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, 2022. Dow is a global materials science company operating through Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, and Performance Materials & Coatings, with Corporate activities reported separately.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $15.264 billion | $11.882 billion | +28% |
| Income before income taxes | $2.055 billion | $1.323 billion | +55% |
| Net income | $1.552 billion | $1.006 billion | +54% |
| Net income available to Dow Inc. common stockholders | $1.569 billion | $991 million | +58% |
| Diluted EPS | $2.11 | $1.32 | +60% |
| Cash from operating activities | $1.603 billion | $(291) million | Improved by $1.894 billion |
| Cash from continuing operations | $1.612 billion | $(228) million | Improved by $1.840 billion |
| Capital expenditures | $315 million | $289 million | +9% |
Cost of sales was $12.402 billion, or 81.3% of sales, compared with 84.7% in the prior-year quarter. Implied gross margin was approximately 18.7%, versus 15.3% in Q1 2021. Net margin attributable to Dow Inc. common stockholders was approximately 10.3%, versus 8.3% in Q1 2021.
- Operating EBIT was $2.419 billion, compared with $1.554 billion, and Operating EBITDA was $3.171 billion, compared with $2.271 billion.
- Free cash flow, defined by Dow as operating cash flow from continuing operations less capital expenditures, was $1.297 billion, compared with negative $517 million.
- Cash and cash equivalents were $3.143 billion at March 31, 2022, compared with $2.988 billion at December 31, 2021. Cash, committed credit facilities and other committed liquidity totaled $12.8 billion.
- Gross debt was $14.555 billion and net debt was $11.170 billion, compared with $14.672 billion and $11.439 billion, respectively, at year-end 2021.
- Dow had $8.4 billion of committed and available credit facilities, all undrawn. The current ratio was 1.70:1 at March 31, 2022, versus 1.58:1 at December 31, 2021.
- Dow Inc. paid a quarterly dividend of $0.70 per share and repurchased $600 million of common stock, or 10.0 million shares, during the quarter.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by a 28% increase in local price and product mix, a 3% volume increase, and a 3% unfavorable currency impact. Price increases reflected tight supply and demand conditions and higher feedstock, energy and raw-material costs.
- Packaging & Specialty Plastics sales increased 25% to $7.627 billion, while Operating EBIT was broadly stable at $1.234 billion because higher selling prices were offset by input and logistics costs.
- Industrial Intermediates & Infrastructure sales increased 25% to $4.524 billion, and Operating EBIT increased to $661 million from $326 million, primarily due to price increases.
- Performance Materials & Coatings sales increased 44% to $3.049 billion, and Operating EBIT increased to $595 million from $62 million, reflecting margin expansion and higher volume in Consumer Solutions.
- Equity earnings from nonconsolidated affiliates declined to $174 million from $224 million, primarily because of planned maintenance activity at Sadara.
- Interest expense declined to $167 million from $196 million following liability-management actions in 2021.
- Operating cash flow improved substantially because of higher earnings, dividends from equity-method investments and the absence of the $1.0 billion elective pension contribution made in Q1 2021. Working capital consumed cash as sales and raw-material costs increased.
Guidance, Outlook, Risks and Unusual Items
Management reported strong demand across end markets and expects Dow’s global scale, cost-advantaged positions and feedstock flexibility to support resilient performance. Dow continues to target more than $3 billion of underlying earnings growth during its transition toward a more sustainable, low-carbon and circular portfolio and expects mid-cycle earnings above pre-pandemic levels.
- Full-year 2022 capital spending is expected to be approximately $2.2 billion, subject to economic conditions.
- Digital acceleration is expected to generate more than $300 million of incremental annual run-rate Operating EBITDA by the end of 2025, plus a one-time $100 million structural working-capital benefit. Additional cash expenditures of approximately $190 million are expected primarily through 2022.
- The company recorded $186 million of pretax asset-related charges associated with the Russia-Ukraine conflict, including inventory write-downs, bad-debt reserves and asset impairments. Dow stated that its remaining net asset exposure was not significant and that the conflict was not expected to have a material impact at the filing date.
- Restructuring and implementation activities are expected to require approximately $143 million of additional cash expenditures, primarily through the third quarter of 2022. Additional employee-related costs cannot be reasonably estimated.
- Key risks include the Russia-Ukraine conflict and sanctions, supply-chain and logistics disruption, inflation in energy and raw-material costs, foreign-exchange and interest-rate volatility, weaker demand, competition, environmental and litigation liabilities, pension obligations, cybersecurity and risks related to the separation from DowDuPont.
- Environmental remediation accruals were $1.281 billion. Management indicated that ultimate costs for accrued matters could be approximately one and a half times the recorded amount.
- Asbestos-related liabilities were $1.005 billion, and estimated additional contributions to the Dow Silicones breast-implant settlement facility were $127 million.
- Dow’s guarantees had maximum future payments of $1.377 billion and recorded liabilities of $216 million. Dow’s proportionate guarantee exposure related to Sadara’s interest payments was estimated at $496 million, although management did not expect to perform under the guarantee based on current forecasts.
- Subsequent to quarter-end, Dow declared another $0.70 per-share dividend and approved a new $3 billion share-repurchase authorization.
Important Facts for Investors to Verify
- Whether pricing gains remain sufficient to offset feedstock, energy, logistics and inflationary pressures.
- The durability of volume growth and demand conditions across the three operating segments.
- The financial and operational effects of the Russia-Ukraine conflict, sanctions and related asset impairments.
- Progress toward the stated 2022 capital-spending plan, digital acceleration benefits and decarbonization objectives.
- Cash conversion and working-capital trends, particularly receivables and inventories.
- Debt maturities, refinancing conditions and continued availability of the $8.4 billion credit facilities.
- Environmental, asbestos, product-liability, separation-related and Sadara guarantee exposures.
- Actual timing and scale of future dividends and share repurchases under the new authorization.