Business Context and Reporting Period
This Form 8-K, dated December 4, 1998, reports on E. I. du Pont de Nemours and Company (DuPont). The primary event is the divestiture of the petroleum business (Conoco). Following an initial public offering on October 21, 1998, DuPont indirectly owns approximately 70% of Conoco common stock. The company intends to complete a tax-free split-off of remaining shares to shareholders by the third quarter of 1999. Consequently, DuPont's consolidated financial statements now report the petroleum business as discontinued operations.
Key Financial Metrics
1998 Year-to-Date (Continuing Operations):
- Income from Continuing Operations: $867 million (before extraordinary items).
- After-Tax Operating Income (ATOI): $1,095 million.
- Third Quarter 1998 Performance: Reported a loss of $564 million from continuing operations, driven significantly by nonrecurring charges.
1997 Full Year (Continuing Operations):
- Sales: $24,089 million.
- Net Income: $2,405 million.
- Income from Continuing Operations: $1,432 million.
- Debt: Short-term borrowings of $6,152 million; Long-term borrowings of $5,897 million.
- Working Capital: Negative $2,117 million.
Segment Performance (1998 YTD ATOI):
- Polymers: $642 million
- Chemicals: $475 million
- Fibers: $438 million
- Life Sciences: $(475) million (loss)
- Diversified Businesses: $15 million
Material Changes and Nonrecurring Items
The filing highlights significant volatility in the third quarter of 1998 due to specific nonrecurring charges and accounting adjustments:
- Productivity Initiative: A $256 million charge was recorded in Q3 1998 for a company-wide productivity improvement initiative.
- Life Sciences Charges: A $845 million charge in Q3 1998 related to purchased in-process research and development (IPR&D) from the acquisition of Merck's interest in The DuPont Merck Pharmaceutical Company. Additionally, a $60 million charge was recorded in Q1 1998 for IPR&D related to Protein Technologies International.
- Diversified Businesses: A $109 million charge in Q3 1998 for revised IPR&D estimates related to the Imperial Chemical Industries (ICI) polyester acquisition.
- Fibers Segment: Q1 and Q2 included $85 million and $45 million respectively for employee separation costs and facility shutdowns.
- Asset Sale: A $36 million gain was recorded in Q3 1998 on the sale of Hydrogen Peroxide assets.
Excluding these nonrecurring items, 1998 YTD Income from Continuing Operations would have been $2,231 million, compared to $3,108 million for the full year 1997.
Outlook, Risks, and Management Commentary
Divestiture Timeline: Management intends to complete the split-off of Conoco shares no later than the third quarter of 1999.
Financial Position Adjustments: The filing notes that current debt ratios include 100% of historical debt but exclude petroleum earnings. Management provides adjusted 1997 ratios assuming a $5,000 million debt reduction post-split-off, which would result in a Total Debt to Total Capitalization ratio of 37% and a Return on Average Investors' Capital of 9.7%.
Risks and Contingencies: The $845 million Life Sciences charge is based on preliminary purchase price allocations and is subject to revision upon completion of independent valuations and final purchase accounting.
Investor Verification Checklist
- Verify the final valuation and purchase accounting for the Merck pharmaceutical interest, as the $845 million charge is preliminary.
- Confirm the timeline and tax implications of the Conoco split-off scheduled for Q3 1999.
- Assess the impact of the $256 million productivity initiative on future operating margins across all segments.
- Review the revised debt structure post-split-off to validate the adjusted leverage ratios provided in the notes.
- Monitor the Life Sciences segment for further IPR&D charges related to the PTI and ICI acquisitions.