CTA-PB

Business Context and Reporting Period

This Form 10-Q covers E. I. du Pont de Nemours and Company (DuPont) for the quarterly period ended September 30, 1998. The filing reports significant strategic shifts, including the divestiture of its petroleum business (Conoco), which is now classified as discontinued operations following an initial public offering in October 1998. The company is also navigating a challenging global economic environment, a strong U.S. dollar, and substantial restructuring costs.

Key Financial Metrics

Segment Performance (Q3 1998 vs Q3 1997): Chemicals earnings rose 6% to $161M. Fibers earnings fell 12% to $207M due to polyester price/volume declines. Polymers earnings dropped 7% to $208M. Life Sciences earnings plummeted 60% to $48M, driven by agricultural headwinds and pharmaceutical R&D costs. Diversified Businesses earnings increased 26% to $63M.

Material Changes vs. Prior Period

• Net Loss in Q3: The company reported a net loss of $605 million ($0.54 per share) for the quarter, compared to a net loss of $17 million in Q3 1997. This deterioration was driven by nonrecurring charges totaling $1.21 per share.
• Nonrecurring Charges: Significant charges included $1,441 million for purchased in-process research and development (primarily related to the DuPont Merck acquisition), $391 million for employee separation and asset write-downs, and a $201 million after-tax extraordinary charge for early debt extinguishment.
• Debt Increase: Total debt increased by $5.0 billion to $17.1 billion, primarily due to commercial paper issuances to finance acquisitions (ICI polyester films and DuPont Merck) and working capital needs.
• Discontinued Operations: Conoco is now reported as discontinued operations. Q3 1998 income from discontinued operations was $160 million, down from $256 million in 1997, reflecting lower oil prices and production volumes.

Guidance, Outlook, and Risks

Management Commentary: Management attributes the decline in earnings to weakening global economies and a strong U.S. dollar. The company is intensifying productivity initiatives, including workforce reductions and asset rationalization. DuPont expects a challenging global economy in 1999 and plans to maintain a focus on productivity.

Outlook: The company anticipates the Cash Flow to Total Debt ratio will improve following the Conoco divestiture. DuPont intends to complete the tax-free split-off of remaining Conoco shares to shareholders by the third quarter of 1999.

Risks and Contingencies:

• Year 2000 Problem: Estimated total remediation costs are $300-$400 million, with $140 million spent as of September 30, 1998. Risks include potential disruptions from suppliers or customers failing to become Y2K compliant.
• Legal Proceedings: Over 700 lawsuits remain regarding "Benlate" 50 DF fungicide, including crop damage, personal injury, and securities fraud claims. Accruals are recorded, but adverse changes could result in additional charges.
• Acquisition Integration: The company recently agreed to acquire Herberts (Hoechst AG coatings) for $1.9 billion, pending government approval.

Investor Verification Checklist

• Verify the final purchase price allocation for the DuPont Merck Pharmaceutical Company acquisition, specifically the $1.3 billion in-process R&D charge, as preliminary valuations are subject to revision.
• Monitor the timeline and execution of the Conoco split-off to ensure the anticipated improvement in liquidity and debt ratios materializes.
• Assess the progress of Year 2000 remediation for key third-party suppliers and customers, as operational disruptions could materially impact financial results.
• Review the status of "Benlate" 50 DF litigation, particularly the pending class actions and potential criminal contempt proceedings, to gauge potential liability exposure.
• Track the integration of the Herberts acquisition and its impact on the automotive coatings market position.