DOW Inc.: Form 10-Q for the period ended Sep 30, 2023

This Quarterly Report on Form 10-Q is a combined report being filed by Dow Inc. and The Dow Chemical Company and its consolidated subsidiaries (“TDCC” and together with Dow Inc., “Dow” or the "Company") due to the parent/subsidiary relationship between Dow Inc. and TDCC. The information reflected in the report is equally applicable to both Dow Inc. and TDCC, except where otherwise noted. Each of Dow Inc. and TDCC is filing information in this report on its own behalf and neither company makes any representation to the information relating to the other company.

Pursuant to General Instruction H(1)(a) and (b) for Form 10-Q "Omission of Information by Certain Wholly-Owned Subsidiaries," TDCC is filing this Form 10-Q with a reduced disclosure format.

Except as otherwise indicated by the context, the term "Union Carbide" means Union Carbide Corporation and the term "Dow Silicones" means Dow Silicones Corporation, both wholly owned subsidiaries of the Company.

OUTLOOK

With the Company's continued focus on operational and financial discipline, Dow is navigating challenging market dynamics and expects to further benefit from rising oil prices that favor its cost-advantaged asset footprint. The Company remains committed to disciplined and balanced capital allocation priorities as it advances its Decarbonize and Grow and Transform the Waste strategies, which, by 2030, are expected to deliver more than $3 billion in underlying earnings, reduce greenhouse gas emissions by 5 million metric tons and commercialize 3 million metric tons of circular and renewable solutions annually.

OVERVIEW

The following is a summary of the results for the three months ended September 30, 2023:

• The Company reported net sales in the third quarter of 2023 of $10.7 billion, down 24 percent from $14.1 billion in the third quarter of 2022, with decreases across all operating segments and geographic regions; Packaging & Specialty Plastics (down 26 percent), Industrial Intermediates & Infrastructure (down 25 percent) and Performance Materials & Coatings (down 20 percent).
• Local price decreased 18 percent compared with the third quarter of 2022 with decreases across all operating segments and geographic regions; Packaging & Specialty Plastics (down 20 percent), Industrial Intermediates & Infrastructure (down 17 percent) and Performance Materials & Coatings (down 17 percent).
• Volume decreased 6 percent compared with the third quarter of 2022. Volume decreased in all operating segments; Packaging & Specialty Plastics (down 7 percent), Industrial Intermediates & Infrastructure (down 7 percent) and Performance Materials & Coatings (down 3 percent). Volume decreased in all geographic regions, except Latin America (up 4 percent).
• Currency impact on net sales was flat compared with the third quarter of 2022.
• Equity in losses of nonconsolidated affiliates was $7 million in the third quarter of 2023, compared with equity in losses of $58 million in the third quarter of 2022, due to improved results at all of the Company's principal joint ventures, led by Sadara.
• Net income available for Dow Inc. and TDCC common stockholder(s) was $302 million and $285 million, respectively, in the third quarter of 2023, compared with $739 million and $747 million, respectively, in the third quarter of 2022. Earnings per share for Dow Inc. was $0.42 in the third quarter of 2023, compared with $1.02 per share in the third quarter of 2022.
• Cash provided by operating activities - continuing operations was $1,658 million in the third quarter of 2023, down $282 million compared with the same period last year. Cash provided by operating activities - continuing operations was up $311 million compared with the second quarter of 2023.
• Dow Inc. repurchased $125 million of the Company's common stock in the third quarter of 2023.
• On July 14, 2023, an incident occurred that included an explosion and subsequent fire at Dow's Louisiana Operations Glycol-2 unit in Plaquemine, Louisiana. There were no injuries reported from the incident. The incident was limited to the Glycol-2 unit with minimal disruption to other site operations. The Company is finalizing a root cause investigation and is developing a plan to restore operations. The Company's estimated

impact on pretax earnings from the incident is $100 million per quarter. The Glycol-2 unit is currently expected to resume operations sometime in the second quarter of 2024.

• On August 9, 2023, Dow Inc. announced that its Board of Directors ("Board") declared a dividend of $0.70 per share, which was paid on September 8, 2023, to shareholders of record as of August 31, 2023.
• On August 22, 2023, Standard and Poor's affirmed TDCC's BBB and A-2 rating, and revised its outlook from positive to stable.

In addition, the following events occurred subsequent to the third quarter of 2023:

• On October 12, 2023, Dow Inc. announced that its Board declared a dividend of $0.70 per share, payable on December 8, 2023, to shareholders of record as of November 30, 2023.
• On October 24, 2023, the Company announced that Howard Ungerleider, president and chief financial officer, has elected to retire in January 2024 after 33 years of service with Dow. The Company also announced that Jeffrey L. Tate has been named chief financial officer effective November 1, 2023.

