Exhibit 13
Management's Discussion and Analysis
This review and discussion of financial performance should be read in
conjunction with the consolidated financial statements (pages 43-75).
ANALYSIS OF CONTINUING OPERATIONS
SALES
Consolidated sales in 2001 were $24.7 billion, $3.5 billion or 13 percent below
2000, reflecting 9 percent lower volume, 2 percent lower U.S. dollar selling
prices and a 2 percent reduction due to portfolio changes. Segment sales, which
include the company's pro rata share of equity affiliate sales, were $27.7
billion, down $4.0 billion or 13 percent. Of this decrease, $850 million or 3
percent was attributable to portfolio changes, primarily resulting from the sale
of DuPont Pharmaceuticals and disposition of certain Polyester businesses.
Excluding these portfolio changes, worldwide sales declined 10 percent,
reflecting 8 percent lower volume and 2 percent lower U.S. dollar selling
prices. Volume declines were most significant in the Nylon, Specialty Polymers
and Performance Coatings & Polymers segments. The Specialty Fibers, Agriculture
& Nutrition and Polyester segments had the most significant downward impact on
the worldwide price average. Currency fluctuations, which resulted in a stronger
dollar during the year, reduced worldwide sales by 2 percent. Local prices
declined 1 percent.
Segment sales into the U.S. region were down 17 percent, including a 4 percent
impact from portfolio changes, 1 percent from lower prices and 12 percent from
lower volume. Lower U.S. volume reflected significant declines in the
Performance Coatings & Polymers, Specialty Polymers and Nylon segments. European
region sales decreased 6 percent reflecting 2 percent lower U.S. dollar prices,
3 percent lower volume and a reduction of 1 percent due to portfolio changes.
The net effect of currency fluctuations during the year reduced European sales
by 3 percent. Sales into the Asia Pacific region were down 8 percent reflecting
a 2 percent volume decline and 6 percent lower U.S. dollar prices.
Consolidated sales in 2000 were $28.3 billion, $1.4 billion or 5 percent above
1999. Of this increase, $1.1 billion or 4 percent was attributable to portfolio
changes, primarily sales resulting from acquisition of Pioneer Hi-Bred
International and the Herberts coatings business from Hoechst AG. The benefit of
2 percent higher volume was partly offset by 1 percent lower U.S. dollar prices.
Segment sales were $31.7 billion, 7 percent above 1999. Of this increase, 6
percent was attributable to portfolio changes, primarily sales resulting from
the Herberts and Pioneer acquisitions, 2 percent from higher volume and a 1
percent reduction due to lower U.S. dollar selling prices. Excluding portfolio
changes, the Specialty Polymers, Pigments & Chemicals and Specialty Fibers
segments had the most positive impact on volume. The Specialty Fibers,
Agriculture & Nutrition and Performance Coatings & Polymers segments had the
most significant downward impact on the worldwide price average. The decline in
average worldwide U.S. dollar selling prices continued a trend that began in
1995, largely reflecting the currency impact of translating local country
currencies into U.S. dollars. The net effect of currency fluctuations during the
year reduced worldwide sales by 3 percent.
Segment sales into the U.S. region increased 4 percent, including 7 percent
growth from portfolio changes, 1 percent higher prices and 4 percent lower
volume. Lower U.S. volume principally reflected declines in the Pharmaceuticals,
Polyester and Specialty Fibers segments. European region sales increased 3
percent reflecting 10 percent lower U.S. dollar prices, 5 percent higher volume
and an 8 percent benefit from portfolio changes, principally Herberts. The net
effect of currency fluctuations during the year reduced European sales by 12
percent. Sales into the Asia Pacific region grew 20 percent reflecting 13
percent volume growth, 3 percent higher U.S. dollar prices and a 4 percent
benefit from portfolio changes.
A reconciliation of segment sales to consolidated sales for 2001, 2000 and 1999
is included in Note 32 to the consolidated financial statements.
EARNINGS
Net income for the year 2001 was $4,339 million compared with $2,314 million in
2000. Net income for 2001 includes an $11 million benefit from the adoption of a
new accounting standard governing derivatives and hedging activities. The
increase in 2001 net income principally reflects a $3,866 million after-tax gain
recorded on the sale of DuPont Pharmaceuticals, partly offset by a decline in
operating results of $1,852 million. Earnings per share on a diluted basis were
$4.16 in 2001 versus $2.19 in 2000. These amounts include one-time items which
were significant in both years. For 2001, one-time items, excluding the gain on
the Pharmaceuticals sale, totaled a net charge of $789 million after-tax,
principally for approximately 5,500 employee terminations, facility shutdowns
and asset impairments. For 2000, one-time items totaled a net charge of $564
million, largely attributable to purchase accounting for Pioneer and a
write-down to fair market value associated with an other-than-temporary decline
in the market value of the company's investment in WebMD.
14 DuPont 2001 Annual Report
Management's Discussion and Analysis
Diluted earnings per share excluding one-time items were $1.19 versus $2.73 in
2000, down 56 percent. Net income excluding one-time items was $1,251 million
versus $2,878 million in 2000, down 57 percent. The favorable impact on earnings
per share due to reduced average common shares outstanding in 2001 versus 2000
was less than 1 percent. After-tax operating income (ATOI) excluding one-time
items decreased 49 percent reflecting lower sales volume and local selling
prices, higher raw material costs and the negative currency impact of the
stronger U.S. dollar. While ATOI excluding one-time items was lower across all
segments, it remained positive in all but Polyester, which suffers from
continuing overcapacity. The most significant negative impact on ATOI excluding
one-time items stems from significantly lower sales volumes which resulted from
the severity of the global economic downturn as well as from secular weaknesses
affecting nylon and polyester in the apparel and textile industries.
A reconciliation of ATOI to Income from Continuing Operations for 2001, 2000 and
1999 is included in Note 32 to the consolidated financial statements.
Net income for the year 2000 was $2,314 million compared with $7,690 million in
1999. The decrease in net income principally reflects the absence of a $7,471
million after-tax gain recorded in 1999 on disposal of discontinued business
(Conoco, the company's former energy subsidiary). Earnings per share on a
diluted basis were $2.19 in 2000 versus $6.99 in 1999.
Income from continuing operations was $2,314 million or $2.19 per share in 2000,
compared with $219 million or $.19 per share in 1999. These amounts include
one-time items which were significant in both years. For 2000, one-time items
totaled a net after-tax charge of $564 million, largely attributable to purchase
accounting for Pioneer and a write-down of the company's investment in WebMD to
fair market value. For 1999, one-time items resulted in a net after-tax charge
of $2,624 million. The most significant of these were a write-off of in-process
research and development in connection with the acquisition of Pioneer, charges
for restructuring and asset write-downs in several segments and a gain
recognized from the exchange of the company's investment in WebMD for
Healtheon/WebMD.
Diluted earnings per share from continuing operations excluding one-time items
were $2.73 in 2000 versus $2.58 in 1999, up 6 percent. Income from continuing
operations excluding one-time items was $2,878 million in 2000 versus $2,843
million in 1999, up 1 percent. Earnings per share increased 6 percent primarily
due to reduced average common shares outstanding in 2000 versus 1999. ATOI
excluding one-time items increased 6 percent reflecting higher sales volume and
local selling prices, partly offset by significantly higher raw material costs
and the negative currency impact of the stronger U.S. dollar. The increased
ownership in Pioneer for a full year in 2000 versus only the fourth quarter in
1999 increased ATOI excluding one-time items by $206 million.
Income tax expense and effective income tax rates were as follows:
2001 2000 1999
---- ---- ----
Income tax expense (dollars in millions) $ 2,467 $ 1,072 $ 1,410
Effective income tax rate (EITR) 36.0% 31.1% 83.4%
======== ======== ========
The 2001 EITR of 36 percent and the 2000 EITR of 31 percent were significantly
lower than the 1999 EITR of 83 percent primarily due to the absence of the
write-off of acquired in-process research and development in connection with the
acquisition of Pioneer which reduced earnings with no tax effect in 1999.
Excluding one-time items and related tax effects, the EITR was 32 percent in
2001, 2000 and 1999.
RESTRUCTURING ACTIVITIES
Restructuring programs were instituted in 2001 to further align resources
consistent with the specific missions of the individual businesses in order to
improve competitiveness, accelerate progress toward sustainable growth and
address weakening economic conditions, particularly in the United States. Under
the programs, the company will terminate approximately 5,500 employees involved
in technical, manufacturing, marketing and administrative activities, reduce the
contractor work force by about 1,300 and shut down operating facilities
principally due to transferring production to more cost competitive facilities.
About 4,700 employees have been terminated as of December 31, 2001, and the
additional employee terminations will be completed before July 2002. As a result
of the 2001 programs, the 2002 benefit to earnings will be approximately $400
million before taxes with about 60 percent of these savings resulting in reduced
Cost of Goods Sold and Other Operating Charges, about 30 percent reducing
Selling, General and Administrative Expenses and the balance reducing Research
and Development Expense. Facility shutdown and contract cancellations, which
result in lower depreciation and lease expense, will contribute about $35
million of the total cost savings.
DuPont 2001 Annual Report 15
Management's Discussion and Analysis
In the aggregate, payments from operating cash flows to terminated employees and
third parties for dismantlement and removal activities and contract terminations
will total about $400 million. About $150 million of these cash outlays were
made in 2001 and most of the remaining payments will be made in 2002. Additional
details about these restructuring programs and initiatives implemented in prior
years are contained in Note 6 to the consolidated financial statements.
NEW ACCOUNTING STANDARDS
In 2001 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." The company will adopt SFAS No. 142 on January 1, 2002. SFAS No. 142
requires that goodwill and indefinite-lived intangible assets no longer be
amortized. A preliminary estimate of the annual amortization of goodwill and
indefinite-lived intangible assets that will cease in 2002 as a result of
adopting SFAS No. 142 is approximately $160 million after-tax. In addition, an
initial (and annually thereafter) impairment test of these assets must be
performed. In the initial test, if there is impairment, an adjustment must be
recorded in net income as a cumulative effect of a change in accounting
principle (net of tax). Impairment losses after the initial adoption impairment
test will be recorded as part of income from continuing operations. The company
has identified those reporting units with goodwill and is in the process of
completing the first step of the initial goodwill impairment test required by
SFAS No. 142.
In addition, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The company will adopt SFAS No. 143
on January 1, 2003. The provisions of SFAS No. 143 require companies to record
an asset and related liability for the costs associated with the retirement of a
long-lived tangible asset if a legal liability to retire the asset exists. The
company is in the process of analyzing the provisions of SFAS No. 143; however,
the impact of adoption is not expected to have a significant impact on the
company's financial condition, liquidity or results of operations.
The FASB also issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The company will adopt SFAS No. 144 on January 1, 2002. This
statement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121 and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30 for the
disposal of a segment of a business. SFAS No. 144 retains the basic principles
of SFAS No. 121 for long-lived assets to be disposed of by sale or held and used
and broadens discontinued operations presentation to include a component of an
entity that is held for sale or that has been disposed of. The adoption of SFAS
No. 144 is not expected to have a material effect on net income.
SIGNIFICANT ACCOUNTING POLICIES
A summary of the company's significant accounting policies is included in Note 1
to the consolidated financial statements. Management believes that the
application of these policies on a consistent basis enables the company to
provide the users of the financial statements with useful and reliable
information about the company's operating results and financial condition.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities and the reported amounts of revenue and expenses.
Judgments and assessments of uncertainties are required in applying the
company's accounting policies in many areas. For example, key assumptions are
particularly important when determining the company's projected liabilities for
pension and other postretirement employee benefits. Other areas in which
significant uncertainties exist include, but are not limited to, projected costs
to be incurred in connection with environmental and tax matters and the
resolution of litigation. Actual results will inevitably differ to some extent
from the estimates on which the company's consolidated financial statements are
prepared at any given point in time. Despite these inherent limitations,
management believes that the company's Management's Discussion and Analysis and
audited financial statements provide a meaningful and fair perspective on the
company.
CORPORATE OUTLOOK
The company expects the challenging global economic conditions of 2001 to
continue into 2002 with recovery beginning in the second half of the year. The
timing and strength of economic recovery will significantly influence the
company's potential for earnings growth. The company's business plan calls for
2002 earnings per share, excluding one-time items, to exceed those of 2001 due,
in part, to aggressive cost management and portfolio actions undertaken in 2001.
Reduced amortization expense of about $160 million or $.16 per share will result
from the adoption of
16 DuPont 2001 Annual Report
Management's Discussion and Analysis
a new accounting standard in 2002. This is expected to be essentially offset by
the impact of projected decreases in pension credits and increases in
post-retirement benefit costs primarily resulting from a decline in the value of
pension assets, lower discount rates and escalating health care costs. In
addition, the ongoing impact of the economic turmoil in Argentina is not
expected to have a material effect on the company's results of operations in
2002.
For the segments that comprise the chemicals and materials businesses, the
company expects continuing recessionary pressures through at least the first
quarter 2002 with stronger global economic activity in the second half of the
year. Given the manufacturing sector's very low capacity utilization, it is
expected that several quarters of demand growth may be needed to absorb capacity
before industry pricing improves. The expected margin benefit from lower energy
and raw material prices will likely be constrained by lower selling prices
through much of 2002.
The Agriculture & Nutrition segment is operating principally in the difficult
crop production sector of the U.S. farm economy. Earnings in 2002 are expected
to be roughly similar to 2001 setting aside the impact of the new accounting
standard governing amortization of goodwill and indefinite-lived intangible
assets, which will benefit after-tax earnings by approximately $100 million.
The company expects the impact of restructuring activities along with ongoing
work on productivity, product development and customer initiatives to reduce
fixed costs. Cash proceeds from portfolio changes in 2001 will result in lower
interest expense and fewer outstanding shares of common stock. Pharmaceutical
segment earnings will improve significantly in 2002, reflecting income from the
company's collaboration with Merck & Co. Inc. on Cozaar(R) (losartan potassium)
and Hyzaar(R) (losartan potassium, hydrochlorothiazide) antihypertensive drugs,
but without the substantial research and development and other costs which had
been requisite for operation of DuPont Pharmaceuticals, sold in the fourth
quarter of 2001 to Bristol-Myers Squibb.
The company's prospects for growth will be influenced most importantly by the
following factors: 1) growth in global economies, particularly those in North
America, Europe and Asia Pacific regions; 2) improving market conditions
including profitability in the U.S. manufacturing sector and agricultural
industry; 3) successful commercialization of new products arising from research
and development; 4) stronger worldwide demand and stronger pricing for commodity
chemicals and fibers; 5) changes facing the company's North American apparel
business; and 6) recovery from the severe decline in the electronics and
high-technology markets.
In summary, the company believes the actions it has taken, along with the other
favorable factors described above, are likely to offset the macroeconomic
challenges and other negative factors expected in 2002. Accordingly, the company
expects 2002 earnings per share, excluding one-time items, to exceed those in
2001.
DISCONTINUED OPERATIONS
On September 28, 1998, the company announced that the Board of Directors had
approved a plan to divest Conoco. On October 21, 1998, the company's interest in
Conoco was reduced to 69.5 percent following an initial public offering of
Conoco Class A common stock. On August 6, 1999, the company completed the
planned divestiture through a tax-free split-off whereby the company exchanged
its 436,543,573 shares of Conoco Class B common stock for 147,980,872 shares of
DuPont common stock. The company also bought back 8 million shares for $646
million from non-U.S. persons who were not eligible to participate in the tender
offer. The company's consolidated financial statements and notes report its
former petroleum business as discontinued operations.
The 1999 gain on disposal of discontinued business reflects the company's share
of Conoco's results of operations through August 6, 1999, and the $7,306 million
gain recognized by the company from the completion of the split-off. The gain
from the split-off results from the difference between the market value and the
carrying value of the Conoco Class B common shares, less direct expenses.
In connection with the separation from DuPont, Conoco and DuPont entered into a
tax sharing agreement. In November 2001 Conoco and DuPont settled all
outstanding disputes arising under this agreement. This settlement was not
material to the company's financial position, liquidity or the gain on disposal
of discontinued business.
SEGMENT REVIEWS
Segment sales discussed below include pro rata equity affiliate sales and
intersegment transfers. Segment ATOI does not include corporate expenses,
interest, exchange gains (losses) and corporate minority interests. Prior years'
data have been reclassified to reflect the 2001 organizational structure. The
Agriculture & Nutrition segment now includes the Pioneer
DuPont 2001 Annual Report 17
business. The Specialty Fibers segment now includes the new Apparel & Textile
Sciences strategic business unit, which comprises the former DuPont(TM) Lycra(R)
business, nylon apparel and specialty textile businesses and the polyester
branded specialties businesses.
In February 2002 the company announced the realignment of its businesses into
five market- and technology-focused growth platforms and the creation of a
DuPont Textiles & Interiors subsidiary. The disclosures contained in this report
reflect the company's organizational structure that existed as of December 31,
2001.
AGRICULTURE & NUTRITION
[PLOT POINTS FOR BAR GRAPH]
ATOI BEFORE
SALES ATOI ONE TIME ITEMS
($ in Billions) ($ in Millions) ($ in Millions)
2001 4.3 19 244
2000 4.5 (227) 345
1999 3.0 (1,952) 158
See Segment Information (Note 32 to Financial Statements).
The mission of the Agriculture & Nutrition businesses - Crop Protection, Pioneer
Hi-Bred International Inc. and Nutrition & Health - is to best satisfy the
world's need for food and nutrition by transforming the ways renewable resources
are grown, processed and distributed. In 2001 these businesses continued to make
progress in restructuring operations to enhance productivity and capitalize on
growth opportunities.
Crop Protection serves the production agriculture industry with products for the
grain and specialty crop sectors as well as forestry and vegetation management.
It includes global herbicide, fungicide and insecticide products and services.
Crop Protection increased its focus on serving specialty markets such as fruits,
vegetables and selected plantation crops by offering growers, shippers and
processors broad solutions to their business issues.
Acceptance of recently launched Crop Protection products proceeded well in 2001.
DuPont(TM) Steward(R) and DuPont(TM) Avaunt(TM), cotton, fruit, and vegetable
insecticides, were well received in Asia Pacific, especially in India and
Australia, and the United States. DuPont(TM) Lexus(R), a grass herbicide used in
cereal crops in Europe, had strong sales. DuPont(TM) Steadfast(TM), a U.S. corn
herbicide, was sold in bulk units as opposed to conventional packaging and was
well received. Crop Protection is seeing the benefits of its research and
development reengineering in terms of the quality of pipeline candidates and
shorter discovery/development cycle times, thus ensuring that it can continue to
bring farmers new products in a competitive market.
DuPont owns 100 percent of Pioneer Hi-Bred International Inc., the world's
largest seed company. Pioneer's principal products are hybrid seed corn, soybean
seed, and other crop seed lines sold to customers who grow these products for
sale (as commodities or to special end-user markets), or for use in feeding
livestock. Seed products used to produce grain for human food and industrial
uses comprise significant and growing areas of focus for Pioneer. Pioneer works
with entities throughout the crop value chain to develop grain identity
preservation systems.
In 2001 Pioneer received full food and feed registration within the United
States from the Environmental Protection Agency, Department of Agriculture and
the Food and Drug Administration for the Herculex(TM) I Insect Protection trait,
developed in a research collaboration between Pioneer and Dow AgroSciences.* The
trait will give corn growers protection against more pests than other in-plant
insect protection. Also in 2001, Monsanto Company and DuPont resolved, on
mutually beneficial terms, the issues related to Monsanto's YieldGard(R)
insect-protected corn trait used in Pioneer's corn hybrids.** Under these
agreements, Pioneer will continue to offer Pioneer(R) brand corn hybrids with
YieldGard(R) insect protection under a royalty-bearing license. In other court
action, on December 10, 2001, the U.S. Supreme Court ruled in Pioneer's favor,
affirming the ability to protect new and improved plants under the utility
patent laws in addition to the plant patent laws.
During 2001 Pioneer(R) brand hybrids outperformed all competitive hybrids in
North America in yield by an average of 7.1 bushels per acre based on 188,000
side-by-side comparisons. Growers producing Pioneer(R) brand corn hybrids won 26
of 27 categories in the 2001 National Corn Growers Association Corn Yield
Contest, including one grower who broke the 400-bushel per acre mark for the
first time in contest history. Strong product performance led to market share
gains in Europe, Africa, Mexico and Latin America.
Nutrition & Health includes DuPont Protein Technologies and Qualicon Inc. DuPont
Protein Technologies is a world leader in the research, manufacturing and
marketing of isolated soy protein and soy fiber ingredients. In 2001 the
business introduced the
* Herculex(TM) is a trademark of Dow AgroSciences LLC.
** YieldGard(R) is a registered trademark of, and used under license from,
Monsanto Company.
18 DuPont 2001 Annual Report
Management's Discussion and Analysis
DuPont(TM) Solae(TM) soy protein branding program to help consumers identify
with a "good health seal" for good tasting and healthful soy protein in
mainstream foods. The first product adopting the Solae(TM) brand was 8th
Continent(TM) soymilk, the result of a joint venture between DuPont and General
Mills. 8th Continent(TM) was launched successfully in July 2001 in selected U.S.
markets. DuPont Protein Technologies also unveiled to food companies its new
Solae(TM) consumer branded-ingredient soy protein program, which combines a line
of soy protein ingredients with brand licensing and promotional support. Food
and beverage products containing Solae(TM) were introduced by major food
companies in several markets around the globe.
DuPont Protein Technologies acquired the Yun Meng Protein Company, Ltd. of
Wuhan, China, manufacturers of high-quality soy protein isolate. This enables
DuPont to meet the growing demand in Asian markets for nutritious and good
tasting ingredients in the higher value food segments such as beverages,
supplements and premium processed meat products. In 2001 the business also
launched Basis(TM) brand, a full range of soy protein platforms that provide
unique textures, fibers, and tastes emulating meat and poultry characteristics.
These platforms can be applied in baking applications and in vegetarian-style
products such as burgers, ground meats, fillets, poultry products, sausages and
casseroles.
Qualicon is a world leader in food quality and safety. With a focus on molecular
biology, Qualicon provides the best available diagnostics products to help food
industry customers understand and control the microbial environment in their
manufacturing processes and supply chains. Qualicon products include the BAX(R)
screening system, an automated genetics-based system that provides highly
sensitive and rapid detection of harmful microorganisms in food, water and
environmental samples. The RiboPrinter(R) microbial characterization system is
the world's only automated instrument for fingerprinting the DNA of bacteria.
The system is emerging as a critical tool to address global health problems
related to foodborne disease, antibiotic resistance and pharmaceutical quality
assurance. The system's enhanced capability will allow it to identify and track
a wide range of microorganisms of critical importance to food quality and
safety, public health and pharmaceutical research.
2001 versus 2000 Sales of $4.3 billion were 3 percent lower, reflecting 2
percent lower prices and 1 percent lower volume. ATOI was $19 million compared
with a loss of $227 million. ATOI before one-time items was $244 million versus
$345 million, down 29 percent, reflecting significantly lower Crop Protection
earnings due to lower sales and margins. This was partly offset by improved
results in the Nutrition & Health businesses and Pioneer.
2000 versus 1999 Sales of $4.5 billion were 48 percent higher, principally
reflecting increased ownership interest in Pioneer partly offset by 3 percent
lower Crop Protection prices. ATOI was a loss of $227 million compared with a
loss of $1,952 million. ATOI before one-time items was $345 million versus $158
million, principally reflecting a full year of Pioneer earnings versus the
fourth quarter Pioneer seasonal losses included in 1999. Marginally higher Crop
Protection earnings were more than offset by lower Nutrition & Health earnings.
The latter was due to higher natural gas costs as well as planned higher
research and development and marketing expenses.
Outlook Excluding an estimated $100 million after-tax benefit resulting from the
adoption of a new accounting standard governing goodwill amortization, earnings
for the Agriculture & Nutrition segment in 2002 are expected to be roughly
similar to 2001. Crop Protection is expected to continue to face significant
competitive challenges and change during 2002, including a depressed farm
economy, industry consolidation, and the influence of insect and herbicide
resistant crops. Pioneer is well positioned for 2002 in global markets with
industry leading product performance and excellent supplies of its best hybrids
and varieties. In the key U.S. market, corn acres are expected to be up slightly
in 2002, improving Pioneer's prospects for increased sales of its most
profitable products.
Pioneer will continue to market seed products with biotech traits that provide
value and choice to growers. Based on early indications, Pioneer expects strong
demand in 2002 for its new seed technology, including products such as
insect-resistant corn and herbicide-resistant corn, soybean and canola along
with new proprietary plant genetics, which should drive revenue growth and
improved margins. While there are still a number of regulatory and public
opinion challenges in this area, consumer acceptance of biotechnology products
is growing.
Within the smaller Nutrition & Health businesses, DuPont Protein Technologies
anticipates strong growth as major food companies continue to develop new
mainstream products utilizing soy protein, and as 8th Continent(TM) soymilk is
launched in additional markets. Qualicon also plans to aggressively grow its
food safety business in 2002 with an expanded product portfolio. Qualicon will
continue its business expansion of the RiboPrinter(R) system in the
pharmaceutical and personal care market segments.
DuPont 2001 Annual Report 19
Management's Discussion and Analysis
The results of operations in this segment could be significantly affected by the
ultimate outcome of litigation alleging damages from various forms of DuPont(TM)
Benlate(R) fungicide. Some of these cases include allegations of fraud and
misconduct. While several hundred lawsuits have been filed since 1991, there are
approximately 110 cases pending. DuPont believes that Benlate(R) did not cause
the damages alleged in these cases, denies the allegations of fraud and
misconduct, and intends to defend itself in these cases. The company
discontinued the manufacture and sale of Benlate(R) fungicide in all its forms
in 2001. The results of operations in this segment also could be significantly
affected by the ultimate outcome of litigation, in which Pioneer is both
plaintiff and defendant, concerning intellectual property rights related to corn
and soybean products. Management does not anticipate that the ultimate outcome
of this litigation or the litigation alleging damages from Benlate(R) will have
a material adverse effect on the company's consolidated financial position or
liquidity.
NYLON
DUPONT NYLON FLOORING
DUPONT NYLON INTERMEDIATES & SPECIALTY POLYMERS
DUPONT NYLON INDUSTRIAL RUBBER
[PLOT POINTS FOR BAR GRAPH]
ATOI BEFORE
SALES ATOI ONE TIME ITEMS
($ in Billions) ($ in Millions) ($ in Millions)
2001 2.7 (75) 60
2000 3.1 285 258
1999 3.1 (23) 303
See Segment Information (Note 32 to Financial Statements).
Nylon continues to be the global leader in sales and manufacturing of nylon,
providing nylon intermediates, polymers and fibers in major markets such as
carpets and rugs, tire reinforcement and other industrial applications. The
DuPont(TM) Stainmaster(R) and DuPont(TM) Antron(R) carpet brands, heavily
entrenched in the residential and commercial carpet industry, offer a pipeline
of new products, innovation and style to customers worldwide. DuPont(TM)
Tactesse(R) fiber, introduced in 2000 for Stainmaster(R) carpet, continued to
demonstrate significant volume growth in 2001. Tactesse(R) fibers provide soft,
thick, wool-like characteristics to carpet while maintaining durability and soil
resistance.
DuPont Nylon Flooring expanded its product offering with four new nylon fiber
technologies from Antron(R) carpet. The new technologies enhance carpet styling
with the shine of metal, the luster of natural fiber and unique color
characteristics to offer additional high-end appearance and superior
performance. Among the world's largest recyclers of nylon, DuPont during 2001
completed upgrades at the Calhoun, Georgia, reclamation center that combines
both sorting and recycling processes in one location, vastly reducing energy,
time and costs of the recycling process.
Overall, DuPont Nylon Flooring business declined in 2001 consistent with weak
industry demand. Commercial volumes experienced the largest decline due to
weakness in the commercial building and refurbishment markets, especially in the
corporate sector. The company's retail flooring sales and installations business
was adversely affected by weak consumer demand. Non-competitive flooring
manufacturing assets were shut down in Seaford, Delaware; Oestringen, Germany;
and Berazategui, Argentina. The startup of a new line at the Kingston, Ontario,
site; process improvements at the Waynesboro, Virginia, facility; and
productivity gains at other sites will enable the business to meet future
customer demands.
DuPont Nylon Intermediates & Specialty Polymers makes commercial sales of nylon
intermediates (adipic acid and hexamethylene diamine) as well as specialty
polymers derived from nylon intermediate production (dibasic acids and
dodecanedioic acid). In 2001 a new dibasic acid offering for the coatings market
and a twelve-carbon ketone for the fragrance market were introduced in direct
response to customer demand. A capacity expansion was completed at the Victoria,
Texas, site for the production of dodecanedioic acid in response to increased
global demand. Additional improvements were completed at the Wilton, England,
site resulting in enhanced production of DuPont(TM) Adi-pure(R) high purity
adipic acid for the polyurethanes market.
DuPont Nylon Industrial Rubber operates primarily through DuPont-Sabanci
International, LLC. This 50/50 joint venture between DuPont and Haci Omer
Sabanci Holding A.S. is the global leader in nylon industrial fibers and
fabrics. The business utilizes state-of-the-art industrial yarn spinning
technology from DuPont. A new plant for single-end cord production was completed
at the Whiteville, North Carolina, site during 2001. Modernization continues at
the Laurel Hill, North Carolina, and Camacari, Brazil, sites and new
construction continues on a fabric treating plant in Berazategui, Argentina.
