Exhibit 99.2
Separation of the Materials Science Business
Effective August 31, 2017, pursuant to the merger of equals transaction contemplated by the Agreement and Plan of Merger, dated as of December 11, 2015, as amended on March 31, 2017, The Dow Chemical Company (“TDCC”) and its consolidated subsidiaries (“Historical Dow”) and E. I. du Pont de Nemours and Company and its consolidated subsidiaries (“Historical DuPont”) each merged with subsidiaries of DowDuPont Inc. (“DowDuPont”) and, as a result, Historical Dow and Historical DuPont became subsidiaries of DowDuPont (the “Merger”). Subsequent to the Merger, Historical Dow and Historical DuPont engaged in a series of internal reorganization and realignment steps (the “Internal Reorganization and Business Realignment”) to realign their businesses into three subgroups: agriculture, materials science and specialty products. Dow Inc. (“Dow”), was formed as a wholly owned subsidiary of DowDuPont to serve as the holding company for the materials science business, which includes DowDuPont’s former Performance Materials & Coatings, Industrial Intermediates & Infrastructure and Packaging & Specialty Plastics segments. In addition, as a result of the Internal Reorganization and Business Realignment, TDCC became a wholly owned subsidiary of Dow.
On April 1, 2019, DowDuPont completed the previously announced separation of its materials science business. The separation was effected by way of a pro rata distribution of all of the then-issued and outstanding shares of Dow common stock to DowDuPont stockholders of record as of the close of business, Eastern Time, on March 21, 2019 (the “Record Date”). The shareholders of record of DowDuPont received one share of Dow common stock, par value $0.01 per share, for every three shares of DowDuPont’s common stock, par value $0.01 per share, held as of the Record Date. No fractional shares of Dow common stock were issued. Instead, cash in lieu of any fractional shares will be paid to DowDuPont shareholders. Dow is now an independent, publicly traded company and Dow common stock is listed on the New York Stock Exchange under the symbol “DOW.”
As of the effective date and time of the distribution, DowDuPont does not beneficially own any equity interest in Dow and will no longer consolidate Dow and its consolidated subsidiaries into its financial results. Beginning in the second quarter of 2019, Dow’s consolidated financial results, prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), will reflect the results of Dow and its consolidated subsidiaries—that is, Historical Dow after giving effect to the distribution of Historical Dow’s agricultural sciences business (“Dow AgCo”) and Historical Dow’s specialty products business (“Dow SpecCo”) and the receipt of Historical DuPont’s ethylene and ethylene copolymers businesses (other than its ethylene acrylic elastomers business) (“ECP”). The U.S. GAAP consolidated financial results of Dow for periods prior to April 1, 2019 will reflect the distribution of Dow AgCo and Dow SpecCo as discontinued operations for each period presented as well as reflect the receipt of ECP as a common control transaction from the closing of the Merger on August 31, 2017.
Unaudited Pro Forma Combined Financial Information
The following unaudited pro forma combined financial information (the “pro forma financial statements”) present the consolidated financial statements of Historical Dow after giving effect to the distribution of Dow AgCo and Dow SpecCo (see the column titled Total—Continuing Operations). Unaudited pro forma financial information that gives effect to the receipt of ECP is also being voluntarily furnished in the unaudited pro forma financial statements to conform to the presentation of the unaudited pro forma combined financial information contained in Dow’s Registration Statement on Form 10 that was filed with the U.S. Securities and Exchange Commission (“SEC”) in connection with the separation. Information in the unaudited pro forma combined financial statements is presented as follows:
| • | The unaudited pro forma combined balance sheet as of December 31, 2018 (the “pro forma balance sheet”) was prepared based on (i) the consolidated balance sheet of Historical Dow as of December 31, 2018, (ii) the distribution of Dow AgCo and Dow SpecCo as if they had been consummated on December 31, 2018, and (iii) the receipt of ECP as if it had been consummated on December 31, 2018. |
| • | The unaudited pro forma combined statements of income (the “pro forma statements of income”) for all periods presented were prepared based on (i) the consolidated statements of income of Historical Dow for such periods, (ii) the distribution of Dow AgCo and Dow SpecCo for such periods, and (iii) the receipt of ECP as if it had been consummated on January 1, 2017. |
The pro forma financial statements should be read in conjunction with the accompanying notes to the pro forma financial statements. In addition, the pro forma financial statements were based on and should be read in conjunction with the audited consolidated financial statements of Historical Dow and the accompanying notes thereto included in TDCC’s Annual Report on Form10-K for the year ended December 31, 2018, filed with the SEC on February 11, 2019.
