UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-815
E. I. du Pont de Nemours and Company
(Exact Name of Registrant as Specified in Its Charter)
Delaware 51-0014090
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1007 Market Street, Wilmington, Delaware 19898
(Address of Principal Executive Offices)
(302) 774-1000
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- ---------
1,039,681,849 shares (excludes 87,041,427 shares of treasury stock) of common
stock, $0.30 par value, were outstanding at July 31, 2001.
1
E. I. DU PONT DE NEMOURS AND COMPANY
Table of Contents
Page(s)
Part I Financial Information ------
Item 1. Financial Statements
Consolidated Income Statement 3
Consolidated Statement of Cash Flows 4
Consolidated Balance Sheet 5
Notes to Financial Statements 6-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-Looking Statements 18-19
Results of Operations:
Financial Results 19-20
Segment Performance 21-22
Outlook 22
Financial Condition 22-23
Other Items:
New Accounting Standards 23-24
DuPont Pharmaceuticals Pending Sale 24
Pioneer Patent Disputes 24-25
Purchased In-Process Research and Development 25
Part II Other Information
Item 1. Legal Proceedings 26-27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27-28
Signature 29
Exhibit Index 30-31
Exhibit 10.13 - Purchase Agreement (dated June 7, 2001) 32
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges 33
2
Form 10-Q
Part I. Financial Statements
Item 1. FINANCIAL STATEMENTS
E. I. DU PONT DE NEMOURS AND COMPANY AND CONSOLIDATED SUBSIDIARIES
Three Months Ended Six Months Ended
CONSOLIDATED INCOME STATEMENT(a) June 30 June 30
---------- --------- ----------- ---------
(Dollars in millions, except per share) 2001 2000 2001 2000
---------- --------- ----------- ----------
SALES(b) $ 6,997 $7,914 $ 13,856 $15,507
Other Income(c) 216 218 386 566
---------- --------- ----------- ----------
Total 7,213 8,132 14,242 16,073
---------- --------- ----------- ----------
Cost of Goods Sold and Other Operating Charges(d) 4,615 5,028 9,101 9,884
Selling, General and Administrative Expenses 825 809 1,582 1,566
Depreciation 340 353 667 704
Amortization of Goodwill and Other Intangible Assets 113 109 225 216
Research and Development Expense 437 460 847 881
Interest and Debt Expense 166 210 344 411
Purchased In-Process Research and Development(e) - - - (11)
Employee Separation Costs and Write-Down of Assets(f) 1,046 98 1,046 98
---------- --------- ----------- ----------
Total 7,542 7,067 13,812 13,749
---------- --------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND (329) 1,065 430 2,324
MINORITY INTERESTS
Provision (Benefit) for Income Taxes (139) 355 133 794
Minority Interests in Earnings of Consolidated Subsidiaries 23 22 26 39
---------- --------- ----------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A (213) 688 271 1,491
CHANGE IN ACCOUNTING PRINCIPLE(b)
Cumulative Effect of a Change in Accounting Principle, - - 11 -
Net of Income Taxes(g)
---------- --------- ----------- ----------
NET INCOME (LOSS) $ (213) $ 688 $ 282 $ 1,491
========== ========= =========== ==========
- ---------------------------------------------------------------------------- ----------- --------- ----------- -- ----------
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK(h)(i)
Income (Loss) before Cumulative Effect of a Change in $ (.21) $ .66 $ .26 $ 1.42
Accounting Principle
Cumulative Effect of a Change in Accounting Principle - - .01 -
---------- --------- ----------- ----------
Net Income (Loss) $ (.21) $ .66 $ .27 $ 1.42
========== ========= =========== ==========
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON
STOCK(h)
Income (Loss) before Cumulative Effect of a Change in $ (.21) $ .65 $ .25 $ 1.41
Accounting Principle
Cumulative Effect of a Change in Accounting Principle - - .01 -
---------- --------- ----------- ----------
Net Income (Loss) $ (.21) $ .65 $ .26 $ 1.41
========== ========= =========== ==========
DIVIDENDS PER SHARE OF COMMON STOCK $ .35 $ .35 $ .70 $ .70
========== ========= =========== ==========
See Notes to Financial Statements.
3
Form 10-Q
Six Months Ended
CONSOLIDATED STATEMENT OF CASH FLOWS(a) June 30
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATIONS:
Net Income $ 282 $ 1,491
Adjustments to Reconcile Net Income to Cash:
Cumulative Effect of a Change in Accounting Principle, Net of Tax(g) (11) -
Depreciation 667 704
Amortization of Goodwill and Other Intangible Assets 225 216
Purchased In-Process Research and Development(e) - (11)
Other Noncash Charges and Credits - Net 600 407
Change in Operating Assets and Liabilities - Net (1,705) (833)
------- -------
Cash Provided by Operations 58 1,974
------- -------
INVESTMENT ACTIVITIES:
Purchases of Property, Plant and Equipment (667) (909)
Investment in Affiliates (49) (59)
Payments for Businesses Acquired (Net of Cash Acquired) (39) (41)
Proceeds from Sales of Assets 133 241
Net Decrease in Short-Term Financial Instruments 58 59
Miscellaneous - Net (13) (47)
------- -------
Cash Used for Investment Activities (577) (756)
------- -------
FINANCING ACTIVITIES
Dividends Paid to Stockholders (734) (738)
Net Increase in Borrowings 852 106
Acquisition of Treasury Stock (199) (250)
Proceeds from Exercise of Stock Options 125 39
Increase in Minority Interests(j) 622 -
------- -------
Cash Provided by (Used for) Financing Activities 666 (843)
------- -------
Effect of Exchange Rate Changes on Cash (206) (126)
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (59) $ 249
======= =======
See Notes to Financial Statements.