2001 versus 2000 Sales of $2.7 billion were 14 percent lower, resulting from a
13 percent volume decline and 1 percent lower prices reflecting depressed
conditions in most markets. ATOI was
20 DuPont 2001 Annual Report
Management's Discussion and Analysis
a loss of $75 million compared with earnings of $285 million. ATOI before
one-time items was $60 million versus $258 million, down 77 percent. Lower
earnings reflect significantly lower sales volumes and continued erosion of
profit margins resulting from lower prices and modestly higher raw material
costs.
2000 versus 1999 Sales of $3.1 billion were 3 percent higher, reflecting
modestly higher volume and prices. ATOI was $285 million versus a loss of $23
million. ATOI before one-time items was $258 million versus $303 million, down
15 percent. Lower earnings reflect rapidly declining profit margins resulting
from significantly higher raw material costs, principally those derived from oil
and natural gas.
Outlook Earnings for DuPont Nylon Flooring in 2002 are not expected to recover
significantly from the depressed levels of 2001. Volume and price are expected
to remain under pressure globally due to weak economic conditions at least
through mid-year. Residential and commercial flooring fiber volumes for 2002 are
expected to improve versus 2001 due to increased demand from new products and
increased brand awareness initiatives. Productivity improvements in DuPont Nylon
Intermediates & Specialty Polymers completed in 2001 are expected to increase
production capacity and generate additional cost savings. The introduction of
two new hexamethylene diamine specialty products is planned with the potential
for wide application in pharmaceutical and agricultural markets. DuPont Nylon
Industrial Rubber expects earnings in 2002 to improve due to aggressive cost
reductions and anticipated improvement in global demand in the second half of
the year.
PERFORMANCE COATINGS & POLYMERS
DUPONT PERFORMANCE COATINGS
DUPONT ENGINEERING POLYMERS
DUPONT ELASTOMERS
[PLOT POINTS FOR BAR GRAPH]
ATOI BEFORE
SALES ATOI ONE TIME ITEMS
($ in Billions) ($ in Millions) ($ in Millions)
2001 5.8 319 377
2000 6.5 674 733
1999 6.1 582 645
See Segment Information (Note 32 to Financial Statements).
DuPont Performance Coatings - the world's leading automotive coatings supplier -
offers high performance liquid and powder coatings for the automotive original
equipment manufacturer (OEM) and aftermarket and general industrial OEM
applications as well as high performance specialty products for digital
printing, adhesive bonding and electrical insulation markets. The business also
offers the DuPont(TM) Ink Jet 3210, the industry's first integrated digital
textile printing solution for home furnishings, and a complete line of
DuPont(TM) Artistri(TM) Ink for textiles.
In 2001, DuPont Performance Coatings:
- - Introduced DuPont(TM) SupraShield(TM) scratch and mar resistant clearcoat to
meet more stringent environmental requirements and improve end use customer
satisfaction;
- - Completed Phase II of the Herberts integration program, including the final
shutdown of plants in the United Kingdom, France and Germany; and
- - Placed DuPont(TM) Ink Jet 3210 digital textile printers at leading home
furnishing companies in Europe and North America.
DuPont Engineering Polymers manufactures and markets a broad portfolio of
engineering materials for automotive, electrical, electronic, consumer and
industrial applications. The automotive and electrical/electronics industries
are among its most important markets. Serving customers throughout the world,
the business supplies six families of engineering resins - DuPont(TM) Zytel(R)
nylon, DuPont(TM) Delrin(R) acetal, DuPont(TM) Rynite(R) PET polyester,
DuPont(TM) Crastin(R) PBT polyester, DuPont(TM) Hytrel(R) thermoplastic
elastomer and DuPont(TM) Zenite(R) liquid crystal polymer - plus DuPont(TM)
Vespel(R) parts and shapes, and DuPont(TM) Tynex(R) filaments. The business is
focused on continuing its penetration of metals and thermoset substitution
opportunities in applications that offer customers weight reduction, energy
savings and added manufacturing cost productivity.
DuPont Engineering Polymers and Bayer AG reached agreement for their 50/50
manufacturing joint venture to build a new 80,000-ton plant to produce PBT base
polymer in Europe. Start-up of the plant is planned for the third quarter of
2003. Two major development applications were concluded in 2001. Ford Motor
Company will use a large transformer bobbin made of Rynite(R) for recharging the
battery of the new "Th!nk" electric city car. In addition, Tyco Electronics of
Berlin, Germany, will use Crastin(R) in a new heat exchanger application that
will significantly reduce operating noise.
DuPont Elastomers operates primarily through DuPont Dow Elastomers, a 50/50
joint venture between DuPont and The Dow Chemical Company. This joint venture is
a leading global supplier of mid- and high-performance elastomers. DuPont Dow
Elastomers products include Engage(R) polyolefin elastomers, Hypalon(R)
DuPont 2001 Annual Report 21
Management's Discussion and Analysis
chlorosulfonated polyethylene, Kalrez(R) perfluoroelastomer, Nordel(R) IP EPDM,
neoprene synthetic rubber and Viton(R) fluoroelastomer. Investment to expand
capacity for Engage(R) and Viton(R) continues.
2001 versus 2000 Sales of $5.8 billion were 11 percent lower, principally
reflecting 10 percent lower volume and 1 percent lower prices. ATOI was $319
million compared with $674 million. ATOI before one-time items was $377 million
versus $733 million, down 49 percent. ATOI was lower in all three strategic
business units, principally reflecting lower motor vehicle production in North
America, and weaker demand in the automotive refinish and inks businesses.
Margins were reduced by lower U.S. dollar prices and higher raw material costs.
2000 versus 1999 Sales of $6.5 billion were 6 percent higher, principally
reflecting the addition of Herberts for full year 2000. Excluding Herberts,
sales were 1 percent lower, reflecting 2 percent lower prices partly offset by 1
percent higher volume. ATOI was $674 million compared with $582 million. ATOI
before one-time items was $733 million versus $645 million, up 14 percent. ATOI
was higher in all three strategic business units, with DuPont Performance
Coatings earnings up most significantly, principally reflecting a full year of
Herberts results.
Outlook DuPont Performance Coatings will operate in a challenging business
environment in 2002 as competitive conditions within the coatings industry are
expected to remain intense. All areas of the value chain - suppliers,
distributors and customers - are expected to continue to experience
consolidation. The level of global new car builds in 2002 will depend on the
timing and extent of replenishing inventories which were depleted as a result of
the aggressive sales promotions used by most United States car manufacturers in
the second half of 2001. Most suppliers will continue to focus on
environmentally friendly products that provide systems solutions. In 2002,
DuPont Performance Coatings will launch a SuperSolids ultralow emissions
coating.
DuPont Engineering Polymers expects 2002 results to be largely dependent upon
the strength and timing of the recovery in the automotive, electronics and high
technology markets. DuPont Elastomers revenues will continue to be under
pressure from softness in automotive, industrial and electronic markets,
particularly in the first half of the year, but earnings are expected to benefit
from continued efforts to reduce costs and improve productivity.
PHARMACEUTICALS
[PLOT POINTS FOR BAR GRAPH]
ATOI BEFORE
SALES ATOI ONE TIME ITEMS
($ in Billions) ($ in Millions) ($ in Millions)
2001 .9 3,924 * 58
2000 1.5 89 133
1999 1.6 230 263
* Includes $3,866 gain on sale of DuPont Pharmaceuticals.
See Segment Information (Note 32 to Financial Statements).
On October 1, 2001, DuPont Pharmaceuticals was sold to the Bristol-Myers Squibb
Company. DuPont retained its interest in the Cozaar(R) and Hyzaar(R) brands.
These antihypertensive drugs were discovered by DuPont and developed in
collaboration with Merck. Effective with fourth quarter 2001 results, the
Pharmaceuticals segment reflects only DuPont's share of the financial results of
this ongoing collaboration.
The U.S. patents covering Cozaar(R) and Hyzaar(R) compounds, pharmaceutical
formulation and use for treatment of hypertension expire in 2009. The company
has exclusively licensed marketing rights for Cozaar(R) and Hyzaar(R) to Merck.
In conjunction with the sale of DuPont Pharmaceuticals, Bristol-Myers agreed to
continue to manufacture Cozaar(R) and Hyzaar(R) for DuPont at the former DuPont
Pharmaceuticals manufacturing site at Garden City, New York.
Cozaar(R) and Hyzaar(R) are the leading angiotensin II receptor blockers (AIIA)
worldwide in the treatment of hypertension. Cozaar(R) is the first and only
antihypertensive to demonstrate, in an important outcomes study, a significant
reduction in End-stage Renal Disease (ESRD) in Type 2 diabetes, which is among
the fastest growing public health concerns.
2001 versus 2000 Sales of $0.9 billion were 39 percent lower principally due to
the sale of DuPont Pharmaceuticals on October 1, 2001. ATOI was $3,924 million,
including a $3,866 million after-tax gain on the divestiture, compared with $89
million. ATOI before one-time items was $58 million versus $133 million, down 56
percent, principally reflecting lower revenue.
2000 versus 1999 Sales of $1.5 billion were 9 percent lower, reflecting a
significant drop in fourth quarter sales versus 1999. This decline was
anticipated, as the volume of product in the distribution channel was reduced
from historically high levels resulting from previous sales promotion programs.
ATOI was $89 million compared with $230 million. ATOI before one-time items was
$133 million versus $263 million, down 49 percent. The
22 DuPont 2001 Annual Report
Management's Discussion and Analysis
decline resulted principally from significantly lower fourth quarter sales as
well as planned higher research and development and marketing expenses.
Outlook DuPont and Merck continue to support the growth of Cozaar(R) and
Hyzaar(R) with ongoing investments in two large outcomes studies, LIFE and
OPTIMAAL. Results from the LIFE study will be presented at the American College
of Cardiology meeting in March 2002. These studies may result in additional
indications for Cozaar(R) and Hyzaar(R). Although DuPont will no longer report
any product sales within the Pharmaceuticals segment, the company expects the
ongoing Cozaar(R)/Hyzaar(R) collaboration to generate significant earnings for
the foreseeable future.
PIGMENTS & CHEMICALS
DUPONT WHITE PIGMENT & MINERAL PRODUCTS
DUPONT CHEMICAL SOLUTIONS ENTERPRISE
DUPONT FLUOROCHEMICALS
[PLOT POINTS FOR BAR GRAPH]
ATOI BEFORE
SALES ATOI ONE TIME ITEMS
($ in Billions) ($ in Millions) ($ in Millions)
2001 3.6 439 469
2000 3.9 714 715
1999 3.7 634 633
See Segment Information (Note 32 to Financial Statements).
DuPont White Pigment & Mineral Products is the world's largest manufacturer of
titanium dioxide, serving customers globally in the coatings, plastic and paper
industries. The company operates six titanium dioxide plants, all of which
utilize the chloride manufacturing process. DuPont(TM) Ti-Pure(R) titanium
dioxide (TiO2) is available to customers in slurry and powder form in a variety
of grades.
2001 was characterized by low capacity utilization and resulting weak industry
pricing. During 2001 an integrated Customer Service Center in Shanghai, China,
was opened to provide all-in-one service to Chinese customers for DuPont TiO2
products. The center incorporates the sales and marketing organization, customer
service, technical service and research labs, warehousing and other facilities
to serve all TiO2 customers in China, the fastest growing TiO2 market in the
world.
DuPont Chemical Solutions Enterprise (CSE) develops, produces and markets a
diverse range of industrial and performance chemicals, and selected services and
technologies. Primary markets served are plastics, textiles, mining, household
and industrial cleaners, petroleum refining and water treatment. Industrial
chemicals produced are aniline, acrylonitrile, hydrogen cyanide, sodium cyanide,
methylamines and amides, o,m,p-phenylene diamines, phthaloyl chlorides, sodium,
lithium and sulfur products. Performance chemicals include DuPont(TM) Teflon(R)
repellent finishes, DuPont(TM) Krytox(R) lubricants, DuPont(TM) Oxone(R)
oxidizing agents, DuPont(TM) glycolic acid descaling systems, DuPont(TM)
Tyzor(R) organic titanates and DuPont(TM) Vazo(R) free radical sources.
To assist in the global effort to halt the spread of Foot and Mouth Disease, CSE
teamed with long-term customer Antec International to provide adequate supplies
of the much needed Virkon(R) S biocide, which uses DuPont(TM) Oxone(R) as an
essential ingredient. The biocide now is used in more than 100 nations. DuPont
also supported preventive measures by the U.S. Department of Agriculture.
DuPont Fluorochemicals is a leading global manufacturer of industrial and
specialty fluorochemicals - both hydrofluorocarbons (HFCs) and
hydrochlorofluorocarbons (HCFCs). Products include DuPont(TM) Suva(R)
refrigerants used in air conditioning and refrigeration, DuPont(TM) Formacel(R)
foam expansion agents, DuPont(TM) Dymel(R) propellants, DuPont(TM) Vertrel(R)
solvents, DuPont(TM) Zyron(R) electronic gases, and DuPont(TM) FE(TM) fire
extinguishants.
DuPont Fluorochemicals began marketing a new fire extinguishant, FE-227(TM), to
the high value halon replacement market in the computer, telecommunications and
data processing industries. DuPont now has the most complete product line of
non-halon, "clean agent" fire extinguishants, which are low in toxicity, leave
no residue and are environmentally preferred to ozone-depleting halon products.
The business also recorded initial commercial sales of DuPont(TM) Dymel(R)
227ea/P pharmaceutical propellant used in medical metered dose inhalers, which
are popular tools for treating asthma and other respiratory disorders.
2001 versus 2000 Sales of $3.6 billion were 9 percent lower, reflecting 7
percent lower volume and 2 percent lower prices. ATOI was $439 million compared
with $714 million. ATOI before one-time items was $469 million versus $715
million, down 34 percent. ATOI declined in all three strategic business units,
reflecting economic weakness in the U.S. manufacturing sector, and reduced
margins resulting from higher raw material costs and lower prices stemming from
excess worldwide production capacity.
DuPont 2001 Annual Report 23
Management's Discussion and Analysis
2000 versus 1999 Sales of $3.9 billion were 7 percent higher, reflecting 1
percent higher prices and 6 percent higher volume. ATOI was $714 million
compared with $634 million. ATOI before one-time items was $715 million versus
$633 million, up 13 percent. ATOI was higher in all three strategic business
units, principally reflecting higher sales.
Outlook DuPont White Pigment & Mineral Products earnings for 2002 will depend
largely on improved industry capacity utilization and pricing. In addition, new
product offerings are expected to drive revenue growth at a somewhat higher rate
than the industry. DuPont Chemical Solutions Enterprise (CSE) expects its
margins to improve in 2002 as a result of lower energy and key raw material
prices. Within CSE, the sales mix continues to shift in favor of higher growth
and higher margin specialty chemical products. DuPont Fluorochemicals expects
continued growth in the use of its FE(TM) fire extinguishant products and
Dymel(R) pharmaceutical propellants; growth in Zyron(R) electronic gases as the
semiconductor industry recovers; and continued overall growth in HFCs in
refrigeration and other sectors as HCFCs are phased out on a global basis.
POLYESTER
[PLOT POINTS FOR BAR GRAPH]
ATOI BEFORE
SALES ATOI ONE TIME ITEMS
($ in Billions) ($ in Millions) ($ in Millions)
2001 1.9 (349) (74)
2000 2.3 66 62
1999 2.4 (133) (53)
See Segment Information (Note 32 to Financial Statements).
The Polyester segment consists of the company's fibers, resins and intermediates
businesses; the global films joint venture with Teijin Limited; and the European
joint venture with Sabanci.
The fibers, resins and intermediates businesses include DuPont(TM) Dacron(R)
filaments, polyester intermediate chemicals, DMT (dimethyl terephthalate), PTA
(purified terephthalic acid), ethylene glycol, specialty resins, technology
licensing and consulting, and polyester fiber chip manufactured by a joint
venture in China. Initiatives during 2001 included:
- - The transition of product manufacture to DuPont's Kinston and Unifi, Inc.'s
Yadkinville plants in North Carolina for improved operating efficiency, cost
reduction and customer flexibility. This was done as part of the Dacron(R)
filaments' manufacturing alliance in the Americas with Unifi, which enables
each company to match the production of polyester filament with the best
assets available. As a result, the DuPont polyester filament manufacturing
operations at Wilmington, North Carolina, were shut down in the second
quarter;
- - The expansion of the commercialization of DuPont(TM) Biomax(R)
hydrobiodegradable resin for specialty packaging applications in the food
industry, including plates, bowls and clamshells. This was done as part of a
joint development program with Earthshell Corporation; and
- - DuPont's sale of its ownership in the U.S. polymer grade TPA (terephthalic
acid) and Melinar(R) PET container resins businesses and associated
manufacturing assets to Alpek, the petrochemical group of ALFA S.A. de C.V.
The two companies further agreed to transfer DuPont's ownership of their
staple fiber joint venture to Alpek by mid-2002. This reflects the
continuation of DuPont's previously announced strategy to reshape its
polyester investment.
DuPont Teijin Films(TM) is a 50/50 global joint venture formed to produce and
sell PET and PEN polyester films in the specialty, industrial, packaging,
electrical, electronics, advanced magnetic media and photo systems markets. With
sales of $1.1 billion, the company leads the industry with its strong product
and process technology platform, and the broadest portfolio of differentiated
products offered throughout the world. The company improved its cost position
through the shutdown of a manufacturing facility at the Circleville, Ohio, site.
Brand names include Mylar(R), Melinex(R) and Teijin(R) Tetoron(R) PET films, and
Teonex(R) and Kaladex(R) PEN polyester films.
DuPont Sabanci Polyester Europe B. V. (DuPontSA), headquartered in the
Netherlands, is a 50/50 joint venture formed for the development, production and
sale of polyester fibers, container resins, and intermediates PTA and DMT for
markets throughout Europe, the Middle East and Africa. The venture is the
largest polyester company in the region with annual revenues of about $750
million.
2001 versus 2000 Sales of $1.9 billion were 17 percent lower, reflecting 5
percent lower prices, 8 percent lower volume and 4 percent due to the sale of
certain polyester businesses during the year. This decline was principally
driven by the global economic downturn led by the U.S. economy, and by Asian
competition. ATOI was a loss of $349 million compared with earnings of $66
million. ATOI before one-time items was a loss of $74 million versus earnings of
$62 million reflecting earnings
24 DuPont 2001 Annual Report
Management's Discussion and Analysis
declines in all business units due to lower volumes and margins, the latter
reflecting intense competitive pressure and excess global capacity.
2000 versus 1999 Sales of $2.3 billion were 5 percent lower, principally due to
the restructuring of formerly wholly-owned businesses into joint ventures whose
sales are reflected in segment sales on a pro rata ownership basis. Apart from
the impact of the restructuring, sales were essentially flat. ATOI was $66
million compared with a loss of $133 million. ATOI before one-time items was $62
million versus a loss of $53 million. The earnings improvement is primarily due
to cost reductions resulting from restructuring and productivity initiatives.
Outlook The global polyester market is expected to remain highly competitive,
characterized by a low-price, low-margin environment, exacerbated by significant
excess capacity and strong competitive forces. The company has successfully
implemented a series of major restructuring initiatives in recent years aimed at
reducing fixed costs. Nevertheless, the financial outlook in 2002 is not
encouraging due to expected continuing overcapacity and depressed margins.
Accordingly, DuPont is continuing to assess alternative strategies and
aggressive actions to optimize the company's investment in its various polyester
businesses.
The company believes that Unifi has substantially breached the agreement
covering the manufacturing alliance discussed above. The company is seeking
damages as well as injunctive relief. This matter has been submitted to binding
arbitration.
SPECIALTY FIBERS
DUPONT APPAREL & TEXTILE SCIENCES
DUPONT ADVANCED FIBER SYSTEMS
DUPONT NONWOVENS
[PLOT POINTS FOR BAR GRAPH]
ATOI BEFORE
SALES ATOI ONE TIME ITEMS
($ in Billions) ($ in Millions) ($ in Millions)
2001 4.4 356 387
2000 5.0 740 740
1999 5.1 832 831
See Segment Information (Note 32 to Financial Statements).
DuPont Apparel & Textile Sciences (A&TS) was established in 2001 as a strategic
business unit to capitalize on marketplace synergies by combining sales,
marketing and manufacturing resources for the DuPont(TM) Lycra(R) branded
elastane, generic spandex, and nylon and polyester businesses that sell into
apparel and specialty textile value chains. A&TS - the largest elastane
manufacturer worldwide - continues to be the brand leader in the high-growth
stretch apparel market and is now expanding the stretch concept to
non-traditional and non-apparel end uses. Other brands are DuPont(TM) Tactel(R)
nylon and DuPont(TM) Supplex(R) nylon for apparel, and DuPont(TM) Cordura(R)
nylon for products including packs and bags, boots and shoes, and apparel.
Leading polyester brands include DuPont(TM) Coolmax(R) performance fabrics,
DuPont(TM) Comforel(R) sleep products and DuPont(TM) Thermolite(R) insulation
fibers. In addition, the DuPont(TM) Teflon(R) brand has recently been
incorporated into the A&TS portfolio to satisfy high consumer value for "easy
care" brands in apparel for the ready-to-wear market as well as in the home.
In 2001, A&TS reconfigured global capacity to better align with shifting market
dynamics. For example, the business:
- - Increased Lycra(R) capacity in Singapore by 6 kilo-tons;
- - Took steps to establish a production leadership position in China to serve
the complex Chinese textile value chain. The business began construction of
additional capacity in China using state-of-the-art technology with spinning
productivity twice the rate of the nearest competitor and established a
50/50 joint venture with LYG; and
- - Installed new state-of-the art nylon manufacturing equipment in the United
States and Mexico.
A&TS launched several new products for the apparel market including:
- - A new "easy set" spandex product, branded Lycra(R) that is more compatible
with cotton heat set temperatures and enables customers to reduce processing
steps and costs;
- - Tactel(R) metallics, new fibers that enable manufacturers to create metallic
effects with superb softness;
- - Tactel(R) Prisma, a lightweight, soft-to-the-touch fiber that creates a
sparkling heather effect in garments;
- - T-400, a new elastic fiber based on proprietary multi-component technology
that utilizes DuPont(TM) Sorona(TM) 3GT polymer as one of its components;
and
- - T-800, a nylon fiber, that offers the unique properties of relaxed "non-body
hugging" stretch.
DuPont Advanced Fiber Systems (AFS) comprises DuPont(TM) Kevlar(R) brand fiber,
DuPont(TM) Nomex(R) brand fiber and paper, DuPont(TM) Thermount(R) pre-preg and
laminates and
DuPont 2001 Annual Report 25
Management's Discussion and Analysis
DuPont(TM) Teflon(R) brand fluoropolymer fiber. Major markets served include
personal protective apparel, life protection, electronics, telecommunications,
electrical insulation, automotive, transportation, filtration, numerous
industrial applications and new consumer applications. In 2001, AFS reorganized
into five global businesses (Life Protection, Protective Apparel, Power &
Communications, Performance Materials and New Businesses) to increase the focus
on key markets and customers and to accelerate growth in these markets.
AFS launched the Kevlar(R) Partners Program(TM) in 2001, the first dedicated
program aimed at saving the lives of correctional officers. Kevlar(R)
Correctional(TM) is a patented technology of puncture-, stab- and
slash-resistant fibers and fabrics designed to provide comfortable, concealable
protective body armor that is significantly lighter and more flexible than metal
alloy vests. Also in 2001, Levi's and Ralph Lauren's RLX brand launched denim
jeans made with Kevlar(R) in selected markets. AFS also introduced Nomex(R)
Limitedwear coveralls targeted at segments requiring affordable flame protection
for short or infrequent periods of use.
The primary products of DuPont Nonwovens include DuPont(TM) Tyvek(R) brand
protective material, DuPont(TM) Sontara(R) spunlaced fabrics, DuPont(TM)
Cambrelle(R) footwear lining and DuPont(TM) Typar(R) high-strength spunbonds.
Major markets served include construction, protective apparel, medical and
healthcare, aerospace, automotive, cleanroom, printing, packaging, carpeting and
geotextiles.
The Tyvek(R) Weatherization Systems business introduced a new window flashing
product - Tyvek(R) Flexwrap(TM). Tyvek(R) Worker Protection announced the launch
of NEW Tyvek(R) protective fabric which is four times as breathable, feels
significantly softer yet provides all the protection and durability of
traditional Tyvek(R). The DuPont Nonwovens Sontara(R) plant in Asturias, Spain,
was commercialized and began serving global markets. A 50/50 joint venture in
Brazil with Cipatex SA was formed for the production and sale of needlepunch and
spunlace fabrics for footwear, artificial leather and industrial applications.
Also in 2001, DuPont Nonwovens secured a multi-year contract with the U.S.
Postal Service for the Tyvek(R) envelope business. The Sontara(R) business and
DuPont Performance Coatings collaborated to launch a car finishing system
consisting of custom-made fabrics made of Sontara(R). The system was specially
designed for each step in the automotive refinish process.
2001 versus 2000 Sales of $4.4 billion were 11 percent lower, reflecting 7
percent lower volume and 4 percent lower prices. ATOI was $356 million compared
with $740 million. ATOI before one-time items was $387 million versus $740
million, down 48 percent, reflecting significantly lower earnings in A&TS. A&TS
earnings were adversely affected by very weak U.S. apparel and textile markets,
higher raw material costs, and lower U.S. dollar prices. Sales of DuPont
Nonwovens increased, reflecting strong sales of protective apparel, medical
fabrics, and construction products, but margins declined, adversely affecting
earnings. AFS sales and ATOI increased reflecting increased demand for military
protective products.
2000 versus 1999 Sales of $5.0 billion were down 2 percent reflecting 3 percent
lower prices partly offset by 1 percent higher volume. ATOI was $740 million
compared with $832 million. ATOI before one-time items was $740 million versus
$831 million, down 11 percent, as higher earnings in AFS were more than offset
by lower earnings in A&TS and DuPont Nonwovens. Lower margins resulted
principally from increased pricing pressures from generic competition, adverse
currency impact of the stronger dollar, high natural gas prices and continued
technical difficulties at a European tetrahydrofuran facility which has affected
cost competitiveness in the global market. While progress was made, the facility
continued to operate substantially below design capacity.
Outlook DuPont Apparel & Textile Sciences (A&TS) will continue to be adversely
affected by industry consolidation and bankruptcies which are expected to
continue in the global textile markets, particularly in North America. The
industry is contending with a secular shift away from North American textile and
fiber production toward less expensive Asian production. A&TS earnings in 2002
are not expected to recover from depressed levels experienced in 2001. New
opportunities for Lycra(R) - particularly shoes, home textiles, Leather with
Lycra(R) and stretch nonwovens - are poised for growth. Finally, 2002 will see
the launch of Teflon(R) easy care and Stainmaster(R) fabrics for upholstery.
Volume growth for DuPont Advanced Fiber Systems beyond that expected with
anticipated U.S. economic strengthening will depend largely on the timing of the
turnaround for the electrical insulation and automotive markets. Expansion of
Kevlar(R) brand fiber capacity, expected to come on line in early 2003, is based
on
26 DuPont 2001 Annual Report
Management's Discussion and Analysis
new technology that will allow higher productivity for specialty products and
enable the business to meet demand growth as the global economy begins to
recover.
DuPont Nonwovens expects continued growth through the expansion of markets
currently being served as well as entrance into new markets. The U.S. housing
market has remained robust in spite of the economic downturn and this trend is
expected to continue into 2002. New products will be introduced for the
construction, worker protection, cleanroom, absorbents and medical markets. The
Sontara(R) medical fabrics business continues to be a key area for additional
resourcing and new technologies with good growth potential.
SPECIALTY POLYMERS
DUPONT PACKAGING & INDUSTRIAL POLYMERS
DUPONT DISPLAY TECHNOLOGIES
DUPONT ELECTRONIC TECHNOLOGIES
DUPONT IMAGING TECHNOLOGIES
DUPONT FLUOROPOLYMERS
DUPONT SURFACES
[PLOT POINTS FOR BAR GRAPH]
ATOI BEFORE
SALES ATOI ONE TIME ITEMS
($ in Billions) ($ in Millions) ($ in Millions)
2001 3.9 372 402
2000 4.5 714 714
1999 4.3 668 666
See Segment Information (Note 32 to Financial Statements).
DuPont Packaging & Industrial Polymers (P&IP) is a world leader in specialized,
high value resins and films for the packaging and selected industrial markets.
Products and their end uses include DuPont(TM) Surlyn(R), DuPont(TM) Nucrel(R)
and DuPont(TM) Elvax(R) sealants and adhesives for flexible packaging
structures; Nucrel(R) and Elvax(R) resins for wire and cable construction;
DuPont(TM) Keldax(R) resins for automotive carpet backing; Surlyn(R) for golf
ball covers; DuPont(TM) Vamac(R) for automotive hoses and gaskets; DuPont(TM)
Butacite(R) interlayers for laminated safety glass for automotive and
architectural applications; DuPont(TM) Elvanol(R) for textile sizing; and
DuPont(TM) Clysar(R) shrink films.
In 2001 P&IP:
- - Continued to expand its market for glass laminated products as more states
adopted the hurricane impact protection section of the International
Buildings and Residential Codes that is met by window systems incorporating
P&IP's SentryGlas(R) Plus or Butacite(R);
- - Introduced a new family of Elvaloy(R) AC resins offering new processing and
performance opportunities for packaging, automotive, and construction
markets;
- - Launched its Clysar(R) HP Gold product line, a premium polyolefin film
offering advantages in terms of processability, reliability and clarity; and
- - Launched DuPont(TM) Trancend(TM), a new extrusion coating sealant resin for
the flexible packaging market.
