Dow Inc. 2023 Q2 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 six months ended June 30, 2023. Dow operates primarily through Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, and Performance Materials & Coatings.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $11.420 billion | $15.664 billion | $23.271 billion | $30.928 billion |
| Net income attributable to Dow Inc. common stockholders | $485 million | $1.661 billion | $392 million | $3.230 billion |
| Diluted EPS | $0.68 | $2.26 | $0.54 | $4.37 |
| Operating EBIT | $885 million | $2.375 billion | $1.593 billion | $4.794 billion |
| Cash from operating activities | $1.347 billion (continuing operations) | $1.856 billion (continuing operations) | $1.878 billion (continuing operations) | $3.468 billion (continuing operations) |
| Capital expenditures | $561 million | $457 million | $1.001 billion | $772 million |
| Free cash flow | Not separately provided | Not separately provided | $877 million | $2.696 billion |
Q2 net margin was approximately 4.3%, compared with approximately 10.7% in the prior-year quarter. Cost of sales represented 86.5% of sales versus 82.3% in Q2 2022. The six-month operating cash flow conversion ratio was 65.0%, compared with 55.7% in the prior-year period.
- Q2 sales decreased 27%, reflecting an 18% decline in local price and product mix, an 8% volume decline, and a 1% unfavorable currency impact.
- Q2 Operating EBIT declined 63%. Segment Operating EBIT was $918 million for Packaging & Specialty Plastics, a loss of $35 million for Industrial Intermediates & Infrastructure, and $66 million for Performance Materials & Coatings.
- Cash and cash equivalents were $2.924 billion at June 30, 2023, compared with $3.886 billion at December 31, 2022. Current assets were $18.549 billion and current liabilities were $9.649 billion, producing a 1.92:1 current ratio.
- Gross debt was $14.944 billion and net debt was $11.304 billion, compared with $10.597 billion of net debt at year-end 2022. Long-term debt was $14.735 billion, with no substantive long-term maturities due until 2027.
- Cash and committed available liquidity totaled $12.8 billion. Committed credit facilities of $8.4 billion were undrawn, and no commercial paper was outstanding at quarter-end.
- Dow paid a $0.70 per-share dividend and repurchased $250 million of common stock during Q2. Approximately $1.675 billion remained under the $3 billion repurchase authorization.
Material changes versus the prior comparable period
- All operating segments and geographic regions reported lower sales, primarily because of weaker demand, lower selling prices, industry supply additions, and slower economic activity.
- Equity in earnings of nonconsolidated affiliates shifted to a $57 million loss from $195 million of earnings, mainly due to weaker results at Sadara and Kuwait joint ventures.
- Higher interest rates increased interest expense to $172 million in Q2 from $165 million. The effective tax rate increased to 29.5% from approximately 22.5%.
- The Company recorded $549 million of pretax restructuring charges during the first six months, including $541 million in Q1 and $8 million in Q2. The program includes a workforce reduction of approximately 2,000 employees and asset rationalization.
- A $177 million pretax charge was recorded in Q1 for legacy agricultural-product groundwater contamination matters. The related liability was $237 million at June 30.
- Six-month capital expenditures increased to $1.001 billion from $772 million, while free cash flow declined to $877 million from $2.696 billion.
Guidance, outlook, risks, contingencies, and unusual items
Management expects the macroeconomic environment to remain challenging in the second half of 2023. Cost-saving actions are on track to deliver approximately $1 billion of savings in 2023. Full-year 2023 capital spending is expected to be approximately $2.2 billion, subject to economic conditions.
- The 2023 restructuring program is expected to be substantially complete by the end of 2024. Additional restructuring cash expenditures of approximately $273 million and implementation and efficiency expenditures of approximately $340 million are expected, primarily through 2024.
- On July 14, 2023, after quarter-end, an explosion and fire occurred at the Glycol-2 unit in Plaquemine, Louisiana. No injuries were reported. Dow estimated a preliminary pretax earnings impact of approximately $100 million and was investigating restoration requirements.
- Environmental remediation liabilities totaled $1.236 billion, although management stated ultimate costs for accrued matters could be approximately twice the accrued amount.
- Asbestos-related liabilities were $904 million at June 30, 2023; approximately 74% related to future claims. Unresolved claims totaled 7,162.
- Key risks include weak global demand, commodity and energy price volatility, supply-chain and geopolitical disruptions, foreign exchange exposure, environmental and asbestos liabilities, litigation, restructuring execution, joint-venture performance, cybersecurity, and the ability to fund decarbonization and growth projects.
- Dow stated that it was in compliance with debt covenants and that disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether demand, pricing, volumes, and margins stabilize across the three operating segments in the second half of 2023.
- The timing and cash cost of the restructuring program, including the approximately 2,000 employee reductions and facility closures.
- The operational and financial impact of the Plaquemine incident and the timing of the Glycol-2 restart.
- Progress toward the $1 billion 2023 cost-savings target and the $2.2 billion capital-spending plan.
- Cash generation, dividend coverage, share repurchases, and the increase in net debt to $11.304 billion.
- Developments in environmental, groundwater contamination, asbestos, indemnification, and other litigation contingencies.
- Performance and cash dividends from Sadara, Kuwait joint ventures, and other nonconsolidated affiliates.