Dow Inc. 2020 Form 10-K Summary
Business context and reporting period
Dow Inc. filed a combined Form 10-K with The Dow Chemical Company for the fiscal year ended December 31, 2020. Dow is a global materials science company operating through Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, and Performance Materials & Coatings. It operates 106 manufacturing sites in 31 countries and employs approximately 35,700 people. Results are presented primarily from continuing operations after the 2019 separation of Dow’s agricultural sciences and specialty products businesses from DowDuPont.
The filing includes quarterly information. Fourth-quarter 2020 net sales were $10.706 billion, net income was $1.254 billion, and net income attributable to Dow Inc. was $1.236 billion.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $38.542 billion | $42.951 billion | Down 10% |
| Income from continuing operations, net of tax | $1.294 billion | $(1.717) billion | Improved |
| Net income attributable to Dow Inc. | $1.225 billion | $(1.359) billion | Improved |
| Diluted EPS from continuing operations | $1.64 | $(2.42) | Improved |
| Operating EBIT | $2.715 billion | $4.352 billion pro forma | Down 38% |
| Operating EBITDA | $5.589 billion | $7.290 billion pro forma | Down 23% |
| Cash flow from continuing operations | $6.252 billion | $5.713 billion | Up 9% |
| Free cash flow | $5.000 billion | $3.752 billion | Up 33% |
| Capital expenditures | $1.252 billion | $1.961 billion | Down 36% |
| Cash and cash equivalents | $5.104 billion | $2.367 billion | Up $2.737 billion |
| Gross debt | $17.107 billion | $16.996 billion | Up $111 million |
| Net debt | $11.958 billion | $14.608 billion | Down $2.650 billion |
| Net debt to total capitalization | 47.9% | 50.9% | Improved |
| Dividends paid | $2.80 per share; $2.071 billion | $2.10 per share; $1.550 billion | Increased |
Gross margin was $5.196 billion, or approximately 13.5% of sales, compared with $6.294 billion, or approximately 14.7%, in 2019. Cost of sales declined to $33.346 billion from $36.657 billion, but cost of sales as a percentage of sales increased to 86.5% from 85.3%.
Segment performance
| Segment | 2020 sales | Sales change | 2020 Operating EBIT | Operating EBIT change |
|---|---|---|---|---|
| Packaging & Specialty Plastics | $18.301 billion | Down 10% | $2.325 billion | Down 20% from 2019 pro forma |
| Industrial Intermediates & Infrastructure | $12.021 billion | Down 11% | $355 million | Down 58% |
| Performance Materials & Coatings | $7.951 billion | Down 11% | $314 million | Down 66% |
| Corporate | $269 million | Down from $343 million | $(279) million | Improved from $(315) million pro forma |
Material changes versus the prior comparable period
- Sales declined because local price and product mix decreased 7% and volume decreased 3%; currency was approximately flat. Packaging & Specialty Plastics volume increased 1%, while the other two operating segments declined 6% each.
- The first half of 2020 was materially affected by COVID-19, lower oil prices, reduced demand in automotive, construction, furniture, bedding and other consumer durable markets, and temporary production curtailments. Demand, pricing and margins improved sequentially in the third and fourth quarters.
- Income from continuing operations returned to profitability, partly reflecting lower restructuring and separation costs, gains on divestitures and a $544 million gain related to the Nova ethylene asset matter.
- Restructuring, goodwill impairment and asset-related charges decreased to $708 million from $3.219 billion. The 2019 amount included a $1.039 billion goodwill impairment and a $1.755 billion Sadara-related charge.
- Integration and separation costs declined to $239 million from approximately $1.063 billion for Dow Inc. in 2019; separation activities were completed by December 31, 2020.
- Dow generated significantly more cash, reduced capital spending, improved working capital, temporarily suspended share repurchases, and reduced operating expenses by approximately $500 million.
- Dow sold rail infrastructure assets for net proceeds of $303 million and marine and terminal assets for net proceeds of $600 million, recognizing pretax gains of $233 million and $499 million, respectively.
- Dow issued approximately $2.25 billion of euro-denominated notes and $2.0 billion of U.S.-dollar notes, while redeeming or tendering portions of existing debt. Gross debt was broadly stable, but higher cash reduced net debt.
Guidance, outlook, risks and unusual items
- Management expects continued but uneven economic recovery in 2021, with higher average crude oil prices than in 2020, competitive natural gas prices and continued feedstock volatility.
- Management expects improved margins and demand across all three operating segments, but noted risks from COVID-19 developments, new industry capacity, operating rates, GDP growth and energy and raw-material prices.
- Planned 2021 cash uses include approximately $1.6 billion of capital expenditures, $300 million of pension contributions, $350 million of restructuring-related cash outflows, $150 million for Digital Acceleration and approximately $1 billion for further deleveraging.
- The 2020 Restructuring Program targets more than $300 million of annualized Operating EBITDA benefit by the end of 2021 and includes a global workforce-cost reduction of approximately 6%. Additional restructuring and implementation cash expenditures are expected through 2022.
- Digital Acceleration is expected to generate more than $300 million of incremental annual run-rate Operating EBITDA by the end of 2025, with approximately $400 million of additional cash expenditures primarily through 2022.
- Sadara reached an agreement in principle to re-profile its project debt. The proposed transaction would extend maturities, provide a grace period through June 2026, and require Dow to provide guarantees for approximately $1.3 billion of Sadara debt plus certain interest obligations. Final terms remained subject to completion.
- Environmental remediation liabilities totaled $1.244 billion. Management stated that ultimate costs could be approximately one and a half times the accrued amount.
- Union Carbide asbestos-related liabilities were $1.098 billion, and Dow Silicones’ breast implant liability was $160 million. The filing states that actual future costs could differ materially from current estimates.
- Dow had $14.6 billion of cash and committed and available liquidity at year-end, no substantive long-term debt maturities until the second half of 2024, and all committed credit facilities undrawn. TDCC remained in compliance with its debt covenants.
- Credit ratings at January 31, 2021 were BBB-/A-3 with a stable outlook from Standard & Poor’s, Baa2/P-2 with a stable outlook from Moody’s, and BBB+/F2 with a negative outlook from Fitch.
Most important facts for investors to verify
- Whether the recovery in fourth-quarter demand, pricing and margins continues through 2021, particularly in Packaging & Specialty Plastics.
- The extent to which the 2020 Restructuring Program delivers the targeted more than $300 million annualized Operating EBITDA benefit and the related cash costs.
- Final terms and Dow’s ultimate guarantee exposure under the Sadara debt re-profiling.
- The sustainability of $5.0 billion of 2020 free cash flow after the return of deferred maintenance spending, higher 2021 capital expenditures and restructuring outflows.
- Future environmental, asbestos, pension and separation-related liabilities, including potential costs above recorded reserves.
- Whether gains from the Nova matter and asset divestitures are nonrecurring and how results perform excluding these unusual items.
- Progress toward deleveraging, dividend funding and any resumption of share repurchases.