DuPont Display Technologies is a world leader in holographic optical components
and holograms for electronics, security and authentication applications. The
strategic business unit is focused on development of advanced information
display devices and visual enhancement technologies. In 2001, DuPont Display
Technologies opened a state-of-the-art holographics facility in Logan, Utah. The
new facility will design and manufacture advanced holographic optical elements
that are used for enhancing brightness in liquid crystal displays (LCD) as well
as holograms for graphic arts and security applications. DuPont Display
Technologies formed a joint venture with Label Systems, LLC to produce security
tags, labels and identification cards utilizing proprietary DuPont holographic
materials.
Also in 2001, DuPont Display Technologies:
- - Constructed a pre-production facility for the development and production of
advanced Organic Light Emitting Diode (OLED) displays;
- - Invested in RIT Display Technology Company, a subsidiary of RiTEK
Corporation, Inc. RIT Display is building a full production facility to
produce OLED displays components exclusively for DuPont. DuPont Display
Technologies expects to ship polymer OLED displays for commercial sales by
year-end 2002; and
- - Acquired a majority interest in Polar Vision, an optical components and
lamination services provider serving display integrators and OEM's in the
rapidly expanding display enhancement industry. The investment provides
DuPont Display Technologies access to Polar Vision's expertise in filters,
polarizers, and custom lamination capability.
DuPont Electronic Technologies is a leading supplier of advanced electronic
materials to the global electronics industry. Major product lines include:
DuPont(TM) Kapton(R) polyimide film, DuPont(TM) Pyralux(R) flexible laminates,
DuPont(TM) Riston(R) dry film photoresists, DuPont(TM) Green Tape(TM) low
temperature co-fired ceramics,
DuPont 2001 Annual Report 27
Management's Discussion and Analysis
DuPont(TM) Fodel(R) photoimageable composites and colloidal silica based
slurries. Market segments served include the printed wiring board, semiconductor
and cellular and Internet infrastructure industries. DuPont Electronic
Technologies intends to meet the rapidly changing market needs for smaller, more
portable and powerful electronic devices by building on its strength as a
leading supplier of organic, flexible and ceramic circuit materials.
In 2001, DuPont Electronic Technologies began controlled sales of a family of
thin metal copper laminates, Microlux(R) HD and Pyralux(R) TM. These products
are focused at meeting the growing demands for increasingly higher density
flex-circuits and integrated circuit (IC) packages. Commercialization was
completed of a fifth generation Fodel(R) photoimageable product which improves
quality and reduces customer cost for making large plasma display panels (PDPs).
PDPs are currently manufactured by six OEMs and production is expected to double
in 2002. The Foam Glass Barrier process technology developed by Photonics
Systems, Inc., Northwood, Ohio, was purchased for the manufacture of barrier rib
structures in PDPs. A new business unit - Integrated Circuit Packaging &
Interconnects - was formed within DuPont Electronic Technologies as part of a
strategy to expand into materials for the interconnection of ICs.
DuPont Imaging Technologies markets to the packaging and commercial printing
industry DuPont(TM) Cyrel(R) flexographic printing plates as well as color
proofing systems, including DuPont(TM) WaterProof(R), DuPont(TM) Cromalin(R) and
DuPont(TM) Dylux(R). Installations of DuPont Imaging Technologies' Cyrel(R) Fast
- - the only thermal platemaking technology available on the market - increased
significantly in 2001. The color proofing business launched its new Thermal
4-color Halftone technology in four evaluation sites and began controlled sales
in June. Thermal proofing is one of the fastest growing technologies in the
market, and DuPont is one of three companies offering this technology.
DuPont Fluoropolymers - the largest global manufacturer of fluoropolymers -
markets to the telecommunications, aerospace, automotive, electronics, chemical
processing and housewares industries. The DuPont offering includes DuPont(TM)
Teflon(R) and DuPont(TM) Tefzel(R) fluoropolymer resins, DuPont(TM) Autograph(R)
and Teflon(R) non-stick finishes; and Teflon(R) and DuPont(TM) Tedlar(R)
fluoropolymer films.
In 2001 DuPont Fluoropolymers produced the first commercial Teflon(R) polymer
using fundamentally new fluoropolymer manufacturing technology. These new
Teflon(R) products have superior properties compared with conventional FEP
fluoropolymers, and are aimed at demanding precision extrusion applications. The
business also completed its global introduction of Teflon(R) PFA HP Plus for use
in high-purity fluid handling in the semiconductor, pharmaceutical and chemical
industries.
DuPont Surfaces markets DuPont(TM) Corian(R) solid surfaces and DuPont(TM)
Zodiaq(R) quartz surfaces. These materials continue to be popular for homeowners
and have been specified in premier commercial locations. Corian(R) Easy
Elegance(TM) bath collection - a quick-turnaround, easy-to-install, luxurious
bath vanity top offering - was introduced at Lowe's and Home Depot.
2001 versus 2000 Sales of $3.9 billion were down 14 percent, reflecting 12
percent lower volume and 2 percent lower prices. All strategic business units
had lower sales. ATOI was $372 million compared with $714 million. ATOI before
one-time items was $402 million versus $714 million, down 44 percent. While
earnings were lower in all strategic business units, DuPont Electronic
Technologies and DuPont Fluoropolymers were most significantly affected by
protracted weak worldwide demand in electronics and related high-technology
markets. Segment earnings also reflect lower earnings in P&IP resulting from
higher raw material costs and lower volumes.
2000 versus 1999 Sales of $4.5 billion were up 6 percent, reflecting 8 percent
higher volume, partly offset by 2 percent lower prices. All strategic business
units except DuPont Imaging Technologies had higher sales. ATOI was $714 million
compared with $668 million. ATOI before one-time items was $714 million versus
$666 million, up 7 percent. ATOI increased in DuPont Surfaces, DuPont
Fluoropolymers and DuPont Electronic Technologies reflecting higher sales. This
was partly offset by lower ATOI in the remaining strategic business units,
principally in P&IP, which was affected by significantly higher raw material
costs, primarily ethane.
Outlook The outlook for DuPont Packaging & Industrial Polymers will depend on
growth in specialty product applications in packaging, automotive and other
industrial markets; margin improvements resulting from the continued easing of
raw material and energy costs; and ongoing activities aimed at delivering
productivity improvements.
28 DuPont 2001 Annual Report
Management's Discussion and Analysis
The outlook for DuPont Display Technologies, DuPont Electronic Technologies and
DuPont Fluoropolymers largely depends on the timing and the strength of the
economic recovery in the electronic and related high-technology markets.
The major challenge for DuPont Imaging Technologies will be to manage the
transition from analog to digital products for image transfers.
DuPont Surfaces continues to focus on growth in the face of competitive
materials by expanding its market reach and providing a broader product
offering, which includes new surface applications and additional colors. In
2002, DuPont Surfaces will introduce DuPont(TM) Wall Surfaces, a 3mm acrylic
sheet product for builder shower wall and commercial wet wall applications.
OTHER
The company groups the results of its nonaligned businesses and embryonic
businesses under Other. These businesses include the company's remaining
interest in DuPont Photomasks, Inc., DuPont Safety Resources, DuPont Bio-Based
Materials, and Growth Initiatives. In the aggregate, sales from these businesses
represent about 1 percent of total segment sales.
DuPont Safety Resources (DSR) is a recognized authority on safe workplaces,
providing safety solutions for people, property and operations. Consulting and
training services are grouped in practices including workplace safety,
contractor safety, ergonomics and engineering services. Formed in 1998 to
leverage DuPont's 200-year operational excellence in safety, DSR helps
responsible companies gain sustainable improvement in safety performance,
security, productivity, quality, operating costs, and employee morale. Hundreds
of companies worldwide are part of DSR's growing roster of clients who benefit
from implementing a step-change approach to safety to improve business
performance and reduce the impact of workplace injuries, illnesses and deaths.
DuPont Bio-Based Materials focuses on discovering and developing products of
industrial biotechnology for diverse markets. The business applies a rigorous
process to the identification of new and unique applications of industrial
biotechnology that offer superior value to the user. Its first product,
DuPont(TM) Sorona(TM) 3GT, is the company's newest polymer platform. In fiber
form, Sorona(TM) brings softness, stretch and recovery, easy dyeability, and
wrinkle resistance to fabrics. Although currently manufactured using chemical
methods, the key ingredient for Sorona(TM) will soon be produced from a
corn-based microbial process.
2001 versus 2000 Sales of $279 million were down 37 percent, principally
reflecting further reductions in the company's ownership interest in DuPont
Photomasks, Inc. ATOI before one-time items was a loss of $64 million versus a
loss of $23 million.
2000 versus 1999 Sales of $443 million were down 8 percent, primarily reflecting
a reduction in the company's ownership interest in DuPont Photomasks, Inc. ATOI
before one-time items was a loss of $23 million versus earnings of $18 million.
LIQUIDITY & CAPITAL RESOURCES
The company considers its strong financial position and financial flexibility to
be a competitive advantage. The company's credit ratings of AA- and Aa3 from
Standard & Poor's and Moody's Investors Services, respectively, and its
commercial paper ratings of A-1+ by S&P and Prime 1 by Moody's are evidence of
that strength. This advantage is based on strong business operating cash flows
over an economic cycle, a commitment to cash discipline regarding working
capital and capital expenditures, and the intent to pursue a fiscally
responsible policy of accretive acquisitions related to existing lines of
business.
SOURCES OF CASH
The company's liquidity needs can be met through a variety of independent
sources, including: cash from operations, cash, commercial paper markets,
syndicated credit lines, bilateral credit lines, equity and long-term debt
markets, and asset sales.
The company's cash provided by operations was $2.4 billion in 2001. This amount
was $2.7 billion less than the $5.1 billion generated in 2000, primarily due to
recession-related earnings declines and the strong U.S. dollar. In 2000 the
company's cash provided by operations included a one-time benefit of $610
million from the securitization of trade accounts receivable and a transfer from
the pension trust fund of $300 million to pay retiree health care costs. No
transfers were made from the pension trust fund to pay retiree health care costs
in 2001. The company's ratio of current assets to current liabilities was 1.8:1
at year-end 2001,
DuPont 2001 Annual Report 29
Management's Discussion and Analysis
compared with 1.3:1 in 2000. In 1999 cash provided by operations totaled $4.8
billion, essentially flat with 2000.
Cash and cash equivalents and marketable debt securities totaled $5.8 billion at
December 31, 2001. This represents a $4.2 billion increase over December 31,
2000, due primarily to receipt of $7.8 billion from Bristol-Myers Squibb for the
sale of DuPont Pharmaceuticals. This cash was used to reduce commercial paper
borrowings and to repurchase DuPont common stock. The company will use a portion
of its cash in 2002 to pay about $1.9 billion in taxes associated with the gain
on the sale of DuPont Pharmaceuticals and to fund $470 million for the
completion of the DuPont common stock share repurchase program authorized in
1998 and increased in July 2000.
Commercial paper markets are a source of "same day" cash for the company. The
company can access this market at preferred rates given its strong credit
rating, which has been recently affirmed. The weighted-average interest rate
before taxes on short-term borrowings at December 31, 2001, 2000 and 1999, was
7.6 percent, 6.8 percent and 6.0 percent, respectively. The increase in the 2001
rate reflects the shift in the weight of the company's debt from lower rate
commercial paper to higher rate longer-term borrowings payable within one year.
At December 31, 2001, DuPont's commercial paper balance was $75 million, $2.4
billion less than at December 31, 2000. The company's long-term borrowings due
within one year increased $1.1 billion in 2001.
In the unlikely event that the company could not meet its short-term liquidity
needs, the company has access to $3.8 billion in syndicated and bilateral "same
day" credit lines with several major financial institutions. These credit lines
are split about equally between 364-day and multi-year facilities.
DuPont also has access to equity markets and to long-term debt capital markets.
The company's current relatively low long-term borrowing level, strong financial
position and credit rating provide access to these markets.
Proceeds from sales of assets were $8.1 billion in 2001, primarily reflecting
the $7.8 billion received from the DuPont Pharmaceuticals sale. In 2000 and in
1999 proceeds from the sale of assets totaled $0.7 billion and $0.6 billion,
respectively. Additional details on these sales are provided in Note 28 to the
consolidated financial statements.
USES OF CASH
Purchases of property, plant and equipment and investments in affiliates were
$1.6 billion in 2001 compared with $2.0 billion in 2000 and $2.1 billion in
1999. Since 1999 the company has liberated $500 million of cash by reducing
expenditures for property, plant and equipment. The company expects purchases of
property, plant and equipment in 2002 to be about the same as in 2001.
There were no significant payments for businesses acquired in 2001 and 2000.
1999 cash payments for businesses acquired of $5.1 billion included $3.4 billion
for the acquisition of the remaining 80 percent interest in Pioneer and $1.6
billion for the acquisition of Herberts. The Pioneer acquisition included the
issuance of $4.2 billion in common stock. Both of these acquisitions included
the assumption of debt. The company continues to seek accretive acquisitions
related to existing lines of business to strengthen its current portfolio of
businesses.
The company has paid a quarterly common dividend since its first dividend in the
fourth quarter of 1904. Dividends per share of common stock were $1.40 in 2001,
2000 and 1999.
In 1998 the company's Board of Directors approved a program to purchase and
retire up to 20 million shares of DuPont common stock to offset dilution from
shares issued under compensation programs. In July 2000 the company's Board of
Directors approved an increase in the total number of shares of DuPont common
stock remaining to be repurchased under the 1998 program from about 16 million
shares to the total number of shares that could be purchased for $2.5 billion.
These purchases are not limited to those needed to offset dilution from shares
issued under compensation programs. Forty-three million shares were purchased
for $1.8 billion in 2001, 9.5 million shares for $462 million in 2000 and 8.8
million shares for $690 million in 1999. The company completed this program
purchasing 10.8 million shares for $470 million in February 2002. In addition
the company's Board of Directors authorized a new $2 billion share buyback plan
in June 2001.
FINANCIAL CONDITION
At year-end 2001 the company's net debt (borrowings and capital lease
obligations less cash and cash equivalents and marketable debt securities) had
been reduced to less than $1.0 billion, providing the company with significant
financial flexibility. The table below summarizes changes in the company's
consolidated net debt for 1999 through 2001.
30 DuPont 2001 Annual Report
Management's Discussion and Analysis
(Dollars in millions) 2001 2000 1999
- --------------------- ---- ---- ----
Net debt - beginning of year $ 8,288 $ 9,984 $ 10,055
-------- -------- --------
Cash provided by continuing operations 2,419 5,070 4,840
Purchases of property, plant &
equipment & investment in affiliates (1,634) (2,022) (2,103)
Net payments for businesses acquired (78) (46) (5,073)
Proceeds from sales of assets 253 703 609
Net proceeds from sale of
DuPont Pharmaceuticals 7,798 -- --
Dividends paid to stockholders (1,460) (1,465) (1,511)
Acquisition of treasury stock (1,818) (462) (690)
Increase in minority interests 1,980 -- 105
Net cash flow from
discontinued operations (110) -- 4,475
Other (28) (82) (581)
-------- -------- --------
Decrease in net debt 7,322 1,696 71
------- -------- --------
NET DEBT - END OF YEAR $ 966 $ 8,288 $ 9,984
======== ======== ========
Net debt was reduced by $7.3 billion in 2001 from $8.3 billion at year-end 2000
to $1.0 billion at year-end 2001 largely as a result of the sale of DuPont
Pharmaceuticals. Net debt at year-end 1999 totaled $10 billion. The programs
described below also contributed to reduced debt levels.
To broaden sources of liquidity and improve financial flexibility the company
has entered into two minority interest structures and an accounts receivable
securitization program. In addition, the company entered into a synthetic lease
program to improve the efficiency and effectiveness of its leasing activities.
The minority interest transactions provided the company with a new source of
funding at a cost essentially equivalent to debt. The accounts receivable
securitization provided additional liquidity at competitive rates.
MINORITY INTEREST STRUCTURES
In May and December 2001, the company received proceeds of $637 million and
$1,400 million, respectively, from two minority interest transactions. Costs
incurred in connection with these transactions totaled $42 million and are being
amortized to expense over a five-year period. The proceeds were used to reduce
debt and are reported as Minority Interests in the Consolidated Balance Sheet.
The company does not expect to obtain additional investment proceeds utilizing
these structures.
The minority investors earn a preferred, cumulative adjustable return on their
investment. The after-tax distribution reflected in Minority Interests in
Earnings of Consolidated Subsidiaries for 2001 totaled $14 million, reflecting a
preferred return of 2.9 percent. In addition, amortized costs of $2 million in
2001 were reported in Minority Interests in Earnings of Consolidated
Subsidiaries.
The legal structure for the above transactions in each case involved creating
new consolidated limited liability companies with separate assets and
liabilities. DuPont contributed cash as part of the capital structure and assets
that provide security for the repayment of capital to the unrelated minority
investors. The substance of these transactions is to monetize selected assets in
exchange for a cash investment that earns an adjustable preferred return paid to
the minority investors. The assets involved remain on the company's Consolidated
Balance Sheet and continue to be managed by the company. In addition, the
company manages the new companies and generally has the right to dispose of
their assets for fair value and substitute cash or other assets of equal value
as security to the minority investors, provided the minority investors consent
to the asset substitution. Secured assets included in the above transactions are
real estate, nonstrategic operating assets and equity securities in certain
consolidated companies.
The company has the option to redeem some or all of the minority interests in
both transactions at any time. In limited circumstances, such as nonpayment of
the preferred return, the minority investors can require the sale of the assets
in the new companies. By 2006 the minority investors' adjustable returns may be
renegotiated at the request of the company or the minority investors. If
agreement on the adjustable returns is not reached, the company will redeem the
minority interests or remarket them to other third parties.
RECEIVABLES SECURITIZATION PROGRAM
An accounts receivable securitization program was initiated in 2000 to sell an
interest in a revolving pool of trade accounts receivable. Under the program,
the company sells certain trade receivables to a consolidated company which in
turn sells an interest in those receivables to third parties. Proceeds received
in 2000 from the sale of the interest were $610 million and were reflected as a
reduction in trade accounts receivable. At December 31, 2001, the interest had
been reduced to $468 million. Miscellaneous receivables include an
overcollateralization of $130 million as security for this program.
The cost of this program is competitive with other sources of financing, and
cash proceeds were used to reduce debt. Expenses in connection with this program
were $16 million and
DuPont 2001 Annual Report 31
Management's Discussion and Analysis
$27 million in 2000 and 2001, respectively. The company may terminate the
program at any time by stopping the sale of receivables. In the future, the
company does not expect the interest sold in the revolving pool of receivables
to exceed $500 million.
SYNTHETIC LEASE PROGRAM
A synthetic lease program was implemented in 2000 as an alternative financing
source for selected assets at competitive rates. In 2000 and 2001 this program
was used for the sale and leaseback of corporate aircraft, rail cars and other
equipment. In addition, the company has entered into agreements to lease, upon
completion, manufacturing facilities in Singapore and Tennessee for the
Specialty Fibers segment. The total value of assets under these leases as of
December 31, 2001, was $450 million with lease terms ranging from one to seven
years. Lease payments totaled $21 million in 2001 and were reported as operating
expense in the Consolidated Income Statement. These are operating leases and
accordingly the related assets and liabilities are not recorded on the company's
Consolidated Balance Sheet. The company may terminate the program at any time by
purchasing the assets. Should the company decide neither to renew the leases nor
to exercise its purchase option, it must pay the owner a residual value
guarantee amount, which may be recovered from a sale of the property to a third
party. Residual value guarantees totaled $264 million at December 31, 2001.
Information related to the company's contractual obligations and commercial
commitments are summarized in the following tables (dollars in millions):
Payments Due In
---------------
Total at 2007
Contractual December 31, 2003- 2005- and
Obligations 2001 2002 2004 2006 beyond
------ ------ ------ ------ ------
Long-term debt(1) $6,353 $1,050 $1,751 $ 472 $3,080
Capital lease
obligations(1) 50 3 6 7 34
Operating leases(2) 905 200 272 173 260
Unconditional
purchase
obligations(3) 171 110 19 20 22
Other long-term
obligations(4) 757 150 284 268 55
------ ------ ------ ------ ------
Total contractual
cash obligations $8,236 $1,513 $2,332 $ 940 $3,451
====== ====== ====== ====== ======
(1) Includes the portion payable within one year; see Note 20 to the
consolidated financial statements.
(2) Includes synthetic leases with contractual obligations totaling $76 million.
(3) Includes fixed obligations to purchase certain raw materials.
(4) Includes long-term contracts with Computer Sciences Corporation and
Accenture LLP for information technology infrastructure and information
systems consulting.
Total at
December 31,
Commercial Commitments 2001
- ---------------------- ----
Lines of credit $ --
Standby letters of credit 17
Guarantees(1) 1,913
Residual value guarantees(2) 264
------
Total commercial commitments $2,194
======
(1) Includes direct guarantees of affiliates and other companies of $953 million
and guarantees of certain financial obligations of Conoco of $960 million;
see Note 25 to the consolidated financial statements.
(2) Applicable to the company's synthetic lease program.
In summary, the company expects to meet its $8.2 billion contractual obligations
through its normal sources of liquidity and does not expect to finance any of
its $2.2 billion in commercial commitments. However, the company believes its
financial strength and strong balance sheet could be used to satisfy these
obligations and commitments should unforeseen circumstances arise.
COMMERCIAL PAPER FACILITY
In the first quarter of 2002 the company intends to implement a commercial paper
conduit financing program to reduce the financing costs of the synthetic lease
programs and the accounts receivable securitization program by gaining direct
access to the asset-backed commercial paper market. The conduit will issue notes
secured by the receivables interests, and the equipment and real estate under
synthetic leases.
The legal structure of the facility will include nonconsolidated entities that
are not affiliated with the company through ownership interests. No director,
officer or employee of the company will be a director, officer or employee of
any of these entities.
32 DuPont 2001 Annual Report
Management's Discussion and Analysis
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
Purchased in-process research and development represents the value assigned in a
purchase business combination to research and development projects of the
acquired business that were commenced, but not yet completed, at the date of
acquisition and which, if unsuccessful, have no alternative future use in
research and development activities or otherwise. In accordance with SFAS No. 2,
"Accounting for Research and Development Costs," as interpreted by FASB
Interpretation No. 4, amounts assigned to purchased in-process research and
development meeting the above criteria must be charged to expense at the date of
consummation of the purchase business combination. In this regard, the company
recorded charges totaling $2,250 million in 1999 with respect to two purchase
business combinations completed that year. In 2000 the company recorded a credit
totaling $11 million for revisions of preliminary estimates for a purchase
business combination completed in 1999. There were no charges related to
in-process research and development expense in 2001.
The following is a more detailed discussion of the purchased in-process research
and development associated with each of these acquisitions. The company believes
that the assumptions and forecasts used in valuing purchased in-process research
and development were reasonable at the time of the respective business
combination. No assurance can be given, however, that future events will
transpire as estimated. As such, actual results may vary from the projected
results.
Management expects to continue supporting these research and development
efforts. However, as noted below, there is uncertainty associated with the
successful completion of these research and development projects. There can be
no assurance that any of these projects will meet with either technological or
commercial success. If none of these projects is successfully completed, the
sales and profitability of the company may be adversely affected in future
periods. Failure of any single project would not materially impact the company's
financial condition, liquidity or results of operations.
VALUATION METHODOLOGY
There are three general types of in-process research and development projects -
new product development projects, process modification projects and new
manufacturing process projects. New product development projects have as their
goal the discovery and development of new formulations and/or significant
modifications of existing product formulations to meet specific end-user needs.
Process modification projects have as their goal the design and development of
significant modifications to existing capital assets in order to increase
capacity or otherwise improve the efficiency of the manufacturing process. New
manufacturing process projects have as their goal the design and development of
totally new manufacturing processes. Successful completion of a project is
deemed to occur when the new product or process has been defined and
technological feasibility has been objectively demonstrated.
The fair values of purchased in-process research and development projects are
based on estimates prepared by management. These estimates utilize explicit
assumptions about the range of possible estimated cash flows and their
respective probabilities to determine the expected cash flow for each project.
Under this approach, projected cash flows are adjusted for risks prior to being
discounted to present value. Risks so addressed include completion risk,
competitive risk and timing risk. A simplified model of these procedures is as
follows:
Cash flows from successful completion
LESS: Cash flows to complete
LESS: Return on assets employed
---------------------------------------------
EQUALS: Adjusted cash flows
TIMES: Probability of technical & commercial success
---------------------------------------------
EQUALS: Risk adjusted cash flows
TIMES: Present value factor
---------------------------------------------
EQUALS: Fair value
Cash flows from successful completion represent the estimated future revenues
and/or cost savings forecast to be realized from the successful completion of
the project less the costs and expenses required to generate those revenues/cost
savings. Significant assumptions include estimates of market size, market share
to be achieved, timing of completion, life cycle pattern, product pricing,
operating margins and the effects of competition. These projections do not
anticipate material changes from historical pricing, margins and expense levels
unless specifically noted otherwise.
Cash flows to complete represent the estimated future research and development
costs required to complete the project, assuming the project is successful.
Significant assumptions
DuPont 2001 Annual Report 33
Management's Discussion and Analysis
include the work required to complete the project, the timing of expenditures
and the date of completion.
Return on assets employed represents an allocation of the project's estimated
cash flows from successful completion to existing assets, including identifiable
intangible assets, thereby ensuring that all appropriate future cash flows are
attributed to existing assets for purposes of determining their fair value.
Probability of technical and commercial success represents management's informed
assessment of the unique risks associated with successfully completing a
specific project and implementing the project's results. It is used to adjust
for the risk that a project may not be successfully completed and for the risk
that, even if the project is successfully completed, it may not be able to be
successfully implemented on a commercial scale. In developing these
probabilities, consideration is given to scientific assessments regarding the
project's stage of completion, the results achieved to date, and the complexity
of completing the project. Consideration is also given to the business'
historical experience with similar types of research and development projects
and to the effects competition, changes in industry trends, and similar economic
risks may have on successful completion of the project. Probability of technical
and commercial success also is used by the company in managing its research and
development activities.
Risk adjusted cash flows are discounted to present value using a discount rate
generally aligned with the estimated weighted average cost of capital for the
acquired business. The weighted average cost of capital is a market-based
measure of investment risk, i.e., the risk associated with investing in a
particular business, company, industry, etc.
PIONEER HI-BRED INTERNATIONAL
On October 1, 1999, the company acquired the approximately 80 percent of Pioneer
Hi-Bred International not previously owned by the company for $7,684 million
consisting of:
- - $3,419 million representing cash payments for the purchase of Pioneer
shares;
- - $4,154 million representing the fair value of 68,612,135 shares of DuPont
common stock issued in exchange for Pioneer shares;
- - $81 million representing 80 percent of the fair value of options to purchase
DuPont common stock issued in exchange for the outstanding vested options to
purchase Pioneer common stock under Pioneer's employee stock option plan;
and
- - $30 million representing the company's estimated acquisition related costs
and expenses.
The allocation of purchase price to the identifiable assets acquired and
liabilities assumed, based on their estimated fair values, is as follows
(dollars in millions):
Current assets $ 2,176
Property, plant and equipment 602
Other assets 2,264
In-process research and development 2,175
Current liabilities (954)
Long-term borrowings (163)
Other liabilities (287)
Deferred income taxes (847)
Minority interests (6)
-------
Total identifiable assets less liabilities $ 4,960
=======
The $2,724 million excess of the cost of the acquisition over the estimated fair
value of the identifiable assets less liabilities was recorded as goodwill.
At the date of acquisition, Pioneer had extensive research and development
efforts underway that met the criteria for purchased in-process research and
development. These research and development activities had as their goals (a)
the improvement of harvestable yield, (b) the reduction of crop losses, grower
input costs and risk through genetically improving insect, disease and herbicide
resistance and (c) improvement of the quality of the grain and forage produced
through a combination of traditional breeding methods and modern biotechnology.
Pioneer's research and development efforts consist of new product development
for its traditional businesses and trait and technology development. Of the
$2,175 million estimated fair value of purchased in-process research and
development, $1,012 million represents the estimated fair value of projects
related to new product development for traditional businesses and $1,163 million
represents the estimated fair value of projects related to trait and technology
development.
New product development for traditional businesses consists of Pioneer's seed
research done through classical plant breeding
34 DuPont 2001 Annual Report
Management's Discussion and Analysis
techniques. Each year, Pioneer maize researchers evaluate about 1 million new
experimental corn hybrids. These hybrids enter into a four- to five-year testing
cycle during which the hybrids are tested in a range of soil types, stresses and
climate conditions. As the results of these tests become known, fewer and fewer
hybrids are designated as candidates for further testing. The Pioneer research
and development procedures classify these projects based on their stage of
completion as follows:
Probability of
Approximate Technical &
Stage of Number of Commercial
Completion Hybrids Success
- ---------- ------- -------
First cross 1,000,000 0.01%
Second generation 210,000 0.02%
R1 - R2 10,000 0.50%
R3 250 20.00%
R4 160 30.00%
R5 50 95.00%
========= =======
Each hybrid at each stage of completion is genetically unique. The probability
of technical and commercial success in this table is the probability that an
individual hybrid at a particular stage of completion will ultimately become a
commercial product. These probabilities were developed based on Pioneer's
extensive historical experience in developing new hybrids of corn. While stage
of completion is indicative of how long it will take to develop hybrids in that
stage, results can vary, with some hybrids taking less time and others taking
longer. Based on these probabilities, it is projected that Pioneer will
introduce, on average, approximately 50 new hybrids of corn each year for the
next seven years as a result of these research and development projects. These
projects represent approximately 73 percent of the estimated fair value of
research and development projects related to new product development for
traditional businesses.
After seven years, new hybrids will principally result from research and
development projects that have not yet begun. These future projects are not
included in the valuation of purchased in-process research and development.