RESULTS OF OPERATIONS

Net Sales

The following tables summarize net sales and sales variances by operating segment and geographic region from the prior year:

In millions

Net sales in the third quarter of 2023 were $10.7 billion, down 24 percent from $14.1 billion in the third quarter of 2022, with local price down 18 percent, volume down 6 percent and currency flat. Net sales decreased in all operating segments and geographic regions, primarily driven by slower global macroeconomic activity. Local price decreased in Packaging & Specialty Plastics (down 20 percent), Industrial Intermediates & Infrastructure (down 17 percent), and Performance Materials & Coatings (down 17 percent), driven by lower global energy and feedstock costs. Volume decreased in all operating segments and geographic regions except Latin America (up 4 percent). Volume decreased in Packaging & Specialty Plastics (down 7 percent), Industrial Intermediates & Infrastructure (down 7 percent), and Performance Materials & Coatings (down 3 percent). Currency remained flat with an increase in EMEAI (up 1 percent) offset by a decrease in Asia Pacific (down 2 percent). Excluding the Hydrocarbons & Energy business, net sales decreased 20 percent.

Net sales for the first nine months of 2023 were $34.0 billion, down 25 percent from $45.0 billion in the same period last year, with local price down 16 percent, volume down 8 percent and an unfavorable currency impact of 1 percent. Net sales decreased in all operating segments and geographic regions, primarily driven by lower demand and prices due to slower global macroeconomic activity. Local price decreased in Packaging & Specialty Plastics (down 18 percent), Industrial Intermediates & Infrastructure (down 13 percent), and Performance Materials & Coatings (down 16 percent), driven by industry supply additions and lower global energy and feedstock costs. Volume decreased in all operating segments and geographic regions except Latin America (up 3 percent). Volume decreased in Packaging & Specialty Plastics (down 6 percent), Industrial Intermediates & Infrastructure (down 12 percent), and Performance Materials & Coatings (down 7 percent). Currency unfavorably impacted net sales by 1 percent, driven by EMEAI (down 1 percent) and Asia Pacific (down 2 percent). Excluding the Hydrocarbons & Energy business, net sales decreased 22 percent.

Cost of Sales

Cost of sales ("COS") was $9.6 billion in the third quarter of 2023, compared with $12.4 billion in the third quarter of 2022. For the first nine months of 2023, COS was $30.1 billion, compared with $37.7 billion in the first nine months of 2022. COS in the third quarter and for the first nine months of 2023 decreased primarily due to lower raw material costs on lower volume and lower global energy and feedstock costs. COS as a percentage of net sales was 89.4 percent in the third quarter of 2023 (87.7 percent in the third quarter of 2022) and 88.5 percent for the first nine months of 2023 (83.7 percent for the first nine months of 2022).

Research and Development Expenses

Research and development ("R&D") expenses totaled $197 million in the third quarter of 2023, compared with $191 million in the third quarter of 2022. R&D expenses for the first nine months of 2023 were $616 million, compared with $626 million in the first nine months of 2022. R&D expenses in the first nine months of 2023 decreased primarily due to lower performance-based compensation costs.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses totaled $380 million in the third quarter of 2023, compared with $356 million in the third quarter of 2022. SG&A expenses increased in the third quarter of 2023, primarily due to higher costs associated with the Company's restructuring implementation and efficiency actions. For the first nine months of 2023, SG&A expenses were $1,216 million, compared with $1,289 million in the first nine months of 2022. SG&A expenses in the first nine months of 2023 decreased primarily due to lower bad debt reserve write-offs, lower performance-based compensation costs and lower costs resulting from actions taken as part of the 2023 Restructuring Program, which more than offset increases in fringe benefit expenses tied to stock market changes and labor costs.

Amortization of Intangibles

Amortization of intangibles was $81 million in the third quarter of 2023, compared with $83 million in the third quarter of 2022. In the first nine months of 2023, amortization of intangibles was $243 million, compared with $256 million in the first nine months of 2022.

Restructuring and Asset Related Charges - Net

2023 Restructuring Program

On January 25, 2023, the Dow Inc. Board approved restructuring actions to achieve the Company's structural cost improvement initiatives in response to the continued economic impact from the global recessionary environment and to enhance its agility and long-term competitiveness across the economic cycle. As a result of these actions, in the first quarter of 2023 the Company recorded pretax restructuring charges of $541 million, consisting of severance and related benefit costs of $344 million and asset write-downs and write-offs of $197 million. Restructuring charges by segment were as follows: $1 million in Packaging & Specialty Plastics, $40 million in Industrial Intermediates & Infrastructure, $49 million in Performance Materials & Coatings and $451 million in Corporate. In the second quarter of 2023, the Company recorded additional pretax restructuring charges related to asset write-downs and write-offs of $8 million (related to Industrial Intermediates & Infrastructure). These actions are expected to be substantially complete by the end of 2024.