4
Form 10-Q
CONSOLIDATED BALANCE SHEET(a) June 30 December 31
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share) 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 1,481 $ 1,540
Marketable Securities 18 77
Accounts and Notes Receivable 5,532 4,552
Inventories(k) 4,191 4,658
Prepaid Expenses 415 228
Deferred Income Taxes 627 601
---------- ----------
Total Current Assets 12,264 11,656
PROPERTY, PLANT AND EQUIPMENT, less accumulated depreciation
(June 30, 2001 - $20,618; December 31, 2000 - $20,468) 13,701 14,182
GOODWILL AND OTHER INTANGIBLE ASSETS 8,118 8,365
INVESTMENT IN AFFILIATES 2,121 2,206
OTHER ASSETS 2,930 3,017
--------- ---------
TOTAL $ 39,134 $39,426
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 1,809 $ 2,731
Short-Term Borrowings and Capital Lease Obligations 4,374 3,247
Income Taxes 104 250
Other Accrued Liabilities 3,255 3,027
--------- ---------
Total Current Liabilities 9,542 9,255
LONG-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS 6,219 6,658
OTHER LIABILITIES 7,643 7,729
DEFERRED INCOME TAXES 2,021 2,105
--------- ---------
Total Liabilities 25,425 25,747
--------- ---------
MINORITY INTERESTS(j) 1,010 380
--------- ---------
STOCKHOLDERS' EQUITY(l)
Preferred Stock 237 237
Common Stock, $.30 par value; 1,800,000,000 shares authorized;
shares issued at June 30, 2001 - 1,039,599,142; December 31,
2000 - 1,129,973,354 338 339
Additional Paid-In Capital 7,578 7,659
Reinvested Earnings 11,535 12,153
Accumulated Other Comprehensive Income (Loss) (262) (188)
Common Stock Held in Treasury at Cost (Shares: June 30, 2001 -
87,041,427; December 31, 2000 - 87,041,427) (6,727) (6,727)
Common Stock Held in Trust for Unearned Employee Compensation
and Benefits (Flexitrust), at Market (Shares: June 30, 2001 - 0;
December 31, 2000 - 3,601,199) - (174)
---------- ----------
Total Stockholders' Equity 12,699 13,299
--------- ---------
TOTAL $ 39,134 $ 39,426
========= =========
See Notes to Financial Statements.
5
Form 10-Q
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
(a) These statements are unaudited, but reflect all adjustments that, in the
opinion of management, are necessary to provide a fair presentation of the
financial position, results of operations and cash flows for the dates and
periods covered. Results for interim periods should not be considered
indicative of results for a full year. Reference should be made to the
financial statements contained in the registrant's Annual Report on Form
10-K for the year ended December 31, 2000.
Three Months Ended Six Months Ended
(b) INDUSTRY SEGMENT INFORMATION(1) June 30 June 30
--------- -------- ---------- ----------
2001 2000 2001 2000
--------- -------- ---------- ----------
SEGMENT SALES(2)
-------------
Agriculture & Nutrition $ 1,517 $1,650 $ 3,055 $ 3,199
Nylon 708 804 1,382 1,553
Performance Coatings & Polymers 1,514 1,716 2,972 3,369
Pharmaceuticals 304 394 509 783
Pigments & Chemicals 952 1,038 1,903 1,998
Polyester 543 613 1,046 1,129
Specialty Fibers 1,141 1,284 2,327 2,600
Specialty Polymers 1,009 1,151 2,048 2,242
Other 81 143 162 266
--------- -------- ---------- ----------
Total Segment Sales 7,769 8,793 15,404 17,139
Elimination of Intersegment Transfers (127) (177) (273) (336)
Elimination of Equity Affiliate Sales (654) (703) (1,282) (1,298)
Miscellaneous 9 1 7 2
--------- -------- ---------- ----------
CONSOLIDATED SALES $ 6,997 $7,914 $ 13,856 $ 15,507
--------- -------- ---------- ----------
AFTER-TAX OPERATING INCOME (LOSS)(3)
---------------------------------
Agriculture & Nutrition(4) $ 126 $ 78 $ 292 $ 216
Nylon (141) 74 (124) 141
Performance Coatings & Polymers(5) 17 129 149 308
Pharmaceuticals 10 51 (54) 105
Pigments & Chemicals 93 186 217 350
Polyester (281) 8 (289) 12
Specialty Fibers 74 191 225 418
Specialty Polymers 53 183 183 348
Other(6) (7) 6 (4) 6
--------- -------- ---------- ----------
Total Segment ATOI (56) 906 595 1,904
Interest & Exchange Gains and Losses (88) (136) (185) (259)
Corporate Expenses (69) (82) (139) (154)
--------- -------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE $ (213) $ 688 $ 271 $ 1,491
========= ======== ========== ==========
6
Form 10-Q
FOOTNOTES TO NOTE (b)
---------------------
(1) Certain reclassifications of segment data have been made to reflect
changes in organizational structure. The Agriculture & Nutrition segment
now includes the Pioneer business. The Specialty Fibers segment now
includes the new Apparel & Textile Sciences SBU, which comprises the
former Lycra(R) business, nylon apparel and specialty textile businesses,
and the polyester branded specialties businesses.
(2) Includes pro rata share of equity affiliate sales and intersegment
transfers. Excludes sales of intermediates by DuPont to joint ventures
within the Nylon and Polyester segments.
(3) Second quarter 2001 charges of $679 result 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.
