Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2002, for E. I. du Pont de Nemours and Company (DuPont). The company operates globally in approximately 75 countries, deriving roughly half of its revenues from the United States and half from international markets. The reporting period reflects the adoption of new accounting standards, specifically SFAS No. 142 regarding goodwill and intangible assets, effective January 1, 2002.
Key Financial Metrics
| Metric | Q1 2002 | Q1 2001 |
|---|---|---|
| Sales | $6,142 million | $6,859 million |
| Net Income | $479 million | $495 million |
| Diluted EPS | $0.48 | $0.47 |
| Cash Used for Operations | $(1,070) million | $(522) million |
| Cash and Cash Equivalents (End of Period) | $3,245 million | $1,345 million |
| Net Debt | $3,205 million | $(966) million (Net Cash) |
| Dividends Per Share | $0.35 | $0.35 |
Note: Net Debt is defined as borrowings and capital lease obligations less cash, cash equivalents, and marketable debt securities.
Material Changes vs. Prior Period
- Revenue Decline: Consolidated sales decreased 11% to $6.1 billion. This was driven by a 4% decrease in local prices, a 4% negative currency impact, and a 2% decline in volume across major regions.
- Profitability: Net income decreased slightly to $479 million, though diluted EPS increased to $0.48 due to a 4% reduction in average outstanding shares. Underlying earnings (excluding one-time items) were $0.55 per share, compared to $0.54 in the prior year.
- Cash Flow: Cash used for operations increased significantly to $1.1 billion, primarily due to a $2 billion tax payment related to the 2001 sale of DuPont Pharmaceuticals and seasonal working capital builds.
- Balance Sheet: Net debt increased by $2.2 billion to $3.2 billion, driven by operational cash usage, $470 million in stock repurchases, and $351 million in dividends.
- Accounting Changes: The adoption of SFAS No. 142 eliminated goodwill amortization, which benefited reported earnings by approximately $34 million (after-tax) compared to the prior year.
Outlook, Risks, and Unusual Items
Guidance and Outlook
Management anticipates sequential volume increases in the second quarter of 2002. The company expects second-quarter underlying earnings per share to show double-digit improvement versus the prior year and to be approximately equal to the first-quarter underlying EPS of $0.55. This outlook assumes continued strong dollar impacts and a difficult pricing environment.
Unusual Items and One-Time Charges
- Argentina Exchange Loss: A $63 million pretax loss resulted from the mandatory conversion of U.S. dollar-denominated receivables to Argentine pesos.
- Textiles & Interiors Restructuring: A net charge of $9 million was recorded for exiting joint ventures in China. Additionally, the company announced plans to reduce over 2,000 employees in this segment, expecting a one-time second-quarter after-tax charge of $0.12–$0.16 per share.
- Pharmaceuticals Divestiture: The segment reported a profit of $51 million, contrasting with a $64 million loss in Q1 2001, as the prior year included operating losses from the business divested in October 2001.
Risks and Contingencies
- Benlate Litigation: Approximately 110 lawsuits remain pending regarding alleged crop and shrimp damage from Benlate fungicide. While management does not anticipate a material adverse effect on liquidity, ultimate liabilities could be significant.
- Goodwill Impairment: Preliminary indications suggest potential goodwill impairment in the Pioneer Hi-Bred (Agriculture) and DuPont Flooring Systems (Textiles) units, totaling approximately $2,900 million in recorded goodwill. Final impairment charges are expected by the end of Q3 2002.
- Raw Material Costs: Earnings growth is sensitive to increases in oil, natural gas, and derived product costs.
Investor Verification Checklist
- Goodwill Impairment Timing: Verify the final impairment charge amount and timing for Pioneer and Flooring Systems, expected by Q3 2002.
- Textiles Restructuring Costs: Monitor the second-quarter financials for the anticipated $0.12–$0.16 per share charge related to the 2,000+ employee reduction.
- Benlate Litigation Status: Track developments in the pending 110 cases, particularly the appeal of the $29 million Florida judgment.
- Cash Flow Recovery: Assess whether the $2 billion tax payment was a one-time event and if operating cash flow will normalize in subsequent quarters.
- Acquisition Closing: Confirm the closing of the $333 million acquisition of Liqui-Box Corporation in the second quarter.