Asset Related Charges

In the first quarter of 2022, the Company recorded pretax asset related charges of $186 million due to the Russia and Ukraine conflict and the expectation that certain assets will not be recoverable. These charges included the write-down of inventory, the recording of bad debt reserves and the impairment of other assets. Asset related charges by segment were as follows: $31 million in Packaging & Specialty Plastics, $109 million in Industrial Intermediates & Infrastructure, $16 million in Performance Materials & Coatings and $30 million in Corporate.

Equity in Earnings (Losses) of Nonconsolidated Affiliates

The Company's share of equity in losses of nonconsolidated affiliates was $7 million in the third quarter of 2023, compared with equity in losses of nonconsolidated affiliates of $58 million in the third quarter of 2022, an increase of $51 million primarily due to higher volumes and lower feedstock costs at Sadara and improved performance at the Kuwait and Thai joint ventures. The Company's share of equity in losses of nonconsolidated affiliates was $112 million for the first nine months of 2023, compared with equity in earnings of nonconsolidated affiliates of $311 million for the first nine months of 2022, a decrease of $423 million primarily due to lower integrated polyethylene margins and equity losses at Sadara and the Kuwait joint ventures as a result of lower local prices and demand and planned maintenance turnaround activity. Cash dividends from nonconsolidated affiliates were $188 million in the first nine months of 2023, compared with $828 million in the first nine months of 2022.

Sundry Income (Expense) – Net

For the three months ended September 30, 2023, Sundry income (expense) - net was income of $92 million and $71 million for Dow Inc. and TDCC, respectively, compared with income of $69 million and $73 million, respectively, for the three months ended September 30, 2022. The third quarter of 2023 and 2022 included non-operating pension and postretirement benefit plan credits, which were partially offset by foreign currency exchange losses. The third quarter of 2022 also included gains on the sales of assets and investments.

For the nine months ended September 30, 2023, Sundry income (expense) - net was income of $202 million and $169 million for Dow Inc. and TDCC, respectively, compared with income of $292 million and $287 million, respectively, for the nine months ended September 30, 2022. The first nine months of 2023 and 2022 included non-operating pension and postretirement benefit plan credits and gains on the sales of assets and investments. These were partially offset by foreign currency exchange losses.

Interest Expense and Amortization of Debt Discount

Interest expense and amortization of debt discount was $192 million in the third quarter of 2023, compared with $155 million in the third quarter of 2022. Interest expense and amortization of debt discount was $549 million in the first nine months of 2023, compared with $487 million in the first nine months of 2022. The increase in interest expense is primarily due to $1.5 billion of senior unsecured notes issued in the fourth quarter of 2022 and local country borrowings outside the United States.

Provision for Income Taxes

The Company's effective tax rate fluctuates based on, among other factors, where income is earned, the level of income relative to tax attributes and the level of equity earnings, since most earnings from the Company's equity method investments are taxed at the joint venture level. In the third quarter of 2023, the Company reported a provision for income taxes of $90 million, resulting in an effective tax rate of 21.6 percent and 22.5 percent for Dow Inc. and TDCC, respectively. In the third quarter of 2022, Dow Inc. and TDCC reported a provision for income taxes of $241 million and $242 million, respectively, resulting in an effective tax rate of 24.1 percent and 24.0 percent, respectively. The third quarter of 2023 was favorably impacted by a change in reinvestment assertion on a foreign jurisdiction and an increase in tax credits available to the Company.

For the first nine months of 2023, Dow Inc. and TDCC reported a provision for income taxes of $253 million, resulting in an effective tax rate of 25.1 percent and 25.7 percent, respectively. For the first nine months of 2022, Dow Inc. and TDCC reported a provision for income taxes of $1,232 million and $1,233 million, respectively, resulting in an effective tax rate of 23.6 percent. The increase in the effective tax rate for the first nine months of 2023 compared with 2022 is primarily due to changes in the geographic mix of earnings.

Net Income Available for Common Stockholder(s)

Dow Inc.

Net income available for Dow Inc. common stockholders was $302 million, or $0.42 per share, in the third quarter of 2023, compared with $739 million, or $1.02 per share, in the third quarter of 2022. Net income available for Dow Inc. common stockholders was $694 million, or $0.97 per share, in the first nine months of 2023, compared with $3,969 million, or $5.41 per share, in the first nine months of 2022. See Note 6 to the Consolidated Financial Statements for details on Dow Inc.'s earnings per share calculations.

TDCC

Net income available for the TDCC common stockholder was $285 million in the third quarter of 2023, compared with $747 million in the third quarter of 2022. Net income available for the TDCC common stockholder was $672 million in the first nine months of 2023, compared with $3,975 million in the first nine months of 2022. TDCC's common shares are owned solely by Dow Inc.

