Dow Inc. 2020 Q3 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 quarter and nine months ended September 30, 2020. Results reflect continuing operations after the 2019 separation from DowDuPont, with agriculture and specialty products presented as discontinued operations in prior periods. Dow operates through Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, and Performance Materials & Coatings.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $9.712 billion | $10.764 billion | $27.836 billion | $32.747 billion |
| Income from continuing operations, net of tax | $(1) million | $347 million | $40 million | $593 million |
| Net income available to Dow common stockholders | $(25) million | $333 million | $(11) million | $964 million |
| EPS | $(0.04) | $0.45 | $(0.02) | $1.29 |
| Operating EBIT | $761 million | $1.117 billion | $1.661 billion | $3.319 billion pro forma |
| Cash flow from operations | Not separately provided | Not separately provided | $4.596 billion | $3.793 billion |
| Capital expenditures | $287 million | $472 million | $955 million | $1.384 billion |
Q3 sales declined 10%, driven by a 9% decrease in local price and a 1% volume decline. Nine-month sales declined 15%, reflecting an 11% local-price decrease and a 4% volume decline. Cost of sales represented 86.2% of sales in Q3 versus 87.1% in the prior-year quarter, but represented 87.0% for the nine-month period versus 85.3% in 2019. Q3 Operating EBIT margin was approximately 7.8% of sales, compared with approximately 10.4% in Q3 2019.
- Packaging & Specialty Plastics: Q3 sales of $4.565 billion and Operating EBIT of $647 million; EBIT declined from $798 million.
- Industrial Intermediates & Infrastructure: Q3 sales of $3.058 billion and Operating EBIT of $104 million; EBIT declined from $193 million.
- Performance Materials & Coatings: Q3 sales of $2.002 billion and Operating EBIT of $75 million; EBIT declined from $200 million.
- Q3 restructuring and asset-related charges were $617 million, including $575 million under the new 2020 Restructuring Program.
- Q3 included a $233 million pretax gain from the rail infrastructure divestiture and a $63 million loss on early debt extinguishment.
Cash flow, liquidity and debt
- Operating cash flow from continuing operations was $4.596 billion in the first nine months, up from $3.793 billion in the comparable period. Free cash flow, as defined by Dow, was $3.641 billion versus $2.409 billion.
- Cash and cash equivalents were $4.549 billion at September 30, 2020, compared with $2.367 billion at December 31, 2019.
- Gross debt was $17.374 billion, compared with $16.996 billion at year-end 2019. Net debt was $12.795 billion, down from $14.608 billion, helped by higher cash balances.
- Dow reported more than $13.5 billion of cash and committed available liquidity, including $7.825 billion of committed credit facilities.
- There were no substantive long-term debt maturities until the second half of 2024. Management stated that debt covenants were satisfied; the reported debt-to-capitalization ratio under the principal revolving credit agreement was 0.53 to 1.00 versus a 0.65 to 1.00 maximum.
- Dow reduced its 2020 capital expenditure target to approximately $1.25 billion and temporarily suspended share repurchases. Approximately $2.375 billion remained available under the repurchase authorization at September 30, 2020.
Material changes versus the prior comparable period
- COVID-19, lower energy prices and weaker demand in durable goods, automotive, construction, furniture and bedding reduced sales and segment profitability. Packaging, health and hygiene, home care and pharmaceutical demand provided partial offsets.
- Demand and operating rates improved sequentially from Q2, with Q3 sales up 16% from Q2 and higher margins and cash flow, although recovery remained uneven.
- The Board approved a restructuring program targeting approximately 6% global workforce-cost reduction, manufacturing-asset rationalization and more than $300 million of annualized Operating EBITDA benefit by the end of 2021.
- Integration and separation costs declined to $63 million in Q3 from $164 million and to $174 million for nine months from $964 million for Dow Inc. in the prior-year period. These activities were expected to be substantially complete by year-end 2020.
- Dow issued €2.25 billion of notes in February and $2.0 billion of notes in August, using proceeds to repay or tender debt. Long-term debt increased modestly, while interest expense declined because of refinancing at lower coupon rates.
- Dow completed the sale of rail infrastructure for approximately $303 million net proceeds and agreed to divest marine and terminal operations for expected proceeds of $620 million, subject to closing conditions.
Guidance, outlook, commentary and risks
Management expected fourth-quarter 2020 net sales of $9.5 billion to $9.8 billion, with continued demand recovery offset by typical seasonality. Management expected sequential local-price increases across all segments and regions, supported by improving supply and demand, while noting that a significant second wave of COVID-19 could disrupt the recovery.
- The 2020 Restructuring Program was expected to generate more than $300 million of annualized Operating EBITDA benefit by the end of 2021. Additional cash expenditures were estimated at approximately $380 million for severance and exit activities and $150 million for restructuring implementation, primarily through 2022.
- Dow expected approximately $50 million to $65 million of additional integration and separation cash expenditures through year-end 2020.
- Dow expected to contribute approximately $250 million to pension plans in 2020, of which $188 million had been contributed through September 30.
- Key risks include the severity and duration of COVID-19, oil and raw-material price volatility, demand and margin pressure, supply-chain disruptions, customer credit risk, foreign exchange movements, asset impairments, cybersecurity, environmental obligations, litigation and restructuring execution.
- Environmental remediation accruals were $1.216 billion, with reasonably possible costs potentially reaching approximately one and a half times the accrued amount.
- Union Carbide’s asbestos-related liability was $1.117 billion at September 30, 2020; management stated that the ultimate cost cannot be estimated and could materially affect results and cash flows.
- Dow’s guarantee exposure related primarily to Sadara project financing, with maximum future payments of approximately $3.788 billion. Sadara had $10.4 billion of project financing outstanding.
Most important facts for investors to verify
- Whether the COVID-19-driven recovery and fourth-quarter sales outlook of $9.5 billion to $9.8 billion were achieved.
- The timing, cash cost and realized savings from the 2020 Restructuring Program and the approximately 6% workforce-cost reduction.
- Progress and final proceeds from the marine and terminal divestiture.
- Segment margins, particularly the recovery of Industrial Intermediates & Infrastructure and Performance Materials & Coatings.
- Liquidity, refinancing needs, credit ratings and covenant compliance, including the potential effect of any downgrade.
- Future cash requirements associated with Sadara, environmental remediation, asbestos claims, Dow Silicones liabilities and other contingencies.
- The sustainability of operating cash flow and the quarterly $0.70-per-share dividend while share repurchases remained suspended.