CTA-PB

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 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 company's realignment into five market- and technology-focused growth platforms plus a Textiles & Interiors subsidiary, following the divestiture of DuPont Pharmaceuticals in late 2001.

Key Financial Metrics

Note: Net Debt is defined as borrowings and capital lease obligations less cash and cash equivalents and marketable debt securities.

Material Changes vs. Prior Period

• Revenue: Consolidated sales for Q3 2002 decreased 3% to $5.5 billion compared to Q3 2001. On a comparable business basis (excluding acquisitions/divestitures), sales increased 4% due to 6% higher volume, offset by 2% lower selling prices. Year-to-date sales were down 6%.
• Profitability: Q3 Net Income increased to $469 million from $142 million in the prior year. However, the nine-month period reported a net loss of $1.453 billion, primarily driven by a one-time noncash charge of $2.944 billion related to the adoption of SFAS No. 142 (Goodwill Impairment). Excluding this charge, income before cumulative effect was $1.491 billion for the nine months.
• Restructuring: The company recorded $232 million in employee separation costs and asset write-downs for the nine months ended September 30, 2002. This includes a significant restructuring program in the Textiles & Interiors segment involving approximately 2,000 employee terminations and facility shutdowns.
• Goodwill Impairment: A cumulative effect charge of $2.944 billion was recorded in Q2 2002 (impacting the nine-month view) due to goodwill impairments of $2.866 billion in Agriculture & Nutrition and $78 million in Textiles & Interiors.
• Interest Expense: Pretax interest expense decreased 47% in Q3 and 43% year-to-date, primarily due to lower debt levels.

Guidance, Outlook, and Risks

• Outlook: Management expects Q4 2002 earnings per share to be approximately $0.30. This estimate includes a recently announced charge of about $0.04 per share related to productivity initiatives in the Coatings & Color Technologies segment. The outlook assumes no other significant unusual items.
• Segment Performance: Performance Materials and Coatings & Color Technologies showed strong ATOI (After-Tax Operating Income) growth. Textiles & Interiors improved significantly from prior year losses but faces continued pricing pressure.
• Acquisitions: On November 6, 2002, DuPont completed the acquisition of ChemFirst, Inc. for approximately $400 million to strengthen its position in electronic materials.
• Risks and Contingencies:
  • Benlate Litigation: Ongoing lawsuits regarding crop damage and shrimp farm damage. While the company has not established a reserve for certain adverse judgments (believing they will not be upheld), it has incurred approximately $1.5 billion in costs to date.
  • Environmental: Reserves for environmental remediation totaled $390 million. A settlement regarding a 1997 hydrogen fluoride release in Louisville, KY, is expected to be completed in Q4 2002 for approximately $1.1 million.
  • Accounting Changes: Adoption of SFAS No. 143 (Asset Retirement Obligations) in 2003 is expected to result in a charge of approximately $0.03 per share. Expensing of stock options starting in 2003 is expected to reduce EPS by approximately $0.03 in 2003, growing to $0.09 by 2005.

Investor Verification Checklist

• Goodwill Impairment Impact: Verify the sustainability of earnings excluding the $2.944 billion noncash goodwill impairment charge recorded in the first half of 2002.
• Restructuring Costs: Monitor the execution of the Textiles & Interiors restructuring program, specifically the $120 million annual pretax cost savings target and the timing of cash outlays ($167 million total expected).
• Benlate Litigation Exposure: Review the status of pending Benlate cases, particularly the Florida racketeering appeal and shrimp farm cases, to assess potential future reserves beyond the $1.5 billion already incurred.
• Q4 Earnings Guidance: Confirm if the $0.30 EPS guidance for Q4 holds, considering the $0.04 charge for Coatings & Color Technologies and potential volatility in raw material costs.
• ChemFirst Integration: Assess the strategic fit and financial impact of the $400 million ChemFirst acquisition on the Electronic & Communication Technologies segment.