SEGMENT RESULTS

For further discussion of the Company's segments, see Part I, Item 1. Business of the combined Dow Inc. and TDCC Annual Report on Form 10-K for the fiscal year ended December 31, 2022 ("2022 10-K"), filed with the SEC on February 1, 2023.

Dow’s measure of profit/loss for segment reporting purposes is Operating EBIT as this is the manner in which the Company's chief operating decision maker assesses performance and allocates resources. The Company defines Operating EBIT as earnings (i.e., "Income before income taxes") before interest, excluding the impact of significant items. Operating EBIT by segment includes all operating items relating to the businesses; items that principally apply to Dow as a whole are assigned to Corporate.

PACKAGING & SPECIALTY PLASTICS

In millions

Packaging & Specialty Plastics net sales were $5,454 million in the third quarter of 2023, down 26 percent from net sales of $7,327 million in the third quarter of 2022, with local price down 20 percent, volume down 7 percent and a favorable currency impact of 1 percent. Local price decreased in both businesses and across all geographic regions. Local price decreased in Hydrocarbons & Energy, primarily in EMEAI and the U.S. & Canada, as prices for co-products are generally correlated to Brent crude oil prices, which, on average, decreased 12 percent compared with the third quarter of 2022. Local price decreased in Packaging and Specialty Plastics in all geographic regions, driven by lower polyethylene and olefin prices, primarily due to lower global energy costs. Volume decreased in Hydrocarbons & Energy, primarily in EMEAI and the U.S. & Canada, driven by lower sales of olefins and aromatics. Volume increased in Packaging and Specialty Plastics primarily due to higher polyethylene demand across all regions.

Operating EBIT was $476 million in the third quarter of 2023, down $309 million from Operating EBIT of $785 million in the third quarter of 2022. Operating EBIT decreased primarily due to lower selling prices, reduced demand and increased planned maintenance activity, which were partially offset by lower raw material, energy and feedstock costs.

Packaging & Specialty Plastics net sales were $17,508 million in the first nine months of 2023, down 24 percent from net sales of $23,187 million in the first nine months of 2022, with local price down 18 percent, volume down 6 percent and currency flat. Local price decreased in both businesses and across all geographic regions. Local price decreased in Hydrocarbons & Energy, primarily in EMEAI and the U.S. & Canada, as prices for co-products are generally correlated to Brent crude oil prices, which, on average, decreased 20 percent compared with the first nine months of 2022. Local price decreased in Packaging and Specialty Plastics in all geographic regions primarily driven by lower polyethylene prices. Volume decreased in Hydrocarbons & Energy, driven by lower sales primarily in EMEAI and the U.S. & Canada. Volume decreased in Packaging and Specialty Plastics across all geographic regions, except Latin America.

Operating EBIT was $2,036 million in the first nine months of 2023, down $1,419 million from Operating EBIT of $3,455 million in the first nine months of 2022. Operating EBIT decreased primarily due to lower selling prices and reduced demand, which were partially offset by lower raw material, energy and feedstock costs.

INDUSTRIAL INTERMEDIATES & INFRASTRUCTURE

In millions

Industrial Intermediates & Infrastructure net sales were $3,035 million in the third quarter of 2023, down 25 percent from $4,059 million in the third quarter of 2022, with local price down 17 percent, volume down 7 percent and an unfavorable currency impact of 1 percent. Local price decreased in both businesses and across all geographic regions. Volume decreased in Polyurethanes & Construction Chemicals in all geographic regions, driven primarily by lower demand for consumer durables and building and construction. Volume decreased in Industrial Solutions in all geographic regions, driven by lower demand for industrial applications, coatings and agricultural applications. The unfavorable currency impact was driven by EMEAI and Asia Pacific.

Operating EBIT was $21 million in the third quarter of 2023, down $146 million from Operating EBIT of $167 million in the third quarter of 2022. Operating EBIT decreased primarily due to lower selling prices and demand.

Industrial Intermediates & Infrastructure net sales were $9,590 million in the first nine months of 2023, down 26 percent from net sales of $12,953 million in the first nine months of 2022, with local price down 13 percent, volume down 12 percent and an unfavorable currency impact of 1 percent. Local price decreased in both businesses and across all geographic regions. Volume in Polyurethanes & Construction Chemicals decreased in all geographic regions, primarily due to lower demand, particularly for consumer durables, building and construction and industrial applications. Volume in Industrial Solutions decreased in all geographic regions, driven by lower demand for industrial applications, coatings and agricultural applications. Currency had an unfavorable impact on sales, driven by EMEAI and Asia Pacific.

Operating EBIT was $109 million in the first nine months of 2023, down $1,145 million from Operating EBIT of $1,254 million in the first nine months of 2022. Operating EBIT decreased primarily due to lower selling prices and demand, and lower equity earnings at the EQUATE and Sadara joint ventures.