The pro forma financial statements, which were prepared in accordance with Article 11 of RegulationS-X, have been presented for informational purposes only and are not necessarily indicative of what Dow’s financial position or results of operations actually would have been had the Merger, Internal Reorganization and Business Realignment, separation, distribution and other related transactions been completed as of the dates indicated above. In addition, the pro forma financial statements do not purport to project the future financial position or results of operations of Dow.
Pro forma adjustments to historical financial information are subject to assumptions described in the accompanying notes. Management believes that these assumptions and adjustments are reasonable and appropriate under the circumstances and are factually supported based on information currently available. The unaudited pro forma financial information set forth below primarily gives effect to the following:
| • | the distribution of Dow AgCo and Dow SpecCo; |
| • | the receipt of ECP; |
| • | the reclassification of transactions between Dow and Dow AgCo and Dow SpecCo from intercompany transactions to trade transactions; |
| • | the reclassification of transactions between Dow and ECP from related party transactions (included in “Net sales”) to intercompany transactions; |
| • | the 2017 impact of a consummated divestiture agreed to with the European Commission (“EC”) as a condition of approval for the Merger; |
| • | the impact of various manufacturing, supply and service related agreements Dow and/or certain of its subsidiaries have entered into with DowDuPont and Corteva, Inc. (“Corteva”) in connection with the separation. These agreements provide for different pricing than the historical intercompany and intracompany practices of Historical Dow and Historical DuPont (for 2018 only); |
| • | the impact of certainone-time costs related to the Merger, Internal Reorganization and Business Realignment, separation, distribution and other related transactions; and |
| • | a cash contribution from DowDuPont in connection with the separation. |
As a result of discontinued operations accounting treatment, the pro forma financial statements include $360 million, $435 million and $383 million for the years ended December 31, 2018, 2017 and 2016, respectively, of costs previously assigned to Dow AgCo and Dow SpecCo that did not meet the definition of discontinued operations in accordance with Accounting Standards Codification (“ASC”)205-20 “Discontinued Operations” (“ASC205-20”). These costs primarily consist of leveraged services that are provided through service centers as well as other corporate overhead costs that will not continue to be utilized by Dow AgCo or Dow SpecCo following the separation and distribution, such as costs related to information technology, finance, manufacturing, research and development, sales and marketing, supply chain, human resources, sourcing and logistics, legal, and communications, public affairs and government affairs functions. Dow expects to significantly reduce these costs in the future as part of its ongoing cost synergy and stranded cost reduction programs and efforts to further integrate and optimize its post-spin organization. Dow anticipates that a significant portion of the cost reductions will be achieved through reductions in headcount as well as reduced information technology costs, lower professional fees and contractor services expenses, corporate facilities and office space reductions, and the rightsizing of other corporate activities. Dow management currently expects, based on identified initiatives and available mitigation actions, that Dow will be able to eliminate approximately $300 million of these stranded costs, and continues to work to identify further actions to remove the remaining costs from Dow’s cost structure.
One-time transaction-related costs incurred prior to, or concurrent with, the closing of the Merger and the distribution and receipt transactions are not included in the pro forma statements of income. The pro forma financial statements do not reflect restructuring or integration activities or other costs following the separation, distribution and receipt transactions that may be incurred to achieve cost or growth synergies of Dow. As no assurance can be made that these costs will be incurred or the growth synergies will be achieved, no adjustment has been made.
Dow will incur certain nonrecurring third-party costs related to the separation, distribution and receipt transactions. Such nonrecurring amounts will include financial advisory, information technology, legal, accounting, consulting and other professional advisory fees and other transaction-related costs that will not be capitalized. The pro forma statements of income do not reflect these nonrecurring expenses.
For additional information on the separation of the materials science business, refer to Amendment No. 4 to the Registration Statement on Form 10 filed by Dow with the SEC on March 8, 2019, and Dow’s other filings with the SEC.