Each year, Pioneer's soybean researchers test approximately 500,000 new
experimental lines of soybeans. These experimental lines of soybeans undergo a
testing and selection process similar to the one described for corn. Soybean
projects are classified as to stage of completion using essentially the same
classification system shown for corn. Probabilities of technical and commercial
success were estimated for each stage of completion based on Pioneer's extensive
historical experience. Soybean research and development projects represent
approximately 15 percent of the estimated fair value of in-process research and
development projects related to new product development for traditional
businesses.
Research and development projects for alfalfa, sorghum, wheat, sunflowers,
canola and microbial products make up the remaining approximately 12 percent of
the estimated fair value of in-process research and development projects related
to new product development for traditional businesses.
Research and development projects related to trait and technology development
have as their objective the use of modern biotechnology to improve insect,
disease and herbicide resistance in crops and to develop products that increase
the value of commodity grains by modifying their protein, oil and carbohydrate
components. At the date of acquisition, six in-process projects had progressed
sufficiently to meet the criteria used by DuPont to identify projects qualifying
as purchased in-process research and development. Key criteria in this
identification process include the ability to reasonably estimate the future
benefits if the project is successful, the cost to complete the project, the
probable completion date, and the project's probability of technical and
commercial success.
Approximately 53 percent of the estimated fair value of research and development
projects related to trait and technology development is represented by a project
to develop resistance to a broad spectrum of lepidopteran insects, including
European corn borer. At the date of acquisition, this project was expected to be
completed in 2002 and the probability of technical and commercial success was
estimated to be 85 percent. At December 31, 2001, this project is expected to be
completed in 2003 and the probability of technical and commercial success is
estimated to be 95 percent.
Approximately 20 percent of the estimated fair value of research and development
projects related to trait and technology development is represented by a project
to impart resistance to molds and mycotoxins. At the date of acquisition, this
project was expected to be completed in 2004 and the probability of technical
and commercial success was estimated to be 80 percent. At December 31, 2001,
this project is expected to be
DuPont 2001 Annual Report 35
Management's Discussion and Analysis
completed in 2009 and the probability of technical and commercial success is
estimated to be 40 percent.
Approximately 15 percent of the estimated fair value of research and development
projects related to trait and technology development is represented by a project
to develop resistance to corn rootworm. At the date of acquisition, this project
was expected to be completed in 2002 and the probability of technical and
commercial success was estimated to be 65 percent. At December 31, 2001, this
project is expected to be completed in 2004 and the probability of technical and
commercial success is estimated to be 80 percent.
The remaining approximately 12 percent of the estimated fair value of research
and development projects related to trait and technology development is
represented by projects to develop sclerotinia resistance in oil seeds; nuclear
male sterility in corn; and high oleic high oil corn. At the date of
acquisition, these projects were expected to be completed in 2003, 2005 and
2004, respectively, and the probability of technical and commercial success was
estimated to be 65 percent, 70 percent and 80 percent, respectively. At December
31, 2001, the research project to develop sclerotinia resistance in oil seeds
expanded and is expected to be completed between 2005 and 2008, and the
probability of technical and commercial success is estimated to be from 50
percent to 70 percent depending on the particular oil seed involved. The project
to develop nuclear male sterility in corn is expected to be completed in 2006
and the probability of technical and commercial success is estimated to be 95
percent. The project to develop high oleic high oil corn was discontinued.
At the date of acquisition, the company expected to spend approximately $960
million through 2006 to complete these projects. Risk adjusted cash flows were
discounted to present value using discount rates ranging from 12.25 percent to
13.75 percent, except for the high oleic high oil corn trait and technology
project for which a 17 percent discount rate was used. These discount rates are
somewhat higher than the 11.5 percent estimated weighted average cost of capital
for Pioneer and are intended to compensate for projection risk and market
uncertainty beyond that explicitly addressed in the cash flow projections.
Future results of Pioneer may be significantly affected by government programs,
weather and commodity prices.
PERFORMANCE COATINGS
In February 1999 the company purchased the global Herberts coatings business
from Hoechst AG for $1,588 million cash and acquisition related costs of $10
million. The allocation of purchase price to the identifiable assets acquired
and liabilities assumed, based on their estimated fair values, is as follows
(dollars in millions):
Current assets $ 720
Property, plant and equipment 526
Other assets 203
In-process research and development 64
Liabilities (including assumed debt of $113) (690)
-----
Total identifiable assets less liabilities $ 823
=====
The $775 million excess of the cost of the acquisition over the estimated fair
value of the identifiable assets less liabilities was recorded as goodwill.
At the date of the acquisition, the business had 29 research and development
projects meeting the criteria for purchased in-process research and development.
These projects were of two principal types (dollars in millions):
Number of Fair
Project Type Projects Value
- ------------ -------- -----
New product development 25 $51
New manufacturing processes 4 $13
== ===
Cash flows were discounted to present value using a 16 percent discount rate.
This rate is higher than the estimated weighted average cost of capital for this
business and reflects management's assessment of the risks of projections,
volatility and market uncertainty. Other than reflecting the future benefits
associated with planned cost reduction initiatives, the project cash flows do
not anticipate any material changes from historical pricing, margins and expense
levels.
Management estimates the probability of technical and commercial success for new
product development projects ranges from 28 percent to 85 percent. These
projects are expected to be completed by 2005.
Management estimates the probability of technical and commercial success for new
manufacturing process projects ranges from 29 percent to 49 percent. These
projects are expected to be completed by 2005.
36 DuPont 2001 Annual Report
Management's Discussion and Analysis
The risk-adjusted cost to complete these 29 projects is estimated to total $24
million through 2005. As of December 31, 2001, eleven of the projects have
achieved technical feasibility; five have been terminated and the remaining
projects are still in process.
FINANCIAL INSTRUMENTS
DERIVATIVES AND OTHER HEDGING INSTRUMENTS
Under procedures and controls established by the company's Financial Risk
Management Framework, the company enters into contractual arrangements
(derivatives) in the ordinary course of business to hedge its exposure to
foreign currency, interest rate and commodity price risks. The counterparties to
these contractual arrangements are major financial institutions and major
petrochemical and petroleum companies. Although the company is exposed to credit
loss in the event of nonperformance by these counterparties, this exposure is
managed through credit approvals, limits and monitoring procedures and, to the
extent possible, by restricting the period over which unpaid balances are
allowed to accumulate. The company does not anticipate nonperformance by
counterparties to these contracts, and no material loss would be expected from
any such nonperformance.
FOREIGN CURRENCY RISK
The company's objective in managing exposure to foreign currency fluctuations is
to reduce earnings and cash flow volatility associated with foreign currency
rate changes. Accordingly, the company enters into various contracts that change
in value as foreign exchange rates change to protect the value of its existing
foreign currency-denominated assets, liabilities, commitments and cash flows.
The company routinely uses forward exchange contracts to hedge its net
exposures, by currency, related to the foreign currency-denominated monetary
assets and liabilities of its operations. The primary business objective of this
hedging program is to maintain an approximately balanced position in foreign
currencies so that exchange gains and losses resulting from exchange rate
changes, net of related tax effects, are minimized.
In 2001 the company implemented a new foreign currency revenue hedging program
to reduce exposure to earnings and cash flow volatility related to changes in
foreign currency exchange rates. Option and forward exchange contracts are used
to hedge a portion of anticipated foreign currency revenues so that gains and
losses on these contracts offset changes in the related foreign
currency-denominated revenues.
In addition, from time to time, the company will enter into forward exchange
contracts to establish with certainty the U.S. dollar amount of future firm
commitments denominated in a foreign currency. Decisions regarding whether or
not to hedge a given commitment are made on a case-by-case basis taking into
consideration the amount and duration of the exposure, market volatility and
economic trends. Forward exchange contracts are also used from time to time to
manage near-term foreign currency cash requirements and to place foreign
currency deposits and marketable securities investments into currencies offering
favorable returns.
In December 1998 the company entered into forward exchange contracts to purchase
3.1 billion German marks for $1.9 billion in conjunction with the signing of a
definitive agreement to purchase the performance coatings business of Hoechst AG
for 3.1 billion German marks. The business purpose of these contracts was to
lock in the U.S. dollar functional currency cost of this acquisition and thereby
prevent adverse movements in the dollar/mark exchange rate from causing the net
U.S. dollar cash purchase price to exceed the negotiated fair value of the
business. The use of hedge accounting for these contracts was precluded by
accounting guidance. Changes in fair value of these contracts were included in
income in the period the change occurred. The contracts expired in August 1999.
INTEREST RATE RISK
The company uses a combination of financial instruments, including interest rate
swaps and structured medium-term financings, as part of its program to manage
the interest rate mix of the total debt portfolio and related overall cost of
borrowing.
Interest rate swaps involve the exchange of fixed for floating rate interest
payments to effectively convert fixed rate debt into floating rate debt based on
LIBOR or commercial paper rates. Interest rate swaps allow the company to
maintain a target range of floating rate debt.
Structured medium-term financings consist of a structured medium-term note and a
concurrently executed structured medium-term swap which, for any and all
calculations of the note's interest and/or principal payments over the term of
the
DuPont 2001 Annual Report 37
Management's Discussion and Analysis
note, provide a fully hedged transaction such that the note is effectively
converted to a U.S. dollar-denominated fixed or floating interest rate payment.
Structured medium-term swaps allow the company to be fully hedged against
fluctuations in exchange rates and interest rates and to achieve U.S. dollar
fixed or floating interest rate payments below the market interest rate, at the
date of issuance, for borrowings of comparable maturity.
COMMODITY PRICE RISK
The company enters into exchange-traded and over-the-counter derivative
commodity instruments to hedge its exposure to price fluctuations on certain raw
material purchases.
A portion of energy feedstock purchases is hedged to reduce price volatility
using various risk management strategies. Hedged commodity purchases include
natural gas, ethane and cyclohexane. In addition, certain sales of ethylene are
also hedged.
Pioneer contracts with independent growers to produce finished seed inventory.
Under these contracts, Pioneer compensates growers with bushel equivalents that
are marketed to Pioneer for the market price of grain for a period of time
following harvest. Pioneer uses derivative instruments such as commodity futures
that have a high correlation to the underlying commodity to hedge the commodity
price risk involved in compensating growers.
Additional details on these and other financial instruments are set forth in
Note 30 to the financial statements.
VALUE AT RISK
A Value-at-Risk analysis provides a forward-looking perspective of the maximum
potential loss in fair value for a defined period of time assuming normal market
conditions and a given confidence level. The company believes this analysis
provides a more meaningful view of its exposure to market risk factors versus
the tabular presentation of notional amounts that has been provided in the past.
The company's risk management portfolio consists of a variety of hedging
instruments which provide protection from volatility in the areas of interest
rates, foreign currency, agricultural commodities and energy feedstock
commodities. The valuations and risk calculations for the analysis were
conducted using our risk management portfolios as of December 31, 2001 and 2000.
The analysis used a Monte Carlo simulation model that employed 3,000 market
scenarios including all risk factors associated with the hedging instruments in
the company's risk management portfolios. The calculations were conducted over a
20 business day period at a 95 percent confidence level.
The following table details the results of the Value-at-Risk analysis for each
significant risk management portfolio at December 31, 2001 and 2000.
(Dollars in millions) 2001 2000
- --------------------- ---- ----
Interest rates $(30) $ (7)
Foreign currency (20) (29)
Agricultural commodities (20) (20)
Energy feedstock commodities (14) -- *
==== ====
* No energy feedstock commodity hedges were in place at the end of 2000.
The table above represents the Value-at-Risk maximum potential pretax loss when
each risk management portfolio is valued individually. The Value-at-Risk for the
entire risk management portfolio is $(41) for 2001 and $(24) for 2000; these
values reflect the diversification benefits and covariance correlation of the
total portfolio. The model's results are only estimates and are not intended to
forecast actual losses that may be incurred in future periods.
The company believes its risk management programs are highly effective, and
therefore expects the potential loss in value for each risk management portfolio
described above would be largely offset by changes in the value of the
underlying exposures.
ENVIRONMENTAL MATTERS
DuPont operates global manufacturing facilities, product-handling and
distribution facilities that are subject to a broad array of environmental laws
and regulations. Company policy requires that all operations fully meet or
exceed legal and regulatory requirements. In addition DuPont implements
voluntary programs to reduce air emissions, eliminate the generation of
hazardous waste, decrease the volume of wastewater discharges and increase the
efficiency of energy use. The costs to comply with complex environmental laws
and regulations, as well as internal voluntary programs and goals, are
significant and will continue to be so for the foreseeable future. Even though
these costs may increase in the future, they are not expected to have a material
impact on the company's competitive or financial position, liquidity or results
of operations.
38 DuPont 2001 Annual Report
Management's Discussion and Analysis
In 2001 DuPont spent about $103 million on environmental capital projects either
required by law or necessary to meet the company's internal waste elimination
and pollution prevention goals. The company currently estimates expenditures for
environmental-related capital projects will total $113 million in 2002. In the
United States, significant capital expenditures are expected to be required over
the next decade for treatment, storage and disposal facilities for solid and
hazardous waste and for compliance with the Clean Air Act (CAA). Until all CAA
regulatory requirements are established and known, considerable uncertainty will
remain regarding future estimates for capital expenditures. Total CAA capital
costs over the next two years are currently estimated to range from $10 million
to $20 million.
The Environmental Protection Agency (EPA) challenged the U.S. chemical industry
to voluntarily conduct screening level health and environmental effects testing
on nearly 3,000 high production volume (HPV) chemicals or to make equivalent
information publicly available. A HPV chemical is a chemical listed on the 1990
Inventory Update Rule with an annual U.S. cumulative production of 1 million
pounds or more. The cost to DuPont of testing for HPV chemicals it makes is
estimated to be $8 million to $10 million over the next four years; for the
entire industry, the cost of testing is estimated to be $500 million.
Global climate change is being addressed by the Framework Convention on Climate
Change adopted in 1992. The Kyoto Protocol, adopted in December 1997, is an
effort to establish short-term actions under the Convention. With completion of
technical rules in November 2001, it now appears likely that the Protocol will
be ratified by enough countries to become operational. The United States is
unlikely to ratify the Protocol. The Protocol would establish significant
emission reduction targets for six gases considered to have global warming
potential and would drive mandatory reductions in developed nations outside the
United States. DuPont has a stake in a number of these gases - CO2, N2O, HFCs
and PFCs - and has been reducing its emissions of these gases since 1991. While
well ahead of the target/timetable contemplated by the Protocol on a global
basis, the company faces prospects of country-specific restrictions where major
reductions have not yet been achieved. DuPont is working to enable success of
emissions trading mechanisms under the Protocol that could aid in satisfying
such country-specific requirements. Emission reduction mandates within the
United States are not expected in the near future, although the Administration
has announced plans for voluntary programs and incentives.
Estimated pretax environmental expenses charged to current operations totaled
about $550 million in both 2001 and 2000 compared with $560 million in 1999.
These expenses include the remediation accruals discussed below, operating,
maintenance and depreciation costs for solid waste, air and water pollution
control facilities and the costs of environmental research activities. The
largest of these expenses in 2001 resulted from the operation of water pollution
control facilities and solid waste management facilities for about $180 million
and $150 million, respectively. About 77 percent of total annual expenses
resulted from the operations in the United States.
REMEDIATION ACCRUALS
DuPont accrues for remediation activities when it is probable that a liability
has been incurred and reasonable estimates of the liability can be made. These
accrued liabilities exclude claims against third parties and are not discounted.
Much of this liability results from the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA, often referred to as Superfund), the
Resource Conservation and Recovery Act (RCRA) and similar state laws. These laws
require the company to undertake certain investigative and remedial activities
at sites where the company conducts or once conducted operations or at sites
where company-generated waste was disposed. The accrual also includes a number
of sites identified by the company that may require environmental remediation,
but which are not currently the subject of CERCLA, RCRA or state enforcement
activities. Over the next two decades the company may incur significant costs
under both CERCLA and RCRA. Considerable uncertainty exists with respect to
these costs and under adverse changes in circumstances, potential liability may
exceed amounts accrued as of December 31, 2001.
Remediation activities vary substantially in duration and cost from site to
site. These activities, and their associated costs, depend on the mix of unique
site characteristics, evolving remediation technologies, diverse regulatory
agencies and enforcement policies, as well as the presence or absence of
potentially liable third parties. Therefore, it is difficult to develop
reasonable estimates of future site remediation costs. At December 31, 2001, the
company's balance sheet included an accrued liability of $385 million as
compared with $408 million and $435 million at year-end
DuPont 2001 Annual Report 39
Management's Discussion and Analysis
2000 and 1999, respectively. Approximately 77 percent of the company's
environmental reserve at December 31, 2001, was attributable to RCRA and similar
remediation liabilities, while 23 percent was attributable to CERCLA
liabilities. During 2001, remediation accruals of $43 million were added to the
reserve compared with $38 million in 2000 and $35 million in 1999.
REMEDIATION EXPENDITURES
RCRA extensively regulates and requires permits for the treatment, storage and
disposal of hazardous waste. RCRA requires that permitted facilities undertake
an assessment of environmental contamination at the facility. If conditions
warrant, companies may be required to remediate contamination caused by prior
operations. As contrasted by CERCLA, the costs of the RCRA corrective action
program are typically borne solely by the company. The company anticipates that
significant ongoing expenditures for RCRA remediation activities may be required
over the next two decades. Annual expenditures for the near term, however, are
not expected to vary significantly from the range of such expenditures
experienced in the past few years. Longer term, expenditures are subject to
considerable uncertainty and may fluctuate significantly. The company's
expenditures associated with RCRA and similar remediation activities were
approximately $49 million in 2001, $53 million in 2000 and $43 million in 1999.
The company, from time to time, receives requests for information or notices of
potential liability from the EPA and state environmental agencies alleging that
the company is a "potentially responsible party" (PRP) under CERCLA or an
equivalent state statute. The company has also, on occasion, been engaged in
cost recovery litigation initiated by those agencies or by private parties.
These requests, notices and lawsuits assert potential liability for remediation
costs at various sites that typically are not company owned, but allegedly
contain wastes attributable to the company's past operations. As of December 31,
2001, the company had been notified of potential liability under CERCLA or state
law at 359 sites around the United States, with active remediation under way at
126 of those sites. In addition, the company has resolved its liability at 134
sites, either by completing remedial actions with other PRPs or by participating
in "de minimis buyouts" with other PRPs whose waste, like the company's,
represented only a small fraction of the total waste present at a site. The
company received notice of potential liability at 11 new sites during 2001
compared with 13 similar notices in 2000 and 10 in 1999. In 2001, 10 sites were
settled by the company. The company's expenditures associated with CERCLA and
similar state remediation activities were approximately $17 million in 2001, $12
million in 2000 and $19 million in 1999.
For nearly all Superfund sites, the company's potential liability will be
significantly less than the total site remediation costs because the percentage
of waste attributable to the company versus that attributable to all other PRPs
is relatively low. Other PRPs at sites where the company is a party typically
have the financial strength to meet their obligations and, where they do not, or
where PRPs cannot be located, the company's own share of liability has not
materially increased. There are relatively few sites where the company is a
major participant, and the cost to the company of remediation at those sites,
and at all CERCLA sites in the aggregate, is not expected to have a material
impact on the company's competitive or financial position, liquidity or results
of operations.
Total expenditures for previously accrued remediation activities under CERCLA,
RCRA and similar state laws were $66 million in 2001, $65 million in 2000 and
$62 million in 1999. Although future remediation expenditures in excess of
current reserves are possible, the effect on future financial results is not
subject to reasonable estimation because of the considerable uncertainty
regarding the cost and timing of expenditures.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements which may be identified by their
use of words like "plans," "expects," "will," "anticipates," "intends,"
"projects," "estimates" or other words of similar meaning. All statements that
address expectations or projections about the future, including statements about
the company's strategy for growth, product development, market position,
expenditures and financial results are forward-looking statements.
Forward-looking statements are based on certain assumptions and expectations of
future events. The company cannot guarantee that these assumptions and
expectations are accurate or will be realized. In addition to the factors
discussed in this
40 DuPont 2001 Annual Report
Management's Discussion and Analysis
report, the following are some of the important factors that could cause the
company's actual results to differ materially from those projected in any such
forward-looking statements:
- - The company operates in approximately 75 countries worldwide. The company
derives about half of its revenues from sales inside the United States and
about half from sales outside the United States. Therefore, governmental and
quasi-governmental activities, including changes in the laws or policies of
any country in which the company operates, could affect the company's
business and profitability in that country. Also the company's business and
profitability in a particular country could be affected by political or
economic repercussions on a domestic, country specific or global level from
terrorist activities and the response to such activities. In addition,
economic factors (including a decline in U.S. or European sales from slowing
economic growth in those regions, inflation or fluctuations in interest and
foreign currency exchange rates) and competitive factors (such as greater
price competition or expiration of patent protection) in those countries
could affect the company's revenues, expenses and results of operations.
- - The company's ability to grow earnings will be affected by increases in the
cost of raw materials, particularly oil, natural gas and products derived
from oil and natural gas. The company may not be able to fully offset the
effects of higher raw material costs through price increases or productivity
improvements.
- - The company's growth objectives are largely dependent on its ability to
renew its pipeline of new products and to bring those products to market.
This ability may be adversely affected by difficulties or delays in product
development such as the inability to: identify viable new products;
successfully complete research and development; obtain relevant regulatory
approvals; obtain adequate intellectual property protection; or gain market
acceptance of the new products.
- - As part of its strategy for growth, the company has made and may continue to
make acquisitions and divestitures and form strategic alliances. There can
be no assurance that these will be completed or beneficial to the company.
- - To a significant degree, results in the company's Agriculture & Nutrition
segment reflect changes in agricultural conditions, including weather and
government programs. These results also reflect the seasonality of sales of
agricultural products; highest sales in the United States occur in the first
half of the year. In addition, demand for products produced in these
segments may be affected by market acceptance of genetically enhanced
products.
- - The company has undertaken and may continue to undertake productivity
initiatives, including organizational restructurings and Six Sigma
productivity improvement projects, to improve performance and generate cost
savings. There can be no assurance that these will be completed or
beneficial to the company. Also there can be no assurance that any estimated
cost savings from such activities will be realized.
- - The company's facilities are subject to a broad array of environmental laws
and regulations. The costs of complying with complex environmental laws and
regulations, as well as internal voluntary programs, are significant and
will continue to be so for the foreseeable future. The company's accruals
for such costs and liabilities may not be adequate since the estimates on
which the accruals are based depend on a number of factors including the
nature of the allegation, the complexity of the site, the nature of the
remedy, the outcome of discussions with regulatory agencies and other
potentially responsible parties (PRPs) at multiparty sites, and the number
and financial viability of other PRPs.
- - The company's results of operations could be affected by significant
litigation adverse to the company including product liability claims, patent
infringement claims and antitrust claims.
The foregoing list of important factors is not inclusive, or necessarily in
order of importance.
DuPont 2001 Annual Report 41
Responsibility for Financial Reporting
Management is responsible for the consolidated financial statements and the
other financial information contained in this Annual Report. The financial
statements have been prepared in accordance with generally accepted accounting
principles considered by management to present fairly the company's financial
position, results of operations and cash flows. The financial statements include
some amounts that are based on management's best estimates and judgments.
The company's system of internal controls is designed to provide reasonable
assurance as to the protection of assets against loss from unauthorized use or
disposition, and the reliability of financial records for preparing financial
statements and maintaining accountability for assets. The company's business
ethics policy is the cornerstone of our internal control system. This policy
sets forth management's commitment to conduct business worldwide with the
highest ethical standards and in conformity with applicable laws. The business
ethics policy also requires that the documents supporting all transactions
clearly describe their true nature and that all transactions be properly
reported and classified in the financial records. The system is monitored by an
extensive program of internal audit, and management believes that the system of
internal controls at December 31, 2001, meets the objectives noted above.
The financial statements have been audited by the company's independent
accountants, PricewaterhouseCoopers LLP. The purpose of their audit is to
independently affirm the fairness of management's reporting of financial
position, results of operations and cash flows. To express the opinion set forth
in their report, they study and evaluate the internal controls to the extent
they deem necessary. Their report is shown on this page. The adequacy of the
company's internal controls and the accounting principles employed in financial
reporting are under the general oversight of the Audit Committee of the Board of
Directors. This committee also has responsibility for employing the independent
accountants, subject to stockholder ratification. No member of this committee
may be an officer or employee of the company or any subsidiary or affiliated
company. The independent accountants and the internal auditors have direct
access to the Audit Committee, and they meet with the committee from time to
time, with and without management present, to discuss accounting, auditing and
financial reporting matters.
/s/ C. O. Holliday, Jr. /s/ Gary M. Pfeiffer
Charles O. Holliday, Jr. Gary M. Pfeiffer
Chairman of the Board Senior Vice President
and Chief Executive Officer and Chief Financial Officer
February 15, 2002
Report of Independent Accountants
TO THE STOCKHOLDERS AND THE BOARD OF DIRECTORS OF
E. I. dU PONT DE NEMOURS AND COMPANY
In our opinion, the consolidated financial statements appearing on pages 43-75
of this Annual Report present fairly, in all material respects, the financial
position of E. I. du Pont de Nemours and Company and its subsidiaries at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, on January 1,
2001, the company adopted Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Two Commerce Square, Suite 1700
2001 Market Street
Philadelphia, Pennsylvania 19103
February 15, 2002
42 DuPont 2001 Annual Report
Financial Statements
E. I. du Pont de Nemours and Company and Consolidated Subsidiaries
CONSOLIDATED INCOME STATEMENT
(Dollars in millions, except per share)
- --------------------------------------- ---- ---- ----
2001 2000 1999
---- ---- ----
SALES $ 24,726 $ 28,268 $ 26,918
Other income (Note 2) 644 934 974
-------- -------- --------
25,370 29,202 27,892
Total -------- -------- --------
16,727 18,207 16,991
Cost of goods sold and other operating charges (Note 3) 2,925 3,041 2,595
Selling, general and administrative expenses 1,320 1,415 1,444
Depreciation 434 445 246
Amortization of goodwill and other intangible assets 1,588 1,776 1,617
Research and development expense 590 810 535
Interest expense (Note 4) -- (11) 2,250
Purchased in-process research and development (Note 5) 1,078 101 524
Employee separation costs and write-down of assets (Note 6) (6,136) -- --
Gain on sale of DuPont Pharmaceuticals (Note 7) -- (29) --
Gain on issuance of stock by affiliates - nonoperating (Note 8) -------- -------- --------
18,526 25,755 26,202
Total -------- -------- --------
6,844 3,447 1,690
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTERESTS 2,467 1,072 1,410
Provision for income taxes (Note 9) 49 61 61
Minority interests in earnings of consolidated subsidiaries -------- -------- --------
4,328 2,314 219
INCOME FROM CONTINUING OPERATIONS
DISCONTINUED OPERATIONS (Note 10) -- -- 7,471
Gain on disposal of discontinued business, net of taxes -------- -------- --------
4,328 2,314 7,690
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 11 -- --
Cumulative effect of a change in accounting principle, net of taxes (Note 11) -------- -------- --------
$ 4,339 $ 2,314 $ 7,690
NET INCOME ======== ======== ========
BASIC EARNINGS PER SHARE OF COMMON STOCK (Note 12) $ 4.17 $ 2.21 $ .19
Continuing operations before cumulative effect of a change in accounting principle -- -- 6.89
Discontinued operations -------- -------- --------
4.17 2.21 7.08
Before cumulative effect of a change in accounting principle .01 -- --
Cumulative effect of a change in accounting principle -------- -------- --------
$ 4.18 $ 2.21 $ 7.08
Net income ======== ======== ========
DILUTED EARNINGS PER SHARE OF COMMON STOCK (Note 12) $ 4.15 $ 2.19 $ .19
Continuing operations before cumulative effect of a change in accounting principle -- -- 6.80
Discontinued operations -------- -------- --------
4.15 2.19 6.99
Before cumulative effect of a change in accounting principle .01 -- --
Cumulative effect of a change in accounting principle -------- -------- --------
$ 4.16 $ 2.19 $ 6.99
Net income ======== ======== ========
See pages 47-75 for Notes to Financial Statements.
DuPont 2001 Annual Report 43
Financial Statements
E. I. du Pont de Nemours and Company and Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEET
(Dollars in millions, except per share)
- --------------------------------------- ---- ----
December 31 2001 2000
- ----------- ---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,763 $ 1,540
Marketable debt securities 85 77
Accounts and notes receivable (Note 13) 3,903 4,552
Inventories (Note 14) 4,215 4,658
Prepaid expenses 217 228
Deferred income taxes (Note 9) 618 601
-------- --------
Total current assets 14,801 11,656
-------- --------
PROPERTY, PLANT AND EQUIPMENT (Note 15) 33,778 34,650
Less: Accumulated depreciation 20,491 20,468
-------- --------
Net property, plant and equipment 13,287 14,182
-------- --------
GOODWILL AND OTHER INTANGIBLE ASSETS (Note 16) 6,897 8,365
INVESTMENT IN AFFILIATES (Note 17) 2,045 2,206
OTHER ASSETS (Notes 9 and 18) 3,289 3,017
-------- --------
TOTAL $ 40,319 $ 39,426
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable (Note 19) $ 2,219 $ 2,731
Short-term borrowings and capital lease obligations (Note 20) 1,464 3,247
Income taxes (Note 9) 1,295 250
Other accrued liabilities (Note 21) 3,089 3,027
-------- --------
Total current liabilities 8,067 9,255
LONG-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS (Note 22) 5,350 6,658
OTHER LIABILITIES (Note 23) 7,336 7,729
DEFERRED INCOME TAXES (Note 9) 2,690 2,105
-------- --------
Total liabilities 23,443 25,747
-------- --------
MINORITY INTERESTS (Note 24) 2,424 380
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 25)
STOCKHOLDERS' EQUITY (next page)
Preferred stock, without par value - cumulative; 23,000,000 shares authorized;
issued at December 31:
$4.50 Series - 1,672,594 shares (callable at $120) 167 167
$3.50 Series - 700,000 shares (callable at $102) 70 70
Common stock, $.30 par value; 1,800,000,000 shares authorized;
Issued at December 31, 2001 - 1,088,994,789; 2000 - 1,129,973,354 327 339
Additional paid-in capital 7,371 7,659
Reinvested earnings 13,517 12,153
Accumulated other comprehensive income (loss) (273) (188)
Common stock held in trust for unearned employee compensation and benefits
(Flexitrust), at market (Shares: December 31, 2001 - 0; 2000 - 3,601,199) -- (174)
Common stock held in treasury, at cost
(Shares: December 31, 2001 - 87,041,427; 2000 - 87,041,427) (6,727) (6,727)
-------- --------
Total stockholders' equity 14,452 13,299
-------- --------
TOTAL $ 40,319 $ 39,426
======== ========
See pages 47-75 for Notes to Financial Statements.
