CTA-PB

Business Context and Reporting Period

Company: E. I. du Pont de Nemours and Company (DuPont)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: DuPont is a global science and technology leader operating in approximately 75 countries. In 2002, the company realigned its businesses into five growth platforms (Agriculture & Nutrition, Coatings & Color Technologies, Electronic & Communication Technologies, Performance Materials, and Safety & Protection) and created DuPont Textiles & Interiors (DTI) with the intent to separate DTI by year-end 2003. The company employs approximately 79,000 people worldwide.

Key Financial Metrics

Note: 2002 Net Loss includes a $2,944 million non-cash charge for the cumulative effect of a change in accounting principle (SFAS No. 142) regarding goodwill impairment.

Material Changes vs. Prior Period

• Revenue: Net sales decreased 3% to $24.0 billion, driven by a 4% reduction due to portfolio changes (divestiture of DuPont Pharmaceuticals and Clysar shrink film business) and a 3% decline in selling prices, partially offset by a 4% volume increase.
• Profitability: The company reported a net loss of $1.1 billion compared to net income of $4.3 billion in 2001. Excluding the $2.9 billion goodwill impairment charge, income from continuing operations before taxes was $2.1 billion, down from $6.8 billion in 2001.
• Goodwill Impairment: A significant $2.9 billion charge was recorded under SFAS No. 142, primarily affecting the Agriculture & Nutrition ($2.9 billion) and Textiles & Interiors ($78 million) segments due to difficult economic conditions and slower biotechnology adoption.
• Restructuring: The company recorded $290 million in employee separation costs and asset write-downs in 2002, compared to $1.1 billion in 2001. Major restructuring occurred in Textiles & Interiors ($208 million) and Coatings & Color Technologies ($69 million).
• Liquidity: Net debt increased by $1.7 billion to $2.7 billion, primarily due to tax payments associated with the 2001 sale of DuPont Pharmaceuticals and reduced cash from operations.

Guidance, Outlook, and Risks

Outlook for 2003:

• Earnings: Management expects 2003 earnings per share to reflect increased sales volumes but anticipates negative impacts from pension and postretirement expenses ($0.34–$0.39 per share), a higher effective tax rate (returning to historical levels from 8.7% in 2002), and new accounting standards (SFAS No. 143 and SFAS No. 123) reducing EPS by approximately $0.05.
• Market Conditions: The company expects worldwide GDP growth of about 2%. While housing and motor vehicle production are expected to remain strong, the ability to raise prices may be limited by low manufacturing capacity utilization and higher raw material costs.
• Strategic Separation: DuPont intends to separate the Textiles & Interiors segment by year-end 2003, market conditions permitting.

Key Risks and Contingencies:

• Benlate(R) Litigation: Approximately 104 cases remain pending regarding crop damage, personal injury, and racketeering claims. The company recorded an $80 million charge in Q4 2002 to increase reserves. Total costs incurred to date are approximately $1.7 billion.
• Environmental Liabilities: Accrued liability for environmental remediation is $371 million. Potential liability could range up to two to three times this amount under adverse circumstances. Significant matters include the APFO (ammonium perfluorooctanoate) investigation in West Virginia and Ohio.
• Raw Material Costs: Earnings are sensitive to increases in oil, natural gas, and hydrocarbon feedstock costs, which may not be fully offset by price increases.
• Accounting Changes: Adoption of FIN No. 46 regarding Variable Interest Entities (VIEs) may require consolidation of synthetic lease programs, though management does not expect a material impact on financial position.

Investor Verification Checklist

• Goodwill Impairment: Verify the assumptions used in the $2.9 billion goodwill impairment charge, particularly regarding the Agriculture & Nutrition segment's biotechnology pipeline and market acceptance.
• Benlate(R) Exposure: Monitor the status of the 104 pending Benlate(R) lawsuits and the adequacy of the litigation reserve, given the history of adverse judgments.
• Textiles & Interiors Separation: Assess the progress and potential financial impact of the planned separation of the DTI segment, including the valuation of the remaining entity.
• Environmental Reserves: Review the $371 million environmental accrual and the potential for the liability to increase to two or three times that amount, specifically regarding APFO and Superfund sites.
• 2003 Tax Rate: Confirm the effective income tax rate for 2003, as management expects a significant increase from the 8.7% rate recorded in 2002.