Dow
Unaudited Pro Forma Combined Balance Sheet
As of December 31, 2018
| In millions | Historical Dow | Distribution of Dow AgCo and Dow SpecCo | Total - Continuing Operations | Receipt of ECP | Pro Forma Adjustments | Note 2 Ref. | Dow Pro Forma | |||||||||||||||||||
Assets | ||||||||||||||||||||||||||
Current Assets | ||||||||||||||||||||||||||
Cash and cash equivalents | $ | 2,669 | $ | — | $ | 2,669 | $ | 55 | $ | 2,024 | A | $ | 4,748 | |||||||||||||
Marketable securities | 100 | — | 100 | — | — | 100 | ||||||||||||||||||||
Accounts and notes receivable: | ||||||||||||||||||||||||||
Trade, net | 8,246 | (2,768 | ) | 5,478 | 194 | — | 5,672 | |||||||||||||||||||
Other | 4,136 | (773 | ) | 3,363 | — | 63 | B | 3,426 | ||||||||||||||||||
Inventories | 9,260 | (2,826 | ) | 6,434 | 465 | — | 6,899 | |||||||||||||||||||
Other current assets | 852 | (151 | ) | 701 | 12 | — | 713 | |||||||||||||||||||
Total current assets | 25,263 | (6,518 | ) | 18,745 | 726 | 2,087 | 21,558 | |||||||||||||||||||
Investments | ||||||||||||||||||||||||||
Investment in nonconsolidated affiliates | 3,823 | (616 | ) | 3,207 | 108 | — | 3,315 | |||||||||||||||||||
Other investments | 2,648 | (2 | ) | 2,646 | — | — | 2,646 | |||||||||||||||||||
Noncurrent receivables | 394 | (36 | ) | 358 | — | — | 358 | |||||||||||||||||||
Total investments | 6,865 | (654 | ) | 6,211 | 108 | — | 6,319 | |||||||||||||||||||
Property | ||||||||||||||||||||||||||
Property | 61,437 | (8,368 | ) | 53,069 | 915 | — | 53,984 | |||||||||||||||||||
Less accumulated depreciation | 37,775 | (5,353 | ) | 32,422 | 145 | — | 32,567 | |||||||||||||||||||
Net property | 23,662 | (3,015 | ) | 20,647 | 770 | — | 21,417 | |||||||||||||||||||
Other Assets | ||||||||||||||||||||||||||
Goodwill | 13,848 | (7,590 | ) | 6,258 | 3,587 | — | 9,845 | |||||||||||||||||||
Other intangible assets | 4,913 | (1,830 | ) | 3,083 | 1,143 | — | 4,226 | |||||||||||||||||||
Deferred income tax assets | 2,031 | (234 | ) | 1,797 | 13 | 378 | C | 2,188 | ||||||||||||||||||
Deferred charges and other assets | 796 | (61 | ) | 735 | 1 | — | 736 | |||||||||||||||||||
Total other assets | 21,588 | (9,715 | ) | 11,873 | 4,744 | 378 | 16,995 | |||||||||||||||||||
Total Assets | $ | 77,378 | $ | (19,902 | ) | $ | 57,476 | $ | 6,348 | $ | 2,465 | $ | 66,289 | |||||||||||||
Liabilities and Equity | ||||||||||||||||||||||||||
Current Liabilities | ||||||||||||||||||||||||||
Notes payable | $ | 305 | $ | (7 | ) | $ | 298 | $ | — | $ | — | $ | 298 | |||||||||||||
Long-term debt due within one year | 340 | (4 | ) | 336 | 2 | — | 338 | |||||||||||||||||||
Accounts payable: | ||||||||||||||||||||||||||
Trade | 5,378 | (1,118 | ) | 4,260 | 214 | — | 4,474 | |||||||||||||||||||
Other | 3,330 | (869 | ) | 2,461 | — | — | 2,461 | |||||||||||||||||||
Income taxes payable | 791 | (234 | ) | 557 | — | — | 557 | |||||||||||||||||||
Accrued and other current liabilities | 3,611 | (715 | ) | 2,896 | 36 | — | 2,932 | |||||||||||||||||||
Total current liabilities | 13,755 | (2,947 | ) | 10,808 | 252 | — | 11,060 | |||||||||||||||||||
Long-Term Debt | 19,254 | (5 | ) | 19,249 | 4 | — | 19,253 | |||||||||||||||||||
Other Noncurrent Liabilities | ||||||||||||||||||||||||||
Deferred income tax liabilities | 664 | (568 | ) | 96 | 432 | 378 | C | 906 | ||||||||||||||||||
