Dow Inc. Form 10-K Summary
Business context and reporting period
This combined Form 10-K covers Dow Inc. and The Dow Chemical Company for the fiscal year ended December 31, 2019. The filing includes fourth-quarter results, but it is an annual report rather than a standalone quarterly filing. Dow became an independent, publicly traded company on April 1, 2019, following its separation from DowDuPont. Historical periods are presented on a continuing-operations basis, with AgCo and SpecCo reported as discontinued operations.
Dow operates three reportable segments: Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, and Performance Materials & Coatings. It operates 109 manufacturing sites in 31 countries and employs approximately 36,500 people.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $42.951 billion | $49.604 billion | Down 13% |
| Income from continuing operations, net of tax | $(1.717) billion | $2.940 billion | Turned to loss |
| Net loss attributable to Dow Inc. | $(1.359) billion | $4.641 billion income | Turned to loss |
| EPS from continuing operations | $(2.42) | $3.80 | Declined |
| Cost of sales | $36.657 billion | $41.074 billion | Down 11% |
| Gross margin | $6.294 billion | $8.530 billion | Down 26% |
| Operating cash flow from continuing operations | $5.713 billion | $3.096 billion | Up 84% |
| Capital expenditures | $1.961 billion | $2.091 billion | Down 6% |
| Free cash flow, non-GAAP | $3.752 billion | $1.662 billion | Up 126% |
| Cash and cash equivalents | $2.367 billion | $2.724 billion | Down $357 million |
| Gross debt | $16.996 billion | $19.889 billion | Down $2.893 billion |
| Net debt | $14.608 billion | $17.065 billion | Down $2.457 billion |
Sales declined primarily because local price and product mix decreased 11%, volume decreased 2%, and currency reduced sales by 1%. Cost reductions, lower feedstock costs and working-capital improvements supported cash generation, despite the net loss.
- Packaging & Specialty Plastics sales were $20.245 billion and pro forma Operating EBIT was $2.904 billion, down 16% and 19%, respectively.
- Industrial Intermediates & Infrastructure sales were $13.440 billion and pro forma Operating EBIT was $845 million, down 13% and 52%, respectively.
- Performance Materials & Coatings sales were $8.923 billion and pro forma Operating EBIT was $918 million, down 8% and 26%, respectively.
- Corporate pro forma Operating EBIT improved to a loss of $315 million from a loss of $370 million.
Material changes versus the prior comparable period
- Dow completed its separation from DowDuPont and began trading on the NYSE under the symbol DOW. The separation materially affected capital structure, equity, reporting segments and comparability.
- Restructuring, goodwill impairment and asset-related charges increased to $3.219 billion from $221 million, including a $1.039 billion goodwill impairment for Coatings & Performance Monomers and $1.755 billion of Sadara-related charges.
- Equity in earnings of nonconsolidated affiliates changed from income of $555 million to a loss of $94 million, primarily due to Sadara and weaker joint-venture results.
- Integration and separation costs were $1.063 billion for Dow Inc., down from $1.179 billion, but remained a substantial expense.
- Net debt decreased, but net debt as a percentage of total capitalization increased to 50.9% from 33.7% because separation-related adjustments and the 2019 loss reduced stockholders’ equity.
- Dow declared and paid $2.10 per share of dividends, or $1.550 billion, and repurchased $500 million of common stock. Approximately $2.5 billion remained under the repurchase authorization at year-end.
- The company adopted the new lease standard, recording approximately $2.3 billion of operating lease right-of-use assets and liabilities at adoption.
Fourth-quarter items and unusual factors
- Fourth-quarter 2019 included $2.851 billion of restructuring, goodwill impairment and asset-related charges.
- Sadara’s equity investment was written down to zero, and certain Sadara receivables and accrued interest were reserved. Dow expects continued financial support, including an approximately $500 million loan in 2020 that may be converted to equity.
- Dow recorded a $1.039 billion goodwill impairment after lowering projected revenue and profitability for Coatings & Performance Monomers.
- 2019 environmental charges totaled $588 million, including a $399 million pretax charge recorded in cost of sales. Accrued environmental remediation and restoration liabilities were $1.155 billion at year-end.
- Dow recorded a $170 million gain related to the Nova ethylene asset matter and received approximately $800 million in cash. Nova has appealed portions of the judgment, and $893 million remained recorded for the disputed portion.
- Dow recorded a $102 million loss on early extinguishment of debt and a $205 million net gain from litigation-related matters.
Guidance, outlook and management commentary
- For 2020, Dow expected crude oil prices to be flat to slightly higher than 2019 and natural gas prices to be lower, with continued volatility from macroeconomic and geopolitical factors.
- Capital expenditures were expected to be $1.5 billion to $1.75 billion; pension contributions approximately $250 million; and interest expense approximately $850 million.
- Integration and separation cash spending was expected to be approximately $200 million to $250 million, with substantially lower restructuring and separation cash requirements than in 2019.
- Management expected to balance free cash flow between shareholder returns and debt reduction, while continuing to provide financial support to Sadara.
- Packaging margins were expected to remain stable in U.S. and Canada but challenged in Europe and Asia Pacific. Industrial Intermediates faced constrained MEG margins, added industry capacity and weak demand in several end markets. Coatings and industrial markets were expected to remain soft.
Liquidity, debt and contingencies
Dow reported $7.428 billion of available committed credit facilities against $9.428 billion of total committed facilities. Its credit ratings at January 31, 2020 were investment grade: S&P BBB/A-2, Moody’s Baa2/P-2 and Fitch BBB+/F2, each with a stable outlook. Management stated that liquidity and financial flexibility were sufficient to meet obligations.
- Long-term debt due within one year was $435 million; contractual long-term debt obligations totaled $16.741 billion.
- The company had $1.165 billion of asbestos-related liabilities and $1.155 billion of accrued environmental remediation and restoration obligations.
- Guarantees totaled $3.952 billion, primarily related to nonconsolidated affiliates and Sadara project financing. Dow’s potential Sadara guarantee was approximately $3.9 billion.
- U.S. qualified pension plans were underfunded by $4.768 billion on a projected-benefit-obligation basis. Total pension and other postretirement benefit liabilities were $10.083 billion.
- Principal risks include feedstock and energy-price volatility, chemical and environmental regulation, plastic-waste restrictions, global economic weakness, supply disruptions, cyber threats, litigation, pension funding, goodwill impairment and risks associated with operating as a standalone company.
Most important facts for an investor to verify
- Whether the large 2019 loss is primarily noncash or otherwise nonrecurring, and the extent to which recurring earnings and margins deteriorated.
- The assumptions supporting the $1.039 billion Coatings & Performance Monomers goodwill impairment and the risk of additional impairments.
- Sadara’s operating performance, funding requirements, collectability of receivables and potential equity conversion of future loans.
- The ultimate cash exposure from environmental remediation, asbestos claims, Nova litigation and other indemnification obligations.
- Whether the stated 2020 capital-spending, debt-reduction, dividend and share-repurchase plans remain compatible with weaker demand and elevated leverage.
- The comparability of 2019 with prior periods after the DowDuPont separation, discontinued-operations presentation and changes in intercompany pricing and segment allocations.