Dow Inc. 10-Q Summary: Second Quarter 2021
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, 2021. Dow operates through Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, Performance Materials & Coatings, and Corporate activities. Results reflect recovery from COVID-19, tight supply-and-demand conditions, higher product pricing, and lingering effects from Winter Storm Uri.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Net sales | $13.885 billion | $8.354 billion | $25.767 billion | $18.124 billion |
| Net income attributable to Dow Inc. common stockholders | $1.901 billion | $(225) million | $2.892 billion | $14 million |
| Diluted EPS | $2.51 | $(0.31) | $3.83 | $0.01 |
| Operating EBIT | $2.828 billion | $57 million | $4.382 billion | $900 million |
| Cash flow from operating activities | Not separately provided for Q2 | Not separately provided for Q2 | $1.713 billion | $2.829 billion |
| Operating cash flow from continuing operations | Approximately $2.0 billion in Q2 commentary | Approximately $1.6 billion implied by commentary | $1.793 billion | $2.835 billion |
| Capital expenditures | $333 million | $273 million | $622 million | $668 million |
| Free cash flow | Not provided | Not provided | $1.171 billion | $2.167 billion |
Q2 2021 net margin was approximately 13.7%, compared with negative 2.7% in Q2 2020. Cost of sales declined to 77.3% of sales from 91.1%, producing an implied gross margin of approximately 22.7% versus 8.9%. For the first six months, cost of sales was 80.7% of sales versus 87.4% in the prior-year period.
- Q2 sales increased 66%, driven by a 53% increase in local price and product mix, 9% volume growth, and a 4% favorable currency impact.
- Operating EBIT increased to $2.828 billion from $57 million, reflecting margin expansion and substantially higher equity earnings.
- Equity earnings from nonconsolidated affiliates were $278 million, compared with a $95 million loss in Q2 2020. The improvement was primarily attributable to Sadara and Kuwait and Thai joint ventures.
- Cash and cash equivalents were $3.491 billion at June 30, 2021, versus $5.104 billion at December 31, 2020.
- Gross debt was $15.741 billion, down from $17.107 billion at year-end. Net debt was $12.145 billion versus $11.958 billion.
- Net debt represented 42.9% of total capitalization, down from 47.9% at December 31, 2020. Dow reported $13 billion of cash and committed and available liquidity, including $8.1 billion of committed credit facilities, all undrawn.
- Dow paid $1.043 billion of dividends and repurchased $200 million of common stock during the first six months. The quarterly dividend was $0.70 per share.
Material Changes Versus the Prior Comparable Period
- Sales rose across all operating segments and geographic regions. Q2 segment sales growth was 78% in Packaging & Specialty Plastics, 74% in Industrial Intermediates & Infrastructure, and 33% in Performance Materials & Coatings.
- Packaging & Specialty Plastics Operating EBIT increased to $2.014 billion from $318 million; Industrial Intermediates & Infrastructure improved to $648 million from a $220 million loss; Performance Materials & Coatings increased to $225 million from $27 million.
- Interest expense declined to $187 million in Q2 from $200 million and to $383 million for the first half from $415 million, primarily due to debt redemptions and lower coupon rates.
- Restructuring charges were $22 million in both the quarter and first half of 2021, compared with $6 million and $102 million, respectively, in the comparable 2020 periods. Integration and separation costs fell to zero from $46 million in Q2 2020 and $111 million in H1 2020.
- Operating cash flow from continuing operations declined by $1.042 billion for the first half, primarily because of a $1 billion elective pension contribution, increased working-capital needs, higher compensation payments, and the absence of certain prior-year receipts.
- Dow reduced gross debt by approximately $1.1 billion in Q2 by redeeming notes due in 2024. Management reported no substantive long-term debt maturities until the end of 2025.
- Standard & Poor’s upgraded TDCC’s ratings to BBB/A-2 with a stable outlook; Fitch reaffirmed BBB+/F2 and revised its outlook to stable.
Guidance, Outlook, Risks, and Unusual Items
- Management expects continued earnings momentum from improving consumer spending, international travel, industrial production, and the global economic recovery.
- 2021 capital expenditures are expected to be approximately $1.6 billion.
- The 2020 Restructuring Program is expected to be substantially complete by year-end 2021. Additional cash expenditures are estimated at $269 million for severance and exit activities and approximately $130 million for implementation, demolition, and decommissioning activities.
- Digital acceleration activities are expected to require approximately $320 million of additional cash expenditures through the end of 2022. Management targets more than $300 million of incremental annual run-rate Operating EBITDA by the end of 2025 and a one-time $100 million structural working-capital benefit.
- COVID-19 remains a risk through potential infection resurgences, supply-chain disruptions, logistics constraints, and changing regional restrictions. Dow reported no significant manufacturing shutdowns or labor, raw-material, or protective-equipment shortages as of the filing date.
- Winter Storm Uri caused production outages, supply constraints, higher raw-material costs, and repair costs. Dow’s Gulf Coast ethylene facilities and other sites were operational by March 31, 2021.
- Dow recorded a $102 million pretax loss on early extinguishment of debt in Q2 and a $61 million pretax gain related to Brazilian PIS/COFINS tax credits.
- Environmental remediation accruals totaled $1.250 billion, with potential costs for accrued matters reasonably possible to reach approximately 1.5 times the accrued amount.
- Union Carbide asbestos-related liabilities totaled $1.060 billion. Dow Silicones estimated an additional $160 million contribution to its settlement program after available funds are exhausted.
- Dow provided or maintained significant guarantees related to Sadara. Maximum future payments under guarantees were $1.314 billion, with a recorded liability of $231 million. Management does not expect to perform under the Sadara guarantees based on current forecasts.
- The company faces ongoing litigation and environmental matters, including Nova patent and ethylene-asset disputes, a Texas environmental complaint, and a consent decree requiring approximately $300 million of air-pollution control and monitoring expenditures over several years.
Investor Verification Items
- Verify whether elevated pricing, margins, and equity earnings at Sadara and other joint ventures are sustainable as supply conditions normalize.
- Track working-capital requirements, inventory growth, pension contributions, and the resulting conversion of Operating EBITDA to operating cash flow.
- Confirm completion and cash costs of restructuring, digital acceleration, and environmental compliance programs.
- Assess Sadara’s financial performance and Dow’s potential exposure under its debt and revolving-credit guarantees.
- Review asbestos, environmental, Nova litigation, Brazilian tax-credit, and DowDuPont indemnification contingencies for changes in exposure.
- Monitor debt maturities, refinancing needs, credit ratings, share repurchases, and dividend coverage.