Pension and other postretirement benefits - noncurrent | 9,226 | (292 | ) | 8,934 | 6 | — | 8,940 | |||||||||||||||||||
Asbestos-related liabilities - noncurrent | 1,142 | — | 1,142 | — | — | 1,142 | ||||||||||||||||||||
Other noncurrent obligations | 5,368 | (661 | ) | 4,707 | 2 | — | 4,709 | |||||||||||||||||||
Total other noncurrent liabilities | 16,400 | (1,521 | ) | 14,879 | 440 | 378 | 15,697 | |||||||||||||||||||
Stockholders’ Equity | ||||||||||||||||||||||||||
Common stock | — | — | — | — | — | — | ||||||||||||||||||||
Additionalpaid-in capital | 7,042 | — | 7,042 | — | 2,087 | A/B | 9,129 | |||||||||||||||||||
Retained earnings | 29,808 | (15,975 | ) | 13,833 | 5,652 | — | 19,485 | |||||||||||||||||||
Accumulated other comprehensive loss | (9,885 | ) | 815 | (9,070 | ) | — | — | (9,070 | ) | |||||||||||||||||
Unearned ESOP shares | (134 | ) | — | (134 | ) | — | — | (134 | ) | |||||||||||||||||
Dow stockholders’ equity | 26,831 | (15,160 | ) | 11,671 | 5,652 | 2,087 | 19,410 | |||||||||||||||||||
Noncontrolling interests | 1,138 | (269 | ) | 869 | — | — | 869 | |||||||||||||||||||
Total equity | 27,969 | (15,429 | ) | 12,540 | 5,652 | 2,087 | 20,279 | |||||||||||||||||||
Total Liabilities and Equity | $ | 77,378 | $ | (19,902 | ) | $ | 57,476 | $ | 6,348 | $ | 2,465 | $ | 66,289 | |||||||||||||
See Notes to the Unaudited Pro Forma Combined Financial Statements.
Dow
Unaudited Pro Forma Combined Statement of Income
For the Year Ended December 31, 2018
| In millions, except per share amounts | Historical Dow | Distribution of Dow AgCo and Dow SpecCo | Total - Continuing Operations | Receipt of ECP | Pro Forma Adjustments | Note 3 Ref. | Dow Pro Forma | |||||||
Net sales | $60,278 | $(12,428) | $47,850 | $1,694 | $308 | B/C/G | $49,852 | |||||||
Cost of sales | 47,705 | (7,909) | 39,796 | 1,212 | 262 | B/C/G | 41,270 | |||||||
Research and development expenses | 1,536 | (761) | 775 | 23 | — | 798 | ||||||||
Selling, general and administrative expenses | 2,846 | (1,108) | 1,738 | 43 | — | 1,781 | ||||||||
Amortization of intangibles | 622 | (249) | 373 | 96 | — | 469 | ||||||||
Restructuring and asset related charges - net | 620 | (411) | 209 | 12 | (23) | A | 198 | |||||||
Integration and separation costs | 1,044 | — | 1,044 | 135 | (105) | A | 1,074 | |||||||
Equity in earnings of nonconsolidated affiliates | 950 | (400) | 550 | 5 | — | 555 | ||||||||
Sundry income (expense) - net | 181 | (13) | 168 | 8 | — | 176 | ||||||||
Interest expense and amortization of debt discount | 1,118 | (56) | 1,062 | — | — | 1,062 | ||||||||
Income before income taxes | 5,918 | (2,347) | 3,571 | 186 | 174 | 3,931 | ||||||||
Provision for income taxes | 1,285 | (512) | 773 | 35 | 39 | H | 847 | |||||||
Net income | 4,633 | (1,835) | 2,798 | 151 | 135 | 3,084 | ||||||||
Net income attributable to noncontrolling interests | 134 | (32) | 102 | — | — | 102 | ||||||||
Net income available for Dow common stockholder | $4,499 | $(1,803) | $2,696 | $151 | $135 | $2,982 | ||||||||
Unaudited pro forma earnings per common share: | ||||||||||||||
Basic | $3.99 | |||||||||||||
Diluted | $3.99 | |||||||||||||
Average number of shares used in calculating unaudited pro forma earnings per common share: | ||||||||||||||
Basic | I | 747.2 | ||||||||||||
Diluted | I | 747.2 | ||||||||||||
See Notes to the Unaudited Pro Forma Combined Financial Statements.