PERFORMANCE MATERIALS & COATINGS

In millions

Performance Materials & Coatings net sales were $2,130 million in the third quarter of 2023, down 20 percent from net sales of $2,654 million in the third quarter of 2022, with local price down 17 percent, volume down 3 percent and currency flat. Local price decreased in both businesses and across all geographic regions. Consumer Solutions local price decreased primarily due to unfavorable supply and demand dynamics in upstream siloxanes. Local price decreased in Coatings & Performance Monomers primarily in acrylic monomers and architectural coatings and was driven by lower raw material prices and unfavorable supply and demand dynamics. Volume decreased in Consumer Solutions in Latin America, EMEAI and Asia Pacific, partially offset by an increase in the U.S. & Canada, driven by lower demand for personal and home care and partially offset by higher demand for building and construction. Volume decreased in Coatings & Performance Monomers in Latin America and the U.S. & Canada, partially offset by an increase in EMEAI and Asia Pacific, driven by lower demand for coatings applications. Currency was flat as a favorable currency impact in EMEAI was offset by an unfavorable currency impact in Asia Pacific.

Operating EBIT was $179 million in the third quarter of 2023, down $123 million from Operating EBIT of $302 million in the third quarter of 2022. Operating EBIT decreased primarily due to lower selling prices, which were partially offset by lower raw material costs.

Performance Materials & Coatings net sales were $6,603 million in the first nine months of 2023, down 24 percent from net sales of $8,706 million in the first nine months of 2022, with local price down 16 percent, volume down 7 percent and an unfavorable currency impact of 1 percent. Local price decreased in both businesses and across all geographic regions. Consumer Solutions local price decreased primarily due to unfavorable supply and demand dynamics in upstream siloxanes. Local price decreased in Coatings & Performance Monomers primarily due to lower raw material prices in acrylic monomers and architectural coatings. Volume decreased in Consumer Solutions in EMEAI, the U.S. & Canada, and Latin America, and was flat in Asia Pacific, driven by lower demand for personal care and upstream siloxanes. Volume decreased in Coatings & Performance Monomers in all geographic regions driven by lower demand for coatings applications and building and construction. The unfavorable currency impact was driven by Asia Pacific.

Operating EBIT was $280 million in the first nine months of 2023, down $1,178 million from Operating EBIT of $1,458 million in the first nine months of 2022. Operating EBIT decreased primarily due to lower selling prices and lower demand in both businesses, which were partially offset by lower raw material costs.

CORPORATE

In millions

Net sales for Corporate, which primarily relate to the Company's insurance operations, were $111 million in the third quarter of 2023, an increase from net sales of $75 million in the third quarter of 2022. Net sales were $300 million in the first nine months of 2023, an increase from net sales of $197 million in the first nine months of 2022.

Operating EBIT was a loss of $50 million in the third quarter of 2023, compared with a loss of $59 million in the third quarter of 2022. Operating EBIT was a loss of $206 million in the first nine months of 2023, compared with a loss of $178 million in the first nine months of 2022. Operating EBIT declined in the first nine months of 2023 primarily due to increased environmental costs.

CHANGES IN FINANCIAL CONDITION

The Company had cash and cash equivalents of $3,080 million at September 30, 2023 and $3,886 million at December 31, 2022, of which $1,949 million at September 30, 2023 and $1,789 million at December 31, 2022 was held by subsidiaries in foreign countries, including U.S. territories. For each of its foreign subsidiaries, Dow makes an assertion regarding the amount of earnings intended for permanent reinvestment, with the balance available to be repatriated to the United States.

Cash held by foreign subsidiaries for permanent reinvestment is generally used to finance the subsidiaries' operational activities and future foreign investments. Dow has the ability to repatriate additional funds to the United States, which could result in an adjustment to the tax liability for foreign withholding taxes, foreign and/or U.S. state income taxes and the impact of foreign currency movements. At September 30, 2023, management believed that sufficient liquidity was available in the United States. The Company has and expects to continue repatriating certain funds from its non‑U.S. subsidiaries that are not needed to finance local operations; however, these particular repatriation activities have not and are not expected to result in a significant incremental tax liability to the Company.

The Company's cash flows from operating, investing and financing activities, as reflected in the consolidated statements of cash flows, are summarized in the following table:

In millions

42

Cash Flows from Operating Activities

Cash provided by operating activities from continuing operations in the first nine months of 2023 was primarily driven by the Company's cash earnings, cash provided by working capital and dividends from equity method investments, which were partially offset by performance-based compensation payments. Cash provided by operating activities from continuing operations in the first nine months of 2022 was primarily driven by the Company's cash earnings and dividends from equity method investments, which were partially offset by cash used for working capital requirements and performance-based compensation payments.

In millions

Cash provided by (used for) operating activities from discontinued operations in the first nine months of 2023 and 2022 was related to cash payments and receipts Dow Inc. had with DuPont and Corteva that related to certain agreements and matters related to the separation from DowDuPont Inc. ("DowDuPont").

