Dow Inc. 2021 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, 2021. Dow operates through Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, and Performance Materials & Coatings. The filing compares results with the three and nine months ended September 30, 2020.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $14.837 billion | $9.712 billion | $40.604 billion | $27.836 billion |
| Net income available to Dow Inc. common stockholders | $1.683 billion | $(25) million | $4.575 billion | $(11) million |
| Diluted EPS | $2.23 | $(0.04) | $6.06 | $(0.02) |
| Operating EBIT | $2.886 billion | $761 million | $7.268 billion | $1.661 billion |
| Cash provided by operating activities | Not separately provided in the financial statements; MD&A reports $2.7 billion from continuing operations | Not clearly provided | $4.512 billion from continuing operations | $4.596 billion from continuing operations |
| Capital expenditures | $413 million | $287 million | $1.035 billion | $955 million |
Q3 gross margin, calculated from reported sales and cost of sales, was approximately 21.7%, compared with 13.8% in the prior-year quarter. Operating EBIT margin was approximately 19.5%, compared with 7.8%; net margin attributable to Dow Inc. common stockholders was approximately 11.3%, compared with negative 0.3%.
- Q3 net sales increased 53%, driven by a 50% increase in local price and product mix, 2% volume growth, and a 1% favorable currency effect.
- Q3 equity earnings from nonconsolidated affiliates increased to $249 million from $60 million, primarily reflecting improved results at Sadara and Kuwait joint ventures.
- Cash flow was affected by a $1 billion elective pension contribution, increases in receivables and inventories, and higher accounts payable.
- At September 30, 2021, cash and cash equivalents were $2.911 billion. Committed and available liquidity totaled $12.4 billion, including $8.1 billion of committed credit facilities, all undrawn.
- Gross debt was $14.588 billion and net debt was $11.536 billion. Net debt represented 40.4% of total capitalization for Dow Inc., down from 47.9% at December 31, 2020.
- Total equity was $17.028 billion for Dow Inc. at September 30, 2021, compared with $13.005 billion at year-end 2020.
Material Changes Versus the Prior Comparable Period
- All operating segments reported higher sales and Operating EBIT. Q3 Operating EBIT increased to $1.954 billion in Packaging & Specialty Plastics, $713 million in Industrial Intermediates & Infrastructure, and $284 million in Performance Materials & Coatings.
- Pricing benefited from tight supply and demand conditions, while higher feedstock, energy, and raw-material costs increased cost of sales.
- Restructuring and asset-related charges fell to $22 million for the first nine months of 2021 from $719 million in the prior-year period; integration and separation costs declined to zero from $174 million.
- Interest expense declined to $561 million for the first nine months from $617 million, primarily because of debt redemptions and lower coupon rates.
- Dow recognized a $574 million pretax loss on early extinguishment of debt in the first nine months, including $472 million in Q3. The company retired $1.042 billion of debt through Q3 tenders and voluntarily repaid $81 million of debt due within one year.
- Dow repurchased $600 million of common stock in the first nine months, including $400 million in Q3, and paid $1.561 billion of dividends. Approximately $1.775 billion remained under the $3 billion repurchase authorization at September 30.
- Cash and cash equivalents declined from $5.104 billion at December 31, 2020, primarily because of debt repayments, dividends, share repurchases, pension contributions, capital expenditures, and working-capital investment.
Guidance, Outlook, Risks, and Unusual Items
Management expects robust end-market demand to continue into 2022, although logistics constraints and low inventories remain. Dow expects full-year 2021 capital spending of approximately $1.6 billion. The company stated that supply-chain and logistics challenges are expected to stabilize in 2022 and that manufacturing operations have continued without significant COVID-19-related shutdowns or labor shortages.
- Dow expects more than $300 million of incremental annual Operating EBITDA by the end of 2025 from digital acceleration, plus a one-time $100 million structural working-capital benefit. Related cash expenditures are expected to be approximately $280 million, primarily through 2022.
- The 2020 Restructuring Program is expected to be substantially complete by year-end 2021, with approximately $212 million of additional cash expenditures primarily through Q1 2022 and approximately $80 million of implementation expenditures primarily through Q3 2022.
- Dow expects approximately $1.230 billion of global pension contributions in 2021; $1.165 billion had been contributed through September 30. U.S. pension plans will be frozen for future service and compensation accruals effective December 31, 2023.
- Environmental remediation accruals totaled $1.231 billion. Management stated that ultimate costs for accrued matters could be approximately one and a half times the accrued amount.
- Asbestos-related liabilities totaled $1.047 billion, and Dow Silicones estimated an additional $160 million of contributions to its breast-implant settlement facility.
- Dow provided or remained subject to guarantees associated with Sadara. Maximum future guarantee payments were reported at $1.312 billion, and Dow estimated its share of potential future Sadara interest payments at approximately $501 million. Management does not expect to perform under these guarantees based on Sadara’s current forecasts.
- Other risks include COVID-19 developments, raw-material and energy-price volatility, supply-chain disruptions, inflation, foreign-exchange movements, environmental and litigation contingencies, pension obligations, cybersecurity, regulatory changes, and obligations arising from the separation from DowDuPont.
Important Facts for Investors to Verify
- Whether elevated pricing and margins are sustainable as supply constraints ease and raw-material and energy costs fluctuate.
- The timing and cash cost of restructuring, digital acceleration, pension funding, and capital expenditures.
- Debt reduction progress, future refinancing requirements, and the effect of debt tender losses on reported earnings.
- Potential exposure from Sadara guarantees, environmental remediation, asbestos liabilities, breast-implant claims, and Nova litigation matters.
- Working-capital requirements, particularly the growth in receivables and inventories, and the effect on free cash flow.
- Management’s ability to achieve its 2022 demand outlook and longer-term carbon-reduction, digitalization, and EBITDA-growth targets.