable currency effects and weaker performance in several product groups, partly offset by a 1% volume increase. EMEA sales fell 12%, U.S. and Canada sales fell 11%, Asia Pacific sales fell 2%, and Latin America sales fell 9%.
Cash and cash equivalents were $2.969 billion at March 31, 2019, compared with $2.669 billion at December 31, 2018. Gross debt was $19.846 billion and net debt was $16.776 billion. Net debt represented 37.3% of total capitalization, down from 38.0% at year-end 2018. Total committed credit facilities were $12.130 billion, including $7.630 billion available.
Current liabilities included $2.369 billion of long-term debt due within one year, largely reflecting a $2.0 billion Dow Silicones term-loan maturity that was repaid on April 5, 2019. Dow Silicones intends to extend the remaining $2.5 billion balance for two years.
Material changes versus the prior comparable period
- Net sales decreased $1.317 billion, driven chiefly by an 8% local-price decline and a 2% unfavorable currency impact; volume increased 1%.
- Cost of sales declined in absolute terms but increased to 78.8% of sales from 77.5%, resulting in lower gross margin.
- Equity earnings from nonconsolidated affiliates fell to $13 million from $243 million, primarily because of increased Sadara losses and lower earnings from certain joint ventures.
- Integration and separation costs increased to $408 million from $202 million.
- Restructuring and asset-related charges increased to $232 million from $165 million, including $224 million of Synergy Program charges.
- Operating cash flow improved substantially, reflecting lower working-capital usage, customer advance payments, lower pension contributions and higher dividends from affiliates, despite lower earnings.
- TDCC adopted the new lease standard, recording approximately $2.7 billion of lease assets and liabilities at January 1, 2019. The adoption had no material income statement or cash-flow effect.
Guidance, outlook, management commentary, risks and unusual items
- Management expected 2019 capital spending of approximately $2.5 billion, below depreciation and amortization.
- Additional restructuring cash expenditures were expected to be approximately $350 million, primarily through the end of 2019. Integration and separation costs were expected to decline but remain significant during 2019.
- TDCC expected to loan up to $500 million to Sadara during the remainder of 2019; some or all of these loans could be converted to equity.
- Management expected sufficient liquidity and financial flexibility to meet operating, capital, debt, pension and dividend requirements. TDCC reported compliance with debt covenants and credit ratings of BBB/A-2 from S&P, Baa2/P-2 from Moody’s and BBB+/F2 from Fitch, all with stable outlooks.
- On April 1, Dow Inc. received a $2.024 billion cash contribution from DowDuPont. On April 11, Dow Inc. declared a $0.70-per-share dividend payable June 14, 2019. Dow Inc. also had a $3.0 billion share repurchase authorization announced in February 2019.
- Environmental remediation accruals were $813 million. Management stated that costs could be approximately twice the accrued amount for identified matters and that the separation-related review could increase the accrual by up to $400 million.
- Asbestos-related liabilities were $1.243 billion at March 31, 2019. Dow Silicones recorded $263 million for breast implant and related product-liability claims; the potential maximum liability under the plan was estimated at $2.148 billion. Commercial creditor exposure related to the Chapter 11 proceeding was $83 million, within an estimated remaining range of $77 million to $260 million.
- Guarantees totaled $4.514 billion, primarily related to nonconsolidated affiliates, including up to approximately $4.2 billion of Sadara project-financing guarantees. Management considered payment or performance under these guarantees unlikely.
- Key risks include raw-material and energy price volatility, global economic and currency conditions, competition, supply or business disruptions, litigation and environmental obligations, intellectual-property matters, separation and stand-alone-company execution, tax risks, financing access, and the terms of agreements with DowDuPont and Corteva.
Most important facts for investors to verify
- Reconcile future Dow Inc. reported results to the post-separation perimeter, including the discontinued AgCo and SpecCo businesses and received ECP businesses.
- Monitor price, volume and currency trends, particularly in EMEA and North America, and the effect on margins.
- Track the execution and cash cost of restructuring and separation programs, including the remaining approximately $350 million of expected restructuring expenditures.
- Assess debt maturities, the repayment and extension of the Dow Silicones term loan, commercial-paper usage and available credit capacity.
- Evaluate Sadara’s operating performance, expected funding needs, potential loan-to-equity conversions and release of related guarantees.
- Review environmental, asbestos and Dow Silicones Chapter 11 exposures for changes beyond recorded liabilities.
- Confirm the effects of the separation on dividend policy, the $3.0 billion repurchase authorization and Dow Inc.’s stand-alone costs and obligations.