44 DuPont 2001 Annual Report
Financial Statements
E. I. du Pont de Nemours and Company and Consolidated Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Notes 26 and 27)
(Dollars in millions, except per share)
- ---------------------------------------
Accumulated Total Total
Additional Other Stock- Compre-
Preferred Common Paid-In Reinvested Comprehensive Treasury holders' hensive
Stock Stock Capital Earnings Income (Loss) Flexitrust Stock Equity Income
-------- ------ -------- -------- -------- -------- -------- -------- --------
1999
Balance January 1, 1999 $ 237 $ 342 $ 7,854 $ 6,705 $ (432) $ (752) $ -- $ 13,954
-------- ------ -------- -------- -------- -------- -------- --------
Net income 7,690 $ 7,690
Cumulative translation
adjustment 172 172
Minimum pension liability 76 76
Net unrealized gain on
securities 51 51
--------
Total comprehensive income $ 7,989
========
Common dividends
($1.40 per share) (1,501)
Preferred dividends (10)
Treasury stock
Acquisition (12,095)
Businesses acquired (5) (1,147) 5,324
Retirement (6) (38) 44
Common stock issued
Flexitrust (220) 427
Compensation plans 159
Adjustments to market value 159 (159)
-------- ------ -------- -------- -------- -------- -------- --------
Balance December 31, 1999 $ 237 $ 342 $ 7,941 $ 11,699 $ (133) $ (484) $ (6,727) $ 12,875
-------- ------ -------- -------- -------- -------- -------- --------
2000
Net income 2,314 $ 2,314
Cumulative translation
adjustment (38) (38)
Minimum pension liability 4 4
Net unrealized (loss) on
securities (21) (21)
--------
Total comprehensive income $ 2,259
========
Common dividends
($1.40 per share) (1,455)
Preferred dividends (10)
Treasury stock
Acquisition (462)
Retirement (3) (64) (395) 462
Common stock issued
Flexitrust (96) 204
Compensation plans (16)
Adjustments to market value (106) 106
-------- ------ -------- -------- -------- -------- -------- --------
Balance December 31, 2000 $ 237 $ 339 $ 7,659 $ 12,153 $ (188) $ (174) $ (6,727) $ 13,299
-------- ------ -------- -------- -------- -------- -------- --------
2001
Net income 4,339 $ 4,339
Cumulative translation
adjustment (19) (19)
Cumulative effect of a
change in accounting
principle 6 6
Net revaluation and clearance
of cash flow hedges
to earnings (32) (32)
Minimum pension liability (16) (16)
Net unrealized (loss)
on securities (24) (24)
--------
Total comprehensive income $ 4,254
========
Common dividends
($1.40 per share) (1,450)
Preferred dividends (10)
Treasury stock
Acquisition (1,818)
Retirement (12) (291) (1,515) 1,818
Common stock issued
Flexitrust (47) 165
Compensation plans 59
Adjustments to market value (9) 9
-------- ------ -------- -------- -------- -------- -------- --------
Balance December 31, 2001 $ 237 $ 327 $ 7,371 $ 13,517 $ (273) $ -- $ (6,727) $ 14,452
======== ====== ======== ======== ======== ======== ======== ========
See pages 47-75 for Notes to Financial Statements.
DuPont 2001 Annual Report 45
Financial Statements
E. I. du Pont de Nemours and Company and Consolidated Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
- ------------------------------------ ---- ---- ----
2001 2000 1999
---- ---- ----
CASH PROVIDED BY CONTINUING OPERATIONS
Net income $ 4,339 $ 2,314 $ 7,690
Adjustments to reconcile net income to cash provided by continuing operations:
Net income from discontinued operations -- -- (7,471)
Cumulative effect of a change in accounting principle (Note 11) (11) -- --
Depreciation 1,320 1,415 1,444
Amortization of goodwill and other intangible assets 434 445 246
Purchased in-process research and development (Note 5) -- (11) 2,250
Gain on sale of DuPont Pharmaceuticals (Note 7) (6,136) -- --
Other noncash charges and credits - net 965 899 443
Decrease (increase) in operating assets:
Accounts and notes receivable 435 379 (21)
Inventories and other operating assets (362) (727) (384)
Increase (decrease) in operating liabilities:
Accounts payable and other operating liabilities (634) 87 185
Accrued interest and income taxes (Notes 4 and 9) 2,069 269 458
------- ------- -------
Cash provided by continuing operations 2,419 5,070 4,840
------- ------- -------
INVESTMENT ACTIVITIES OF CONTINUING OPERATIONS (Note 28)
Purchases of property, plant and equipment (1,494) (1,925) (2,055)
Investments in affiliates (140) (97) (48)
Payments for businesses (net of cash acquired) (78) (46) (5,073)
Proceeds from sales of assets 253 703 609
Net proceeds from sale of DuPont Pharmaceuticals (Note 7) 7,798 -- --
Net decrease (increase) in short-term financial instruments (2) 25 (258)
Miscellaneous - net (117) 96 14
------- ------- -------
Cash provided by (used for) investment activities of continuing operations 6,220 (1,244) (6,811)
------- ------- -------
FINANCING ACTIVITIES
Dividends paid to stockholders (1,460) (1,465) (1,511)
Net (decrease) in short-term borrowings (1,588) (95) (3,244)
Long-term and other borrowings:
Receipts 904 4,996 8,420
Payments (2,214) (6,574) (5,612)
Acquisition of treasury stock (Note 26) (1,818) (462) (690)
Proceeds from exercise of stock options 153 63 168
Increase in minority interests (Note 24) 1,980 -- 105
------- ------- -------
Cash provided by (used for) financing activities (4,043) (3,537) (2,364)
------- ------- -------
Net cash flow from discontinued operations* (110) -- 4,475
Effect of exchange rate changes on cash (263) (215) (108)
------- ------- -------
INCREASE IN CASH AND CASH EQUIVALENTS $ 4,223 $ 74 $ 32
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,540 1,466 1,434
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,763 $ 1,540 $ 1,466
======= ======= =======
* Includes payments of direct expenses related to the Conoco divestiture.
See pages 47-75 for Notes to Financial Statements.
46 DuPont 2001 Annual Report
Notes to Financial Statements
(Dollars in millions, except per share)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DuPont follows generally accepted accounting principles. The significant
accounting policies described below, together with the other notes that follow,
are an integral part of the consolidated financial statements.
NEW ACCOUNTING STANDARDS
In 2001 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." The company will adopt SFAS No. 142 on January 1, 2002. SFAS No. 142
requires that goodwill and indefinite-lived intangible assets no longer be
amortized. In addition, an initial (and annually thereafter) impairment test of
these assets must be performed. In the initial test, if there is impairment, an
adjustment must be recorded in Net Income as a Cumulative Effect of a Change in
Accounting Principle (Net of Tax). Impairment losses after the initial adoption
impairment test will be recorded as part of Income from Continuing Operations.
In addition, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The company will adopt SFAS No. 143
on January 1, 2003. The provisions of SFAS No. 143 require companies to record
an asset and related liability for the costs associated with the retirement of a
long-lived tangible asset if a legal liability to retire the asset exists.
The FASB also issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The company will adopt SFAS No. 144 on January 1, 2002. This
statement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121 and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30 for the
disposal of a segment of business. SFAS No. 144 retains the basic principles of
SFAS No. 121 for long-lived assets to be disposed of by sale or held and used
and broadens discontinued operations presentation to include a component of an
entity that is held for sale or that has been disposed of.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the company and
all of its subsidiaries in which a controlling interest is maintained. For those
consolidated subsidiaries in which DuPont ownership is less than 100 percent,
the outside stockholders' interests are shown as Minority Interests. Investments
in affiliates over which the company has significant influence but not a
controlling interest are carried on the equity basis. Investments in affiliates
over which the company does not have significant influence are accounted for by
the cost method.
REVENUE RECOGNITION
The company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer in accordance with
terms of the agreement, title and risk of loss have been transferred,
collectibility is probable, and pricing is fixed or determinable. Accruals are
made for sales returns and other allowances based on the company's experience.
The company accounts for sales incentives as a reduction in revenue at the time
revenue is recorded. Royalty income is recognized in accordance with agreed upon
terms, when the amount is determinable and collectibility is probable.
AFFILIATE AND SUBSIDIARY STOCK TRANSACTIONS
Gains or losses arising from issuances by an affiliate or a subsidiary of its
own stock are recorded as nonoperating items.
CASH AND CASH EQUIVALENTS
Cash equivalents represent investments with maturities of three months or less
from time of purchase. They are carried at cost plus accrued interest, which
approximates fair value because of the short-term maturity of these instruments.
INVESTMENTS IN SECURITIES
Marketable Debt Securities represent investments in fixed and floating rate
financial instruments with maturities of twelve months or less from time of
purchase. They are classified as held-to-maturity and recorded at amortized
cost.
Other Assets includes Long-Term Investments in Securities which comprises
marketable equity securities and other securities and investments for which
market values are not readily available. Marketable equity securities are
classified as available-for-sale and reported at fair value. Fair value is based
on quoted market prices as of the end of the reporting period. Unrealized gains
and losses are reported, net of their related tax effects, as a component of
Accumulated Other Comprehensive Income (Loss) in stockholders' equity until
sold. At the time of sale, any gains or losses calculated by the specific
identification method are
DuPont 2001 Annual Report 47
Notes to Financial Statements
(Dollars in millions, except per share)
recognized in Other Income. Losses are also recognized in income when a decline
in market value is deemed to be other than temporary. Other securities and
investments for which market values are not readily available are carried at
cost. See Note 18.
INVENTORIES
Except for Pioneer inventories, substantially all inventories are valued at cost
as determined by the last-in, first-out (LIFO) method; in the aggregate, such
valuations are not in excess of market. For Pioneer, inventories are valued at
the lower of cost as determined by the first-in, first-out (FIFO) method or
market.
Elements of cost in inventories include raw materials, direct labor and
manufacturing overhead. Stores and supplies are valued at cost or market,
whichever is lower; cost is generally determined by the average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (PP&E) is carried at cost and is depreciated using
the straight-line method. PP&E placed in service prior to 1995 is depreciated
under the sum-of-the-years' digits method or other substantially similar
methods. Substantially all equipment and buildings are depreciated over useful
lives ranging from 15 to 25 years. Capitalizable costs associated with computer
software for internal use are amortized on a straight-line basis over 5 to 7
years. When assets are surrendered, retired, sold or otherwise disposed of,
their gross carrying value and related accumulated depreciation are removed from
the accounts and included in determining gain or loss on such disposals.
Maintenance and repairs are charged to operations; replacements and improvements
are capitalized. In situations where maintenance activities are planned at
manufacturing facilities, the company accrues in advance the costs expected to
be incurred. Historically, the company's accruals for maintenance activities
have not been significant.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is amortized over periods up to 40 years using the straight-line
method. Identifiable intangible assets such as purchased technology, patents and
trademarks are amortized using the straight-line method over their estimated
useful lives, generally for periods ranging from 5 to 40 years. The company
continually evaluates the reasonableness of the useful lives of these assets.
IMPAIRMENT OF LONG-LIVED ASSETS
The company evaluates the carrying value of long-lived assets to be held and
used, including goodwill and other intangible assets, when events or changes in
circumstances indicate the carrying value may not be recoverable. The carrying
value of a long-lived asset is considered impaired when the total projected
undiscounted cash flows from such asset is separately identifiable and is less
than its carrying value. In that event, a loss is recognized based on the amount
by which the carrying value exceeds the fair market value of the long-lived
asset. Fair market value is determined primarily using the projected cash flows
discounted at a rate commensurate with the risk involved. Losses on long-lived
assets to be disposed of are determined in a similar manner, except that fair
market values are reduced for disposal costs.
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
Accruals for environmental matters are recorded in operating expenses when it is
probable that a liability has been incurred and the amount of the liability can
be reasonably estimated. Accrued liabilities do not include claims against third
parties and are not discounted.
Costs related to environmental remediation are charged to expense. Other
environmental costs are also charged to expense unless they increase the value
of the property or reduce or prevent contamination from future operations, in
which case they are capitalized.
INCOME TAXES
The provision for income taxes has been determined using the asset and liability
approach of accounting for income taxes. Under this approach, deferred taxes
represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax bases of the company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
48 DuPont 2001 Annual Report
Notes to Financial Statements
(Dollars in millions, except per share)
Provision has been made for income taxes on unremitted earnings of subsidiaries
and affiliates, except for subsidiaries in which earnings are deemed to be
permanently invested. Investment tax credits or grants are accounted for in the
period earned (the flow-through method).
FOREIGN CURRENCY TRANSLATION
The U.S. dollar is the functional currency of most of the company's worldwide
continuing operations. For subsidiaries where the U.S. dollar is the functional
currency, all foreign currency asset and liability amounts are remeasured into
U.S. dollars at end-of-period exchange rates, except for inventories, prepaid
expenses, property, plant and equipment, and intangible assets, which are
remeasured at historical rates. Foreign currency income and expenses are
remeasured at average exchange rates in effect during the year, except for
expenses related to balance sheet amounts remeasured at historical exchange
rates. Exchange gains and losses arising from remeasurement of foreign
currency-denominated monetary assets and liabilities are included in income in
the period in which they occur.
For subsidiaries where the local currency is the functional currency, assets and
liabilities denominated in local currencies are translated into U.S. dollars at
end-of-period exchange rates, and the resultant translation adjustments are
reported, net of their related tax effects, as a component of Accumulated Other
Comprehensive Income (Loss) in stockholders' equity. Assets and liabilities
denominated in other than the local currency are remeasured into the local
currency prior to translation into U.S. dollars, and the resultant exchange
gains or losses are included in income in the period in which they occur. Income
and expenses are translated into U.S. dollars at average exchange rates in
effect during the period.
HEDGING AND TRADING ACTIVITIES
On January 1, 2001, DuPont adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. The new standard requires that
all derivative instruments be reported on the balance sheet at their fair
values. For derivative instruments designated as fair value hedges, changes in
the fair values of the derivative instruments will generally be offset on the
income statement by changes in the fair value of the hedged items. For
derivative instruments designated as cash flow hedges, the effective portion of
any hedge is reported in Accumulated Other Comprehensive Income (Loss) until it
is cleared to earnings during the same period in which the hedged item affects
earnings. The ineffective portion of all hedges is recognized in current period
earnings. Changes in the fair values of derivative instruments that are not
designated as hedges are recorded in current period earnings.
The company routinely uses forward exchange contracts to hedge its net exposure,
by currency, related to monetary assets and liabilities denominated in
currencies other than the functional currency. Exchange gains and losses
associated with these contracts are included in income in the period in which
they occur and substantially offset the exchange gains and losses arising from
remeasurement as described above. As a result, net exchange gains and losses are
not expected to be material in amount.
Option and forward exchange contracts are routinely used to offset a portion of
the company's exposure to foreign currency-denominated revenues. These hedges
qualify as cash flow hedges under SFAS No. 133 which requires that the effective
portion of gains and losses on the contracts be deferred in Accumulated Other
Comprehensive Income (Loss) and later reclassified into earnings during the same
period in which the related exposure impacts earnings.
The company selectively enters into forward exchange contracts and similar
agreements to effectively convert firm foreign currency commitments to
functional currency-denominated transactions.
The company enters into interest rate swap agreements as part of its program to
manage the fixed and floating interest rate mix of its total debt portfolio and
related overall cost of borrowing. The differential to be paid or received is
accrued as interest rates change and is recognized in earnings over the life of
the agreements. All of the company's interest rate swaps qualify for the
shortcut method of hedge accounting under SFAS No. 133, thus there is no
ineffectiveness reported in earnings related to these hedges.
The company enters into commodity futures, forward, option and swap contracts to
hedge its exposure to price fluctuations for certain raw material purchases, and
sales of product dependent upon key commodity ingredients. These hedges are
highly effective and are accounted for as cash flow hedges under SFAS No. 133.
DuPont 2001 Annual Report 49
Notes to Financial Statements
(Dollars in millions, except per share)
Pioneer contracts with independent growers to produce finished seed inventory.
Under these contracts, Pioneer compensates growers with bushel equivalents that
are marketed to Pioneer for the market price of grain for a period of time
following harvest. Pioneer uses derivative instruments such as commodity futures
that have a high correlation to the underlying commodity to hedge the commodity
price risk involved in compensating growers. These hedges are accounted for as
cash flow hedges under SFAS No. 133.
In the event that a derivative designated as a hedge of a firm commitment or
anticipated transaction is terminated prior to the maturation of the hedged
transaction, gains or losses realized at termination are deferred and included
in the measurement of the hedged transaction. If a hedged transaction matures,
or is sold, extinguished or terminated prior to the maturity of a derivative
designated as a hedge of such transaction, gains or losses associated with the
derivative through the date the transaction matured are included in the
measurement of the hedged transaction and the derivative is reclassified as for
trading purposes. Derivatives designated as a hedge of an anticipated
transaction are reclassified as for trading purposes if the anticipated
transaction is no longer likely to occur.
In the Consolidated Statement of Cash Flows, the company reports the cash flows
resulting from its hedging activities in the same category as the related item
that is being hedged.
PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications of prior years' data have been made to conform to 2001
classifications.
2. OTHER INCOME
2001 2000 1999
---- ---- ----
Royalty income $380 $349 $289
Interest income, net of miscellaneous
interest expense 146 168 185(1)
Equity in earnings (losses) of
affiliates (see Note 17) (43) 289 135
Gains (losses) on sales of assets 47(2) 394(3) 16(4)
Miscellaneous income and
expenses - net 114 (266)(5) 349(6)
---- ---- ----
$644 $934 $974
==== ==== ====
(1) Includes a $80 benefit related to recalculation of interest on federal tax
refunds and liabilities.
(2) Includes a $52 gain from the company's sale of a portion of its interest in
DuPont Photomasks, Inc.
(3) Includes gains of $176 resulting from the sale by Pioneer of certain
investment securities and $94 associated with the company's sale of a
portion of its interest in DuPont Photomasks, Inc.
(4) Includes a $55 loss on formation of the DuPont Teijin Films(TM) joint
venture.
(5) Includes a $342 noncash charge associated with writing down the company's
investment in WebMD to estimated fair market value in recognition that such
decline is other than temporary and writing off warrants returned to WebMD
in connection with terminating the company's 1999 health care collaboration
agreement.
(6) Includes a $336 noncash gain associated with exchanging the company's
investment in WebMD for Healtheon/WebMD, and a $131 exchange loss on
forward exchange contracts purchased in 1998 to lock in the U.S. dollar
cost of the acquisition of Herberts.
3. COST OF GOODS SOLD AND OTHER OPERATING CHARGES
In accordance with purchase accounting rules, Pioneer inventories which were
acquired on October 1, 1999, were recorded at estimated fair value. The increase
in inventory values above Pioneer's pre-acquisition historical cost was, under
the FIFO method, recorded in cost of goods sold as the inventory on hand at the
acquisition date was sold. This inventory step-up resulted in noncash charges to
cost of goods sold of $140 and $609 in 2001 and 2000, respectively.
4. INTEREST EXPENSE
2001 2000 1999
---- ---- ----
Interest incurred $652 $879 $642
Less: Interest capitalized 62 69 107
---- ---- ----
$590 $810 $535
==== ==== ====
Interest paid (net of amounts capitalized) was $641 in 2001, $823 in 2000 and
$471 in 1999.
50 DuPont 2001 Annual Report
Notes to Financial Statements
(Dollars in millions, except per share)
5. PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
Purchased in-process research and development represents the value assigned in a
purchase business combination to research and development projects of the
acquired business that were commenced, but not yet completed at the date of
acquisition, for which technological feasibility has not been established and
which have no alternative future use in research and development activities or
otherwise. In accordance with SFAS No. 2, "Accounting for Research and
Development Costs," as interpreted by FASB Interpretation No. 4, amounts
assigned to purchased in-process research and development meeting the above
criteria must be charged to expense at the date of consummation of the purchase
business combination.
In 2000 a credit of $11 was recorded to revise the preliminary allocation for
the company's purchase of the remaining 80 percent interest in Pioneer upon
revisions of preliminary purchase price allocations.
In 1999 estimated charges of $2,186 and $64 were recorded in conjunction with
the purchase of the remaining 80 percent interest in Pioneer and the purchase of
the Herberts coatings business, respectively, based on preliminary allocations
of purchase price. See Note 28.
6. EMPLOYEE SEPARATION COSTS AND WRITE-DOWN OF ASSETS
2001 ACTIVITIES
During 2001 the company recorded a net charge of $1,078. Charges of $1,087 are
discussed below under 2001 activities; these charges were partially offset by a
benefit of $9 to reflect changes in estimates related to restructuring
initiatives discussed below under the respective prior years' activities.
Restructuring programs were instituted in 2001 to further align resources
consistent with the specific missions of the individual businesses thereby
improving competitiveness, accelerating progress toward sustainable growth and
addressing weakening economic conditions, particularly in the United States. In
addition, write-downs were recorded in the company's Polyester and Agriculture &
Nutrition segments. Charges related to these activities totaling $1,087 reduced
segment earnings as follows: Agriculture & Nutrition - $154; Nylon - $209;
Performance Coatings & Polymers - $84; Pigments & Chemicals - $47; Polyester -
$441; Specialty Fibers - $45; Specialty Polymers - $49; and Other - $58.
These charges included $432 related to termination payments for approximately
5,500 employees involved in technical, manufacturing, marketing and
administrative activities. Charges have been reduced by estimated reimbursements
pursuant to a manufacturing alliance with a third party. These charges reduced
segment earnings as follows: Agriculture & Nutrition - $64; Nylon - $81;
Performance Coatings & Polymers - $56; Pigments & Chemicals - $27; Polyester -
$52; Specialty Fibers - $45; Specialty Polymers - $49; and Other - $58.
Termination benefits were communicated to employees prior to June 30, 2001, and
such benefits may be settled over time or at the time of termination. At
December 31, 2001, approximately $217 had been settled and charged against the
related liability; this includes payments of about $95 from the company's
pension trust fund. Approximately 4,700 employees had been terminated as of
December 31, 2001, and the remaining employee terminations will be completed
during 2002.
The charge also included $293 related to the write-down of operating facilities
that were shut down principally due to transferring production to more cost
competitive facilities. The charge covers the net book value of the facilities
of $214 and the estimated dismantlement and removal costs less proceeds from the
sale of equipment and scrap and reimbursements from third parties of $79. The
largest component relates to the shutdown of Nylon manufacturing facilities in
Argentina; Germany; Camden, South Carolina; Chattanooga, Tennessee; and Seaford,
Delaware, of $128. An additional $119 relates to the shutdown of Polyester
manufacturing facilities in Wilmington and Kinston, North Carolina, and
Circleville, Ohio. Other charges of $46 are principally related to the shutdown
of operating facilities in the Agriculture & Nutrition and Pigments & Chemicals
segments. At December 31, 2001, approximately $19 had been settled and charged
against the liability for dismantlement and removal and these activities will be
essentially completed in 2002. The effect of these shutdowns on operating
results was not material.
In connection with the final integration of the Herberts acquisition by DuPont
Performance Coatings, a charge of $20 relates to the cancellation of contractual
agreements. About $9 had been settled and charged against this liability at
DuPont 2001 Annual Report 51
Notes to Financial Statements
(Dollars in millions, except per share)
December 31, 2001. Termination of services under these contractual agreements
will be completed in 2002. The effect of these contract terminations on
operating results was not material.
An additional charge of $342 relates to the write-down of assets to their net
realizable value. A charge of $270 was recorded in the Polyester segment in
connection with the company's announcement that it had reached a definitive
agreement to sell its U.S. polymer grade TPA (terephthalic acid) and Melinar(R)
PET container resins businesses along with their associated manufacturing assets
in Wilmington and Fayetteville, North Carolina, and Charleston, South Carolina,
and to exit a polyester staple fiber joint venture. The transaction closed in
July 2001. This reflects a continuation of the company's previously announced
strategy to reshape its polyester investment. In addition the company recorded
charges totaling $72 to write down intangible assets in the Agriculture &
Nutrition segment. A charge of $30 was recorded pursuant to a sale of
intellectual property that closed in July 2001. The company had previously
established an intangible asset in connection with acquired patents principally
related to wheat-based food ingredients. Due to significantly lower than
expected opportunities in the specialty food ingredient market, the company has
exited this market segment. An additional charge of $42 was recorded to write
down an intangible asset due to a deteriorating market outlook that resulted in
discontinuing development efforts for high oil corn products using the
TOPCROSS(R) system. As a result, an impairment charge was recorded to write down
the intangible asset to its estimated fair value based on the present value of
future cash flows.
Account balances and activity for the 2001 programs are summarized below:
Write- Employee Other
down Separation Exit
of Assets Costs Costs Total
--------- ----- ----- -----
Charges to income in 2001 $ 556 $ 432 $ 99 $ 1,087
Changes to accounts
Asset impairments (342) (342)
Employee separation
settlements (217) (217)
Facility shutdowns (214) (214)
Other expenditures (28) (28)
------- ------- ------- -------
Balance at December 31, 2001 $ -- $ 215 $ 71 $ 286
======= ======= ======= =======
2000 ACTIVITIES
During 2000 the company recorded a net charge of $101. Charges totaling $124
relate to restructuring activities in the following segments: Performance
Coatings & Polymers - $96; and Pigments & Chemicals - $28. In 2000 these charges
were partially offset by a benefit of $20 to reflect changes in estimates
related to restructuring initiatives and $3 to reflect higher than expected
proceeds from the sale of assets as discussed below under the respective prior
years' activities.
Performance Coatings & Polymers
A restructuring program (Phase II) was instituted to continue the consolidation
of business assets and to eliminate redundancies as a result of the acquisition
of Herberts in 1999 by DuPont Performance Coatings. Charges resulting from these
activities totaled $96. The charges included $71 related to termination payments
to be settled over time for about 1,000 employees involved in technical,
manufacturing, marketing and administrative activities. As of June 30, 2001,
essentially all employees had been terminated. At December 31, 2001, about $64
had been settled and charged against the related liabilities. Charges of $13
related to the write-down of operating facilities in Germany and the United
States that were shut down in the second quarter. The remaining charge of $12
relates to the cancellation of contractual agreements. A net benefit of $2 was
recorded in 2001 to reflect lower costs associated with contract cancellations.
At December 31, 2001, about $10 had been settled and charged against the related
liability, thereby completing these activities.
Pigments & Chemicals
A restructuring program was instituted in the third quarter to address poor
economic and intensely competitive market conditions for the DuPont Chemical
Solutions Enterprise. Charges resulting from this restructuring totaled $28.
This charge included $24 related to the write-down of operating facilities at
the New Jersey Chambers Works site that were shut down in the third quarter. The
charge covers the net book value of the facilities of $15 and estimated
dismantlement and removal costs less estimated proceeds from the sale of
equipment and scrap of $9. The effect of this shutdown on operating results was
not material. At December 31, 2001, about $9 had been settled and charged
against the liability for
52 DuPont 2001 Annual Report
Notes to Financial Statements
(Dollars in millions, except per share)
dismantlement and removal, thereby completing these activities. The remaining
restructuring charge of $4 relates to employee termination payments to be
settled over time for approximately 65 employees involved in manufacturing and
technical activities. As of March 31, 2001, essentially all employees had been
terminated, and at December 31, 2001, about $4 in employee termination payments
had been settled and charged against the related liability, thereby completing
the program.
Account balances and activity for the 2000 restructuring programs are summarized
below:
Write- Employee Other
down Separation Exit
of Assets Costs Costs Total
--------- ----- ----- -----
Charges to income in 2000 $ 28 $ 75 $ 21 $ 124
Changes to accounts
Employee separation
settlements (27) (27)
Facility shutdowns (28) (28)
Other expenditures (5) (5)
-------- -------- -------- --------
Balance at December 31, 2000 $ - $ 48 $ 16 $ 64
-------- -------- -------- --------
Changes to accounts
Credits to income in 2001 (2) (2)
Employee separation
settlements (41) (41)
Other expenditures (14) (14)
-------- -------- -------- --------
Balance at December 31, 2001 $ -- $ 7 $ -- $ 7
======== ======== ======== ========
1999 ACTIVITIES
During 1999 the company recorded a net charge of $524. Charges totaling $604
relate to restructuring and asset write-downs in the following segments:
Agriculture & Nutrition - $169; Nylon - $375; and Polyester - $60. These charges
were partly offset by a net benefit of $80 to reflect changes in estimates
related to restructuring and divestiture initiatives as discussed below under
Other Activities.