(4) Second quarter 2000 includes a charge of $138 resulting from the sale of
acquired Pioneer inventories which, in accordance with purchase
accounting rules, were recorded at fair value on October 1, 1999, and a
charge of $62 to increase the company's reserve for Benlate(R) 50 DF
fungicide litigation. Year-to-date 2001 and 2000 include noncash charges
of $83 and $353, respectively, resulting from the sale of acquired
Pioneer inventories. Year-to-date 2000 also includes the $62 charge for
Benlate(R) litigation discussed above, a $109 gain resulting from the
sale of certain equity securities classified as available for sale, and a
credit of $11 to reduce the preliminary purchase price allocated to
acquired in-process research and development.
(5) Second quarter 2000 includes a charge of $61 related to employee
separation costs for about 1,000 employees, the shutdown of related
manufacturing facilities, and other exit costs.
(6) Second quarter 2001 includes a gain of $34 resulting from the company's
sale of stock that reduced its ownership interest in DuPont Photomasks.
7
Form 10-Q
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
(continued)
(c) Second quarter 2001 includes a $52 gain resulting from the company's sale
of stock that reduced its ownership interest in DuPont Photomasks.
Year-to-date 2000 includes a $176 gain resulting from the sale by Pioneer
of certain equity securities classified as available for sale.
(d) In accordance with purchase accounting rules applied to the acquisition of
the remaining 80 percent ownership interest in Pioneer on October 1, 1999,
Pioneer inventory was increased to fair value. This inventory step-up
generated noncash charges to cost of goods sold as the inventory on hand at
the acquisition date was sold. Year-to-date 2001 charges were $133. Second
quarter and year-to-date 2000 charges were $220 and $567, respectively.
During second quarter 2000, a charge of $100 was also recorded to increase
the company's reserve for Benlate(R) 50 DF fungicide litigation.
(e) 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 yet been
established, and which have no alternative future use in research and
development activities or otherwise. Year-to-date 2000 includes a credit of
$11 that was recorded based on revisions of preliminary purchase price
allocations associated with the Pioneer acquisition.
(f) In the second quarter 2001, a restructuring program was instituted 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 principally in connection with the company's plan to sell
certain of its Polyester businesses and manufacturing assets. Charges
related to these activities totaling $1,046 reduced segment earnings as
follows: Agriculture & Nutrition - $117; Nylon - $218; Performance Coatings
and Polymers - $86; Pigments & Chemicals - $47; Polyester - $424; Specialty
Fibers - $44; Specialty Polymers - $51; Other - $59.
These charges included $441 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 - $67; Nylon - $86; Performance Coatings and Polymers - $58;
Pigments & Chemicals - $27; Polyester - $49; Specialty Fibers - $44;
Specialty Polymers - $51; Other - $59. Termination benefits were
communicated to employees prior to June 30, 2001, and such benefits may be
paid to employees over time or via a single payment at the time of
termination. At June 30, 2001, approximately $8 had been settled and
charged against the related liability and approximately 2,500 employees had
been terminated. The remainder of employee terminations will be completed
during 2002.
The charge also included $282 related to the write-down of operating
facilities that were shut down during the second quarter principally due to
transferring production to more cost competitive facilities. The charge
covers the net book value of the facilities ($198) and the estimated
dismantlement and removal costs less proceeds from the sale of equipment
and scrap and
8
Form 10-Q
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
(continued)
reimbursements from third parties ($84). The largest component relates to
the shutdown of Nylon manufacturing facilities in Argentina; Germany;
Camden, South Carolina; Chattanooga, Tennessee; and Seaford, Delaware
($132). In addition, Polyester manufacturing facilities in Wilmington and
Kinston, North Carolina, were shut down ($102). Other charges are
principally related to the shutdown of operating facilities in
Agriculture & Nutrition and Pigments & Chemicals. Dismantlement and
removal will be completed in 2002. The effect of these shutdowns on
operating results was not material.
In addition, in connection with the final integration of the Herberts
acquisition by Performance Coatings, a charge of $20 relates to
the cancellation of contractual agreements principally associated with
the global distribution of products. About $1 had been settled and
charged against this related liability at June 30, 2001. Termination of
services under these contractual agreements will be completed in 2002.
The effect of the contract terminations on operating results was not
material.
The remaining charge of $303 relates to the write-down of assets to their
net realizable value pursuant to sales agreements. A charge of $273 was
recorded in the Polyester segment in connection with the company's
announcement that it had reached a definitive agreement to sell its
domestic terephthalic (TPA), polyethylene terephthalate (PET) container
resins and its staple 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. This reflects a continuation of the company's previously
announced strategy to reshape its polyester investment. In addition the
company recorded a charge of $30 to write down purchased intangible
assets in the Agriculture & Nutrition segment to their net realizable
value pursuant to a sale agreement. 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 is exiting this market segment. Both transactions
closed in July 2001.
Account balances and activity for the 2001 program are summarized below:
Employee
Write-down Separation Other
of Assets Costs Exit Costs Total
------------- -------------- ---------- --------
Charges to income in 2001 $ 501 $441 $104 $ 1,046
Changes to accounts
Asset impairments (303) (303)
Employee separation settlements (8) (8)
Facility shutdowns (198) (198)
Other expenditures (1) (1)
------ ---- ---- -------
Balance at June 30, 2001 $ - $433 $103 $ 536
====== ==== ==== =======
In second quarter 2001, there were no changes in estimates related to
reserves established for restructuring initiatives in prior years. An
update on second quarter activity is provided below under the respective
prior years' activities. A complete discussion of these activities is
included in Item 8 of the company's Annual Report on Form 10-K for the
period ending December 31, 2000, at Note 6 "Employee Separation Costs and
Write-down of Assets."