Dow
Unaudited Pro Forma Combined Statement of Income
For the Year Ended December 31, 2017
| In millions, except per share amounts | Historical Dow | Distribution of Dow AgCo and Dow SpecCo | Total - Continuing Operations | Receipt of ECP | Pro Forma Adjustments | Note 3 Ref. | Dow Pro Forma | |||||||
Net sales | $55,508 | $(12,558) | $42,950 | $1,727 | $95 | B/D/G | $44,772 | |||||||
Cost of sales | 43,612 | (7,990) | 35,622 | 1,244 | (153) | A/B/D /E/F/G | 36,713 | |||||||
Research and development expenses | 1,648 | (854) | 794 | 23 | 1 | F | 818 | |||||||
Selling, general and administrative expenses | 2,920 | (1,143) | 1,777 | 60 | (4) | A | 1,833 | |||||||
Amortization of intangibles | 624 | (255) | 369 | 32 | 64 | F | 465 | |||||||
Restructuring, goodwill impairment and | 3,100 | (376) | 2,724 | 18 | — | 2,742 | ||||||||
Integration and separation costs | 786 | (18) | 768 | 98 | (150) | A | 716 | |||||||
Equity in earnings of nonconsolidated affiliates | 762 | (372) | 390 | 8 | — | 398 | ||||||||
Sundry income (expense) - net | 195 | (285) | (90) | 18 | 460 | A/D | 388 | |||||||
Interest expense and amortization of debt discount | 976 | (61) | 915 | — | — | 915 | ||||||||
Income before income taxes | 2,799 | (2,518) | 281 | 278 | 797 | 1,356 | ||||||||
Provision for income taxes | 2,204 | (636) | 1,568 | 64 | 295 | H | 1,927 | |||||||
Net income (loss) | 595 | (1,882) | (1,287) | 214 | 502 | (571) | ||||||||
Net income attributable to noncontrolling interests | 129 | (28) | 101 | — | — | 101 | ||||||||
Net income (loss) available for Dow common stockholder | $466 | $(1,854) | $(1,388) | $214 | $502 | $(672) | ||||||||
Unaudited pro forma loss per common share: | ||||||||||||||
Basic | $(0.91) | |||||||||||||
Diluted | $(0.91) | |||||||||||||
Average number of shares used in calculating unaudited pro forma loss per common share: | ||||||||||||||
Basic | I | 744.8 | ||||||||||||
Diluted | I | 744.8 | ||||||||||||
See Notes to the Unaudited Pro Forma Combined Financial Statements.
Dow
Unaudited Pro Forma Combined Statement of Income
For the Year Ended December 31, 2016
| In millions, except per share amounts | Historical Dow | Distribution of Dow AgCo and Dow SpecCo | Total - Continuing Operations | |||||||||
Net sales | $ | 48,158 | $ | (11,897 | ) | $ | 36,261 | |||||
Cost of sales | 37,668 | (7,614 | ) | 30,054 | ||||||||
Research and development expenses | 1,593 | (848 | ) | 745 | ||||||||
Selling, general and administrative expenses | 2,953 | (1,152 | ) | 1,801 | ||||||||
Amortization of intangibles | 544 | (228 | ) | 316 | ||||||||
Restructuring and asset related charges - net | 595 | (16 | ) | 579 | ||||||||
Integration and separation costs | 349 | — | 349 | |||||||||
Asbestos-related charge | 1,113 | — | 1,113 | |||||||||
Equity in earnings of nonconsolidated affiliates | 442 | (254 | ) | 188 | ||||||||
Sundry income (expense) - net | 1,486 | (893 | ) | 593 | ||||||||
Interest expense and amortization of debt discount | 858 | (31 | ) | 827 | ||||||||
Income before income taxes | 4,413 | (3,155 | ) | 1,258 | ||||||||
Provision (credit) for income taxes | 9 | (226 | ) | (217 | ) | |||||||
Net income | 4,404 | (2,929 | ) | 1,475 | ||||||||
Net income attributable to noncontrolling interests | 86 | (33 | ) | 53 | ||||||||
Net income attributable to Dow | 4,318 | (2,896 | ) | 1,422 | ||||||||
Preferred stock dividends | 340 | — | 340 | |||||||||
Net income available for Dow common stockholder | $ | 3,978 | $ | (2,896 | ) | $ | 1,082 | |||||
Unaudited pro forma earnings per common share: | ||||||||||||
Basic | $ | 3.57 | $ | 1.57 | ||||||||
Diluted | $ | 3.52 | $ | 1.55 | ||||||||
Average number of shares used in calculating unaudited pro forma earnings per common share: | ||||||||||||
Basic | 1,108.1 | 681.6 | ||||||||||
Diluted | 1,123.2 | 690.9 | ||||||||||
See Notes to the Unaudited Pro Forma Combined Financial Statements.
