CTA-PB

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2001, for E. I. du Pont de Nemours and Company (DuPont). The company operates globally across approximately 70 countries, deriving roughly half of its revenues from outside the United States. The reporting period reflects a challenging economic environment characterized by weakening demand, particularly in the U.S., and adverse currency effects.

Key Financial Metrics

Note: Net Debt is calculated as debt and capital lease obligations net of cash and marketable securities as of June 30, 2001.

Material Changes vs. Prior Period

• Revenue Decline: Consolidated sales decreased 12% year-over-year in Q2 2001, driven by a 10% volume decline, partially offset by modest price increases. Adverse currency effects (weaker Euro and Yen) reduced sales by an additional 2%.
• Profitability Collapse: The company reported a net loss of $213 million in Q2 2001 compared to $688 million in Q2 2000. This shift was primarily due to lower volumes, higher raw material costs, and significant one-time charges.
• Restructuring Charges: A major restructuring program initiated in Q2 2001 resulted in $1,046 million in charges. This included $441 million for employee separations (approx. 5,500 employees), $282 million for facility shutdowns, and $303 million for asset write-downs (principally in the Polyester segment).
• Cash Flow Deterioration: Cash provided by operations plummeted to $58 million for the six months ended June 30, 2001, compared to $1,974 million in the prior year, largely due to the reduction in net income.

Outlook, Risks, and Management Commentary

Outlook and Guidance

• Economic View: Management maintains a cautious view, expecting economic conditions to deteriorate further into Q3 2001 before stabilizing in Q4. The electronics market is expected to continue declining through year-end.
• Earnings Forecast: DuPont anticipates Q3 2001 earnings per share will be at least 70% below Q3 2000 levels. Some mitigation is expected in Q4 due to restructuring savings and U.S. manufacturing stabilization.
• Cost Savings: The restructuring program is expected to generate over $400 million in annual pretax cost savings, with one-third realized by year-end 2001.

Material Events and Risks

• Pharmaceuticals Sale: On June 7, 2001, DuPont agreed to sell DuPont Pharmaceuticals to Bristol-Myers Squibb for $7.8 billion. The transaction is expected to close later in 2001, subject to regulatory approval. Proceeds will fund debt reduction and a new $2 billion share buyback program.
• Polyester Divestiture: The company reached a definitive agreement to sell its domestic terephthalic acid (TPA), PET container resins, and staple businesses to Alpek S.A. de C.V.
• Legal Proceedings:
  • Benlate(R): Ongoing litigation regarding crop damage and shrimp farm deaths. Management denies liability but acknowledges potential significant impact on results of operations.
  • Pioneer Patent Disputes: Active lawsuits with Monsanto and Aventis regarding YieldGard(R) corn and Roundup Ready(R) soybeans. Adverse outcomes could impair intangible assets.
• Accounting Changes: Adoption of SFAS No. 133 resulted in a $11 million after-tax cumulative effect gain. Future adoption of SFAS No. 142 (Goodwill) in 2002 is expected to eliminate approximately $150 million in annual after-tax amortization charges.

Investor Verification Checklist

• Restructuring Execution: Verify the timeline and actual cash outflows for the $1,046 million restructuring charge, specifically the $420 million in payments to employees and third parties.
• Pharmaceuticals Sale Closing: Monitor regulatory approvals for the $7.8 billion sale to Bristol-Myers Squibb, as this is critical for the company's debt reduction strategy.
• Raw Material Costs: Track the impact of petroleum-based feedstock and natural gas prices on margins, as management noted these costs may not be fully offset by price increases.
• Legal Reserves: Review updates on Benlate(R) litigation and Pioneer patent disputes, as adverse rulings could trigger additional non-cash impairment charges.
• Q3 Performance: Validate management's forecast of a >70% year-over-year earnings decline in Q3 against actual results when reported.