9
Form 10-Q
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
(continued)
2000 Activities
Performance Coatings & Polymers
A restructuring program was instituted in the second quarter to continue
the consolidation of business assets and to eliminate redundancies as a
result of the 1999 acquisition of Herberts by 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. At June 30, 2001, essentially all employees
had been terminated, and about $50 had been settled and charged against
the related liabilities. Restructuring charges of $13 related to the
write-down of operating facilities that were shut down in the second
quarter. The remaining charge of $12 relates to the cancellation of
contractual agreements and, as of June 30, 2001, about $9 had been
settled and charged against the related liability. At June 30, 2001, this
program has been completed.
Pigments & Chemicals
A restructuring program was instituted in the third quarter to address
poor economic and intensely competitive market conditions for the
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. At June
30, 2001, about $4 had been charged against the liability for
dismantlement and removal and these activities will be completed in 2001.
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. At March 31, 2001, essentially
all employees had been terminated thereby completing this portion of the
program. At June 30, 2001, about $2 in employee termination installment
benefits had been settled and charged against the related liability.
Account balances and activity for the 2000 restructuring programs are
summarized below:
Employee
Write-down Separation Other
of Assets Costs Exit Costs Total
------------- -------------- ---------- --------
Balance at December 31, 2000 $ - $ 48 $ 16 $ 64
Changes to accounts
Employee separation settlements (15) (15)
Other expenditures (5) (5)
---------- ---------- ---------- ----------
Balance at March 31, 2001 - 33 11 44
Changes to accounts
Employee separation settlements - (10) (10)
Other expenditures (3) (3)
---------- ---------- ---------- ----------
Balance at June 30, 2001 $ 0 $ 23 $ 8 $ 31
========== ========== ========== ==========
10
Form 10-Q
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
(continued)
1999 Activities
Agriculture & Nutrition
A restructuring program was instituted in the third quarter to address
poor economic and intensely competitive market conditions for DuPont 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 subsequently recorded to reflect lower costs associated
with employees who accepted other work assignments partially offset by
higher costs associated with employees that were terminated. At December
31, 2000, approximately 730 employees had been terminated and the
remaining employees have accepted other work assignments within the
company thereby completing this portion of the program. At June 30, 2001,
approximately $38 had been settled and charged against the related
liability.
The remaining restructuring charge of $79 principally related to the
write-down of operating facilities that were shut down in 1999. The
effect on results of removing these facilities from operations was not
material. The charge covers the net book value of the facilities ($64)
and estimated dismantlement and removal costs less estimated proceeds
from the sale of equipment and scrap ($15). A benefit of $6 was
subsequently recorded to reflect lower costs associated with
dismantlement and removal. At June 30, 2001, approximately $7 in
dismantlement and removal costs had been paid.
Nylon Enterprise
The company also recorded a charge of $28 in the third quarter 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 subsequently recorded
to reflect higher costs associated with terminating employees. At
December 31, 2000, essentially all employees had been terminated thereby
completing this program. At June 30, 2001, approximately $16 had been
settled and charged against the related liability. Also included was $13
for a manufacturing facility that was shut down in 1999.
Polyester Enterprise
A restructuring program was instituted in the second quarter 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. A net benefit of $2 was
subsequently recorded to reflect lower costs associated with employees
who accepted other work assignments partially offset by higher costs
associated with terminating employees. At December 31, 2000,
approximately 800 employees had been terminated and the remaining
employees had accepted other work assignments within the company thereby
completing this program. At June 30, 2001, about $55 in employee
termination installment benefits had been charged against the related
liability.
11
Form 10-Q
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
(continued)
Account balances and activity for the 1999 restructuring programs are
summarized below:
Employee
Write-down Separation Other
of Assets Costs Exit Costs Total
---------- ---------- ---------- -----
Balance at December 31, 2000 $ - $ 18 $ 4 $ 22
Changes to accounts
Employee separation settlements (6) (6)
Other expenditures (1) (1)
----- ---- ----- ----
Balance at March 31, 2001 - 12 3 15
Changes to accounts
Employee separation settlements (3) (3)
Other expenditures (1) (1)
----- ---- ----- ----
Balance at June 30, 2001 $ - $ 9 $ 2 $ 11
===== ==== ===== ====
1998 Activities
During the third quarter 1998 the company recorded a charge of $577
directly related to management decisions to implement company-wide
productivity improvement initiatives. These charges included $310 related
to employee separation costs to be settled over time, substantially all
of which were for estimated termination payments for approximately 4,100
employees, and were based on plans that identified the number of
employees to be terminated, their functions and their businesses. A net
benefit of $33 was subsequently recorded to reflect changes in estimates.
As of December 31, 1999, about 4,000 employees had been terminated and
the remaining employees have accepted other work assignments within the
company thereby completing this program. At June 30, 2001, about $272 in
employee termination installment benefits had been settled and charged
against the related liability.
The remaining charge of $267 is related to write-downs of property, plant
and equipment, principally due to the shutdown of excess production
capacity, and there are no outstanding liabilities related to this
shutdown.
Account balances and activity for the 1998 restructuring programs are
summarized below:
Employee
Write-down Separation Other
of Assets Costs Exit Costs Total
---------- ---------- ---------- -----
Balance at December 31, 2000 $ - $ 7 $ - $ 7
Changes to accounts
Employee separation settlements (2) (2)
------ ------ ----- ---
Balance at March 31, 2001 and
June 30, 2001 $ - $ 5 $ - $ 5
====== ====== ===== ===
12
Form 10-Q
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
(continued)
(g) On January 1, 2001, the company adopted Statement of Financial Accounting
Standards (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 million ($11
million 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 have been reflected in accumulated other comprehensive income (loss).
The company also recorded a pretax increase to accumulated other
comprehensive income (loss) of $10 million ($6 million after-tax). The
increase in accumulated other comprehensive income (loss) is primarily due
to unrealized gains in agricultural commodity hedging programs.