Dow
Notes to Unaudited Pro Forma Combined Financial Statements
1. Basis of Pro Forma Presentation
The accompanying unaudited pro forma financial statements for Dow were prepared in accordance with Article 11 of RegulationS-X and are based on the consolidated financial information of Historical Dow. The consolidated financial information has been adjusted in the accompanying pro forma financial statements to give effect to pro forma events that are (i) directly attributable to the Merger, Internal Reorganization and Business Realignment, separation, distribution and other related transactions, (ii) factually supportable, and (iii) with respect to the pro forma statements of income, expected to have a continuing impact on the consolidated results.
Dow will account for the separation and distribution of Dow AgCo and Dow SpecCo and Dow’s receipt of ECP as transactions between entities under common control of their parent company, DowDuPont. Dow AgCo and Dow SpecCo are presented as discontinued operations upon distribution based on the guidance in ASC205-20. Discontinued operations presentation involves removing the results of the discontinued businesses from the financial statements on aline-by-line basis and presenting the net results as “Income (Loss) from discontinued operations, net of tax.” Since the distribution of Dow AgCo and Dow SpecCo are not reflected in the consolidated financial statements of Historical Dow, those transactions will be reflected for the purpose of pro forma financial statements.
The pro forma financial statements include unaudited pro forma financial information that gives effect to the receipt of ECP as if it had been consummated on January 1, 2017, which has been voluntarily furnished in this filing. The U.S. GAAP financial statements will reflect the receipt of ECP as a common control transaction from the closing of the Merger on August 31, 2017.
The presentation of the distribution of Dow AgCo and Dow SpecCo and the receipt of ECP represents management’s best estimate of Dow’s retrospectively adjusted historical financial statements. Actual results could differ from these estimates.
2. Adjustments to the Pro Forma Combined Balance Sheet
Explanations of the adjustments to the pro forma combined balance sheet are as follows:
| A. | Reflects the cash contribution from DowDuPont of $2,024 million. |
| B. | Reflects a $63 million receivable from Corteva related to an indemnification. |
| C. | Reflects a $378 million impact on deferred tax assets and deferred tax liabilities from jurisdictional netting. |
3. Adjustments to the Pro Forma Combined Statements of Income
Explanations of the adjustments to the pro forma statements of income are as follows:
| A. | Represents the elimination ofone-time transaction costs directly attributable to the Merger and distribution transactions of $128 million for the year ended December 31, 2018 and $1,042 million for the year ended December 31, 2017. |
These amounts include financial advisory fees, outside legal, accounting and professional consultancy fees, and other transaction-related costs ($105 million for the year ended December 31, 2018 and $150 million for the year ended December 31, 2017). In addition, the values include costs related to change in control provisions that were triggered in connection with the Merger, as described below.
The provisions of a U.S.non-qualified pension plan required the payment of plan obligations to certain participants upon a change in control of Historical Dow, which occurred at the time of the Merger. Certain participants could elect to receive alump-sum payment or could direct Historical Dow to purchase an annuity on their behalf using theafter-tax proceeds of the lump sum. In addition to thislump-sum amount, Historical Dow also paid $205 million for income and payroll taxes for participants electing the annuity option, of which $201 million was included in “Cost of sales” and $4 million was included in “Selling, general and administrative expenses.” Historical Dow recorded a settlement charge of $687 million associated with the payout, which was included in “Sundry income (expense) - net” for the year ended December 31, 2017.