Cash Flows from Investing Activities

Cash used for investing activities in the first nine months of 2023 and 2022 were primarily for capital expenditures and purchases of investments, which were partially offset by proceeds from sales and maturities of investments.

The Company's capital expenditures were $1,598 million in the first nine months of 2023, compared with $1,224 million in the first nine months of 2022. The Company expects full year capital spending in 2023 to be approximately $2.2 billion. The Company will adjust its spending as economic conditions evolve.

Cash Flows from Financing Activities

Cash used for financing activities in the first nine months of 2023 was primarily for debt related activities. In addition, Dow Inc. included cash outflows for dividends paid to stockholders and purchases of treasury stock. TDCC included cash outflows for dividends paid to Dow Inc. Cash used for financing activities in the first nine months of 2022 was primarily for payments on long-term debt. In addition, Dow Inc. included cash outflows for dividends paid to stockholders and purchases of treasury stock. TDCC included cash outflows for dividends paid to Dow Inc.

Dow Inc. Non-GAAP Cash Flow Measures

Free Cash Flow

Dow defines Free Cash Flow as "Cash provided by operating activities - continuing operations," less capital expenditures. Under this definition, Free Cash Flow represents the cash generated by Dow from operations after investing in its asset base. Free Cash Flow, combined with cash balances and other sources of liquidity, represents the cash available to fund obligations and provide returns to shareholders. Free Cash Flow is an integral financial measure used in the Company's financial planning process.

Operating EBITDA

Dow defines Operating EBITDA as earnings (i.e., "Income before income taxes") before interest, depreciation and amortization, excluding the impact of significant items.

Cash Flow Conversion (Operating EBITDA to Cash Flow from Operations)

Dow defines Cash Flow Conversion (Operating EBITDA to Cash Flow from Operations) as "Cash provided by operating activities - continuing operations," divided by Operating EBITDA. Management believes Cash Flow Conversion is an important financial metric as it helps the Company determine how efficiently it is converting its earnings into cash flow.

These financial measures are not recognized in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and should not be viewed as alternatives to GAAP financial measures of performance. All companies do not calculate non-GAAP financial measures in the same manner and, accordingly, Dow's definitions may not be consistent with the methodologies used by other companies.

In millions

In millions

1. The nine months ended September 30, 2023 includes restructuring charges and implementation and efficiency costs associated with the Company's 2023 Restructuring Program, certain gains and losses associated with previously impaired equity investments, a loss associated with legacy agricultural products groundwater contamination matters and activity related to the separation from DowDuPont. The nine months ended September 30, 2022 includes costs associated with implementing the Company's Digital Acceleration program and 2020 Restructuring Program, asset related charges due to the Russia and Ukraine conflict, a loss on early extinguishment of debt and activity related to the separation from DowDuPont. See Note 16 to the Consolidated Financial Statements for additional information.

Liquidity & Financial Flexibility

The Company’s primary source of incremental liquidity is cash flows from operating activities. The generation of cash from operations and the Company's ability to access capital markets is expected to meet the Company’s cash requirements for working capital, capital expenditures, debt maturities, contributions to pension plans, dividend distributions to stockholders, share repurchases and other needs. In addition to cash from operating activities, the Company’s current liquidity sources also include TDCC's U.S. and Euromarket commercial paper programs, committed and uncommitted credit facilities, committed accounts receivable facilities, a medium-term notes program, a U.S. retail note program (“InterNotes®”) and other debt markets.

The Company continues to maintain a strong financial position with all of its committed credit facilities undrawn and fully available at September 30, 2023. Cash and committed and available forms of liquidity were $12.9 billion at September 30, 2023. The Company also has no substantive long-term debt maturities due until 2027. As a well-known seasoned issuer the Company may issue debt at any time as an additional source of liquidity. Additional details on sources of liquidity are as follows:

Commercial Paper

TDCC issues promissory notes under its U.S. and Euromarket commercial paper programs. TDCC had no commercial paper outstanding at September 30, 2023. TDCC maintains access to the commercial paper market at competitive rates. Amounts outstanding under TDCC's commercial paper programs during the period may be greater, or less than, the amount reported at the end of the period. TDCC did not issue commercial paper subsequent to September 30, 2023.

Committed Credit Facilities

The Company also has the ability to access liquidity through TDCC's committed and available credit facilities. At September 30, 2023, TDCC had total committed and available credit facilities of $8.4 billion.

Uncommitted Credit Facilities

The Company has entered into various uncommitted bilateral credit arrangements as a potential source of excess liquidity. These lines can be used to support short-term liquidity needs and for general purposes. At September 30, 2023, TDCC had total uncommitted credit facilities of $960 million available.

