CTA-PB

Business Context and Reporting Period

Company: E. I. du Pont de Nemours and Company (DuPont)
Filing Type: Form 8-K (Current Report)
Reporting Period: Second Quarter ended June 30, 2003
Date of Report: July 29, 2003

DuPont reported consolidated financial results for the second quarter of 2003. The company operates in a difficult economic environment but continues to drive top-line growth while managing costs. Key strategic activities include the planned separation of the Textiles & Interiors (DTI) segment and the formation of The Solae Company venture.

Key Financial Metrics

Segment Performance (After-Tax Operating Income - ATOI):

• Agriculture & Nutrition: $382 million (up 65% vs. prior year); record sales and earnings.
• Safety & Protection: $140 million (up 18% vs. prior year); strong double-digit growth.
• Textiles & Interiors (DTI): $17 million (vs. loss of $50 million); excluding special items, ATOI was $7 million vs. $93 million prior year.
• Performance Materials: $73 million (down 41%); impacted by higher raw material costs.
• Coatings & Color Technologies: $132 million (down 3%).
• Electronic & Communication Technologies: $39 million (down 32%).

Material Changes vs. Prior Period

• Revenue Growth: Consolidated net sales increased 10% year-over-year, driven by a 1% price benefit, 5% currency benefit, and 4% from acquisitions/divestitures. Worldwide volumes were flat overall.
• Profitability Drivers: Reported earnings increased primarily due to the absence of prior-year restructuring and facility shutdown costs. However, core operating income (before special items) declined 12% due to significantly higher raw material and energy costs, as well as increased non-cash pension expenses.
• Special Items: Q2 2003 included a $52 million after-tax benefit, contrasting with a $168 million charge in Q2 2002. Key 2003 items included a $41 million gain on the formation of The Solae Company and a $10 million gain on the Unifi settlement. Key 2002 items included $209 million in restructuring charges for DTI.
• Tax Rate: The effective tax rate was lower in 2003 compared to 2002, partially offsetting higher operating costs.

Guidance, Outlook, and Risks

Management Commentary: CEO Charles O. Holliday, Jr. stated that operating discipline is helping offset significant increases in energy and raw material costs. The company expects to continue managing cash fixed costs to mitigate these impacts.

Outlook for Remainder of 2003:

• Cost Pressures: The company expects high energy and raw material costs to persist. The estimated year-over-year impact of higher variable costs is approximately $0.60 per share for the full year ($0.28 already incurred).
• Pension/Stock Option Expense: Higher non-cash pension and stock option expenses are expected, with a negative impact of approximately $0.40 per share spread evenly across quarters.
• Tax Rate: Full-year base income tax rate is estimated at 27.5% (vs. 24.2% in 2002).
• Regional Demand: Double-digit volume growth is expected in Asia in the second half. U.S. industrial production recovery timing remains uncertain; if growth occurs late in the second half, earnings may trend toward the lower end of analyst estimates ($1.60 - $2.10 range).

Contingencies and Unusual Items:

• DTI Separation: In preparation for the separation of Textiles & Interiors, DuPont completed a tender offer for DuPont Canada shares (approx. $1.1 billion) and redeemed $2 billion in Minority Interest Structures, increasing debt.
• Refinancing: Plans to refinance approximately $700 million in synthetic leases and accounts receivable securitizations in the third quarter.
• Litigation: A $78 million charge was recorded year-to-date for the settlement of the 1995 Benlate shareholder litigation case.

Investor Verification Checklist

• Core Earnings Trend: Verify the 12% decline in income before special items ($623M vs. $711M) to assess underlying operational performance excluding one-time gains/losses.
• Raw Material Sensitivity: Confirm the magnitude of raw material and energy cost increases impacting the Performance Materials and DTI segments.
• DTI Separation Impact: Review the balance sheet impact of the $2 billion minority interest redemption and the $1.1 billion DuPont Canada tender offer on debt levels and liquidity.
• Accounting Changes: Note the adoption of SFAS No. 143 (Asset Retirement Obligations) and its $29 million cumulative effect adjustment in 2003.
• U.S. Demand Indicators: Monitor U.S. industrial production data to validate the company's bias toward the lower end of the full-year earnings estimate range.