Historical Dow also incurred severance of $23 million for the year ended December 31, 2018 under certain employee agreements due to a change in control of Historical Dow that occurred at the time of the Merger.
| B. | Reflects the reclassification of $238 million for the year ended December 31, 2018 and $218 million for the year ended December 31, 2017 of Historical Dow’s sale of certain products to Dow AgCo and Dow SpecCo, under various manufacturing, supply and service related agreements. Prior to the separation and distribution, Historical Dow sold these products to Dow AgCo and Dow SpecCo on an intracompany or intercompany basis. Pursuant to the terms of the agreements, after the distribution Dow will reflect the sale of these products as trade sales in its consolidated statements of income. |
| C. | Reflects the margin impact of the various manufacturing, supply and service related agreements included in Note B above, that Dow and/or certain of its subsidiaries have entered into with DowDuPont and Corteva in connection with the separation. These new agreements provide for different pricing than the historical intercompany and intracompany pricing practices of Historical Dow and Historical DuPont. As a result, “Net sales” increased by $171 million and “Cost of sales” increased by $125 million for the year ended December 31, 2018. |
| D. | As a condition of the EC’s regulatory approval of the Merger, Historical Dow divested its global Ethylene Acrylic Acid (“EAA”) copolymers and ionomers business to SK Global Chemical Co., Ltd. (collectively, the “Dow Divested Assets”) on September 1, 2017. The pro forma statement of income gives effect to the elimination of “Net sales” ($90 million), “Cost of sales” ($59 million) and “Sundry income (expense) - net” (pretax gain of $227 million) related to the Dow Divested Assets for the year ended December 31, 2017. |
| E. | Reflects the removal of “Cost of sales” of $120 million for the year ended December 31, 2017 related to the amortization of ECP’s inventorystep-up recognized in connection with the Merger. |
| F. | Reflects additional depreciation of $43 million ($42 million in “Cost of sales” and $1 million in “Research and development expenses”) and additional amortization of intangibles of $64 million for the period January 1, 2017 - August 31, 2017 related to thestep-up in basis of property and intangibles assets in connection with the Merger. |
| G. | Reflects the elimination of sales between Dow and ECP of $101 million for the year ended December 31, 2018 and $33 million for the year ended December 31, 2017 that will be treated as intercompany sales after the receipt of ECP. |
| H. | Represents the income tax effect of the pro forma adjustments related to the transactions calculated using statutory tax rates by jurisdiction, resulting in a tax rate of 22.5 percent in 2018 and 37.5 percent in 2017. Management believes the tax rate provides a reasonable basis for the pro forma adjustments, however, the effective tax rate of Dow could be significantly different depending on the mix of activities. |
| I. | As of the distribution date, Historical Dow equity was exchanged to reflect the distribution of shares of Dow common stock to DowDuPont stockholders at a distribution ratio of one share of Dow common stock for every three shares of DowDuPont common stock. See Note 4 for detailed calculations. |
The following table summarizes pro forma adjustments for “Net sales,” “Cost of sales” and “Sundry income (expense) - net” and provides a reconciliation of such amounts to the total amount appearing in the column titled “Pro Forma Adjustments” in the pro forma income statements for the years ended December 31, 2018 and 2017:
| In millions | Note Ref. | Dec 31, 2018 | Dec 31, 2017 | |||||||||
Net sales | ||||||||||||
| B | $ | 238 | $ | 218 | ||||||||
| C | 171 | — | ||||||||||
| D | — | (90 | ) | |||||||||
| G | (101 | ) | (33 | ) | ||||||||
Total net sales | $ | 308 | $ | 95 | ||||||||
Cost of sales | ||||||||||||
| A | $ | — | $ | (201 | ) | |||||||
| B | 238 | 218 | ||||||||||
| C | 125 | — | ||||||||||
| D | — | (59 | ) | |||||||||
| E | — | (120 | ) | |||||||||
| F | — | 42 | ||||||||||
| G | (101 | ) | (33 | ) | ||||||||
Total cost of sales | $ | 262 | $ | (153 | ) | |||||||
Sundry income (expense) - net | ||||||||||||
| A | $ | — | $ | 687 | ||||||||
| D | — | (227 | ) | |||||||||
Total sundry income (expense) - net | $ | — | $ | 460 | ||||||||
4. Earnings (Loss) Per Share
2018
“Pro forma net income available for Dow common stockholder” is used as the numerator for basic and diluted pro forma earnings per common share in 2018.
The number of shares of Dow common stock used to compute the unaudited pro forma earnings per common share - basic is based on DowDuPont common shares outstanding as of the March 21, 2019 Record Date for the April 1, 2019 distribution, adjusted for the distribution ratio of one share of Dow common stock for every three shares of DowDuPont common stock.