Committed Accounts Receivable Facilities

In addition to the above committed credit facilities, the Company maintains a committed accounts receivable facility in the U.S. where eligible trade accounts receivable, up to $900 million, may be sold at any point in time. The Company also maintains a committed accounts receivable facility in Europe where eligible trade accounts receivable, up to €500 million, may be sold at any point in time. In the third quarter of 2023, there were no material sales of receivables under the U.S. and Europe committed accounts receivable facilities (no material sales of receivables in the first nine months of 2023).

Company-Owned Life Insurance

The Company has investments in company-owned life insurance ("COLI") policies, which are recorded at their cash surrender value as of each balance sheet date. The Company has the ability to monetize its investment in its COLI policies as an additional source of liquidity. The Company had no outstanding monetization of its existing COLI policies' surrender value at September 30, 2023.

Debt

As the Company continues to maintain its strong balance sheet and financial flexibility, management is focused on net debt (a non-GAAP financial measure), as the Company believes this is the best representation of its financial leverage at this point in time. As shown in the following table, net debt is equal to total gross debt minus "Cash and cash equivalents" and "Marketable securities."

In millions

1. Included in "Other current assets" in the consolidated balance sheets.

The Company may at any time repurchase certain debt securities in the open market or in privately negotiated transactions subject to: the applicable terms under which any such debt securities were issued, certain internal approvals of the Company, and applicable laws and regulations of the relevant jurisdiction in which any such potential transactions might take place. This in no way obligates the Company to make any such repurchases nor should it be considered an offer to do so.

TDCC's public debt instruments and primary, private credit agreements contain, among other provisions, certain customary restrictive covenant and default provisions. TDCC's most significant debt covenant with regard to its financial position is the obligation to maintain the ratio of its consolidated indebtedness to consolidated capitalization at no greater than 0.70 to 1.00 at any time the aggregate outstanding amount of loans under the Five Year Competitive Advance and Revolving Credit Facility Agreement ("Revolving Credit Agreement") equals or exceeds $500 million. The ratio of TDCC's consolidated indebtedness to consolidated capitalization as defined in the Revolving Credit Agreement was 0.40 to 1.00 at September 30, 2023. Management believes TDCC was in compliance with all of its covenants and default provisions at September 30, 2023. For information on TDCC's debt covenants and default provisions, see Note 14 to the Consolidated Financial Statements included in the 2022 10-K. There were no material changes to the debt covenants and default provisions related to TDCC’s outstanding long-term debt and primary, private credit agreements in the first nine months of 2023.

While taking into consideration the current economic environment, management expects that the Company will continue to have sufficient liquidity and financial flexibility to meet all of its business obligations.

Credit Ratings

At September 30, 2023, TDCC's credit ratings were as follows:

On June 15, 2023, Fitch Ratings affirmed TDCC’s BBB+ long-term credit rating and announced a short-term credit rating upgrade to F1 from F2, and also revised its long-term outlook from positive to stable. On August 22, 2023, Standard and Poor's affirmed TDCC's BBB and A-2 rating, and revised its outlook from positive to stable. These credit agencies' decisions were made as part of their annual review process and reflect the Company's supportive financial policies and strong operating performance.

Dividends

Dow Inc.

Dow Inc. has paid dividends on a quarterly basis since the separation from DowDuPont and expects to continue to do so, subject to approval by the Dow Inc. Board. Dividends declared by the Board align to the Company's strategy announced in 2018 of returning approximately 45 percent of Operating Net Income to shareholders through dividends and total shareholder remuneration of approximately 65 percent, when including share repurchases, over the economic cycle. The Company defines Operating Net Income, a non-GAAP measure, as "Net income available for Dow Inc. common stockholders," excluding the impact of significant items. The following table summarizes dividends declared and paid to common stockholders of record in 2023:

Dow Inc. Dividends Declared and Paid

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TDCC

TDCC has committed to fund Dow Inc.'s dividends paid to common stockholders and share repurchases, as approved by the Dow Inc. Board, as well as certain governance expenses. Funding is accomplished through intercompany loans. TDCC's Board reviews and determines a dividend distribution to Dow Inc. to settle the intercompany loans. For the three months ended September 30, 2023, TDCC declared and paid a dividend to Dow Inc. of $630 million ($2,008 million for the nine months ended September 30, 2023). At September 30, 2023, TDCC's intercompany loan balance with Dow Inc. was insignificant.

Share Repurchase Program

On April 13, 2022, the Dow Inc. Board approved a share repurchase program authorizing up to $3 billion for the repurchase of the Company's common stock, with no expiration date. The Company repurchased $125 million of its common stock in the third quarter of 2023 ($500 million in the first nine months of 2023). At September 30, 2023, approximately $1,550 million of the share repurchase program authorization remained available for repurchases. As previously announced, the Company intends to repurchase shares to cover dilution over the cycle. The Company may from time to time expand its share repurchases beyond dilution, based on a number of factors including macroeconomic conditions, free cash flow generation, and the Dow share price. Any share repurchases, when coupled with the Company's dividends, are intended to implement the long-term strategy of targeting shareholder remuneration of approximately 65 percent over the economic cycle.

