Dow Inc. 2022 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, 2022. Dow operates through Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, Performance Materials & Coatings, and Corporate. The filing is prepared under U.S. GAAP.
Key financial metrics
| In millions, except per-share data | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $14,115 | $14,837 | $45,043 | $40,604 |
| Income before income taxes | $1,001 | $2,248 | $5,225 | $6,027 |
| Net income | $760 | $1,706 | $3,993 | $4,644 |
| Net income available to Dow Inc. common stockholders | $739 | $1,683 | $3,969 | $4,575 |
| Diluted EPS | $1.02 | $2.23 | $5.41 | $6.06 |
| Operating EBIT | $1,195 | $2,886 | $5,989 | $7,268 |
| Cash provided by operating activities | $1.9 billion | $2.7 billion | $5,397 | $4,434 |
| Free cash flow | Not separately provided | Not separately provided | $4,184 | $3,477 |
Q3 net sales declined 5% year over year and 10% sequentially. Local price and product mix increased 3% year over year, while volume declined 4% and currency reduced sales by 4%. Cost of sales increased to $12.4 billion from $11.6 billion, reducing the implied gross margin to approximately 12.3% from 21.7%. Operating EBIT margin was approximately 8.5%, versus 19.5% in the prior-year quarter.
For the first nine months, net sales increased 11%, driven by a 16% local-price increase, partly offset by a 1% volume decline and a 4% unfavorable currency impact. Operating EBIT declined 18% year over year, and the implied operating EBIT margin decreased to approximately 13.3% from 17.9%.
Segment performance
| Segment | Q3 2022 sales | Q3 2022 Operating EBIT | Change in Operating EBIT |
|---|---|---|---|
| Packaging & Specialty Plastics | $7,327 million | $785 million | Down $1,169 million |
| Industrial Intermediates & Infrastructure | $4,059 million | $167 million | Down $546 million |
| Performance Materials & Coatings | $2,654 million | $302 million | Up $18 million |
| Corporate | $75 million | $(59) million | Loss improved by $6 million |
Results were pressured by higher feedstock, energy, raw-material and logistics costs, weaker demand in several end markets, margin compression, lower equity earnings from affiliates, and foreign-exchange headwinds. Equity in affiliate earnings fell to a $58 million loss in Q3 from $249 million of earnings, primarily reflecting margin compression at Sadara and Kuwait joint ventures.
Liquidity, cash flow and capital structure
- September 30 cash and cash equivalents were $2.216 billion, compared with $2.988 billion at December 31, 2021.
- Dow Inc. reported gross debt of $13.470 billion and net debt of $11.106 billion, compared with $14.672 billion and $11.439 billion, respectively, at year-end 2021.
- Total committed and available credit facilities were $8.4 billion, all undrawn at September 30. Management reported approximately $12 billion of cash and committed available liquidity.
- There were no substantive long-term debt maturities expected until 2027. The company was in compliance with debt covenants; the applicable debt-to-capitalization ratio was 0.39 to 1.00 versus a 0.70 to 1.00 maximum under the revolving credit agreement.
- Nine-month operating cash flow from continuing operations was $5.408 billion, compared with $4.512 billion in 2021. Capital expenditures were $1.224 billion, versus $1.035 billion, producing reported free cash flow of $4.184 billion.
- Financing cash uses included $957 million of long-term debt repayments, $2.2 billion of Dow Inc. share repurchases and $1.511 billion of dividends to shareholders. The quarterly dividend was $0.70 per share.
- Dow expects 2022 capital spending of approximately $1.9 billion. The company repurchased $800 million of stock in Q3, with approximately $2.175 billion remaining under the new $3 billion authorization.
Material changes versus the prior comparable period
- Q3 net income available to Dow Inc. common stockholders fell 56% to $739 million, and diluted EPS fell to $1.02 from $2.23.
- Q3 Operating EBIT declined 59%, primarily due to cost inflation, lower prices or demand in key businesses, weaker affiliate results and prior-year insurance recoveries.
- Nine-month net sales rose 11%, but net income available to Dow Inc. stockholders declined 13% and Operating EBIT declined 18%.
- Cash flow from continuing operations increased for the nine months, partly because the prior-year period included a $1 billion elective pension contribution. Reported cash flow conversion improved to 66.8% from 47.7%.
- Long-term debt declined following the redemption of $750 million of notes in Q2 2022. The company recorded an $8 million pretax loss on extinguishment.
- Accumulated other comprehensive loss increased to $9.582 billion from $8.977 billion at year-end, primarily reflecting foreign-currency translation and investment losses.
Guidance, outlook, risks and unusual items
- Management expects the near-term macroeconomic environment to remain dynamic and identified a cost-savings playbook with potential to deliver more than $1 billion of savings in 2023.
- Dow continues to pursue its “decarbonize and grow” strategy and expects digital acceleration initiatives to 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.
- The Russia-Ukraine conflict resulted in $186 million of pretax asset-related charges in Q1 2022. Dow suspended purchases of Russian feedstocks and energy and significantly reduced its Russian operations; management stated that the remaining net asset exposure was not significant.
- Environmental remediation liabilities were $1.197 billion. Management stated that ultimate costs for accrued matters could be approximately twice the accrued amount, and excess costs could materially affect results, liquidity and cash flow.
- Union Carbide asbestos-related liabilities totaled $958 million. Dow Silicones estimated an additional $87 million contribution to its product-liability settlement facility.
- Dow had guarantees with maximum future payments of $1.249 billion, including guarantees related to Sadara. Management does not expect to be required to perform under the Sadara guarantees based on current forecasts.
- Other risks include global economic slowdown, inflation, energy and raw-material volatility, foreign-exchange movements, supply-chain disruption, sanctions, cybersecurity threats, litigation, environmental matters, customer demand changes and risks related to the DowDuPont separation.
- The filing states that disclosure controls and procedures were effective and that there were no material changes in internal control over financial reporting.
Investor verification checklist
- Verify the sustainability of margins as energy, feedstock and raw-material costs fluctuate and demand remains weak in EMEAI and consumer-related markets.
- Reconcile GAAP net income and Operating EBIT with significant items, including Russia-Ukraine charges, digital acceleration costs, restructuring costs and debt-extinguishment losses.
- Monitor affiliate performance, particularly Sadara and the Kuwait joint ventures, and assess related guarantee exposure.
- Assess whether projected 2023 cost savings and digital initiatives are achieved without impairing growth or requiring additional restructuring spending.
- Review environmental, asbestos, Dow Silicones product-liability and other litigation contingencies for changes in estimates or cash requirements.
- Confirm capital-allocation capacity after dividends, share repurchases, capital spending and debt maturities, including the renewal of the U.S. accounts-receivable facility expected in November 2022.