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 program. Derivative instruments utilized during the period include
forwards, options, futures, and swaps. The company has not designated any
nonderivatives as hedging instruments.
Fair Value Hedges
-----------------
During both the three and six months ended June 30, 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, corn, soybeans, and soybean meal. While each risk management
program has a different time horizon, no program currently extends beyond
the next two-year period.
13
Form 10-Q
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
(continued)
The effects of 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.
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
Pretax Pretax
Cash Flow Hedge Results Gain/(Loss) Gain/(Loss)
------------------------------------------- ------------------ -----------------
Hedge ineffectiveness reported in earnings $(3) $ (6)
Hedge gains/(losses) excluded from
assessment of hedge effectiveness (9) (15)
Reclassification to earnings for forecasted
transactions that did not occur - -
Three Months Ended Six Months Ended
Accumulated Other Comprehensive June 30, 2001 June 30, 2001
Income (Loss) --------------------------- ---------------------------
(Cash Flow Hedge Portion Only) Pretax Tax After-Tax Pretax Tax After-Tax
----------------------------------------- ------ ------- --------- ------ ------- ---------
Beginning balance $(13) $ 5 $ (8) $ 10 $ (4) $ 6
Additions and revaluations of derivatives
designated as cash flow hedges (17) 6 (11) (44) 16 (28)
Less: Clearance of hedge results to
earnings (2) 1 (1) (6) 2 (4)
------ ----- ------ ------ ----- -------
Ending balance $ (28) $ 10 $ (18) $ (28) $10 $ (18)
====== ===== ====== ====== ===== =======
Portion of ending balance expected to be
reclassified into earnings over the next
twelve months $ (17) $ 6 $ (11) $ (17) $ 6 $ (11)
====== ===== ====== ====== ===== =======
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.
Hedges Of Net Investment In A Foreign Operation
-----------------------------------------------
During both the three and six months ended June 30, 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.
14
Form 10-Q
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
(continued)
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.
(h) Basic earnings per share is computed by dividing income (loss) available
to common stockholders (the numerator) by the weighted-average number of
common shares (the denominator) for the period. The numerator for both
income (loss) before cumulative effect of a change in accounting
principle and net income (loss) is reduced by preferred dividends of $2.5
and $5.0 for the three- and six-month periods, respectively. For diluted
earnings per share, 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.
Three Months Ended Six Months Ended
June 30 June 30
----------------------------------- -----------------------------------
Basic Diluted Basic Diluted
------------- ------------- ------------- -------------
2001 1,041,759,701 1,041,759,701 1,041,962,856 1,047,878,439
2000 1,045,857,572 1,053,658,428 1,046,447,044 1,055,367,888
The difference between basic and diluted weighted-average common shares
outstanding generally results from the assumption that dilutive stock
options outstanding were exercised. The diluted weighted-average number
of common shares outstanding for the three-month period ended June 30,
2001 excludes incremental shares of 6,025,863 related to in-the-money
stock options. These shares are excluded due to their antidilutive effect
as a result of the company's net loss during the three-month period ended
June 30, 2001.
The following average stock options are antidilutive, and therefore are
not included in the diluted earnings per share calculation since the
exercise price is greater than the average market price:
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- ----------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Average Stock Options 35,173,734 35,059,358 35,259,106 24,220,698
Compensation expense (benefit) recognized in income for stock-based
employee compensation awards was $1 and $(4) for the three months and $2
and $(29) for the six months ended June 30, 2001, and 2000, respectively.
Treasury stock and shares previously held by the Flexitrust are not
considered outstanding in computing the foregoing weighted-average number
of common shares.
15
Form 10-Q
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
(continued)
(i) Year-to-date earnings per share do not equal the sum of quarterly
earnings per share due to changes in average share calculations.
(j) Minority Interests
------------------
In May 2001, the company transferred assets to a new wholly owned limited
liability company as security for the arrangement described below. That
company contributed capital to a second new limited liability company in
exchange for a managing member interest. A third party investor also
contributed capital to the second limited liability company in exchange
for a noncontrolling preferred member interest. As a result of the
transaction, the company received net proceeds of $622. The preferred
member interest earns a cumulative adjustable return on its investment;
the initial after-tax rate of return reflected in "Minority Interest in
Earnings of Consolidated Subsidiaries" in the Consolidated Income
Statement is 3.08 percent. These entities are separate legal entities and
have separate assets and liabilities. They are included in the company's
consolidated financial statements and the third-party investor's interest
is included in "Minority Interests" in the Consolidated Balance Sheet.
Absent certain events, the company has the option to acquire the
preferred member's interest in the second limited liability company. At
May 23, 2006, the preferred member adjustable return may be renegotiated
at the request of the company or the preferred member. If agreement on
the adjustable return is not reached, the company will redeem the
preferred member's interest or remarket it to another third party.
June 30 December 31
(k) Inventories 2001 2000
----------- -------- -----------
Finished Products $ 2,951 $ 2,818
Semifinished Products 898 1,504
Raw Materials and Supplies 931 907
--------- --------
4,780 5,229
Less: Adjustment of Inventories to a Last-In,
First-Out (LIFO) Basis 589 571
--------- --------
Total $ 4,191 $ 4,658
========= ========
16
Form 10-Q
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
(continued)
(l) The following sets forth the company's Total Comprehensive Income (Loss)
for the periods shown:
Three Months Ended Six Months Ended
June 30 June 30
------------------------ ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net Income (Loss) $ (213) $ 688 $282 $1,491
Cumulative Translation Adjustment - (13) (32) (20)
Cumulative Effect of Change in
Accounting Principle - - 6 -
Net Revaluation and Clearance of
Cash Flow Hedges to Earnings (10) - (24) -
Unrealized Gains (Losses)
on Securities 12 (37)* (24) (166)*
-------- -------- ------- -------
Total Comprehensive Income (Loss) $ (211) $ 638 $208 $1,305
======== ======== ======= =======
* Primarily reflects unrealized holding losses of $60 and $145 for the
second quarter and year-to-date, respectively, associated with the
company's investment in Healtheon/WebMD. The remainder relates to
unrealized holding gains and losses of other equity securities.