There is no dilutive effect for the year ended December 31, 2018 as Historical Dow did not engage in activities giving rise to dilution. As a result, this calculation may not be indicative of the dilutive effect that will actually result from Dow’s stock-based compensation awards issued in connection with the adjustment of outstanding DowDuPont stock-based compensation awards as a result of the distribution, or the grant of new stock-based compensation awards. The number of dilutive shares of common stock underlying Dow’s stock-based compensation awards issued in connection with the adjustment of outstanding DowDuPont stock-based compensation awards will not be determined until shortly after the distribution date.
Share Count Information (Shares in millions) | Dec 31, 2018 | |||
DowDuPont common shares outstanding1 | 2,241.7 | |||
Distribution ratio | 1:3 | |||
Dow common shares outstanding - basic | 747.2 | |||
Dilutive effect2 | N/A | |||
Dow common shares outstanding - diluted | 747.2 | |||
| 1. | Based on 2,246.3 million DowDuPont common shares outstanding as of the March 21, 2019 Record Date for the April 1, 2019 distribution, less 4.6 million Employee Stock Ownership Plan (“ESOP”) shares that had not been released and were not considered outstanding. |
| 2. | There is no dilutive effect for the year ended December 31, 2018 as Historical Dow did not engage in activities giving rise to dilution. |
2017
The table below contains a reconciliation of the numerator for basic and diluted pro forma loss per common share:
Pro Forma Net Loss for Loss Per Common Share (In millions) | Dec 31, 2017 | |||
Net loss available for Dow common stockholder | $ | (672 | ) | |
Less: Net income attributable to participating securities | 8 | |||
Net loss attributable to Dow common stockholder | $ | (680 | ) | |
The number of shares of Dow common stock used to compute the unaudited pro forma loss per common share - basic for the post-Merger period is based on the DowDuPont common shares outstanding as of the March 21, 2019 Record Date for the April 1, 2019 distribution, adjusted for the distribution ratio. The resulting number of shares is further adjusted for the effect of Historical Dow basic common shares outstanding during thepre-Merger period.
Share Count Information (Shares in millions) | Dec 31, 2017 | |||
Post-Merger period Dow common shares outstanding - basic1 | 747.2 | |||
Adjustment forpre-Merger Historical Dow common shares outstanding - basic2 | (2.4 | ) | ||
Dow common shares outstanding - basic | 744.8 | |||
Dilutive effect3 | N/A | |||
Dow common shares outstanding - diluted | 744.8 | |||
| 1. | Calculated using the same method for 2018. |
| 2. | Adjustment for thepre-Merger Historical Dow common shares outstanding and the weighting of share counts betweenpre- and post-Merger periods. |
| 3. | As 2017 pro forma results reflected a net loss, the basic share count was used for purposes of calculating pro forma loss per common share on a diluted basis. |
2016
The table below contains a reconciliation of the numerator for basic and diluted pro forma earnings per common share:
Pro Forma Net Income for Earnings Per Common Share (In millions) | Dec 31, 2016 | |||
Net income available for Dow common stockholder | $ | 1,082 | ||
Less: Net income attributable to participating securities | 14 | |||
Net income attributable to Dow common stockholder | $ | 1,068 | ||
The number of shares of Dow common stock used to compute the unaudited pro forma earnings per common share - basic and diluted is based on Historical Dow weighted average common shares outstanding, adjusted for a conversion factor used to present Historical Dow shares on a basis that is equivalent to the March 21, 2019 Record Date share count for the April 1, 2019 distribution.
Conversion Factor (Shares in millions) | Dec 31, 2016 | |||
Dow common shares outstanding at distribution1 | 747.2 | |||
Divided by: Historical Dow common shares outstanding prior to Merger2 | 1,214.8 | |||
Conversion factor | 0.6151 | |||
| 1. | Calculated using the same method for 2018. |
| 2. | Reflects 1,225.3 million Historical Dow common shares outstanding immediately prior to the effective time of the Merger, less 10.5 million ESOP shares that had not been released and were not considered outstanding. |
Share Count Information (Shares in millions) | Dec 31, 2016 | |||
Historical Dow common shares outstanding - basic | 1,108.1 | |||
Conversion factor | 0.6151 | |||
Dow common shares outstanding - basic | 681.6 | |||
Historical Dow common shares outstanding - diluted | 1,123.2 | |||
Conversion factor | 0.6151 | |||
Dow common shares outstanding - diluted | 690.9 | |||
