Dow Inc. 2023 Q1 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 three months ended March 31, 2023. Dow is a global materials science company operating primarily through Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, and Performance Materials & Coatings.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $11.851 billion | $15.264 billion | Down 22% |
| Income (loss) before income taxes | $(120) million | $2.055 billion | Declined materially |
| Net income available to Dow Inc. common stockholders | $(93) million | $1.569 billion | Turned to a loss |
| Diluted EPS | $(0.13) | $2.11 | Declined materially |
| Operating EBIT | $708 million | $2.419 billion | Down 71% |
| Operating EBITDA | $1.356 billion | $3.171 billion | Down 57% |
| Cash flow from continuing operations | $531 million | $1.612 billion | Down $1.081 billion |
| Free cash flow | $91 million | $1.297 billion | Down $1.206 billion |
| Capital expenditures | $440 million | $315 million | Up $125 million |
| Cash and cash equivalents at March 31 | $3.319 billion | $3.143 billion at March 31, 2022 | Current-period balance |
| Gross debt at March 31 | $15.264 billion | $15.422 billion at Dec. 31, 2022 | Down $158 million |
| Net debt at March 31 | $11.326 billion | $10.597 billion at Dec. 31, 2022 | Up $729 million |
Cost of sales was $10.629 billion, or 89.7% of sales, compared with 81.2% in the prior-year quarter. The implied gross margin was approximately 10.3%, versus approximately 18.8% in Q1 2022. Cash flow conversion declined to 39.2% from 50.8%.
At March 31, 2023, current assets were $19.356 billion and current liabilities were $10.489 billion, producing a current ratio of 1.85:1. Dow reported $13.2 billion of cash and committed available liquidity, including fully available committed credit facilities. Commercial paper outstanding was $200 million, and no substantive long-term debt maturities were due until 2027.
Material changes versus the prior comparable period
- Sales declined across all operating segments and geographic regions. Local price and product mix decreased 10%, volume decreased 11%, and currency had a 1% unfavorable impact.
- Packaging & Specialty Plastics sales declined 20% to $6.114 billion and Operating EBIT declined to $642 million from $1.234 billion.
- Industrial Intermediates & Infrastructure sales declined 25% to $3.378 billion and Operating EBIT declined to $123 million from $661 million.
- Performance Materials & Coatings sales declined 25% to $2.276 billion and Operating EBIT declined to $35 million from $595 million.
- Equity in earnings of nonconsolidated affiliates shifted to a $48 million loss from $174 million of earnings, primarily due to lower integrated polyethylene margins and weaker joint-venture demand.
- Interest expense increased to $185 million from $167 million, primarily because of higher interest rates.
- Operating cash flow from continuing operations declined to $531 million from $1.612 billion, while capital expenditures increased to $440 million from $315 million.
- Dow repurchased $125 million of common stock and paid $496 million of dividends during the quarter. The quarterly dividend was $0.70 per share.
Guidance, outlook, commentary, risks and unusual items
Management expects operational and cost actions to provide increasing benefits during 2023. Dow intends to remain flexible as inflation affects consumer demand and global economic activity remains soft. Management expects oil and gas spreads to support cost-advantaged positions and continues to target longer-term earnings improvement through its decarbonize-and-grow and waste-transformation strategies. Full-year 2023 capital spending is expected to be approximately $2.2 billion, subject to economic conditions.
On January 25, 2023, the Board approved a restructuring program that generated $541 million of pretax charges in Q1, comprising $344 million of severance costs and $197 million of asset write-downs. The program includes a workforce reduction of approximately 2,000 employees and is expected to be substantially complete by the end of 2024. Additional cash expenditures are expected to include approximately $333 million of severance-related costs and approximately $425 million of implementation, decommissioning and efficiency costs.
Dow recorded a $177 million pretax charge for probable and estimable groundwater-contamination legacy liabilities related to historical agricultural products. The related liability totaled $237 million at March 31, 2023.
Environmental remediation liabilities totaled $1.233 billion, although ultimate costs for accrued matters could be approximately twice the recorded amount. Union Carbide asbestos-related liabilities were $929 million. A $323 million liability remained related to the disputed portion of the Dow v. Nova Chemicals ethylene asset damages judgment.
Principal risks include weak global demand, pricing and margin pressure, energy and raw-material volatility, foreign exchange movements, inflation and interest rates, supply-chain and geopolitical disruptions including the Russia-Ukraine conflict, environmental and litigation exposures, restructuring execution, pension obligations, technology and decarbonization execution, cybersecurity, and indemnification obligations related to the DowDuPont separation.
Most important facts for investors to verify
- Whether demand, pricing and operating rates stabilize or continue to pressure all three operating segments.
- The timing and cash cost of the 2023 restructuring program, facility shutdowns and workforce reductions.
- Progress toward the approximately $2.2 billion 2023 capital-spending plan and the effect on free cash flow.
- Liquidity, net debt and refinancing capacity, particularly before the first substantive long-term debt maturities in 2027.
- Changes in environmental, groundwater-contamination and asbestos-related liabilities and potential exposure above recorded accruals.
- Whether joint-venture profitability and dividend distributions recover from Q1 levels.
- Management’s ability to sustain the dividend and planned share repurchases if operating cash flow remains depressed.