CTA-PB

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2001, for E. I. du Pont de Nemours and Company (DuPont). The company operates globally in approximately 70 countries, deriving roughly half of its revenues from sales outside the United States. Key business segments include Agriculture & Nutrition, Nylon, Performance Coatings & Polymers, Pharmaceuticals, Pigments & Chemicals, Pioneer, Polyester, Specialty Fibers, and Specialty Polymers.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Consolidated sales decreased 9.7% to $6.859 billion. Segment sales fell 9% due to a 7% volume decline and a 2% decrease in U.S. dollar selling prices. Adverse currency effects (weaker euro and yen) reduced worldwide segment sales by 3%.
• Earnings Drop: Net income fell 38% to $495 million. Earnings before one-time items were $567 million, down 37% from $898 million in Q1 2000. The decline was driven by significantly lower Pharmaceuticals results and reduced earnings in chemicals and materials segments due to lower volumes and higher raw material costs.
• Cash Flow Reversal: Operating cash flow turned negative at $(522) million compared to positive $335 million in the prior year. This was primarily due to a $1.6 billion increase in net operating assets and liabilities, driven largely by inventory build-up.
• Segment Performance:
  • Pharmaceuticals: Reported a loss of $64 million (vs. $54 million profit in 2000) due to wholesaler inventory reductions.
  • Nylon Enterprise: After-tax operating income (ATOI) declined 86% due to a 40% increase in raw material costs and 15% lower volumes.
  • Pioneer: Earnings increased 17% despite slightly higher sales, reflecting improved margins.

Guidance, Outlook, and Risks

• Outlook: Management anticipates the global economic slowdown will impact the manufacturing sector through Q2 and potentially into the second half of 2001. Q2 volumes are expected to remain below 2000 levels in U.S. chemicals and materials. Agriculture segments face a difficult U.S. farm economy and negative currency impacts. Pharmaceuticals are expected to improve in Q2 but remain in loss territory.
• Restructuring: On April 2, 2001, DuPont announced a plan to reduce the global workforce by approximately 4,000 employees (4%) and 1,300 contract personnel. This is expected to yield $400 million in annual pretax payroll savings. A one-time charge of approximately 40-45 cents per share is expected in Q2 2001.
• Benlate(R) Exit: On April 19, 2001, the company announced it will discontinue the manufacture of Benlate(R) fungicide and phase out sales by December 31, 2001. This is a voluntary business decision, not a product recall.
• Legal Contingencies:
  • Pioneer/Monsanto Litigation: A court ruled that DuPont's acquisition of Pioneer terminated a 1992 license agreement for Roundup Ready(R) soybeans. DuPont is appealing. An adverse outcome could impair the value of the intangible asset recorded for the license.
  • Benlate(R) Litigation: Approximately 125 cases remain pending regarding alleged crop damage. While liabilities could be significant to the Crop Protection segment, management does not anticipate a material adverse effect on consolidated financial position.
• Accounting Change: Adoption of SFAS No. 133 on January 1, 2001, resulted in a cumulative-effect gain of $11 million (after-tax) related to stock warrants and commodity hedging programs.

Investor Verification Checklist

• Verify the impact of the announced 4,000-person workforce reduction on Q2 2001 earnings (estimated 40-45 cents per share charge).
• Monitor the status of the Pioneer/Monsanto litigation regarding the Roundup Ready(R) license and potential impairment of the associated intangible asset.
• Assess the trajectory of Pharmaceuticals segment sales as wholesaler inventories normalize in the second half of the year.
• Review the company's ability to reduce net debt from the current $9.5 billion level to below year-end 2000 levels as planned.
• Track the phase-out of Benlate(R) sales and the resolution of pending litigation related to the product.