Pension Plans

The Company has both funded and unfunded defined benefit pension plans that cover employees in the United States and a number of other countries. The Company's funding policy is to contribute to funded plans when pension laws and/or economics either require or encourage funding. In the second quarter of 2023, the Company received a pension asset reversion of approximately $90 million for a portion of the excess funding of one of its plans in Europe. This plan asset reversion is included in "Other assets and liabilities, net" in the consolidated statements of cash flows. The Company expects to pursue certain de-risking opportunities for its pension plans, including annuitization and risk transfer of certain pension liabilities. If executed, the transactions will result in a non-operating and non-cash settlement charge in the range of $500 million to $1 billion in the fourth quarter of 2023. See Note 12 to the Consolidated Financial Statements and Note 19 to the Consolidated Financial Statements included in the 2022 10-K for additional information related to the Company's pension plans.

Restructuring

The actions related to the 2023 Restructuring Program are expected to result in additional cash expenditures of $163 million, primarily through 2024, and consist of severance and related benefit costs. Restructuring implementation costs, primarily decommissioning and demolition activities related to asset actions, and costs associated with the Company's productivity and efficiency actions, are expected to result in additional cash expenditures of approximately $280 million, primarily through 2024. Restructuring implementation and efficiency costs totaled $82 million in the third quarter of 2023.

The Company expects to incur additional costs in the future related to its restructuring activities, which will be recognized as incurred. The Company also expects to incur additional employee-related costs, including involuntary termination benefits related to its other optimization activities. These costs cannot be reasonably estimated at this time. See Note 4 to the Consolidated Financial Statements for additional information on the Company's restructuring activities.

Contractual Obligations

Information related to the Company’s contractual obligations, commercial commitments and expected cash requirements for interest can be found in Notes 14, 15, 16 and 19 to the Consolidated Financial Statements included in the 2022 10-K. With the exception of the items noted below, there have been no material changes in the Company’s contractual obligations since December 31, 2022.

In millions

1. Excludes unamortized debt discount and issuance costs of $261 million. Includes finance lease obligations of $749 million.

2. Cash requirements for interest on long-term debt was calculated using current interest rates at September 30, 2023, and includes $145 million of various floating rate notes.

3. Includes outstanding purchase orders and other commitments greater than $1 million obtained through a survey conducted within the Company.

Fair Value Measurements

See Note 15 to the Consolidated Financial Statements for information concerning fair value measurements.

OTHER MATTERS

Critical Accounting Estimates

The preparation of financial statements and related disclosures in accordance with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1 to the Consolidated Financial Statements included in the 2022 10-K describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. The Company’s critical accounting policies that are impacted by judgments, assumptions and estimates are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2022 10-K. Since December 31, 2022, there have been no material changes in the Company’s accounting policies that are impacted by judgments, assumptions and estimates.

Asbestos-Related Matters of Union Carbide Corporation

Union Carbide is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past four decades. These suits principally allege personal injury resulting from exposure to asbestos‑containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide’s premises, and Union Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to Union Carbide’s products.

The table below provides information regarding asbestos-related claims pending against Union Carbide and Amchem based on criteria developed by Union Carbide and its external consultants:

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Plaintiffs’ lawyers often sue numerous defendants in individual lawsuits or on behalf of numerous claimants. As a result, the damages alleged are not expressly identified as to Union Carbide, Amchem or any other particular defendant, even when specific damages are alleged with respect to a specific disease or injury. For these reasons and based upon Union Carbide’s litigation and settlement experience, Union Carbide does not consider the damages alleged against Union Carbide and Amchem to be a meaningful factor in its determination of any potential asbestos-related liability.

For additional information, see Asbestos-Related Matters of Union Carbide Corporation in Note 8 to the Consolidated Financial Statements; Part II, Item 1. Legal Proceedings; and Note 15 to the Consolidated Financial Statements included in the 2022 10-K.

See Note 14 to the Consolidated Financial Statements and Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk in the combined Dow Inc. and TDCC Annual Report on Form 10-K for the year ended December 31, 2022, for information on the Company's utilization of financial instruments and an analysis of the sensitivity of these instruments.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, Dow Inc. and The Dow Chemical Company (the "Companies") carried out an evaluation, under the supervision and with the participation of the Companies' Disclosure Committee and the Companies' management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Companies' disclosure controls and procedures pursuant to paragraph (b) of Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Companies' disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There were no changes in the Companies' internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 and 15d-15 that was conducted during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Companies' internal control over financial reporting.

Dow Inc. and Subsidiaries The Dow Chemical Company and Subsidiaries PART II – OTHER INFORMATION