Agriculture & Nutrition
A restructuring program was instituted to address poor economic and intensely
competitive market conditions for Crop Protection. Charges resulting from these
restructuring activities totaled $124. This charge included $45 related to
employee termination payments to be settled over time for approximately 800
employees involved in technical, manufacturing, marketing and administrative
activities. A net benefit of $2 was recorded in 2000 and an additional net
benefit of $4 was recorded in 2001 to reflect lower costs associated with
employees who accepted other work assignments partially offset by higher costs
associated with terminating employees. At December 31, 2001, approximately $39
had been settled and charged against the related liability, thereby completing
this program. At December 31, 2000, approximately 730 employees had been
terminated and the remaining employees have accepted other work assignments
within the company. The remaining restructuring charge of $79 principally
related to the write-down of operating facilities that were shut down in 1999 at
Belle, West Virginia; Chambers Works, New Jersey; LaPorte, Texas; Mobile,
Alabama; Japan; and Puerto Rico. The effect of these shutdowns on operating
results was not material. The charge covers the net book value of the facilities
of $64 and estimated dismantlement and removal costs less estimated proceeds
from the sale of equipment and scrap of $15. In 2000 a net benefit of $3 was
recorded due to higher than expected sale proceeds. In addition a net benefit of
$6 was recorded in 2000 and a net benefit of $1 was recorded in 2001 to reflect
lower costs associated with dismantlement and removal. At December 31, 2001,
approximately $8 in dismantlement and removal costs had been paid, thereby
completing these activities.
An impairment charge of $45 was also recorded to write off an intangible asset.
The company had previously established an intangible asset related to the
acquisition of exclusive rights to market a product under a long-term contract
that included the purchase of stipulated minimum quantities. Due to
significantly lower than expected sales, the company notified the supplier that
it would not purchase the minimum quantity and therefore would forego the right
to exclusively market the product.
Nylon
Charges included an impairment of $252 for the write-down of a manufacturing
facility in Singapore that continues to operate. Nylon constructed a
manufacturing plant designed to produce 250 million pounds of adipic acid
annually. The company had made substantial efforts to resolve operational and
technical
DuPont 2001 Annual Report 53
Notes to Financial Statements
(Dollars in millions, except per share)
problems that have plagued this facility. Despite these efforts, the plant
continued to operate at significantly less than its design capacity. As a
result, an impairment charge was recorded to write down the plant to its
estimated fair value based on the present value of future cash flows.
The company also announced its intent to withdraw from certain nylon ventures in
the Asia Pacific region after it became apparent that these operations would not
become profitable due to unfavorable market conditions. In connection with
exiting the company's majority-owned subsidiary in India, a charge of $61 was
recorded to write down assets to estimated net realizable value pursuant to a
sales agreement. The charge principally covers the net assets being sold and a
contractual obligation associated with exiting this business. In 1999 definitive
agreements were signed under which a third party would acquire the company's
ownership interest and certain related manufacturing equipment. Subsequently,
the company operated the facility in trust for the buyer until the sale was
completed in 2000. In 2001 the company reflected a benefit of $2 due to higher
than expected proceeds from the sales agreement. In addition, the company
recorded a charge of $34 associated with its decision to withdraw from a joint
venture in China due to depressed market conditions. The charge covers the
write-off of the company's investment in this joint venture.
The company also recorded a charge of $28 associated with restructuring
activities in Europe to modernize and consolidate sites. This included employee
termination payments to be settled over time of $15 to about 120 employees
involved principally in manufacturing activities at several locations. A charge
of $2 was recorded in 2000 to reflect higher costs associated with terminating
employees. As of December 31, 2000, essentially all employees had been
terminated and approximately $16 had been settled and charged against the
related liability. Also included was a charge of $13 to write off a
manufacturing facility in Germany that was shut down in 1999. The effect on
operating results of this shutdown was not material.
Polyester
A restructuring program was instituted to address poor economic and intensely
competitive market conditions. Charges of $60 relate to employee separation
costs to be settled over time for about 850 employees primarily engaged in
manufacturing. Approximately 800 employees have been terminated and the
remaining employees have accepted other work assignments within the company,
thereby completing this program. A net benefit of $2 was recorded in 2000 to
reflect lower costs associated with employees who accepted other work
assignments partially offset by higher costs associated with terminating
employees. At December 31, 2001, about $56 in benefits had been charged against
the related liability.
Account balances and activity for the 1999 restructuring programs are summarized
below:
Write- Employee Other
down Separation Exit
of Assets Costs Costs Total
--------- ----- ----- -----
Charges to income in 1999 $ 469 $ 120 $ 15 $ 604
Changes to accounts
Asset impairments (358) (358)
Employee separation
settlements (47) (47)
Facility shutdowns (77) (77)
Withdrawal from
joint venture (34) (34)
-------- -------- -------- --------
Balance at December 31, 1999 $ -- $ 73 $ 15 $ 88
-------- -------- -------- --------
Changes to accounts
Credits to income in 2000 (2) (6) (8)
Employee separation
settlements (53) (53)
Other expenditures (5) (5)
-------- -------- -------- --------
Balance at December 31, 2000 $ -- $ 18 $ 4 $ 22
-------- -------- -------- --------
Changes to accounts
Credits to income in 2001 (4) (1) (5)
Employee separation
settlements (11) (11)
Other expenditures (3) (3)
-------- -------- -------- --------
Balance at December 31, 2001 $ -- $ 3 $ -- $ 3
======== ======== ======== ========
54 DuPont 2001 Annual Report
Notes to Financial Statements
(Dollars in millions, except per share)
OTHER ACTIVITIES
During 1998 the company implemented activities involving employee terminations
and write-down of assets principally related to company-wide productivity
improvement initiatives. A net benefit of $53 was recorded in 1999 to reflect
changes in estimates principally in the following segments: Agriculture &
Nutrition - $3; Nylon - $29; Pigments & Chemicals - $4; and Polyester - $13. A
net benefit of $12 was recorded in 2000 to reflect changes in estimates
principally in the Nylon and Polyester segments of $5 and $4, respectively. The
1998 program is complete and all activity for this program is summarized below.
The remaining employee separation settlements are due to be paid in 2002-2005
and principally represent stipulated installment payments to terminated
employees.
Write- Employee Other
down Separation Exit
of Assets Costs Costs Total
--------- ----- ----- -----
Charges to income in 1998 $ 288 $ 310 $ 35 $ 633
Changes to accounts
Credits to income in
1999 and 2000 (31) (33) (1) (65)
Asset impairments (56) (56)
Employee separation
settlements (273) (273)
Facility shutdowns (201) (201)
Other expenditures (34) (34)
-------- -------- -------- --------
Balance at December 31, 2001 $ -- $ 4 $ -- $ 4
======== ======== ======== ========
In 1999 the company also reflected a benefit of $27 due to changes in estimates
of liabilities established in connection with the sale of Endo Laboratories, the
medical products businesses, and the global graphic arts and printing plates
businesses. These adjustments resulted from lower than expected costs associated
with exiting these businesses. There are no outstanding liabilities for these
divestitures.
7. GAIN ON SALE OF DUPONT PHARMACEUTICALS
On October 1, 2001, the company sold substantially all of the net assets of
DuPont Pharmaceuticals to Bristol-Myers Squibb Company and recorded net proceeds
of $7,798. The company has retained its interest in the Cozaar(R)/Hyzaar(R)
collaboration.
The unaudited results of operations for the business sold to Bristol-Myers
Squibb for the nine months ended September 30, 2001, were as follows:
2001
-----
Sales $ 902
After-tax operating income (loss)* (289)
=====
* Excludes corporate expenses, interest, exchange gains (losses) and
corporate minority interests.
The net assets sold to Bristol-Myers Squibb as of the date of sale and included
within the accompanying Consolidated Balance Sheet at December 31, 2000,
consisted of the following:
October 1, December 31,
2001 2000
------- -------
Current assets $ 584 $ 484
Property, plant and equipment - net 356 374
Other assets - net 1,041 1,139
Current liabilities (282) (392)
Noncurrent liabilities (288) (244)
------- -------
Net assets sold $ 1,411 $ 1,361
======= =======
As a result of this transaction, the company recorded a pretax gain of $6,136,
which included charges that are a direct result of the decision to divest DuPont
Pharmaceuticals. The after-tax gain on this transaction was $3,866.
Under the terms of the sale agreement, the purchase price is subject to
adjustment for finalization of net working capital, transfer of pension assets,
and settlement of tax liabilities. The company expects these matters to be
resolved in 2002 and believes that final resolution of these matters will not be
material to the company's financial position, liquidity or the gain on sale of
DuPont Pharmaceuticals.
8. GAIN ON ISSUANCE OF STOCK BY AFFILIATES - NONOPERATING
In July 2000 DuPont Photomasks, Inc. sold about 1.4 million shares of its common
stock to unrelated parties at a price of $77 per share which raised net cash
proceeds of $104. As a result of this transaction, the company's ownership
interest in DuPont Photomasks was reduced from approximately 38.5 percent to
DuPont 2001 Annual Report 55
Notes to Financial Statements
(Dollars in millions, except per share)
35.3 percent. The company recorded a pretax gain of $29 that represents the
increase in the company's equity investment in DuPont Photomasks which resulted
from the issuance of stock at a price in excess of book value. The company
provided for deferred income taxes as a result of the transaction. The company
has further reduced its ownership interest in DuPont Photomasks to 20.3 percent
at December 31, 2001. See Note 2.
9. PROVISION FOR INCOME TAXES
2001 2000 1999
------- ------- -------
Current tax expense:
U.S. federal $ 1,384 $ 489 $ 536
U.S. state and local 120 27 14
International 376 515 480
------- ------- -------
Total 1,880 1,031 1,030
------- ------- -------
Deferred tax expense:
U.S. federal 565 (128) 322
U.S. state and local 22 (1) (4)
International -- 170 62
------- ------- -------
Total 587 41 380
------- ------- -------
Provision for income taxes 2,467 1,072 1,410
Stockholders' equity
Stock compensation (1) (38) (19) (55)
Cumulative effect of a change in
accounting principle (2) 4 -- --
Net revaluation and clearance of
cash flow hedges to earnings (2) (20) -- --
Minimum pension liability (2) (10) 3 7
Net unrealized gains (losses)
on securities (2) (15) (21) 35
Discontinued operations -- -- 153
------- ------- -------
Total $ 2,388 $ 1,035 $ 1,550
======= ======= =======
(1) Represents deferred tax charge (benefit) of certain stock compensation
amounts that are deductible for income tax purposes but do not affect net
income.
(2) Represents deferred tax charge (benefit) recorded as a component of
Accumulated Other Comprehensive Income (Loss) in stockholders' equity.
See Note 26.
Total income taxes paid on continuing operations worldwide were $456 in 2001,
$791 in 2000 and $1,015 in 1999.
Deferred income taxes result from temporary differences between the financial
and tax bases of the company's assets and liabilities. The tax effects of
temporary differences and tax loss/tax credit carryforwards included in the
deferred income tax provision are as follows:
2001 2000 1999
----- ----- -----
Depreciation $ (3) $ 157 $ 120
Accrued employee benefits 202 63 67
Other accrued expenses (14) 34 36
Inventories 63 (143) 31
Unrealized exchange gain (loss) (2) (4) (10)
Investment in subsidiaries and affiliates 31 102 51
Amortization of intangibles 296 (102) 32
Other temporary differences 30 (53) 74
Tax loss/tax credit carryforwards (38) (19) 3
Valuation allowance change - net 22 6 (24)
----- ----- -----
$ 587 $ 41 $ 380
===== ===== =====
The significant components of deferred tax assets and liabilities at December
31, 2001 and 2000, are as follows:
2001 2000
------------------- -------------------
Deferred Tax Asset Liability Asset Liability
- ------------ ----- --------- ----- ---------
Depreciation $ -- $1,920 $ -- $1,932
Accrued employee benefits 3,141 1,521 3,220 1,357
Other accrued expenses 417 5 407 3
Inventories 203 207 218 158
Unrealized exchange gains 39 15 37 11
Tax loss/tax credit
carryforwards 218 -- 151 --
Investment in subsidiaries
and affiliates 45 197 19 151
Amortization of intangibles 171 990 530 1,053
Other 349 1,300 358 1,141
------ ------ ------ ------
Total $4,583 $6,155 $4,940 $5,806
====== ======
Less: Valuation
allowance 232 210
------ ------
Net $4,351 $4,730
====== ======
56 DuPont 2001 Annual Report
Notes to Financial Statements
(Dollars in millions, except per share)
Current deferred tax liabilities (included in the Consolidated Balance Sheet
caption Income Taxes) were $45 and $34 at December 31, 2001 and 2000,
respectively. In addition, deferred tax assets of $313 and $462 were included in
Other Assets at December 31, 2001 and 2000, respectively. See Note 18.
An analysis of the company's effective income tax rate follows:
2001 2000 1999
------ ------ ------
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
International operations (0.8) (2.8) 4.2
Lower effective tax rate on export sales (0.6) (1.7) (2.2)
In-process research and development* -- -- 46.6
Other - net 2.4 0.6 (0.2)
------ ------ ------
Effective income tax rate 36.0% 31.1% 83.4%
====== ====== ======
* The charge associated with the 1999 Pioneer transaction was not tax
effected because the purchase was a stock acquisition rather than an asset
purchase. See Note 5.
Income from continuing operations before income taxes and minority interests
shown below are based on the location of the corporate unit to which such
earnings are attributable. However, since such earnings are often subject to
taxation in more than one country, the income tax provision shown above as
United States or international does not correspond to the earnings shown in the
following table:
2001 2000 1999
------ ------ ------
United States (including exports) $6,131 $1,544 $ 463
International 713 1,903 1,227
------ ------ ------
$6,844 $3,447 $1,690
====== ====== ======
At December 31, 2001, unremitted earnings of subsidiaries outside the United
States totaling $9,106 were deemed to be permanently invested. No deferred tax
liability has been recognized with regard to the remittance of such earnings. It
is not practicable to estimate the income tax liability that might be incurred
if such earnings were remitted to the United States.
Under the tax laws of various jurisdictions in which the company operates,
deductions or credits that cannot be fully utilized for tax purposes during the
current year may be carried forward, subject to statutory limitations, to reduce
taxable income or taxes payable in a future year. At December 31, 2001, the tax
effect of such carryforwards approximated $218. Of this amount, $145 has no
expiration date, $14 expires after 2001 but before the end of 2006 and $59
expires after 2006.
10. DISCONTINUED OPERATIONS
On August 6, 1999, the company completed the planned divestiture of its
petroleum business (Conoco Inc.) through a tax-free split-off whereby the
company exchanged its 436,543,573 shares of Conoco Class B common stock for
147,980,872 shares of DuPont common stock. The company's consolidated financial
statements and notes report its former petroleum business as discontinued
operations.
For 1999, gain on disposal of discontinued business is $7,471 and includes
income from Conoco's operations of $165. The gain on the exchange offer of
$7,306 results from the difference between the market value and the carrying
value of the Conoco Class B common shares, less direct expenses. The company did
not recognize a deferred tax liability for the difference between the book basis
and tax basis of its investment in Conoco's common stock because this basis
difference was not subject to tax.
Gain on disposal of discontinued business 1999(1)
-------
Net sales $12,015
Income (loss) before income taxes and minority interests(2) 453
Provision for (benefit from) income taxes 164
Minority interests 124
-------
Income (loss) from operations, net of income taxes 165
Net gain from exchange offer 7,306
-------
Gain on disposal of discontinued business,
net of income taxes $ 7,471
=======
(1) Through August 6, 1999.
(2) Includes interest expense allocation (based on specific debt to be assumed)
of $93. Conoco repaid this debt in second quarter 1999.
DuPont 2001 Annual Report 57
Notes to Financial Statements
(Dollars in millions, except per share)
11. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
On January 1, 2001, the company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. The adoption of SFAS No. 133
resulted in a pretax cumulative-effect-type adjustment to income of $19 ($11
after-tax). The primary component of this gain is related to the company's
position in certain stock warrants, which were previously accounted for as
available-for-sale securities for which changes in fair value had been reflected
in Accumulated Other Comprehensive Income (Loss). The company also recorded a
pretax increase to Accumulated Other Comprehensive Income (Loss) of $10 ($6
after-tax). The increase in Accumulated Other Comprehensive Income (Loss) is
primarily due to unrealized gains in agricultural commodity hedging programs.
12. EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share is computed by dividing income available to common
stockholders (the numerator) by the weighted-average number of common shares
(the denominator) for the period. The numerator for both income from continuing
operations and net income is reduced by preferred dividends of $10. For diluted
earnings per share, the numerator is adjusted to recognize reduced share of
earnings assuming options in subsidiary company stock are exercised if the
effect of this adjustment is dilutive. The denominator is based on the following
weighted-average number of common shares and includes the additional common
shares that would have been outstanding if potentially dilutive common shares
had been issued:
2001 2000 1999
------------- ------------- -------------
Basic 1,035,992,748 1,043,358,416 1,084,537,228
Diluted 1,041,164,629 1,051,042,524 1,097,970,329
============= ============= =============
Average stock options of 41,302,525, 29,814,855 and 4,453,930 are antidilutive
as the exercise price is greater than the average market price and, therefore,
are not included in the diluted earnings per share calculation for the years
2001, 2000 and 1999, respectively.
Treasury stock and shares held by the Flexitrust are not considered as
outstanding in computing the weighted-average number of common shares. During
2001 shares in the Flexitrust were depleted and the trust arrangement was
terminated.
13. ACCOUNTS AND NOTES RECEIVABLE
December 31 2001 2000
------ ------
Trade - net of allowances of $198 in 2001
and $175 in 2000 $2,914 $3,634
Miscellaneous 989 918
------ ------
$3,903 $4,552
====== ======
Accounts and notes receivable are carried at amounts that approximate fair value
and include $161 for 2001 and $150 for 2000 due from equity affiliates.
In 2000 the company entered into a program to sell an interest in a revolving
pool of its trade accounts receivable. Proceeds received in 2000 were $610 and
were reflected as a reduction in trade accounts receivable. At December 31,
2001, the revolving balance under this program totaled $468. Expenses incurred
in connection with the program totaled $16 and $27 in 2000 and 2001,
respectively, and are included in Other Income. Miscellaneous receivables
include an overcollateralization of $149 and $130 at December 31, 2000 and 2001,
respectively, provided for under terms of the program.
14. INVENTORIES
December 31 2001 2000
------ ------
Finished products $2,652 $2,818
Semifinished products 1,185 1,504
Raw materials and supplies 844 907
------ ------
Total 4,681 5,229
Less: Adjustment of inventories to a LIFO basis 466 571
------ ------
$4,215 $4,658
====== ======
Inventory values before LIFO adjustment are generally determined by the average
cost method, which approximates current cost. Excluding Pioneer, inventories
valued under the LIFO method comprised 79 percent and 81 percent of consolidated
inventories before LIFO adjustment at December 31, 2001 and 2000, respectively.
Pioneer inventories of $745 and $913 at December 31, 2001 and 2000,
respectively, were valued under the FIFO method. In accordance with purchase
accounting rules, these inventories included an adjustment above Pioneer's
pre-acquisition historical cost so that they were reported at estimated fair
market value, of which $0 and $140 remained in inventory at December 31, 2001
and 2000, respectively.
58 DuPont 2001 Annual Report
Notes to Financial Statements
(Dollars in millions, except per share)
15. PROPERTY, PLANT AND EQUIPMENT
December 31 2001 2000
------- -------
Buildings $ 4,275 $ 4,380
Equipment 27,842 28,417
Land 453 484
Construction 1,208 1,369
------- -------
$33,778 $34,650
======= =======
Property, plant and equipment includes gross assets acquired under capital
leases of $142 and $141 at December 31, 2001 and 2000, respectively; related
amounts included in accumulated depreciation were $67 and $60 at December 31,
2001 and 2000, respectively.
16. GOODWILL AND OTHER INTANGIBLE ASSETS
The company's 1999 acquisitions of the Herberts coatings business and the
remaining 80 percent of Pioneer not previously owned resulted in a significant
amount of goodwill and other intangible assets, principally purchased
technology. With respect to Pioneer, goodwill in the amount of $2,724 is being
amortized over 40 years, and other intangible assets of $2,140 are being
amortized over periods ranging from 10 to 40 years. With respect to Herberts,
goodwill in the amount of $775 is being amortized over 20 years and purchased
technology of $65 is being amortized over 7 years.
December 31 2001 2000
------ ------
Goodwill - net of accumulated amortization
of $359 in 2001 and $234 in 2000 $3,746 $3,935
Intangible assets - net of accumulated
amortization of $822 in 2001 and $724 in 2000 3,151 4,430
------ ------
$6,897 $8,365
====== ======
Goodwill and intangible assets, net of accumulated amortization, was $1,468
lower at December 31, 2001, versus the prior year. The sale of DuPont
Pharmaceuticals included $1,019 of such assets. In addition, write-downs of
intangible assets in the Agriculture & Nutrition and Polyester segments of $72
and $41, respectively, contributed to the reduction.
17. SUMMARIZED FINANCIAL INFORMATION FOR AFFILIATED COMPANIES
Summarized combined financial information for affiliated companies for which the
equity method of accounting is used (see Note 1, Basis of Consolidation) is
shown on a 100 percent basis. The most significant of these affiliates at
December 31, 2001, are DuPont Dow Elastomers LLC, DuPont Teijin Films(TM),
DuPont Sabanci Polyester Europe B.V. and DuPont-Sabanci International, LLC all
of which are owned 50 percent by DuPont. Dividends received from equity
affiliates were $50 in 2001, $180 in 2000 and $168 in 1999.
Year Ended December 31
--------------------------------
Results of operations 2001 2000 1999(1)
------- ------- -------
Sales(2) $ 7,071 $ 7,615 $ 6,512
Earnings (losses) before income taxes (124) 728 400
Net income (loss) (213) 620 249
------- ------- -------
DuPont's equity in earnings (losses) of
affiliates
Partnerships(3) $ (21) $ 153 $ 114
Corporate joint ventures (after
income taxes) (22) 136 21
------- ------- -------
$ (43) $ 289 $ 135
======= ======= =======
(1) Effective October 1, 1999, DuPont purchased the remaining 80 percent
interest in Pioneer and results thereafter are fully consolidated.
(2) Includes sales to DuPont of $799 in 2001, $884 in 2000 and $572 in 1999.
(3) Income taxes are reflected in the company's provision for income tax.
Financial position at December 31 2001 2000
------ ------
Current assets $3,514 $4,267
Noncurrent assets 5,913 5,610
------ ------
Total assets $9,427 $9,877
------ ------
Short-term borrowings* $1,160 $1,112
Other current liabilities 1,731 1,934
Long-term borrowings* 1,340 1,256
Other long-term liabilities 686 763
------ ------
Total liabilities $4,917 $5,065
------ ------
DuPont's investment in affiliates
(includes advances) $2,045 $2,206
====== ======
* DuPont's pro rata interest in total borrowings was $1,219 in 2001 and
$1,134 in 2000 of which $716 in 2001 and $834 in 2000 was guaranteed by the
company. These amounts are included in the guarantees disclosed in Note 25.
DuPont 2001 Annual Report 59
Notes to Financial Statements
(Dollars in millions, except per share)
18. OTHER ASSETS
December 31 2001 2000
------ ------
Prepaid pension cost $2,454 $1,843
Long-term investments in securities 156 215
Deferred income taxes (see Note 9) 313 462
Miscellaneous 366 497
------ ------
$3,289 $3,017
====== ======
Long-term investments in securities includes securities for which market values
are not readily available of $108 and $105 at December 31, 2001 and 2000,
respectively. Long-term investments in securities classified as
available-for-sale are as follows:
December 31 2001 2000
----- -----
Cost $ 43 $ 66
Gross unrealized gains 7 53
Gross unrealized losses (2) (9)
----- -----
Fair value $ 48 $ 110
===== =====
During 2001 proceeds from the sale of equity securities were not material.
During 2000 proceeds from the sale of equity securities totaled $220, with gross
realized gains of $195. In addition the company had gross realized losses of
$342 in 2000.
19. ACCOUNTS PAYABLE
December 31 2001 2000
------ ------
Trade $1,565 $1,900
Payables to banks 169 237
Compensation awards 111 191
Miscellaneous 374 403
------ ------
$2,219 $2,731
====== ======
Payables to banks represents checks issued on certain disbursement accounts but
not presented to the banks for payment. The reported amounts shown above
approximate fair value because of the short-term maturity of these obligations.
20. SHORT-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
December 31 2001 2000
------ ------
Commercial paper $ 75 $2,461
Non-U.S. bank borrowings 245 297
Medium-term notes payable within one year 65 459
Long-term borrowings payable within one year 1,050 --
Industrial development bonds payable on demand 26 26
Capital lease obligations 3 4
------ ------
$1,464 $3,247
====== ======
The estimated fair value of the company's short-term borrowings, including
interest rate financial instruments, based on quoted market prices for the same
or similar issues or on current rates offered to the company for debt of the
same remaining maturities, was $1,500 and $3,200 at December 31, 2001 and 2000,
respectively. The change in estimated fair value in 2001 was primarily due to
changes in short-term borrowing levels.
Unused short-term bank credit lines were approximately $3,800 and $4,300 at
December 31, 2001 and 2000, respectively. These lines support short-term
borrowings.
The weighted-average interest rate on short-term borrowings outstanding at
December 31, 2001 and 2000, was 7.6 percent and 6.8 percent, respectively.
21. OTHER ACCRUED LIABILITIES
December 31 2001 2000
------ ------
Payroll and other employee-related costs $ 546 $ 676
Accrued postretirement benefits cost (see Note 29) 423 381
Miscellaneous 2,120 1,970
------ ------
$3,089 $3,027
====== ======
60 DuPont 2001 Annual Report
Notes to Financial Statements
(Dollars in millions, except per share)
22. LONG-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
December 31 2001 2000
------ ------
U.S. dollar:
Industrial development bonds due 2007 - 2029 $ 332 $ 332
Medium-term notes due 2003 - 2048(1,2) 597 642
6.50% notes due 2002 -- 499
6.75% notes due 2002 -- 300
8.00% notes due 2002 -- 251
8.50% notes due 2003(3) -- 140
6.75% notes due 2004 998 998
8.13% notes due 2004(2) 327 331
8.25% notes due 2006(2) 251 282
6.75% notes due 2007 499 499
5.88% notes due 2009(2) 404 398
6.88% notes due 2009 990 988
8.25% debentures due 2022(2) 49 49
7.95% debentures due 2023(2) 40 38
6.50% debentures due 2028 298 298
7.50% debentures due 2033(2) 24 23
Other loans (various currencies)
due 2002 - 2009 494 536
Capital lease obligations 47 54
------ ------
$5,350 $6,658
====== ======
1 Average interest rates at December 31, 2001 and 2000, were 4.9 percent and
6.3 percent, respectively.
2 The company entered into interest rate swap agreements with a notional
amount totaling $1,073. Over the remaining term of the notes and debentures
the company will receive fixed payments equivalent to the underlying debt
and pay floating payments based on U.S. dollar LIBOR or commercial paper
rates. The fair value of the swaps at December 31, 2001 and 2000, was $23
and ($3), respectively.
3 The company entered into an interest rate swaption agreement that gave the
counterparty the one-time option to put the company into an interest rate
swap with a notional amount of $140 where the company over the remaining
term of the notes would receive fixed payments equivalent to the underlying
notes and pay floating payments equivalent to commercial paper. The premium
received from the counterparty was being amortized to income using the
effective interest method over the remaining maturity of the notes. The
swaption expired unexercised in 2000. The note was called in 2001.
Average interest rates on industrial development bonds and on other loans
(various currencies) were 5.9 percent and 5.0 percent, respectively, at December
31, 2001, and 6.1 percent and 6.2 percent, respectively, at December 31, 2000.
Maturities of long-term borrowings, together with sinking fund requirements for
years ending after December 31, 2002, are $349, $1,402, $197 and $275 for the
years 2003, 2004, 2005 and 2006, respectively.
The estimated fair value of the company's long-term borrowings, including
interest rate financial instruments, based on quoted market prices for the same
or similar issues or on current rates offered to the company for debt of the
same remaining maturities was $5,600 and $6,700 at December 31, 2001 and 2000,
respectively. The change in estimated fair value in 2001 was primarily due to
changes in debt levels.
23. OTHER LIABILITIES
December 31 2001 2000
------ ------
Accrued postretirement benefits cost (see Note 29) $5,210 $5,376
Reserves for employee-related costs 1,012 1,128
Miscellaneous 1,114 1,225
------ ------
$7,336 $7,729
====== ======
24. MINORITY INTERESTS
In May and December 2001 the company received proceeds of $637 and $1,400,
respectively, from two minority interest transactions. Costs incurred in
connection with these transactions totaled $42 and are being amortized on a
straight-line basis over a five-year period to Minority Interests in Earnings of
Consolidated Subsidiaries in the Consolidated Income Statement. The proceeds are
reported as Minority Interests in the Consolidated Balance Sheet.
The minority investors earn a preferred, cumulative adjustable return on their
investment. The after-tax distribution reflected in Minority Interests in
Earnings of Consolidated Subsidiaries for 2001 totaled $14, reflecting a
preferred return of 2.9 percent.
The legal structure for the above transactions in each case involved creating
new consolidated limited liability companies with separate assets and
liabilities. DuPont contributed cash as part of the capital structure and assets
that provide security for the repayment of capital to the unrelated minority
investors. The assets involved remain on the company's Consolidated Balance
Sheet and continue to be managed by the company. In addition, the company
manages the new companies and generally has the right to dispose of their assets
for fair value, and
DuPont 2001 Annual Report 61
Notes to Financial Statements
(Dollars in millions, except per share)
substitute cash or other assets of equal value as security to the minority
investors, provided the minority investors consent to the asset substitution.
