CTA-PB

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2002, for E. I. du Pont de Nemours and Company (DuPont). The company operates globally in approximately 75 countries, deriving about half of its revenues from sales outside the United States. The reporting period reflects the adoption of new accounting standards, specifically SFAS No. 142 regarding goodwill, and ongoing restructuring efforts within the Textiles & Interiors segment.

Key Financial Metrics

Note: Net Debt increased from $1.0 billion at year-end 2001 to $3.5 billion as of June 30, 2002.

Material Changes vs. Prior Period

• Revenue: Consolidated sales decreased 4% to $6.7 billion for the quarter compared to $7.0 billion in 2001. On a comparable business basis (excluding divestitures), sales increased 1%.
• Profitability: Net income for the quarter was $543 million, a significant improvement from a loss of $213 million in the same period in 2001. However, year-to-date net income was a loss of $1.922 billion, primarily driven by a non-cash accounting charge.
• Accounting Change: The adoption of SFAS No. 142 resulted in a cumulative effect charge of $2,944 million recorded in the first half of 2002 due to goodwill impairments ($2,866 million in Agriculture & Nutrition and $78 million in Textiles & Interiors).
• Restructuring: The company recorded $246 million in employee separation costs and asset write-downs in the second quarter, primarily in the Textiles & Interiors segment ($209 million) and Agriculture & Nutrition ($37 million).
• Cash Flow: Cash used in operations for the six months was $416 million, largely due to a $2 billion tax payment related to the 2001 sale of DuPont Pharmaceuticals and seasonal working capital builds.

Guidance, Outlook, and Risks

Outlook and Management Commentary

Management expects the global economic recovery to continue, led by North America and Asia, though at a more modest pace than the first half. The company anticipates substantial improvement in second-half 2002 results compared to the prior year. Specifically, third-quarter 2002 net income before one-time items is expected to be about double that of the third quarter of 2001, with the fourth quarter expected to be triple the prior year's fourth quarter.

Acquisitions and Divestitures

• Liqui-Box Corporation: Acquired for $272 million; results will be reported in the Agriculture & Nutrition segment starting in Q3 2002.
• ChemFirst, Inc.: Agreed to acquire for $408 million; expected to close in Q4 2002.
• Textiles & Interiors: The company announced plans to evaluate separation options, including an IPO, with a target separation by year-end 2003.

Risks and Contingencies

• Legal Proceedings: Approximately 110 cases remain pending regarding the Benlate fungicide, alleging crop damage and fraud. A Florida jury previously found DuPont liable, though the company is appealing.
• Environmental: Ongoing investigations regarding APFO (ammonium perfluorooctanoate) at the Washington Works plant in West Virginia. A class action lawsuit has been filed alleging health effects from APFO in drinking water.
• Market Conditions: Results are sensitive to raw material costs (oil, natural gas), foreign currency fluctuations, and the acceptance of genetically enhanced agricultural products.

Investor Verification Checklist

• Goodwill Impairment: Verify the sustainability of the $2.94 billion non-cash charge and its impact on future earnings quality.
• Restructuring Costs: Monitor the execution of the Textiles & Interiors restructuring program and the realization of the projected $120 million in annual pretax cost savings.
• Cash Flow Usage: Review the $2 billion tax payment related to the prior year's pharmaceutical sale and its impact on liquidity.
• Legal Exposure: Track the status of Benlate litigation appeals and the outcome of the APFO class action lawsuit.
• Acquisition Integration: Assess the integration of Liqui-Box and the regulatory approval status of the ChemFirst acquisition.