Dow Inc. 2021 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, 2021. Dow operates through Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, Performance Materials & Coatings, and Corporate. The filing discusses the continuing COVID-19 recovery, supply-chain conditions, and the effects of Winter Storm Uri on U.S. Gulf Coast operations.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $11.882 billion | $9.770 billion | +22% |
| Income before taxes | $1.323 billion | $396 million | +234% |
| Net income | $1.006 billion | $258 million | +290% |
| Net income available to Dow Inc. common stockholders | $991 million | $239 million | +314% |
| Diluted EPS | $1.32 | $0.32 | +$1.00 |
| Operating EBIT | $1.554 billion | $843 million | +84% |
| Operating EBITDA | $2.271 billion | $1.567 billion | +45% |
| Cash from operating activities | $(291) million | $1.239 billion | $(1.530) billion |
| Cash from continuing operations | $(228) million | $1.236 billion | $(1.464) billion |
| Capital expenditures | $289 million | $395 million | $(106) million |
| Free cash flow | $(517) million | $841 million | $(1.358) billion |
Net income attributable to Dow Inc. represented approximately 8.3% of sales, compared with approximately 2.4% in the prior-year quarter. Operating EBIT margin was approximately 13.1%, compared with 8.6%.
- Cost of sales was $10.062 billion, or 84.7% of sales, versus 84.2% in Q1 2020.
- R&D expense was $194 million, or 1.6% of sales; SG&A was $366 million, or 3.1% of sales.
- The effective tax rate declined to 24.0% for Dow Inc. from 34.8%, primarily due to geographic earnings mix and improved equity earnings.
- Cash and cash equivalents were $4.133 billion at March 31, 2021, versus $5.104 billion at December 31, 2020.
- Gross debt was $16.844 billion and net debt was $12.639 billion. Net debt was 46.5% of total capitalization, versus 47.9% at year-end 2020.
- Dow had $8.1 billion of committed and available credit facilities, all undrawn, and reported total cash and committed available liquidity of $13.6 billion.
- Dow paid a quarterly dividend of $0.70 per share and did not repurchase shares during the quarter. Approximately $2.375 billion remained under the repurchase authorization.
Material changes versus the prior comparable period
- Sales increased 22%, driven by a 19% increase in local price and product mix and a 3% favorable currency effect; volume was flat overall.
- Packaging & Specialty Plastics sales rose 32% to $6.082 billion and Operating EBIT rose 112% to $1.228 billion.
- Industrial Intermediates & Infrastructure sales rose 18% to $3.607 billion and Operating EBIT rose 86% to $326 million.
- Performance Materials & Coatings sales rose 3% to $2.123 billion, but Operating EBIT declined 62% to $62 million because of Winter Storm Uri disruptions and planned maintenance.
- Equity earnings from nonconsolidated affiliates improved to $224 million from an $89 million loss, primarily reflecting improved results at Sadara and other joint ventures.
- Q1 2020 included $96 million of restructuring and asset-related charges, $65 million of integration and separation costs, and an $86 million debt extinguishment loss. These items were absent in Q1 2021.
- Operating cash flow declined sharply because of a $1.061 billion pension contribution, working-capital investment, performance-compensation payments, and the absence of a prior-year cash receipt related to the Nova litigation matter.
- Dow remeasured its U.S. pension plans, recording a $1.268 billion pretax actuarial gain in other comprehensive income. The company expects to contribute approximately $1.230 billion to global pension plans in 2021, including $1.061 billion contributed through March 31.
Guidance, outlook, risks, contingencies, and unusual items
Management entered the second quarter with strong momentum and expects the broadening economic recovery, vaccine distribution, and tight market fundamentals to support value-chain performance through 2021. The company expects approximately $1.6 billion of 2021 capital spending and now expects $400 million to $500 million of 2021 equity earnings from nonconsolidated affiliates.
- The 2020 restructuring program is expected to be substantially complete by year-end 2021. Additional cash expenditures are expected to be approximately $315 million, primarily through the first quarter of 2022, plus approximately $150 million of restructuring implementation costs, primarily through the third quarter of 2022.
- Digital acceleration initiatives are expected to require approximately $370 million of additional cash expenditures through the end of 2022 and 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.
- Winter Storm Uri caused production outages, supply shortages, higher raw-material costs, and repair costs. Dow reported that all Gulf Coast ethylene facilities and sites were operational at March 31, 2021.
- Sadara completed a debt re-profiling. Dow provided a new guarantee of up to approximately $1.3 billion of Sadara debt and expects to guarantee its share of interest payments during the grace period. Management does not expect to provide Sadara shareholder loans or equity contributions in 2021.
- Environmental remediation accruals were $1.243 billion. Management stated that ultimate costs for accrued matters could be approximately one and a half times the accrued amount.
- Asbestos-related liabilities were $1.080 billion. Dow Silicones estimated an additional $160 million of obligations under its breast-implant settlement program after the settlement facility balance is exhausted.
- Dow disclosed disputed amounts of $341 million and $323 million related to two Nova Chemicals judgments. Further proceedings regarding the ethylene asset matter were scheduled for November 2021.
- Principal risks include COVID-19 developments, energy and raw-material prices, supply disruptions, commodity and currency volatility, litigation and environmental liabilities, restructuring execution, joint-venture performance, credit-market access, and risks associated with the separation from DowDuPont.
Most important facts for investors to verify
- Whether improved pricing and margins persist as supply constraints ease and raw-material and energy costs change.
- Whether operating cash flow normalizes after the unusually large pension contribution and working-capital outflows.
- The cash requirements and execution progress for restructuring and digital acceleration programs.
- Dow’s actual exposure under the Sadara guarantees and whether Sadara requires funding or draws its planned revolving facility.
- Potential changes in environmental, asbestos, product-liability, and Nova litigation obligations.
- Whether the company achieves the stated 2021 capital-spending, equity-earnings, liquidity, and digital-benefit expectations.