Secured assets included in the above transactions are real estate, nonstrategic
operating assets and equity securities in certain consolidated companies.
The company has the option to redeem some or all of the minority interests in
both transactions at any time. In limited circumstances, such as nonpayment of
the preferred return, the minority investors can require the sale of the assets
in the new companies. By 2006 the minority investors' adjustable returns may be
renegotiated at the request of the company or the minority investors. If
agreement on the adjustable returns is not reached, the company will redeem the
minority interests or remarket them to other third parties.
25. COMMITMENTS AND CONTINGENT LIABILITIES
The company uses various leased facilities and equipment in its operations.
Future minimum lease payments under noncancelable operating leases are $200,
$152, $120, $91 and $82 for the years 2002, 2003, 2004, 2005 and 2006,
respectively, and $260 for subsequent years, and are not reduced by
noncancelable minimum sublease rentals due in the future in the amount of $12.
In connection with certain of these leased facilities the company has residual
value guarantees in the amount of $264 at December 31, 2001. Rental expense
under operating leases was $233 in 2001, $221 in 2000 and $198 in 1999.
In June 1997 DuPont entered into contracts with Computer Sciences Corporation
(CSC) and Accenture LLP. CSC operates a majority of DuPont's global information
systems and technology infrastructure and provides selected applications and
software services. Accenture provides information systems solutions designed to
enhance DuPont's manufacturing, marketing, distribution and customer service.
The total dollar value of the contracts is in excess of $4,000 over 10 years.
Minimum payments due under the contracts are: $150, $144, $140, $136 and $132
for the years 2002, 2003, 2004, 2005 and 2006, respectively, and a total of $55
thereafter.
The company has various purchase commitments for materials, supplies and items
of permanent investment incident to the ordinary conduct of business. In the
aggregate, such commitments are not at prices in excess of current market.
The company has directly guaranteed various debt obligations under agreements
with certain affiliated and other companies to provide specified minimum
revenues from shipments or purchases of products. At December 31, 2001, the
company had directly guaranteed $953 of the obligations of certain affiliated
companies and others. No material loss is anticipated by reason of such
agreements and guarantees.
In addition, the company has historically guaranteed certain obligations and
liabilities of Conoco Inc., its subsidiaries and affiliates. The company has
guaranteed $960, plus interest, of the financial obligations of Conoco as well
as certain nonfinancial performance obligations. Conoco has indemnified the
company for any liabilities the company may incur pursuant to these guarantees.
The Restructuring, Transfer and Separation Agreement between DuPont and Conoco
requires Conoco to use its best efforts to have Conoco, or any of its
subsidiaries, substitute for DuPont as guarantor.
In connection with the separation from DuPont, Conoco and DuPont entered into a
tax sharing agreement. In November 2001, Conoco and DuPont settled all
outstanding disputes arising under this agreement. This settlement was not
material to the company's financial position, liquidity or the gain on disposal
of discontinued business operations.
The company is subject to various lawsuits and claims with respect to such
matters as product liabilities, governmental regulations and other actions
arising out of the normal course of business. While the effect on future
financial results is not subject to reasonable estimation because considerable
uncertainty exists, in the opinion of company counsel, the ultimate liabilities
resulting from such lawsuits and claims may be significant to results of
operations in the period recognized but management does not anticipate they will
have a material adverse effect on the company's consolidated financial position
or liquidity.
Since 1991, DuPont has been served with several hundred lawsuits alleging
property damage, including damage to shrimping operations, from various forms of
Benlate(R) fungicide. A smaller number of cases allege personal injuries. Many
of these cases include allegations of fraud and misconduct. The majority of
these lawsuits were disposed of by trial, settlement or dismissal. However,
certain plaintiffs who previously settled with the company have filed cases
alleging fraud and other misconduct relating to the litigation and settlement of
Benlate(R)
62 DuPont 2001 Annual Report
Notes to Financial Statements
(Dollars in millions, except per share)
claims. There are approximately 110 cases pending. DuPont believes that
Benlate(R) did not cause the damages alleged in these cases and denies the
allegations of fraud and misconduct. DuPont intends to defend itself in these
cases.
Pioneer is involved in several lawsuits, both as plaintiff and defendant,
concerning intellectual property rights related to corn and soybean products. If
the ultimate outcome of the Benlate(R) lawsuits or the Pioneer intellectual
property rights cases is adverse to the company, it may be significant to the
results of Agriculture & Nutrition's operations in the period recognized.
However, management anticipates that the ultimate outcome will not have a
material adverse effect on the company's consolidated financial position or
liquidity.
The company is also subject to contingencies pursuant to environmental laws and
regulations that in the future may require the company to take further action to
correct the effects on the environment of prior disposal practices or releases
of chemical or petroleum substances by the company or other parties. The company
has accrued for certain environmental remediation activities consistent with the
policy set forth in Note 1. At December 31, 2001, such accrual amounted to $385
and, in management's opinion, was appropriate based on existing facts and
circumstances. Under adverse changes in circumstances, potential liability may
exceed amounts accrued. In the event that future remediation expenditures are in
excess of amounts accrued, they may be significant to results of operations in
the period recognized but management does not anticipate that they will have a
material adverse effect on the company's consolidated financial position or
liquidity.
26. STOCKHOLDERS' EQUITY
In 1998 the company's Board of Directors approved a program to purchase and
retire up to 20 million shares of DuPont common stock to offset dilution from
shares issued under compensation programs. In July 2000 the Board of Directors
approved an increase in the number of shares remaining to be purchased under the
1998 program from about 16 million shares to the total number of shares of
DuPont common stock which can be purchased for $2,500. The remaining purchases
are not limited to those needed to offset dilution from shares issued under
compensation programs. Shares purchased were 43.0 million shares for $1,818 in
2001, 9.5 million shares for $462 in 2000 and 8.8 million shares for $690 in
1999. Under the July 2000 authorization, $470 in purchases remain as of December
31, 2001. In addition, the company's Board of Directors authorized a new $2,000
share buyback plan in June 2001.
In August 1999 DuPont shareholders tendered 147,980,872 shares of DuPont common
stock in exchange for Conoco Class B shares. The company also bought back 8
million shares for $646 from non-U.S. persons who were not eligible to
participate in the tender offer. These shares were held as treasury shares. In
October 1999 the company issued 68,612,135 treasury shares as part of the cash
and stock acquisition of the remaining 80 percent interest in Pioneer. Also in
October 1999, 327,310 treasury shares were issued as part of the cash and stock
acquisition of worldwide intellectual property rights from ImaRx.
Additional paid-in capital includes $61 at December 31, 2001 and 2000, and $85
at December 31, 1999, related to amounts accrued for variable options.
Shares held by the Flexitrust were used to satisfy existing employee
compensation and benefit programs. During 2001 shares in the Flexitrust were
depleted and the trust arrangement was terminated.
Set forth below is a reconciliation of common stock share activity for the three
years ended December 31, 2001:
Shares of common stock Held In
----------------------------------
Issued Flexitrust Treasury
------ ---------- --------
Balance January 1, 1999 1,140,354,154 (14,167,867) --
------------- -------------- --------------
Issued 6,825,622
Treasury stock
Acquisition (156,820,872)
Businesses acquired 68,939,445
Retirement (840,000) 840,000
------------- -------------- --------------
Balance December 31, 1999 1,139,514,154 (7,342,245) (87,041,427)
------------- -------------- --------------
Issued 3,741,046
Treasury stock
Acquisition (9,540,800)
Retirement (9,540,800) 9,540,800
------------- -------------- --------------
Balance December 31, 2000 1,129,973,354 (3,601,199) (87,041,427)
------------- -------------- --------------
Issued 2,035,601 3,601,199
Treasury stock
Acquisition (43,014,166)
Retirement (43,014,166) 43,014,166
------------- -------------- --------------
Balance December 31, 2001 1,088,994,789 -- (87,041,427)
============= ============== ==============
DuPont 2001 Annual Report 63
Notes to Financial Statements
(Dollars in millions, except per share)
The pretax, tax and after-tax effects of the components of other comprehensive
income (loss) are shown below:
Pretax Tax After-tax
------ --- ---------
2001
Cumulative translation adjustment $ (19) $ -- $ (19)
Cumulative effect of a change in
accounting principle 10 (4) 6
Net revaluation and clearance of
cash flow hedges to earnings (52) 20 (32)
Minimum pension liability adjustment (26) 10 (16)
Net unrealized losses on securities (39) 15 (24)
----- ----- -----
Other comprehensive income (loss) $(126) $ 41 $ (85)
----- ----- -----
2000
Cumulative translation adjustment $ (38) $ -- $ (38)
Minimum pension liability adjustment 7 (3) 4
Net unrealized losses on securities
Unrealized losses arising in 2000 (187) 76 (111)
Reclassification adjustments for
net losses realized in 2000 145 (55) 90
----- ----- -----
(42) 21 (21)
----- ----- -----
Other comprehensive income (loss) $ (73) $ 18 $ (55)
===== ===== =====
1999
Cumulative translation adjustment $ 172 $ -- $ 172
Minimum pension liability adjustment 83 (7) 76
Net unrealized gains on securities 86 (35) 51
----- ----- -----
Other comprehensive income (loss) $ 341 $ (42) $ 299
===== ===== =====
Balances of related after-tax components comprising Accumulated Other
Comprehensive Income (Loss) are summarized below:
December 31 2001 2000 1999
----- ----- -----
Foreign currency translation adjustment $ (61) $ (42) $ (4)
Cumulative effect of a change in
accounting principle 6 -- --
Net revaluation and clearance of cash
flow hedges to earnings (32) -- --
Minimum pension liability adjustment (192) (176) (180)
Net unrealized gains on securities 6 30 51
----- ----- -----
$(273) $(188) $(133)
===== ===== =====
27. COMPENSATION PLANS
From time to time, the Board of Directors has approved the adoption of worldwide
Corporate Sharing Programs. Under these programs, essentially all employees have
received a one-time grant to acquire shares of DuPont common stock at the market
price on the date of grant. Option terms are "fixed" and options are generally
exercisable one year after date of grant and expire 10 years from date of grant.
There are no additional shares that may be subject to option under existing
programs.
Stock option awards under the DuPont Stock Performance Plan may be granted to
key employees of the company and may be "fixed" and/or "variable." The purchase
price of shares subject to option is equal to or in excess of the market price
of the company's stock at the date of grant. Optionees are eligible for reload
options upon the exercise of stock options with the condition that shares
received from the exercise are held for at least two years. A reload option is
granted at the market price on the date of grant and has a term equal to the
remaining term of the original option. The maximum number of reload options
granted is limited to the number of shares subject to option in the original
option times the original option price divided by the option price of the reload
option. Generally, fixed options are fully exercisable from one to three years
after date of grant and expire 10 years from date of grant. Beginning in 1998,
shares otherwise receivable from the exercise of nonqualified options can be
deferred as stock units for a designated future delivery.
Variable stock option grants have been made to certain members of senior
management. These options are subject to forfeiture if, within five years from
the date of grant, the market price of DuPont common stock does not achieve a
price of $75 per share for 50 percent of the options and $90 per share for the
remaining 50 percent. This condition was met in 1998 for options with a $75 per
share hurdle price and, as a result, these options became "fixed" and
exercisable.
The maximum number of shares that may be subject to option for any consecutive
five-year period is 72 million shares. Subject to this limit, additional shares
that may have been made subject to options were 40,458,505 for 2001, 45,583,953
for 2000 and 57,203,985 for 1999.
64 DuPont 2001 Annual Report
Notes to Financial Statements
(Dollars in millions, except per share)
Under the DuPont Stock Performance Plan, awards granted to key employees in 2002
consisted of 10,178,720 fixed options to acquire DuPont common stock at the
market price ($42.50 per share) on the date of grant. These options vest over a
three-year period and, except for the last six months of the 10-year option
term, are exercisable when the market price of DuPont common stock exceeds the
option grant price by 20 percent.
The following table summarizes activity for fixed and variable options for the
last three years:
Fixed Variable
Number Weighted- Number Weighted-
of Average of Average
Shares Price Shares Price
------ ----- ------ -----
January 1, 1999 52,163,432 $ 38.62 1,914,850 $ 53.55
---------- --------- --------- ---------
Granted(1) 8,683,066 $ 49.59 -- --
Exercised 6,337,300 $ 29.42 -- --
Forfeited 342,176 $ 48.87 -- --
---------- --------- --------- ---------
December 31, 1999 54,167,022 $ 41.39 1,914,850 $ 53.55
---------- --------- --------- ---------
Granted(2) 14,587,726 $ 48.97 -- --
Exercised 3,004,920 $ 24.80 -- --
Forfeited 1,104,730 $ 55.22 52,950 $ 53.07
---------- --------- --------- ---------
December 31, 2000 64,645,098 $ 43.64 1,861,900 $ 53.56
---------- --------- --------- ---------
Granted 12,452,832 $ 43.30 -- --
Exercised 4,913,247 $ 20.65 -- --
Forfeited 886,601 $ 42.78 -- --
---------- --------- --------- ---------
December 31, 2001 71,298,082 $ 45.18 1,861,900 $ 53.56
========== ========= ========= =========
(1) Includes options granted in exchange for outstanding vested options under
Pioneer's employee stock option plan.
(2) Includes 8,304,800 options related to a one-time stock option grant to
certain Pioneer employees.
Fixed options exercisable and weighted-average exercise prices at the end of the
last three years and the weighted-average fair values of fixed options granted
are as follows:
2001 2000 1999
---- ---- ----
Number of shares at year-end 42,525,102 44,945,610 45,117,694
Weighted-avg. price at year-end $ 43.67 $ 40.29 $ 38.20
Weighted-avg. fair value of
options granted during year $ 10.77 $ 13.40 $ 19.44
=========== =========== ===========
The fair value of fixed options granted is calculated using the Black-Scholes
option pricing model. Assumptions used were as follows:
2001 2000 1999
---- ---- ----
Dividend yield 3.2% 3.0% 3.2%
Volatility 26.4% 25.4% 23.4%
Risk-free interest rate 5.1% 6.1% 5.3%
Expected life (years) 6.5 6.2 5.3
==== ==== ====
The following table summarizes information concerning currently outstanding and
exercisable options:
Exercise Exercise Exercise Exercise
Price Price Price Price
$21.91- $33.63- $50.50- $76.38-
December 31, 2001 $32.87 $50.44 $75.75 $82.09
- ----------------- ------ ------ ------ ------
Fixed options
Options outstanding 14,463,633 24,519,986 32,264,761 49,702
Weighted-avg. remaining
contractual life (years) 2.7 8.3 6.1 4.5
Weighted-avg. price $ 26.62 $ 42.10 $ 55.78 $ 81.18
Options exercisable 14,463,633 3,774,818 24,236,949 49,702
Weighted-avg. price $ 26.62 $ 40.75 $ 54.22 $ 81.18
------------ ------------ ------------ ---------
Variable options
Options outstanding -- -- 1,851,900 10,000
Weighted-avg. remaining
contractual life (years) -- -- 5.1 6.4
Weighted-avg. price -- -- $ 53.41 $ 81.25
Options exercisable -- -- -- --
Weighted-avg. price -- -- -- --
============ ============ ============ =========
The company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock option
plans. Accordingly, no compensation expense has been recognized for fixed
options. SFAS No. 123, "Accounting for Stock-Based Compensation," was issued in
1995. The company has elected not to adopt the optional recognition provisions
of SFAS No. 123. In addition, certain subsidiaries of the company grant options
to their respective employees under APB Opinion No. 25 and have elected not to
adopt SFAS No. 123. The following table sets forth pro forma information as if
the company had adopted these recognition provisions. The pro forma
DuPont 2001 Annual Report 65
Notes to Financial Statements
(Dollars in millions, except per share)
disclosures are not representative of the effects on net income and earnings per
share in future years.
Pro forma net income and
earnings per share 2001 2000 1999
- ------------------ ---- ---- ----
Net income
As reported $4,339 $2,314 $7,690
Pro forma $4,249 $2,217 $7,683
Earnings per share - basic
As reported $ 4.18 $ 2.21 $ 7.08
Pro forma $ 4.09 $ 2.12 $ 7.08
Earnings per share - diluted
As reported $ 4.16 $ 2.19 $ 6.99
Pro forma $ 4.07 $ 2.10 $ 6.99
====== ====== ======
Compensation expense (benefit) recognized in income for stock-based employee
compensation awards was $3 for 2001, $(27) for 2000 and $71 ($53 excluding
Conoco) for 1999.
Awards under the company's Variable Compensation Plan may be granted in stock
and/or cash to employees who have contributed most in a general way to the
company's success, with consideration being given to the ability to succeed to
more important managerial responsibility. Such awards were $108 for 2001, $186
for 2000 and $188 for 1999. Amounts credited to the Variable Compensation Fund
are dependent on company earnings and are subject to maximum limits as defined
by the plan. The amounts credited to the fund were $109 in 2001, $189 in 2000
and $180 in 1999. Awards made and amounts credited under the Variable
Compensation Plan for 2001 relate solely to employees of continuing operations.
In accordance with the terms of the Variable Compensation Plan and similar plans
of subsidiaries, 935,876 shares of common stock are awaiting delivery from
awards for 2001 and prior years.
28. INVESTMENT ACTIVITIES
Net proceeds in 2001 from the sale of DuPont Pharmaceuticals were $7,798; see
Note 7. Other proceeds from the sale of assets were $253 and principally
included $104 related to the company's sale of a portion of its interest in
DuPont Photomasks, Inc. and $95 related to the sale of polyester businesses and
associated manufacturing assets.
Proceeds from sale of assets in 2000 were $703 and principally included $220
from sale of investment securities, $153 from a sale of a portion of the
company's interest in DuPont Photomasks, and $138 from sale of various
transportation and construction equipment. Proceeds from sales of assets in 1999
included $537 related to the formation of the DuPont Teijin Films(TM) joint
venture.
On October 1, 1999, the company acquired the remaining 80 percent of Pioneer
Hi-Bred International not previously owned by the company for $7,684 consisting
of $3,419 cash payments for the purchase of Pioneer common shares, $4,154
representing the fair value of 68,612,135 shares of DuPont common stock issued
in exchange for Pioneer common shares, $81 representing 80 percent of the fair
value of options to purchase DuPont common stock issued in exchange for the
outstanding vested options to purchase Pioneer common stock under Pioneer's
employee stock option plan, and direct acquisition costs and expenses of $30.
The business of Pioneer is the broad application of the science of genetics.
Pioneer develops, produces and markets hybrids of corn, sorghum and sunflowers;
varieties of soybeans, alfalfa, wheat and canola; and microorganisms useful in
crop and livestock production.
The acquisition has been accounted for as a purchase. The final allocation of
purchase price to the identifiable assets acquired and liabilities assumed,
based on their estimated fair values is as follows: current assets $2,176;
noncurrent assets $5,590; in-process research and development $2,175; current
liabilities $954; long term borrowings $163; other liabilities $287; deferred
income taxes $847; and minority interests $6. Noncurrent assets includes $2,724
of goodwill, which is being amortized over 40 years.
On February 26, 1999, the company purchased the Herberts coatings business from
Hoechst AG for a cash payment of $1,588, acquisition related costs of $10, and
assumed debt of $113. For accounting purposes, the acquisition has been treated
as a purchase. The allocation of purchase price is as follows: current assets
$720; noncurrent assets $1,504; in-process research and development $64; and
assumed liabilities $690. Noncurrent assets include $775 of goodwill, which is
being amortized over 20 years. Assumed liabilities include $51 in
66 DuPont 2001 Annual Report
Notes to Financial Statements
(Dollars in millions, except per share)
employee separation costs and $12 in other exit costs pursuant to a
restructuring plan the company began to formulate as of the acquisition date.
Approximately 1,300 employee terminations occurred as manufacturing facilities
were shut down and other business activities were reorganized. In 2001 the
restructuring program was completed.
Note 5 provides information on purchased in-process research and development in
connection with the Pioneer and Herberts transactions.
29. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The company offers various postretirement benefits to its employees. Where
permitted by applicable law, the company reserves the right to change, modify or
discontinue the plans.
Pensions
The company has noncontributory defined benefit plans covering substantially all
U.S. employees. The benefits under these plans are based primarily on years of
service and employees' pay near retirement. The company's funding policy is
consistent with the funding requirements of federal laws and regulations.
Pension coverage for employees of the company's non-U.S. consolidated
subsidiaries is provided, to the extent deemed appropriate, through separate
plans. Obligations under such plans are systematically provided for by
depositing funds with trustees, under insurance policies or by book reserves.
Other Postretirement Benefits
The parent company and certain subsidiaries provide medical, dental, and life
insurance benefits to pensioners and survivors. The associated plans are
unfunded and approved claims are paid from company funds.
Summarized information on the company's postretirement plans is as follows:
Pension Benefits Other Benefits
---------------- --------------
2001 2000 2001 2000
---- ---- ---- ----
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at
beginning of year $ 17,763 $ 17,719 $ 5,126 $ 4,627
Service cost 335 340 57 50
Interest cost 1,244 1,243 385 344
Plan participants' contributions 16 14 42 34
Actuarial (gain) loss 1,423 35 719 488
Foreign currency exchange
rate changes (149) (248) (3) (2)
Benefits paid (1,482) (1,329) (465) (415)
Amendments 14 -- 2 --
Divestiture (518) (18) (31) --
Special termination benefits 123 7 -- --
-------- -------- -------- --------
Benefit obligation at end
of year $ 18,769 $ 17,763 $ 5,832 $ 5,126
======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets
at beginning of year $ 20,314 $ 21,861 $ -- $ --
Actual return on plan assets (615) 85 -- --
Foreign currency exchange
rate changes (127) (186) -- --
Employer contributions 171 182 423 381
Plan participants' contributions 16 14 42 34
Benefits paid (1,482) (1,329) (465) (415)
Retiree health care pension
assets transfer -- (305) -- --
Divestiture (354) (8) -- --
-------- -------- -------- --------
Fair value of plan assets
at end of year $ 17,923 $ 20,314 $ -- $ --
======== ======== ======== ========
Funded status:
U.S. funded plans $ 525 $ 3,521 $ -- $ --
Non-U.S. funded plans (114) 314 -- --
All other plans (1,257)* (1,284)* (5,832) (5,126)
-------- -------- -------- --------
Total $ (846) $ 2,551 $ (5,832) $ (5,126)
Unrecognized prior
service cost 444 514 (489) (595)
Unrecognized actuarial
(gain) loss 2,267 (1,689) 688 (36)
Unrecognized transition asset (172) (324) -- --
-------- -------- -------- --------
Net amount recognized $ 1,693 $ 1,052 $ (5,633) $ (5,757)
======== ======== ======== ========
AMOUNTS RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEET
CONSIST OF:
Prepaid (accrued) benefit cost $ 1,808 $ 1,179 $ (5,633) $ (5,757)
Accrued benefit liability (437) (448) -- --
Intangible asset 10 35 -- --
Accumulated other
comprehensive income (loss) 312 286 -- --
-------- -------- -------- --------
Net amount recognized $ 1,693 $ 1,052 $ (5,633) $ (5,757)
======== ======== ======== ========
* Includes pension plans maintained around the world where full funding is
not permissible or customary.
DuPont 2001 Annual Report 67
Notes to Financial Statements
(Dollars in millions, except per share)
Weighted-average Pension Benefits Other Benefits
assumptions as of ---------------- --------------
December 31 2001 2000 2001 2000
---- ---- ---- ----
Discount rate 7.00% 7.75% 7.00% 7.75%
Expected return on plan assets 9.5% 9.5% -- --
Rate of compensation increase 5.0% 5.0% 5.0% 5.0%
===== ===== ===== =====
The above assumptions are for U.S. plans only. The significant reduction in the
number of employees related to the company's 2001 restructuring activities
resulted in a curtailment gain and remeasurement of liabilities using a 7.5
percent discount rate. For non-U.S. plans, no one of which was material,
assumptions reflect economic assumptions applicable to each country.
The assumed health care trend rates used in determining other benefits at
December 31, 2001, are 9.0 percent decreasing gradually to 5 percent in 2006. At
December 31, 2000, such rates were 7.5 percent decreasing gradually to 5 percent
in 2004.
Components of Pension Benefits Other Benefits
net periodic ---------------- --------------
benefit cost 2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Service cost $ 335 $ 340 $ 412 $ 57 $ 50 $ 60
Interest cost 1,244 1,243 1,192 385 344 305
Expected return
on plan assets (1,874) (1,902) (1,719) -- -- --
Amortization of
transition asset (151) (151) (150) -- -- --
Amortization of
unrecognized
(gain) loss (13) (52) 49 8 (10) (6)
Amortization of
prior service
cost 50 53 50 (73) (75) (75)
Curtailment/
settlement
(gain) loss 35 4 2 (30) -- --
------- ------- ------- ------- ------- -------
Net periodic
benefit cost
(credit) $ (374) $ (465) $ (164) $ 347 $ 309 $ 284
======= ======= ======= ======= ======= =======
The projected benefit obligation and fair value of plan assets for plans with
projected benefit obligations in excess of plan assets are $4,066 and $2,651,
respectively, as of December 31, 2001, and $2,076 and $655, respectively, as of
December 31, 2000. For pension plans with accumulated benefit obligations in
excess of plan assets, the accumulated benefit obligation and fair value of plan
assets are $1,279 and $247, respectively, as of December 31, 2001, and $1,246
and $229, respectively, as of December 31, 2000. U.S. pension assets consist
principally of common stocks, including 9,899,375 shares of DuPont at December
31, 2001, and U.S. government obligations.
Assumed health care cost trend rates have a significant effect on the amount
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
Effect on total of service and
interest cost components $ 46 $(38)
Effect on postretirement
benefit obligation $523 $(438)
==== =====
30. DERIVATIVES AND OTHER HEDGING INSTRUMENTS
OBJECTIVES AND STRATEGIES FOR HOLDING DERIVATIVE INSTRUMENTS
Under procedures and controls established by the company's Financial Risk
Management Framework, the company enters into contractual arrangements
(derivatives) in the ordinary course of business to reduce its exposure to
foreign currency, interest rate and commodity price risks. The framework has
established a variety of approved derivative instruments to be utilized in each
risk management program, as well as varying levels of exposure coverage and time
horizons based on an assessment of risk factors related to each hedging program.
Derivative instruments utilized during the period include forwards, options,
futures and swaps. The company has not designated any nonderivatives as hedging
instruments.
The framework sets forth senior management's financial risk management
philosophy and objectives through a Corporate Financial Risk Management Policy.
In addition, it establishes oversight committees and risk management guidelines
that authorize the use of specific derivative instruments and further
establishes procedures for control and valuation, counterparty credit approval,
and routine monitoring and reporting. The counterparties to these contractual
arrangements are major
68 DuPont 2001 Annual Report
Notes to Financial Statements
(Dollars in millions, except per share)
financial institutions and major petrochemical and petroleum companies. The
company is exposed to credit loss in the event of nonperformance by these
counterparties. The company manages this exposure to credit loss through the
aforementioned credit approvals, limits and monitoring procedures and, to the
extent possible, by restricting the period over which unpaid balances are
allowed to accumulate. The company does not anticipate nonperformance by
counterparties to these contracts, and no material loss would be expected from
such nonperformance. Market and counterparty credit risks associated with these
instruments are regularly reported to management.
FAIR VALUE HEDGES
During the year ended December 31, 2001, the company has maintained a number of
interest rate swaps that involve the exchange of fixed for floating rate
interest payments that allow the company to maintain a target range of floating
rate debt. All interest rate swaps qualify for the shortcut method of hedge
accounting, thus there is no ineffectiveness related to these hedges. Changes in
the fair value of derivatives that hedge interest rate risk are recorded in
Interest Expense each period. The offsetting changes in the fair values of the
related debt are also recorded in Interest Expense. The company maintains no
other fair value hedges.
CASH FLOW HEDGES
The company maintains a number of cash flow hedging programs to reduce risks
related to foreign currency and commodity price risk. Foreign currency programs
involve hedging a portion of foreign currency-denominated revenues and major raw
material purchases from vendors outside of the United States. Commodity price
risk management programs serve to reduce exposure to price fluctuations on
purchases of inventory such as natural gas, ethane, ethylene, corn, cyclohexane,
soybeans, and soybean meal. While each risk management program has a different
time horizon, most programs currently do not extend beyond the next two-year
period. One exception is an inventory purchase program with currency risk, which
has been partially hedged through the first quarter of 2006.
Hedges of foreign currency-denominated revenues are reported on the Sales line
of the Consolidated Income Statement, and the effects of hedges of inventory
purchases are reported as a component of Cost of Goods Sold and Other Operating
Charges.
Cash flow hedge results are reclassified into earnings during the same period in
which the related exposure impacts earnings. Reclassifications are made sooner
if it appears that a forecasted transaction will not materialize. Cash flow
hedge ineffectiveness reported in earnings for 2001 is represented by a pretax
loss of $17. Hedge losses of $15 pretax were excluded from the assessment of
hedge effectiveness. A loss of $1 was reclassified to earnings for forecasted
transactions that did not occur. Accumulated Other Comprehensive Income (Loss)
activity during 2001 consists of a beginning balance of $6 related to the
adoption of SFAS No. 133. Revaluation of cash flow hedges of $(60), and
clearance of cash flow hedge results to earnings of $(28) during the period
yielded an ending balance of $(26). The portion of the ending balance of
Accumulated Other Comprehensive Income (Loss) that is expected to be
reclassified into earnings over the next 12 months is $(20).
