CTA-PB

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1997, and the nine-month period ended on the same date for E. I. du Pont de Nemours and Company (DuPont). The company operates across multiple segments including Chemicals, Fibers, Polymers, Petroleum, Life Sciences, and Diversified Businesses. The filing includes unaudited financial statements and management discussion regarding significant acquisitions, divestitures, and legal proceedings.

Key Financial Metrics

Note: Debt figures are derived from the sum of Short-Term Borrowings ($6,271M) and Long-Term Borrowings ($5,786M) as of September 30, 1997.

Material Changes vs. Prior Period

• Net Income Decline: Reported a net loss of $17 million for the quarter and $2.14 billion for the nine months, compared to net income of $898 million and $2.78 billion in the prior year periods. This decline is primarily driven by nonrecurring charges totaling $998 million ($0.88 per share) in the quarter.
• Nonrecurring Charges: Significant charges included an $850 million write-off of acquired in-process research and development (Pioneer Hi-Bred acquisition) and a $220 million write-down of assets related to the divestiture of graphic arts films and offset printing plates businesses.
• Adjusted Performance: Excluding nonrecurring items, third-quarter earnings were $0.86 per share (up from $0.84 in 1996), and nine-month net income was $3.1 billion (up 9% from $2.9 billion in 1996).
• Debt Increase: Total borrowings increased by $3.1 billion to $12.0 billion, driven by commercial paper increases and new note issuances to fund acquisitions and operations.
• Segment Performance: Petroleum earnings reached a record $282 million for the quarter. Conversely, the Life Sciences segment reported a loss of $656 million for the quarter due to the $850 million R&D charge, though underlying pharmaceutical earnings were higher.

Guidance, Outlook, and Risks

• Acquisitions and Capital Needs: DuPont expects cash expenditures for capital projects and acquisitions to total $8.5 billion in 1997. Pending transactions include the acquisition of ICI businesses (approx. $3 billion) and Protein Technologies International (PTI) from Ralston Purina ($1.5 billion).
• Management Transition: On October 29, 1997, the Board approved a transition where J. A. Krol became Chairman and CEO, with C. O. Holliday, Jr. succeeding Krol as President and CEO on February 1, 1998.
• Legal Proceedings:
  • Benlate Litigation: Over 700 lawsuits remain regarding alleged crop damage from "Benlate" 50 DF fungicide. The company maintains the product did not cause damage and has accrued estimated costs, though adverse changes could result in additional charges.
  • DOJ Suit: The U.S. Department of Justice filed suit regarding an oleum release in Kentucky. DuPont denies violations and plans to contest the DOJ's $2.7 million settlement offer.
• Financial Outlook: The Cash Flow to Debt ratio decreased to 51% from 71% at year-end 1996 due to increased borrowings. Credit ratings were affirmed by Moody's and S&P following acquisition announcements.

Investor Verification Checklist

• Nonrecurring Charges: Verify the tax impact and future cash implications of the $850 million Pioneer Hi-Bred R&D write-off and the $220 million graphic arts asset write-down.
• Acquisition Financing: Confirm the funding sources for the pending $4.5 billion in acquisitions (ICI and PTI) and the impact on future leverage ratios.
• Benlate Liability: Review the adequacy of current accruals for the "Benlate" 50 DF litigation given the volume of pending class actions and personal injury suits.
• Segment Margins: Analyze the impact of the stronger dollar on selling prices in the Chemicals and Fibers segments, which offset volume gains.
• Debt Servicing: Assess the company's ability to service the increased debt load ($12 billion) given the decline in the Cash Flow to Debt ratio.