17
Form 10-Q
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 report and in Management's
Discussion and Analysis in the company's latest Annual 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 70 countries worldwide
and derives about half of its revenues from sales outside
the United States. Changes in the laws or policies of other
governmental and quasi-governmental activities in the
countries in which the company operates could affect its
business in the country and the company's results of
operations. In addition, economic factors (including
inflation and fluctuations in interest rates and foreign
currency exchange rates) and competitive factors (such as
greater price competition or a decline in U.S. or European
industry sales from slowing economic growth) in those
countries could affect the company's revenues, expenses and
results.
. The company's ability to grow earnings will be affected by
increases in the cost of raw materials, particularly
petroleum-based feedstocks, natural gas and paraxylene. 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 projects;
obtain relevant regulatory approvals, which may include
approval from the U.S. Food and Drug Administration; 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 this segment may be affected
by market acceptance of genetically enhanced products.
18
Form 10-Q
. 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 factors is not inclusive, or
necessarily in order of importance.
(a) Results of Operations
(1) Financial Results:
Including one-time items in both periods, diluted earnings
(loss) per share for second quarter 2001 were $(.21) compared to
$.65 in 2000. Second quarter 2001 diluted earnings per share before
one-time items was $.41 per share, 54 percent below the $.90 per
share earned in the second quarter of 2000.
Second quarter 2001 consolidated sales totaled $7.0 billion
compared to $7.9 billion in 2000. Segment sales, which include
intersegment transfers and a pro rata share of sales by equity
affiliates, were $7.8 billion, down 12 percent from $8.8 billion in
2000. This principally reflects 10 percent lower volume. In
addition, modest increases in local selling prices were more than
offset by adverse currency effects, principally from the weaker euro
and Japanese yen, which reduced worldwide segment sales by 2
percent.
Regional segment sales and related variances for the second
quarter 2001 compared with the second quarter 2000 are summarized
below:
% Change Due To
-----------------------------------------------
2Q '01 % Change Local Currency Portfolio
Segment Sales $B vs. 2Q '00 Price Effect Volume Changes
--------------------- -------- ------------ ----- ------------ ------ -------
Worldwide 7.8 (12) 1 (2) (10) (1)
U.S. 3.9 (16) 1 0 (16) (1)
Europe 1.9 (4) 3 (5) (2) 0
Asia Pacific 1.1 (7) 1 (5) (3) 0
Canada, Mexico,
S. America 0.8 (12) (4) (2) (6) 0
19
Form 10-Q
. U.S. second quarter sales volume, excluding portfolio
changes, declined 16 percent principally reflecting lower
volumes in the Specialty Polymers, Nylon, Specialty Fibers,
Performance Coatings & Polymers and Pharmaceuticals
segments.
. European volume declined 2 percent with local currency
prices up 3 percent. However, the stronger dollar reduced
European sales by 5 percent.
. Asia Pacific sales continue to weaken, down 7 percent,
reflecting lower volume and the negative impact of weaker
currencies, particularly the Japanese yen.
Including one-time items, second quarter net income was
a loss of $213 million compared to earnings of $688 million in 2000.
The earnings decline reflects significantly lower results across all
the company's segments principally due to lower U.S. sales volumes,
higher raw material costs, and a stronger U.S. dollar.
Net income before one-time items was $432 million,
compared to $949 million in the second quarter of 2000, down $517
million or 54 percent. One-time items are described below and in the
notes to the accompanying financial statements:
$MM Pretax $MM After-Tax ($ Per Share)
----------------- ----------------- ------------------
2001 2000 2001 2000 2001 2000
------ ------ ------ ------ ------ ------
Pioneer - Inventory Step-up - (220) - (138) - (.13)
Sale of Affiliate Stock 52 - 34 - .03 -
Benlate(R)Accrual - (100) - (62) - (.06)
Employee Separations/Facility Shutdowns (743) (98) (491) (61) (.47) (.06)
Asset Impairments (Principally Polyester) (303) - (188) - (.18) -
------ ------ ------ ------ ------ ------
2nd Quarter - Total (994) (418) (645) (261) (.62) (.25)
====== ====== ====== ====== ====== ======
In the second quarter 2001, a restructuring program was
instituted 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. Under the program, the company will terminate approximate
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. A more
detailed description of these activities is contained in the notes
to the accompanying financial statements.
As a result of this program, the company expects total
pretax cost savings to exceed $400 million per year when completed.
The company anticipates that about one-third of these savings would
be realized by year-end 2001 and the balance essentially realized
next year. About 60 percent of these savings will result in reduced
Cost of Goods Sold and Other Operating Charges, about 30 percent in
Selling, General and Administrative Expenses and the balance in
Research and Development Expense. Facility shutdowns and contract
cancellations resulting in lower depreciation and lease expense will
contribute about $35 million of the total cost savings.
In the aggregate, payments from operating cash flows to
terminated employees and third parties for dismantlement and removal
activities and contract cancellations will total about $420 million.
About 45 percent of these cash outlays will be made in 2001 and most
of the remaining payments will be made next year.