HEDGES OF NET INVESTMENT IN A FOREIGN OPERATION
During the year ended December 31, 2001, the company has not maintained any
hedges of net investment in a foreign operation.
DERIVATIVES NOT DESIGNATED IN HEDGING RELATIONSHIPS
The company uses forward exchange contracts to reduce its net exposure, by
currency, related to foreign currency-denominated monetary assets and
liabilities. The objective of this program is to maintain an approximately
balanced position in foreign currencies so that exchange gains and losses
resulting from exchange rate changes, net of related tax effects, are minimized.
Several small equity affiliates have risk management programs, mainly in the
area of foreign currency exposure, for which they have elected not to pursue
hedge accounting. In addition, Pioneer maintains small risk management programs
for commodities that do not qualify for hedge accounting treatment. Also, the
company owns stock warrants in a few companies for strategic purposes.
DuPont 2001 Annual Report 69
Notes to Financial Statements
(Dollars in millions, except per share)
CURRENCY RISK
The company routinely uses forward exchange contracts to hedge its net
exposures, by currency, related to monetary assets and liabilities of its
operations that are denominated in currencies other than the designated
functional currency. The primary business objective of this hedging program is
to maintain an approximately balanced position in foreign currencies so that
exchange gains and losses resulting from exchange rate changes, net of related
tax effects, are minimized.
Starting in 2001, option and forward exchange contracts were routinely used to
offset a portion of the company's exposure to foreign currency-denominated
revenues. The objective of this new hedge program is to reduce earnings and cash
flow volatility related to changes in foreign currency exchange rates.
In addition, the company from time to time will enter into forward exchange
contracts to establish with certainty the functional currency amount of future
firm commitments denominated in another currency. Decisions regarding whether or
not to hedge a given commitment are made on a case-by-case basis, taking into
consideration the amount and duration of the exposure, market volatility and
economic trends. At December 31, 2001, the fair value of open forward exchange
contracts designated as hedges of firm foreign currency commitments was not
material. Forward exchange contracts are also used from time to time to manage
near-term foreign currency cash requirements and, from time to time, to place
foreign currency deposits and marketable securities investments into currencies
offering favorable returns. Net cash inflow (outflow) from settlement of forward
exchange contracts was $93, $139 and $(73) for the years 2001, 2000 and 1999,
respectively.
In December 1998 the company entered into forward exchange contracts to purchase
3.1 billion German marks for about $1,900 in conjunction with the signing of a
definitive agreement to purchase the coatings business of Hoechst AG for 3.1
billion German marks. The business purpose of these contracts was to lock in the
U.S. dollar functional currency cost of this acquisition and thereby prevent
adverse movements in the dollar/mark exchange rate from causing the net U.S.
dollar cash purchase price to exceed the negotiated fair value of the business.
The use of hedge accounting for these contracts was precluded by accounting
guidance. Changes in fair value of these contracts were included in income in
the period the change occurred. These contracts expired in August 1999.
INTEREST RATE RISK
The company primarily uses interest rate swaps as part of its program to manage
the interest rate mix of the total debt portfolio and related overall cost of
borrowing.
Interest rate swaps involve the exchange of fixed for floating rate interest
payments that are fully integrated with underlying fixed-rate bonds or notes to
effectively convert fixed rate debt into floating rate debt based on LIBOR or
commercial paper rates.
At December 31, 2001, the company had entered into interest rate swap agreements
totaling a notional amount of $1,073 whereby the company, over the remaining
term of the underlying note, will receive a fixed rate payment equivalent to the
fixed interest rate of the underlying note, and pay a floating rate of interest
that is based on three- or six-month U.S. dollar LIBOR or commercial paper
rates. The fair value of the swaps at December 31, 2001, and 2000, was $23 and
$(3), respectively.
Interest rate financial instruments did not have a material effect on the
company's overall cost of borrowing at December 31, 2001 and 2000.
See also Notes 20 and 22 for additional descriptions of interest rate financial
instruments.
COMMODITY PRICE RISK
The company enters into exchange-traded and over-the-counter derivative
commodity instruments to hedge its exposure to price fluctuations on certain raw
material purchases. In addition, Pioneer enters into exchange-traded derivative
commodity instruments to hedge the commodity price risk associated with
compensating growers. The fair value of outstanding derivative commodity
instruments at December 31, 2001, and 2000, was $(43) and $14, respectively.
70 DuPont 2001 Annual Report
Notes to Financial Statements
(Dollars in millions, except per share)
31. GEOGRAPHIC INFORMATION
2001 2000 1999
---- ---- ----
Net Net Net Net Net Net
Sales* Property Sales* Property Sales* Property
------ -------- ------ -------- ------ --------
NORTH AMERICA
United States $12,054 $ 8,167 $14,509 $ 8,887 $13,656 $ 8,977
Canada 918 536 1,074 538 989 482
Mexico 559 164 581 165 500 146
Other 82 85 76 151 114 150
------- ------- ------- ------- ------- -------
Total 13,613 8,952 16,240 9,741 15,259 9,755
EUROPE, MIDDLE EAST AND AFRICA
Germany 1,590 585 1,716 641 1,743 733
France 929 170 986 181 979 228
United Kingdom 704 709 783 721 960 965
Italy 854 25 915 29 884 29
Other 2,354 1,243 2,474 1,232 2,598 1,275
------- ------- ------- ------- ------- -------
Total 6,431 2,732 6,874 2,804 7,164 3,230
ASIA PACIFIC
Japan 906 75 1,023 78 928 138
Taiwan 663 632 809 680 690 769
China 623 133 487 142 361 146
Singapore 110 325 134 345 112 379
Other 1,355 127 1,506 126 1,393 197
------- ------- ------- ------- ------- -------
Total 3,657 1,292 3,959 1,371 3,484 1,629
SOUTH AMERICA
Brazil 576 187 686 123 594 105
Argentina 223 102 243 118 172 126
Other 226 22 266 25 245 26
------- ------- ------- ------- ------- -------
Total 1,025 311 1,195 266 1,011 257
------- ------- ------- ------- ------- -------
TOTAL $24,726 $13,287 $28,268 $14,182 $26,918 $14,871
======= ======= ======= ======= ======= =======
* Sales are attributed to countries based on location of customer.
32. SEGMENT INFORMATION
The company's strategic business units (operating segments) are organized by
product line. For purposes of SFAS No. 131, these have been aggregated into
eight reportable segments including Agriculture & Nutrition, Nylon, Performance
Coatings & Polymers, Pharmaceuticals, Pigments & Chemicals, Polyester, Specialty
Fibers and Specialty Polymers. The company groups the results of its nonaligned
businesses and embryonic businesses under Other. Major products by segment
include: Agriculture & Nutrition (hybrid seed corn and soybean seed, herbicides,
fungicides, insecticides, value-enhanced grains and soy protein); Nylon
(flooring systems, industrial fibers and intermediates); Performance Coatings &
Polymers (automotive finishes, engineering polymers and elastomers);
Pharmaceuticals (prescription pharmaceuticals and radiopharmaceuticals prior to
October 1, 2001, and only the company's interest in the Cozaar(R)/Hyzaar(R)
collaboration thereafter); Pigments & Chemicals (white pigment and mineral
products, specialty chemicals and fluorochemicals); Polyester (films and
polyester fibers, resins and intermediates); Specialty Fibers (Lycra(R) brand
elastane, textiles, nonwovens and aramids); and Specialty Polymers
(photopolymers, electronic materials, packaging and industrial polymers,
fluoropolymers and Corian(R) and Zodiaq(R) surfaces). The company operates
globally in substantially all of its product lines. The company's sales are not
materially dependent on a single customer or small group of customers. The
Performance Coatings & Polymers and Nylon segments have several large customers
in their respective industries that are important to these segments' operating
results.
DuPont 2001 Annual Report 71
Notes to Financial Statements
(Dollars in millions, except per share)
In general, the accounting policies of the segments are the same as those
described in the Summary of Significant Accounting Policies. Exceptions are
noted as follows and are shown in the reconciliations below. Prior years' data
have been reclassified to reflect the 2001 organizational structure. Sales
include pro rata equity affiliate sales and intersegment transfers. Products are
transferred between segments on a basis intended to reflect as nearly as
practicable the "market value" of the products. After-tax operating income does
not include corporate expenses, interest, exchange gains (losses) and corporate
minority interests. Segment net assets measures net working capital, net
permanent investment and other noncurrent operating assets and liabilities of
the segment. Affiliate net assets (pro rata share) excludes borrowings and other
long-term liabilities. Depreciation and amortization includes depreciation on
research and development facilities and amortization of goodwill and other
intangible assets, excluding write-down of assets discussed in Note 6.
Expenditures for long-lived assets excludes investments in affiliates and
includes payments for property, plant and equipment as part of business
acquisitions. See Note 28 for discussion of strategic acquisitions in the
segments.
Perfor-
Agri- mance
culture Coatings Pigments Spec- Spec-
& & Pharma- & ialty ialty Total
Nutrition Nylon Polymers ceuticals Chemicals Polyester Fibers Polymers Other (1)
--------- ----- -------- --------- --------- --------- ------ -------- ----- -------
2001
Total segment sales $ 4,316 $2,696 $ 5,754 $ 902 $ 3,554 $ 1,895 $4,418 $ 3,875 $ 279 $27,689
Intersegment transfers -- 31 4 -- 234 17 65 108 21 480
After-tax operating income(2) 19 (75) 319 3,924 439 (349) 356 372 (69) 4,936
Depreciation and amortization 497 142 247 100 174 105 306 180 10 1,761
Equity in earnings of affiliates (13) (9) 13 -- 1 (62) 3 20 -- (47)
Provision for income taxes (108) (2) 286 2,275 246 (207) 212 236 (51) 2,887
Segment net assets 8,998 1,838 3,927 102(3) 1,732 2,042 4,213 2,513 303 25,668
Affiliate net assets 125 461 532 34 43 1,162 635 260 115 3,367
Expenditures for long-lived assets 177 115 182 50 149 27 328 249 19 1,296
======== ====== ======== ======== ======== ======== ====== ======== ===== =======
2000
Total segment sales $ 4,461 $3,149 $ 6,485 $ 1,487 $ 3,907 $ 2,278 $4,959 $ 4,508 $ 443 $31,677
Intersegment transfers -- 31 4 -- 262 51 73 196 25 642
After-tax operating income(4) (227) 285 674 89 714 66 740 714 39 3,094
Depreciation and amortization 474 153 245 138 185 126 319 175 39 1,854
Equity in earnings of affiliates (13) 33 67 -- 3 23 36 41 8 198
Provision for income taxes (235) 164 426 (2) 342 25 356 391 21 1,488
Segment net assets 9,845 1,953 4,158 2,054 1,693 2,682 4,084 2,374 273 29,116
Affiliate net assets 145 516 615 34 44 1,337 514 266 145 3,616
Expenditures for long-lived assets 267 187 208 114 166 40 361 243 122 1,708
======== ====== ======== ======== ======== ======== ====== ======== ===== =======
1999
Total segment sales $ 3,019 $3,068 $ 6,111 $ 1,630 $ 3,660 $ 2,401 $5,080 $ 4,255 $ 480 $29,704
Intersegment transfers -- 27 10 -- 237 187 88 152 32 733
After-tax operating income(5) (1,952) (23) 582 230 634 (133) 832 668 34 872
Depreciation and amortization 227 142 225 121 190 217 334 172 63 1,691
Equity in earnings of affiliates 22 29 60 -- 2 (13) 42 27 (4) 165
Provision for income taxes (3) 172 416 132 317 (50) 419 365 26 1,794
Segment net assets 11,451 1,830 4,060 1,941 1,771 2,563 4,025 2,330 295 30,266
Affiliate net assets 123 255 404 31 63 770 452 248 -- 2,346
Expenditures for long-lived assets 1,057 208 759 101 144 120 425 270 117 3,201
======== ====== ======== ======== ======== ======== ====== ======== ===== =======
72 DuPont 2001 Annual Report
Notes to Financial Statements
(Dollars in millions, except per share)
1 A reconciliation of the totals reported for the operating segments to the
applicable line items on the consolidated financial statements is as
follows:
SEGMENT SALES TO TOTAL SALES
2001 2000 1999
---- ---- ----
Total segment sales $ 27,689 $ 31,677 $ 29,704
Elimination of intersegment transactions (480) (642) (733)
Elimination of equity affiliate sales (2,493) (2,773) (2,057)
Miscellaneous 10 6 4
-------- -------- --------
Total sales $ 24,726 $ 28,268 $ 26,918
======== ======== ========
AFTER-TAX OPERATING INCOME TO INCOME FROM CONTINUING OPERATIONS
2001 2000 1999
---- ---- ----
Total segment ATOI $ 4,936 $ 3,094 $ 872
Interest and exchange gains (losses) (311) (493) (362)(a)
Corporate expenses (281) (287)(b) (291)
Corporate minority interests(c) (16) -- --
------- ------- -------
Income from continuing operations $ 4,328 $ 2,314 $ 219
======= ======= =======
(a) Includes a charge of $81 on forward exchange contracts to lock in the
U.S. dollar cost of the Herberts acquisition partly offset by a $49
benefit related to recalculation of interest on federal tax refunds
and tax liabilities.
(b) Includes a nonoperating gain of $19 on issuance of stock by an
affiliate. This represents the increase in the company's equity
investment in DuPont Photomasks that resulted from the issuance by
DuPont Photomasks of additional shares to unrelated parties at a price
in excess of book value.
(c) Represents a rate of return to minority interest investors who made
capital contributions during 2001 to consolidated subsidiaries. See
Note 24.
SEGMENT NET ASSETS TO TOTAL ASSETS
2001 2000 1999
---- ---- ----
Total segment net assets $25,668 $29,116 $30,266
Corporate assets 10,463* 5,603 5,173
Liabilities included in net assets 4,188 4,707 5,338
------- ------- -------
Total assets $40,319 $39,426 $40,777
======= ======= =======
* Reflects an increase in Cash and Cash Equivalents related primarily to the
sale of DuPont Pharmaceuticals.
OTHER ITEMS
Segment Consolidated
Totals Adjustments Totals
------ ----------- ------
2001
Depreciation and amortization $ 1,761 $ (7) $ 1,754
Equity in earnings of affiliates (47) 4 (43)
Provision for income taxes 2,887 (420) 2,467
Affiliate net assets 3,367 (1,322) 2,045
Expenditures for long-lived
assets 1,296 198 1,494
2000
Depreciation and amortization $ 1,854 $ 6 $ 1,860
Equity in earnings of affiliates 198 91 289
Provision for income taxes 1,488 (416) 1,072
Affiliate net assets 3,616 (1,410) 2,206
Expenditures for long-lived
assets 1,708 226 1,934
1999
Depreciation and amortization $ 1,691 $ (1) $ 1,690
Equity in earnings of affiliates 165 (30) 135
Provision for income taxes 1,794 (384) 1,410
Affiliate net assets 2,346 (887) 1,459
Expenditures for long-lived
assets 3,201 177 3,378
======= ======= =======
2 Includes the following benefits (charges):
Agriculture & Nutrition(a)(b)(c) $ (225)
Nylon(a)(b) (135)
Performance Coatings & Polymers(b) (58)
Pharmaceuticals(d) 3,866
Pigments & Chemicals(b) (30)
Polyester(a)(b)(e) (275)
Specialty Fibers(b) (31)
Specialty Polymers(b) (30)
Other(b)(f) (5)
-------
$ 3,077
=======
(a) Includes a net benefit of $21 resulting from changes in estimates
related to restructuring activities, principally in the following
segments: Agriculture & Nutrition - $6; Nylon - $8; and Polyester -
$4.
(b) Includes charges of $679 resulting from employee terminations,
facility shutdowns and asset impairments in the following segments:
Agriculture & Nutrition - $80; Nylon - $143; Performance Coatings &
Polymers - $60; Pigments & Chemicals - $30; Polyester - $264;
Specialty Fibers - $30; Specialty Polymers - $32; and Other - $40.
(c) Includes a charge of $32 to write-down intangible assets related to
the TOPCROSS(R) high oil corn business due to a decision to
discontinue development research efforts, primarily as a result of a
deteriorating commercial market outlook, a charge of $83 resulting
from the sale of acquired Pioneer inventories and a charge of $35
related to settlement of litigation with Monsanto.
DuPont 2001 Annual Report 73
Notes to Financial Statements
(Dollars in millions, except per share)
(d) Represents a gain of $3,866 associated with the sale of DuPont
Pharmaceuticals to Bristol-Myers Squibb, including an associated
deferred tax benefit of $49.
(e) Includes a charge of $15 resulting from the shutdown of Polyester
assets at the Circleville, Ohio site.
(f) Includes a gain of $34 resulting from the company's sale of stock that
reduced its ownership interest in DuPont Photomasks, Inc.
3 Represents segment net assets after the sale of certain assets to
Bristol-Myers Squibb on October 1, 2001.
4 Includes the following benefits (charges) :
Agriculture & Nutrition(a)(b) $(572)
Nylon(a)(c) 27
Performance Coatings & Polymers(a)(d) (59)
Pharmaceuticals(e) (44)
Pigments & Chemicals(f) (1)
Polyester(a) 4
Other(g) 62
-----
$(583)
=====
(a) Includes a net benefit of $15 resulting from changes in estimates
related to prior restructuring activities as follows: Agriculture &
Nutrition - $6; Nylon - $3; Performance Coatings & Polymers - $2; and
Polyester - $4.
(b) Includes the following charges: $379 resulting from the sale of
acquired Pioneer inventories, $215 to write down the company's
investment in WebMD to estimated fair market value and to write off
warrants returned to WebMD in connection with terminating the
company's 1999 health care collaboration agreement, $62 to increase
the company's reserve for Benlate(R) litigation, and $42 for accrued
post-employment costs for Pioneer employees. These charges are partly
offset by a $109 gain resulting from the sale by Pioneer of certain
equity securities classified as available-for-sale and a credit of $11
to reduce the preliminary allocation of purchase price to purchased
in-process research and development.
(c) Includes a $24 gain related to formation of a 50/50 global joint
venture with Sabanci for industrial nylon.
(d) Includes a charge of $61 related to employee separation costs for
about 1,000 employees within DuPont Performance Coatings, the shutdown
of related manufacturing facilities, and other exit costs.
(e) Includes a charge of $44 to establish a litigation reserve.
(f) Includes a charge of $17 resulting from restructuring manufacturing
operations at the Chambers Works site, offset by a gain of $16
attributable to the sale of the company's interest in a Mexican
affiliate.
(g) Includes a noncash benefit of $62 resulting from the sale of stock
that reduced the company's ownership interest in DuPont Photomasks.
5 Includes the following benefits (charges):
Agriculture & Nutrition(a)(b) $(2,110)
Nylon(a)(c) (326)
Performance Coatings & Polymers(a)(d) (63)
Pharmaceuticals(a)(e) (33)
Pigments & Chemicals(a) 1
Polyester(a)(f) (80)
Specialty Fibers(a) 1
Specialty Polymers(a) 2
Other(a) 16
-------
$(2,592)
=======
(a) Includes a net benefit of $47 resulting from changes in estimates
related to restructuring and divestiture activities as follows:
Agriculture & Nutrition - $2; Nylon - $11; Performance Coatings &
Polymers - $1; Pharmaceuticals - $3; Pigments & Chemicals - $1;
Polyester - $10; Specialty Fibers - $1; Specialty Polymers - $2; and
Other - $16.
(b) Includes a charge of $107 attributable to employee separation costs,
shutdown of various manufacturing facilities and the write-off of an
intangible asset resulting from the loss of exclusive product
marketing rights; a charge of $2,186 related to the write-off of
purchased in-process research and development in conjunction with the
acquisition of the remaining 80 percent interest in Pioneer; and a
$208 gain associated with exchanging the company's investment in WebMD
for Healtheon/WebMD.
(c) Includes a charge of $337, of which $247 is attributable to an
impairment charge for the write-down of the adipic acid plant in
Singapore that continues to be operated. Other costs are principally
due to the write-down of manufacturing assets in India pursuant to a
sales agreement and the liquidation of a joint venture in China.
(d) Includes a charge of $64 attributable to purchased in-process research
and development in conjunction with the acquisition of Herberts.
(e) Includes a charge of $36 resulting from the finalization of the tax
basis related to the assets acquired and liabilities assumed in
connection with the purchase of Merck's 50 percent interest in The
DuPont Merck Pharmaceutical Company.
(f) Includes a $50 charge resulting from a loss on the formation of a
50/50 global joint venture with Teijin for the polyester films
business and a $40 charge related to employee separation costs.
74 DuPont 2001 Annual Report
Notes to Financial Statements
(Dollars in millions, except per share)
33. SUBSEQUENT EVENTS
In February 2002 the Argentine government announced several economic measures in
an effort to stabilize economic turmoil in the country. One of these measures
requires the immediate conversion of the company's U.S. dollar-denominated trade
receivables to Argentine pesos. This action is expected to result in an exchange
loss of about $50 which will be reflected in the company's first quarter 2002
financial results.
In February 2002 the company announced the realignment of its businesses into
five market- and technology-focused growth platforms: DuPont Electronic &
Communication Technologies, DuPont Performance Materials, DuPont Coatings &
Color Technologies, DuPont Safety & Protection, and DuPont Agriculture &
Nutrition. The company also announced the creation of a Textiles and Interiors
subsidiary. DuPont will consider a full range of options to separate DuPont
Textiles & Interiors from the company.
DuPont 2001 Annual Report 75
Quarterly Financial Data
(Dollars in millions, except per share)
Quarter Ended
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2001
Sales $ 6,859 $ 6,997 $ 5,641 $ 5,229
Cost of goods sold and other expenses(1) 6,092 7,376 5,527 5,077
Income before cumulative effect of a change in accounting principle 484 (213) 142 3,915
Net income (loss) 495(2) (213)(3) 142(4) 3,915(5)
Basic earnings (loss) per share of common stock before cumulative
effect of a change in accounting principle(6) .46 (.21) .13 3.83
Basic earnings (loss) per share of common stock(6) .47 (.21) .13 3.83
Diluted earnings (loss) per share of common stock before cumulative
effect of a change in accounting principle(6) .46 (.21) .13 3.82
Diluted earnings (loss) per share of common stock(6) .47 (.21) .13 3.82
Dividends per share of common stock .35 .35 .35 .35
Market price of common stock(7)
High 49.56 49.88 48.93 45.75
Low 39.86 40.00 32.64 36.28
------- ------- ------- -------
2000
Sales $ 7,593 $ 7,914 $ 6,445 $ 6,316
Cost of goods sold and other expenses(1) 6,481 6,857 5,779 5,857
Net income 803(8) 688(9) 562(10) 261(11)
Basic earnings per share of common stock(6) .76 .66 .54 .25
Diluted earnings per share of common stock(6) .76 .65 .53 .25
Dividends per share of common stock .35 .35 .35 .35
Market price of common stock(7)
High 74.00 63.63 50.69 49.88
Low 45.06 43.13 38.19 39.63
======= ======= ======= =======
(1) Excludes interest expense and nonoperating items.
(2) Includes a net charge of $72 ($.07 per share - diluted) reflecting:
a noncash charge of $83 resulting from the sale of acquired Pioneer
inventories; and a benefit of $11 resulting from a cumulative effect of a
change in accounting principle.
(3) Includes a net charge of $645 ($.62 per share - diluted) reflecting:
a gain of $34 on the sale of DuPont Photomasks stock; and a noncash charge
of $679 related to impairment charges and restructuring activities.
(4) Includes a net benefit of $14 ($.01 per share - diluted) reflecting:
a charge of $35 to establish a reserve related to litigation settlement
with Monsanto; and a benefit of $49 resulting from recognition of
differences between tax basis and book basis of the company's investment in
DuPont Pharmaceuticals.
(5) Includes a net benefit of $3,791 ($3.70 per share - diluted) reflecting:
a gain of $3,817 on the sale of DuPont Pharmaceuticals to Bristol-Myers
Squibb, a benefit of $21 resulting from changes in estimates related to
restructuring activities, a charge of $15 resulting from the shutdown of
certain polyester assets and a charge of $32 resulting from the write-down
of certain Agriculture & Nutrition intangible assets.
(6) Earnings per share for the year may not equal the sum of quarterly earnings
per share due to changes in average share calculations.
(7) As reported on the New York Stock Exchange, Inc. Composite Transactions
Tape.
(8) Includes a net charge of $95 ($.09 per share - diluted) reflecting:
a noncash charge of $215 resulting from the sale of acquired Pioneer
inventories; a gain of $109 from sale of available-for-sale securities; and
a gain of $11 to revise a prior estimate for the 1999 write-off of acquired
in-process research and development.
(9) Includes a net charge of $261 ($.25 per share - diluted) reflecting:
a noncash charge of $138 resulting from the sale of acquired Pioneer
inventories; a charge of $62 to increase the company's reserve for
Benlate(R) fungicide litigation; and a charge of $61 related to employee
separation costs and shutdown of manufacturing facilities.
(10) Includes a net benefit of $25 ($.02 per share - diluted) reflecting:
a gain of $81 on the sale of DuPont Photomasks stock; a charge of $55
related to Pioneer post-employment costs and finalization of purchase
accounting; a charge of $17 related to restructuring manufacturing
operations; and a gain of $16 from the sale of DuPont's interest in an
affiliate.
(11) Includes a net charge of $233 ($.22 per share - diluted) reflecting:
a noncash charge of $215 relating to the WebMD investment write-down and
warrant write-off; a charge of $44 to establish a litigation reserve in
Pharmaceuticals; a noncash charge of $13 resulting from the sales of
Pioneer inventories; a gain of $24 related to formation of a global 50/50
industrial nylon joint venture with Sabanci; and a gain of $15 related to
changes in restructuring activity estimates.
76 DuPont 2001 Annual Report
Five Year Financial Review(1)
(Dollars in millions, except per share)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
SUMMARY OF OPERATIONS
Sales $ 24,726 $ 28,268 $ 26,918 $ 24,767 $ 24,089
Income from continuing operations before income taxes
and minority interests $ 6,844 $ 3,447 $ 1,690 $ 2,613 $ 2,829
Provision for income taxes $ 2,467 $ 1,072 $ 1,410 $ 941 $ 1,354
Income from continuing operations $ 4,328 $ 2,314 $ 219 $ 1,648 $ 1,432
Income from discontinued operations $ -- $ -- $ 7,471 $ 3,033 $ 973
Net income $ 4,328(2) $ 2,314 $ 7,690 $ 4,681(3) $ 2,405
-------- -------- -------- -------- --------
Basic earnings per share of common stock
Income from continuing operations $ 4.17 $ 2.21 $ 0.19 $ 1.45 $ 1.26
Income from discontinued operations $ -- $ -- $ 6.89 $ 2.69 $ 0.86
Net income $ 4.17(2) $ 2.21 $ 7.08 $ 4.14(3) $ 2.12
Diluted earnings per share of common stock
Income from continuing operations(4) $ 4.15 $ 2.19 $ 0.19 $ 1.43 $ 1.24
Income from discontinued operations $ -- $ -- $ 6.80 $ 2.65 $ 0.84
Net income $ 4.15(2) $ 2.19 $ 6.99 $ 4.08(3) $ 2.08
-------- -------- -------- -------- --------
FINANCIAL POSITION AT YEAR END
Working capital $ 6,734 $ 2,401 $ 1,425 $ (2,374) $ (2,110)
Total assets $ 40,319 $ 39,426 $ 40,777 $ 38,536 $ 36,689
Borrowings and capital lease obligations
Short term $ 1,464 $ 3,247 $ 4,941 $ 6,629 $ 6,152
Long term $ 5,350 $ 6,658 $ 6,625 $ 4,495 $ 5,897
Stockholders' equity $ 14,452 $ 13,299 $ 12,875 $ 13,954 $ 11,270
-------- -------- -------- -------- --------
GENERAL
For the year
Capital expenditures $ 1,634 $ 2,022 $ 6,988(5) $ 5,480(5) $ 7,075(5)
Depreciation $ 1,320 $ 1,415 $ 1,444 $ 1,452 $ 1,361
Research and development expense(6) $ 1,588 $ 1,776 $ 1,617 $ 1,308 $ 1,072
As percent of sales 6.4% 6.3% 6.0% 5.3% 4.5%
Average number of shares (millions)
Basic 1,036 1,043 1,085 1,129 1,131
Diluted 1,041 1,051 1,098 1,145 1,150
Dividends per common share $ 1.40 $ 1.40 $ 1.40 $ 1.365 $ 1.23
Common stock prices
High $ 49.88 $ 74.00 $ 75.19 $ 84.44 $ 69.75
Low $ 32.64 $ 38.19 $ 50.06 $ 51.69 $ 46.38
Year-end close $ 42.51 $ 48.31 $ 65.88 $ 53.06 $ 60.06
At year end
Employees (thousands)(7) 79 93 94 101 98
Common stockholders of record (thousands) 127 132 140 145 154
Book value per common share $ 14.20 $ 12.57 $ 12.09 $ 12.18 $ 9.77
======== ======== ======== ======== ========
(1) See Management's Discussion and Analysis, Consolidated Financial Statements
and Quarterly Financial Data for information relating to significant items
affecting the results of operations and financial position.
(2) Before cumulative effect of a change in accounting principle. See Note 11
to the Consolidated Financial Statements.
(3) Before extraordinary charge from early extinguishment of debt of $201, net
of taxes.
(4) Earnings from continuing operations before one-time items - diluted were
$1.19, $2.73, $2.58, $2.55 and $2.70 for the years 2001, 2000, 1999, 1998
and 1997, respectively.
(5) Includes strategic acquisitions.
(6) Excludes purchased in-process research and development.
(7) Includes employees of discontinued Conoco operations prior to 1999.
DuPont 2001 Annual Report 77