Dow Inc. Q1 2024 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 three months ended March 31, 2024. Dow operates through Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, and Performance Materials & Coatings, with Corporate activities primarily including insurance operations.
Financial performance and key metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $10.765 billion | $11.851 billion | Down 9% |
| Income before income taxes | $449 million | Loss of $120 million | Improved |
| Net income attributable to Dow Inc. common stockholders | $516 million | Loss of $93 million | Improved |
| Diluted EPS | $0.73 | $(0.13) | Improved |
| Operating EBIT | $674 million | $708 million | Down 5% |
| Operating EBITDA | $1.394 billion | $1.356 billion | Up 3% |
| Operating cash flow from continuing operations | $460 million | $531 million | Down $71 million |
| Free cash flow | $(254) million | $91 million | Down $345 million |
| Capital expenditures | $714 million | $440 million | Up $274 million |
Net sales declined primarily because local price and product mix decreased 10%, reflecting lower feedstock, energy and raw-material costs and unfavorable supply-demand conditions. Volume increased 1%, while currency was flat. Cost of sales declined to $9.488 billion from $10.629 billion, and cost of sales as a percentage of sales improved to 88.1% from 89.7%. Approximate gross margin increased to 11.9% from 10.3%.
Operating EBIT margin was approximately 6.3%, compared with 6.0% in the prior-year quarter. Net margin attributable to Dow Inc. common stockholders was approximately 4.8%, compared with negative 0.8% in Q1 2023. The 2024 tax result included an $89 million tax credit and a negative 19.8% effective tax rate, primarily due to a $194 million reassessment credit for interest and penalties related to a foreign tax matter.
- Packaging & Specialty Plastics sales were $5.430 billion, down 11%; Operating EBIT was $605 million versus $642 million.
- Industrial Intermediates & Infrastructure sales were $3.008 billion, down 11%; Operating EBIT was $87 million versus $123 million.
- Performance Materials & Coatings sales were $2.152 billion, down 5%; Operating EBIT increased to $41 million from $35 million.
- Equity earnings from nonconsolidated affiliates were $17 million versus a $48 million loss, primarily reflecting improved Kuwait and Sadara joint-venture results.
Liquidity, debt and capital allocation
Cash and cash equivalents were $3.723 billion at March 31, 2024, compared with $2.987 billion at December 31, 2023. Total current assets were $18.448 billion and current liabilities were $10.249 billion, producing a current ratio of 1.80:1.
Gross debt increased to $16.343 billion from $15.086 billion. Net debt, defined by Dow as gross debt less cash and marketable securities, increased to $11.849 billion from $10.799 billion. Net debt represented 38.5% of total capitalization, compared with 36.1% at year-end 2023. Dow reported $8.4 billion of committed and available credit facilities, all undrawn, and total cash plus committed available liquidity of approximately $13.5 billion. Management stated that the Company had sufficient liquidity and financial flexibility.
Dow issued $1.25 billion of senior unsecured green notes, consisting of $600 million due 2034 at 5.15% and $650 million due 2054 at 5.60%. Proceeds are intended for sustainability and circular-economy projects, including the Fort Saskatchewan Path2Zero project. The Company also issued $9 million of InterNotes and $122 million of foreign-currency loans, and repaid $63 million of long-term debt. No substantive long-term debt maturities are due until 2027.
Dow paid a $0.70-per-share dividend, repurchased $200 million of common stock, and had approximately $1.225 billion remaining under its $3 billion repurchase authorization at March 31, 2024.
Material changes versus the prior comparable period
- Sales fell 9% despite a 1% volume increase, with lower pricing across all operating segments and regions.
- Net income shifted from a $73 million consolidated loss to $538 million of net income; income available to Dow Inc. common stockholders shifted from a $93 million loss to $516 million of income.
- Operating EBIT declined 5%, although Operating EBITDA increased 3% due in part to higher depreciation and amortization.
- Operating cash flow declined 13%, while free cash flow became negative because of higher capital expenditures and working-capital usage.
- Equity earnings improved by $65 million, primarily due to improved Kuwait and Sadara joint-venture performance.
- Interest expense increased to $199 million from $185 million, reflecting additional borrowings and the new senior notes.
- Q1 2024 restructuring and asset-related charges totaled $45 million, compared with $541 million in Q1 2023. Q1 2024 significant items also included $46 million of restructuring implementation and efficiency costs, resulting in $91 million of pretax significant items excluded from Operating EBIT.
Guidance, outlook, risks and unusual items
Management stated that demand in key end markets, including packaging, mobility and energy, was trending sequentially higher and in line with expectations at the start of the year. Management expects long-term growth from organic investments and its Decarbonize & Growth and Transform the Waste strategies.
Full-year 2024 capital spending is expected to be approximately $3 billion, including the Fort Saskatchewan Path2Zero project. Spending on that project is expected to average approximately $1 billion annually through 2029, and enterprise-wide capital spending is expected to exceed depreciation and amortization through 2027 during the first phase.
The 2023 restructuring program is expected to be substantially complete by the end of 2024. Remaining restructuring reserve cash payments were $74 million at March 31, 2024, while additional implementation and efficiency expenditures of approximately $255 million were expected, primarily through 2024. Certain polyurethane assets are expected to be shut down by the end of 2025.
- Environmental remediation liabilities were $1.170 billion; ultimate costs for accrued matters could be approximately twice the recorded amount.
- Union Carbide asbestos-related liabilities were $844 million, including liabilities for pending and future claims.
- Legacy groundwater contamination settlement liabilities were $162 million at March 31, 2024.
- Guarantees had maximum future payments of $1.643 billion and recorded liabilities of $191 million. Dow also has significant guarantees related to Sadara financing, although management considers performance under the guarantees unlikely.
- Risks include cyclical demand, pricing and raw-material volatility, energy costs, global economic conditions, foreign exchange, geopolitical conflicts, supply disruptions, litigation and environmental matters, cybersecurity, regulatory developments, plastics-related public concerns, and execution of the Path2Zero project.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Assess whether improving volumes and end-market demand can offset continued pricing pressure.
- Verify the sustainability of the unusual $89 million tax credit and its effect on reported earnings and effective tax rates.
- Monitor net debt growth, interest expense and the funding requirements of the Path2Zero project.
- Evaluate whether capital spending and restructuring cash costs could prolong negative free cash flow.
- Track environmental, asbestos, groundwater and Sadara guarantee exposures, including potential outcomes above recorded reserves.
- Reconcile reported earnings with Operating EBIT, Operating EBITDA and other non-GAAP measures because significant items materially affected comparability.