20
Form 10-Q
(2) Segment Performance:
The following compares second quarter 2001 with second
quarter 2000, for sales and earnings of each segment, excluding the
earnings impact of one-time items described in the "Industry Segment
Information" table on page 6. Segment results include intersegment
transfers and a pro rata ownership share of the sales and earnings
of equity affiliates.
. Agriculture & Nutrition - ATOI declined 26 percent on 8
percent lower sales. Pioneer sales were $771 million,
down 4 percent, while remaining sales in the segment
were down 12 percent. Crop Protection earnings were
principally affected by lower U.S. volumes and by
currency in Europe and Asia.
. Nylon - Sales decreased 12 percent with ATOI down 97
percent, principally reflecting the impact of 23
percent lower U.S. volumes and higher raw material
costs. Sales declines were principally due to lower
flooring volumes, particularly in the United States.
. Performance Coatings & Polymers - Sales were 12 percent
lower than 2000 reflecting lower worldwide vehicle
builds and lower refinish sales, as well as the weak
euro. In addition to lower volumes, increased raw
material costs were a significant factor in lower
results in Engineering Polymers and Elastomers. Segment
ATOI declined 59 percent.
. Pharmaceuticals - ATOI was $10 million versus $51
million last year, primarily due to 23 percent lower
sales. The DuPont share of Cozaar(R)/Hyzaar(R) U.S.
operating profits increased this quarter versus last
year. Major product sales are shown below:
2Q 2001 1Q 2001 2Q 2000
------- ------- -------
($ in millions)
Coumadin(R) 52 26 69
Sustiva(TM) 87 55 141
Cardiolite(R)/Miraluma(TM) 53 18 62
. Pigments & Chemicals - ATOI declined 34 percent on 8
percent lower sales with lower earnings in all
strategic business units reflecting 7 percent lower
worldwide volume. Segment earnings were also negatively
affected by higher raw material and energy costs in
White Pigment & Mineral Products and DuPont Chemical
Solutions Enterprise.
. Polyester - Sales were 11 percent lower, reflecting
depressed conditions in worldwide markets. Margins
continue to be reduced by higher raw material and
energy costs. The second quarter loss was $17 million.
. Specialty Fibers - Sales and ATOI were 11 percent and
46 percent lower, respectively. Continued earnings
growth from Advanced Fiber Systems was more than offset
by lower earnings from Apparel and Textile Sciences
which declined 85 percent, adversely affected by the
weak euro, higher raw material costs, and very weak
U.S. apparel and textile markets. Earnings for
Nonwovens were essentially flat on modestly higher
sales.
21
Form 10-Q
. Specialty Polymers - Sales were down 12 percent.
Segment ATOI declined 54 percent with lower earnings in
all strategic business units. Electronic Technologies
and Fluoropolymers were adversely affected by the
significant slowdown in electronics and related
high-technology markets. The decline in Packaging &
Industrial Polymers earnings resulted from lower
volumes and higher raw materials costs. DuPont Surfaces
and Imaging Technologies results also reflect the
economic downturn.
(3) Outlook:
The company maintains a cautious view of the broader
business environment in the second half of 2001, characterized by
the following key elements:
. It does not appear that the second quarter marked the
bottom of the current economic downturn, and the
company expects conditions to continue to deteriorate
into the third quarter.
. The company expects the U.S. economy to stabilize, but
not to materially improve, by the fourth quarter this
year. The company believes that any modest upturn in
the U.S. is likely to be offset by further declines in
Europe, Asia, and South America. The company also
expects the electronics markets to continue to decline
through the fourth quarter of 2001.
. Although the company is hopeful that the burgeoning
financial crisis in Argentina and Brazil will not
spread, it is expected to affect fourth quarter
southern hemisphere agricultural sales and other
businesses in the region.
. For the second half of 2001, the company expects the
purchased costs for raw materials to remain at
approximately current levels and the U.S. dollar to
stay in roughly its current exchange range versus
trade-weighted average currencies.
Based on this view, the company anticipates that the
third quarter 2001 will be substantially more challenging than the
second quarter, as judged by year-over-year earnings per share
comparisons. Accordingly, the company expects third quarter earnings
to be at least 70 percent below those reported for third quarter
last year. The company does expect some mitigation of these downward
trends in the fourth quarter of 2001, due to savings from its
restructuring activities and assuming stabilization in the U.S.
manufacturing sector.
(b) Financial Condition
Six Months Ended
June 30
------------------------
Selected Cash Flow Information 2001 2000
---------------------------------------------------------- --------- ---------
($ in millions)
Cash Provided by Operations $ 58 $1,974
Purchases of Property, Plant and Equipment (667) (909)
Proceeds from Sales of Assets 133 241
Dividends Paid to Stockholders (734) (738)
Acquisition of Treasury Stock (199) (250)
22
Form 10-Q
Cash provided by operations was $58 million for the first half of
2001 as compared to almost $2 billion for the same period in 2000. This decline
in cash provided by operations is principally due to a reduction in net income
of $1.2 billion this year. In addition, the company reduced its operating assets
during the first half of 2000 by $500 million as a result of cash proceeds from
the securitization of accounts receivable.
Year-to-date purchases of property, plant and equipment were $667
million in 2001, as compared to $909 million spent in 2000. The lower spending
level reflects management's intent to limit full year 2001 total capital
spending, including purchases of property, plant and equipment, investments in
affiliates, and payments for businesses acquired, to about $1.6 billion for the
year.
Proceeds from the sale of assets in the first half of 2001 were $133
million primarily reflecting proceeds from the company's sale of stock that
reduced its ownership interest in DuPont Photomasks. Proceeds from the sale of
assets in the first half of 2000 were $241 million primarily reflecting the sale
of certain available for sale securities held by Pioneer and other small
operating assets. In June 2001, the company announced an agreement to sell
DuPont Pharmaceuticals to Bristol-Myers Squibb Company for $7.8 billion. Closing
of the sale is expected later this year, subject to government approvals.
