Dow Inc. 2020 Q1 SEC Filing Summary
Business Context and Reporting Period
Dow Inc. and The Dow Chemical Company filed a combined unaudited Form 10-Q for the three months ended March 31, 2020. Dow operates through Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, and Performance Materials & Coatings. The comparison period reflects the post-separation presentation, with AgCo and SpecCo reported as discontinued operations in 2019.
Results were affected by the COVID-19 pandemic, lower oil prices, weaker industrial demand, unfavorable currency movements, and continued separation-related activities.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $9.770 billion | $10.969 billion | Down 11% |
| Income from continuing operations | $258 million | $156 million | Up 65% |
| Net income available to Dow Inc. common stockholders | $239 million | $556 million | Down 57% |
| EPS, basic and diluted | $0.32 | $0.74 | Down $0.42 |
| Operating EBIT | $843 million | $1.143 billion pro forma | Down 26% |
| Operating EBITDA | $1.567 billion | $1.886 billion pro forma | Down 17% |
| Cash flow from continuing operations | $1.236 billion | $1.043 billion | Up 18% |
| Free cash flow | $841 million | $601 million | Up 40% |
| Capital expenditures | $395 million | $442 million | Down 11% |
Cost of sales was $8.230 billion, or 84.2% of sales, compared with 83.3% in Q1 2019. The implied gross margin declined to approximately 15.8% from 16.7%. Operating EBIT margin was approximately 8.6%, compared with approximately 10.4% on a pro forma basis in the prior-year period. Cash flow conversion improved to 78.9% from 55.3%.
The effective tax rate was 34.8%, compared with 47.5% in Q1 2019. Interest expense declined to $215 million from $241 million. Equity losses from nonconsolidated affiliates increased to $89 million from $14 million.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $3.633 billion at March 31, 2020, up from $2.367 billion at December 31, 2019.
- Gross debt was $18.187 billion, up from $16.996 billion; net debt was $14.553 billion, compared with $14.608 billion.
- Net debt as a percentage of total capitalization increased to 51.9% from 50.9% for Dow Inc.
- Total committed credit facilities were $8.765 billion, of which $7.515 billion was available at quarter-end. Management reported more than $8 billion of committed and available liquidity, including cash.
- Dow drew $800 million under uncommitted bilateral facilities and partially monetized company-owned life insurance policies. Commercial paper outstanding was $250 million.
- In February 2020, Dow issued €2.25 billion of notes with maturities from 2027 through 2040 and an approximately 1.0% weighted-average coupon. Proceeds supported debt repayment, including redemption of approximately $1.25 billion of 3.0% notes due 2022 and repayment of $750 million under a term loan facility.
- Management stated that the company was in compliance with its debt covenants. The principal revolving-credit covenant required a consolidated indebtedness-to-capitalization ratio no greater than 0.65 to 1.00; the reported ratio was 0.54 to 1.00.
Material Changes Versus the Prior Comparable Period
- Sales declined 11%, driven by a 9% decrease in local price, a 2% volume decline, and a 1% unfavorable currency impact. Sales decreased across all three operating segments and geographic regions.
- Packaging & Specialty Plastics sales declined 10% and Operating EBIT declined 16% to $580 million, primarily from lower polyethylene margins and reduced equity earnings.
- Industrial Intermediates & Infrastructure sales declined 13% and Operating EBIT declined 37% to $175 million, reflecting margin compression, weaker demand, and lower joint-venture earnings.
- Performance Materials & Coatings sales declined 10% and Operating EBIT declined 40% to $162 million, mainly because of upstream siloxanes margin compression and higher planned maintenance spending.
- Integration and separation costs fell to $65 million from $452 million. Restructuring and asset-related charges declined to $96 million from $156 million, although Q1 2020 included $90 million of final DowDuPont Synergy Program charges.
- SG&A declined to $334 million from $448 million, while R&D declined to $179 million from $190 million.
- Reported total net income declined because Q1 2019 included $445 million of net income from discontinued operations. Continuing-operations income increased year over year.
- Other comprehensive loss was $283 million, compared with other comprehensive income of $102 million in Q1 2019, reflecting investment, translation, and derivative losses.
Guidance, Outlook, Risks and Unusual Items
For Q2 2020, management expected sales to decline 10% to 20% sequentially, with declines in all regions except Asia Pacific and across all operating segments. The outlook assumed continued virus containment, gradual reopening of economies in May and June, and a recovery beginning later in the year. Management expected the largest COVID-19 and energy-price-related impact in Q2.
- Dow reduced its 2020 capital expenditure target to approximately $1.25 billion, targeted $350 million of operating-expense reductions, and sought to unlock another $500 million from working capital.
- Share repurchases were temporarily suspended after $125 million of Q1 repurchases. Management stated that it did not expect additional repurchases in 2020 at the time of filing.
- Dow announced temporary idling or reduced operating rates at selected polyethylene, elastomers, polyurethane, and siloxanes facilities in response to weaker demand.
- The company continued operating most manufacturing sites as essential operations and reported no significant COVID-19-related manufacturing shutdowns or shortages through the filing date, although logistics and supply-chain challenges were expected to continue.
- Major risks include the severity and duration of COVID-19, lower oil prices, demand and margin compression, supply-chain disruption, customer credit deterioration, currency volatility, cyber risks, asset impairments, and higher pension or deferred-tax obligations.
- Environmental remediation liabilities were $1.122 billion. Management stated that ultimate costs for accrued matters could be approximately twice the recorded amount.
- Asbestos-related liabilities were $1.148 billion at March 31, 2020. Dow Silicones estimated an additional $165 million of funding obligations for breast implant-related claims after existing settlement-facility funds are exhausted.
- Guarantees totaled $3.950 billion, primarily related to nonconsolidated affiliates, including up to approximately $3.9 billion of guarantees associated with Sadara project financing, subject to expected release upon project completion conditions.
- Dow expected approximately $120 million of additional Synergy Program cash expenditures and $130 million to $190 million of additional separation-related cash expenditures through the end of 2020.
- Subsequent to quarter-end, S&P downgraded Dow's ratings to BBB- and A-3 with a stable outlook, while Fitch maintained BBB+ and F2 ratings but revised its outlook to negative.
Most Important Facts for Investors to Verify
- Whether COVID-19-related volume declines and price pressure were temporary or persisted beyond Q2 2020.
- Progress toward the $1.25 billion capital-expenditure target, $350 million operating-expense reduction, and $500 million working-capital initiative.
- Liquidity usage, commercial paper availability, credit-rating changes, and compliance with debt covenants.
- Actual cash requirements for Sadara support, environmental remediation, asbestos claims, and Dow Silicones obligations.
- Whether the suspended share-repurchase program remained inactive and whether the $0.70-per-share dividend was sustained.
- The comparability of reported 2019 results with 2020 results, including discontinued operations and pro forma adjustments related to the DowDuPont separation.