Pro Forma Income Statement Term Paper

Dow DuPont is a renowned company that surfaced through the merger of chemical gurus; Dow Chemical and DuPont. Dow DuPont is repositioning some operations into three units. This act is aimed at averting a strung-out fight with investors over its post-merger plans (Activists challenge DowDuPont breakup, 2017). The split of the Dow DuPont company into three major companies will lead to diversification of the company functions. More than $8.5 billion of businesses in annual sales is set to be moved from the materials science division to the specialty-chemical unit. In terms of revenue generation, the Material Science sector will top the hierarchy. The Chemicals and Agriculture businesses come in second and third respectively.

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Pro Forma Sales
For a five-year projection, the increase in net sales will be spontaneous since there is the boost in primary sales growth of the three divisions; Materials Science (Packaging & Specialty Plastics by 16% and the Industrial Intermediates & Infrastructure sector by 25%). The Chemicals Specialty division has two categories; Nutrition & Biosciences and Transportation & Advanced Polymers which will register an increase by 12% each. According to the Pro Forma projections, the revenue registered for each progressive year will be 115% of Sales of the year before. These calculations are indicated in the attached worksheet. It is noted by the year 2023, sales incurred by the firm is expected to be twice the sales in 2019.

Pro Forma Cost of Goods sold and Operating Expenses
Diversifying the company into three divisions will consequently lead to an increase in the operating expenses of the company. The financial years that are expected to be heavily affected are 2019 and 2020. This is as a result of the numerous expenses directed to sales and marketing, direct labor, compensation for production personnel, property taxes on production facilities and direct materials. For the projected year 2019, there is an increase on cost of goods sold by 20% which totals to. As for 2020 the cost of goods sold was; will be a slight decrease as compared to the year 2019. For the years 2021 to 2020, the cost of goods sold are projected to remain slightly indifferent (between 20 billion and 19 billion) since the three companies will have gained momentum in the industry.

Pro forma gross profit
Since the companies’ sales are expected to increase over the years, with the cost of goods sold have to be minimized as much as possible, the gross profits for the five years will project an increase. (“Dowdupont Reports Fourth Quarter And Full Year 2017 Results”) The gross profit for each respective year is equivalent to the pro forma sales less the pro forma cost of goods sold.

Full-year pro forma operating EBITDA for the three divisions is projected to improve by 12% over the five years. This will only surface if there will be lower OPEB costs, higher volumes and synergies. The Pro forma operating EBITDA growth is partly offset by much lower local price due to generic crop protection pricing pressure.

PROGRESS REPORT

Scope of Potential Risks and Threats
The three divisions are market-focused entities that will later venture off into three independent companies (“Aker Solutions To Split Into 3 Separate Companies”). In frequent cases, mergers such as the Dow Dupont merger major on short-term financial returns rather than inaugurating sustainable research and development abilities to promote long-term financial returns. The three companies will major on agriculture, specialty chemicals and materials. Research shows that China has become a major contributor to science and technology. The country is producing scientists and engineers at a higher rate of 150%, in comparison to the U.S.A. Furthermore, Chinese chemical manufacturers are seeking to increase research and development spending while moving into less commodity and more specialty products. The more other countries invest in research and development, the U.S. will less likely be able to compete with the talent and research and development strengths. Dow spent 3% on annual revenue earlier on in research and development whereas DuPont spent 7%. Research shows that activist investors, are pushing for a cost reduction in this area. Since the new companies’ goal is to spend a lower percentage on catering for research and development expenses, negative impact will be felt in the renovations segment. This is however inevitable since the split of the company into three divisions relies heavily on renovations for each segment. The Agro-science platform presents a potential threat to the company. During research, we discovered that the Agriculture division sales declined by 25 percent because of unpredictable events that caused havoc to the sector. Weather-related constraints; either drought or extreme heavy rains caused delays that are expected to shift a large portion of the Agriculture earnings to the next quarter (“Marketwatch”).

Progress
In any chemical industry, consolidation is expected to take place. As for DowDuPont GAAP or Pro forma earnings per share from continuing operations was $0.47. Earnings increased by 7 percent to $1.12, in comparison with pro forma adjusted earnings a year ago. With growth in most operating segments of the company and geographic regions, net sales increased 5 percent to $21.51 billion (“Activists Challenge Dow Dupont Breakup”). The Material Science Division increased sales 17 percent, with double-digit gains in all segments and regions. The Specialty Products division increased sales 11 percent. During research, we discovered that the Agriculture division sales declined by 25 percent because of unpredictable events. Weather related delays are expected to shift a large portion of the Agriculture earnings to the next quarter. Overall, volume was declined by 2% but prices rose 3% in each division which was led by increases in all regions and most operating segments. The company achieved cost synergy savings of more than $300 million in the first quarter ahead of its run-rate plan and is expected to deliver a 75 percent run-rate against its $3.3 billion cost synergy commitment by the end of the third quarter of 2018.

