CTA-PB

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2004, for E. I. du Pont de Nemours and Company (DuPont). The company operates globally in approximately 75 countries, deriving over 50% of its revenues from outside the United States. A defining event for the period was the completion of the sale of the majority of the Textiles & Interiors segment (INVISTA) to Koch Industries on April 30, 2004, which significantly altered the company's portfolio and financial structure.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Net sales decreased 7% in the third quarter compared to 2003 ($5.7B vs $6.1B), primarily due to the INVISTA divestiture (-17%), partially offset by higher volumes (+6%) and prices (+2%). Year-to-date sales increased 4% ($21.3B vs $20.5B) driven by volume and price increases.
• Profitability: Net income improved dramatically from a loss of $873 million in Q3 2003 to a profit of $331 million in Q3 2004. This turnaround is largely attributed to the absence of significant separation charges and goodwill impairments recorded in the prior year related to the Textiles & Interiors segment.
• Segment Performance:
  • Performance Materials: Sales up 29% and Pretax Operating Income (PTOI) up to $160 million, boosted by the consolidation of DuPont Dow Elastomers (DDE).
  • Textiles & Interiors: Sales dropped 84% due to the INVISTA sale; PTOI was a loss of $116 million, including $102 million in separation charges.
  • Pharmaceuticals: PTOI increased to $173 million, driven by higher Cozaar/Hyzaar income.
• Liquidity: Net debt decreased by approximately $2.3 billion from year-end 2003 to $4.8 billion, driven by $3.8 billion in net proceeds from the INVISTA sale.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items & Charges:
  • INVISTA Separation: Year-to-date charges totaled $630 million, including $102 million in Q3 for separation activities and adjustments to the purchase price.
  • Restructuring: Q2 2004 included $433 million in employee separation and asset impairment charges ($312 million for workforce reduction, $121 million for asset write-downs).
  • Legal Reserves: A $108 million reserve was established for the PFOA class action settlement in West Virginia. A $150 million reserve was established for DDE antitrust litigation.
• Outlook & Commentary: Management expects full-year capital spending to be approximately $1.3 billion. The company anticipates that cost reduction initiatives will deliver about $225 million in annualized savings. No specific earnings guidance for the full year was provided in this text, though R&D is expected to total approximately $1.3 billion.
• Risks & Contingencies:
  • Legal: Ongoing Benlate litigation (94 cases pending) and PFOA environmental/class action matters. While a settlement was reached for the PFOA class action, personal injury claims remain open pending a health study.
  • Antitrust: Investigations into synthetic rubber markets involving DDE; DuPont has assumed disproportionate liability up to $150 million.
  • Operational: Exposure to raw material costs (oil, natural gas) and currency fluctuations. The company operates in volatile global markets.

Investor Verification Checklist

• INVISTA Sale Finalization: Verify the final purchase price adjustments regarding working capital and pension transfers, as the company and Koch have not yet agreed on the final amount.
• PFOA Settlement Approval: Confirm the Wood County Circuit Court's approval of the $108 million settlement and the status of the independent health study panel.
• DDE Antitrust Exposure: Monitor the outcome of antitrust investigations into DuPont Dow Elastomers, as actual losses could exceed the $150 million reserve.
• Benlate Litigation: Track the status of the 94 pending Benlate cases, particularly the retrial in Florida and the shrimp damage cases in Broward County.
• Capital Allocation: Review the execution of the $2 billion share buyback program and the timing of future pension contributions.