The progress in Industrial Intermediates and Infrastructure will significantly report strong price and demand increases (THAYER). Moreover, Performance Materials and Coatings also reported double-digit growth increases vastly in the respective geographic regions. Improvements in the Agriculture segment was surfaced by the synergies and cost reductions. lower pension costs and volume increases also played a major role in bringing about gains in the sector’s net portfolio. As for the Specialty products sector, the 2017 operating EBITDA was $368 million. This was an increase by 11% from the financial year 2016. However, this increase is expected over the five-year projections due to competitive pressure which is aimed at making the segment much more efficient and meet market demands. If there will be cost synergies and volume growth more than offset hurricane-related costs then there will be negative impact from the sector’s portfolio.

Additional Work
One key factor that was discovered during research, is that The Agriculture division will experience continued instability due to weather related delays. The start of the planting season delayed in Northern Hemisphere and Brazil and lower expected planted area in both North America and Brazil with lower sales in the Brazil safrinha season due to a shift to lower-technology corn driven by delayed summer harvest. A SWOT analysis demonstrated that the agriculture division external threats produce ongoing issues that will least likely promote substantial profitable growth for Dow DuPont. Changes in climate has a major impact on agriculture and food supply; and this has resulted in the dire need for reliable renovations that aim at ensuring the cost of goods sold are reduced over the years. Safety and Construction delivered net sales of around $1.28 billion; net sales growth of 4%. This reflected inevitable demand throughout industrial markets indulged in medical packaging and construction. Thus, the question as to whether the new innovations created from the merge be able to meet the demand for food production. In the 2017 financial year, Dow DuPot recorded a GAAP loss per share from continuing operations of $0.52. The earnings per share registered a price of $0.83 an increase by 40 percent from the pro forma adjusted earnings per share in the financial year 2016 period of $0.59

Recommendations and Expected Results
The United nations projects the populations to reach 10 billion in the year of 2056. This would require a huge increase in food production to meet demand. Since Industrial Intermediates and Infrastructure have reported positive net sales between the years 2015 and 2017, there will be expectations of double-digit sale gains in all geographic regions.

Although as stated, in the event of ongoing trade tensions with China, the Agriculture division might be impacted the most therefore we recommend divesting the Agriculture Division of Dow DuPont. There is a lack of synergy and the best course of action would be to sell the division to an indirect competitor and focus on the core strengths of the Material Science Division and Specialty Products division. The exit strategy that is recommended, would be to sell the division to an indirect competitor which will give DuPont a privilege of cashing out. This will allow Dow Dupont to pay up dividends all investors as well as shareholders. This also allows the buyer to gain access to newly innovated equipment and acquire a better source of supplies while building a positive relationship for both entities. Following the Dow DuPont merger separation, plans of incorporating particulate portfolio adjustments to the Specialty Products and Material Science divisions would be a smart move. This act was aimed at aligning these divisions with end-markets, consequently enhancing competitive advantage of the other companies in question.

References
Activists challenge DowDuPont breakup. (2017). C&EN Global Enterprise, 95(32), pp.10-10.
“Dowdupont Reports Fourth Quarter And Full Year 2017 Results”. Dow-Dupont.Com, 2018, http://www.dow-dupont.com/news-and-media/press-release-details/2018/DowDuPont-Reports-Fourth-Quarter-and-Full-Year-2017-Results/default.aspx. Accessed 22 June 2018.
Aker Solutions to Split Into 3 Separate Companies. Vol 2010, no. 12, 2010, pp. 3-4. Elsevier BV, doi:10.1016/s1365-6937(10)70360-9.
“Marketwatch”. Vol 7, no. 6, 2003, pp. 552-555. Elsevier BV, doi:10.1111/j.1552-6356.2003.tb00593.x.
Thayer, Ann. “Dow, EB Lilly To Merge Agricultural Businesses”. Chemical & Engineering News, vol 67, no. 17, 1989, p. 6. American Chemical Society (ACS), doi:10.1021/cen-v067n017.p006.