The per share dividend paid to stockholders in second quarter 2001
and 2000 was $.35 per share. This rate has been in effect since second quarter
1998.
In July 2000, the company's Board of Directors approved a plan to
purchase the total number of shares of DuPont common stock, which can be
purchased for $2.5 billion. These purchases are not limited to those needed to
offset dilution from shares issued under compensation programs. Under the July
2000 authorization, the company spent $199 million in the first six months of
2001 to purchase and retire 4.8 million shares. To date under the July 2000
authorization, the company has spent $411 million to purchase and retire 9.3
million shares. DuPont anticipates completing this program in 2001 and for it to
be largely funded from proceeds received in connection with the sale of DuPont
Pharmaceuticals. In addition, the company's Board of Directors authorized a new
$2 billion share buyback plan in June 2001 to begin once the current program is
complete.
Minority interests increased $622 million in the first half
reflecting a third party's investment in a newly formed limited liability
company as discussed in Note (j) on page 16.
Debt, including capital lease obligations, net of cash and cash
equivalents and marketable securities at June 30, 2001, was $9.1 billion, as
compared to $8.3 billion at year-end 2000. The increase in debt primarily
reflects the issuance of commercial paper. Proceeds from the DuPont
Pharmaceuticals sale will also contribute to management's plan to reduce debt
from the current level, ending the year with net debt substantially below last
year-end.
Management believes that the company's ability to generate cash from
operations and its capacity to issue short-term and long-term debt will be
adequate to meet anticipated future cash requirements to fund working capital,
capital spending, dividend payments and other cash needs in the foreseeable
future.
(c) Other Items
New Accounting Standards
------------------------
In June 2001, the Financial Accounting Standards Board (FASB)
approved two new accounting standards: Statement of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill
and Other Intangible Assets." DuPont has adopted SFAS No. 141 as of July 1,
23
Form 10-Q
2001 and will adopt SFAS No. 142, on January 1, 2002. The nonamortization and
amortization provisions of SFAS No. 142 will also be applied to goodwill and
intangible assets, if any, acquired after June 30, 2001. SFAS No. 141
establishes the purchase method as the only acceptable method for recording the
acquisition of an entity for all business combinations initiated after June 30,
2001. It also applies to all business combinations accounted for using the
purchase method of accounting after June 30, 2001. 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.
While DuPont is in the early phases of analyzing the effect of SFAS
No. 142 on its consolidated financial statements, 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 $150 million
after-tax.
DuPont Pharmaceuticals Pending Sale
------------------------------------
On June 7, 2001, the company announced an agreement to sell DuPont
Pharmaceuticals to Bristol-Myers Squibb Company for $7.8 billion in cash. As
part of the transaction, DuPont will retain its interest in Cozaar(R)/Hyzaar(R).
The transaction is expected to close later this year, subject to government
approvals. A copy of the Purchase Agreement, signed on June 7, 2001, is attached
as Exhibit 10.13.
Pioneer Patent Disputes
-----------------------
YieldGard(R) MON 810 Bt Insect Resistant Corn
In July 1993, the Monsanto Company and Pioneer entered into an
agreement relating to the development and marketing of MON 810 Bt corn, a
product resistant to the European Corn Borer. Under the terms of the agreement,
Monsanto granted Pioneer the right to sell and produce MON 810 Bt corn under
Monsanto's registered trademark YieldGard(R). Subsequently, in a lawsuit in the
U.S. District Court for the Eastern District of Missouri (St. Louis), Monsanto
sought to terminate the agreement. On August 24, 2000, a jury found that Pioneer
had materially breached the agreement. The court entered judgment on January 2,
2001 terminating the agreement. The court, however, ruled that Monsanto was not
entitled to any past damages for the alleged breach. The company is appealing
the judgment.
In 1996, DEKALB Genetics Corporation filed a number of patent
infringement lawsuits in the U.S. District Court for the Northern District of
Illinois (Rockford) alleging that YieldGard(R) corn sold by Pioneer infringed
its patents. At the time the first lawsuit was filed, Monsanto had a substantial
equity interest in DEKALB and subsequently acquired all of DEKALB. Pioneer
believes that it does not infringe any of the DEKALB patents and that these
patents are invalid and unenforceable. Also, Pioneer believes that it has an
implied license under the DEKALB patents by virtue of Monsanto's acquisition and
control of DEKALB and the 1993 agreement between Monsanto and Pioneer granting
Pioneer the right to produce and sell YieldGard(R) corn. In February 2001, the
first case ended in a mistrial because the jury could not arrive at a unanimous
verdict. This case has been rescheduled for trial starting October 1, 2001.
On June 1, 2000, prior to the trial of the lawsuit in St. Louis,
Monsanto and Pioneer entered into an agreement that permitted Pioneer to produce
and sell YieldGard(R) corn irrespective of the outcome of the St. Louis and
Rockford lawsuits. On October 1, 1999, the company acquired the approximately 80
percent of Pioneer not previously owned for $7,684 million. An intangible asset
has been recorded to recognize the value of the 1993 license agreement. Should
the ultimate outcome of these lawsuits be adverse to the company, the value of
this intangible asset may become impaired, resulting in a one-time noncash
charge to earnings.
24
Form 10-Q
In May 2000, Aventis CropScience filed a patent infringement lawsuit
against Pioneer in the U.S. District Court for the Middle District of North
Carolina alleging that YieldGard(R) corn sold by Pioneer and a new Bt corn
product being developed by Pioneer infringed its patents. In December 2000,
Monsanto filed its own action against Aventis in the U.S. District Court for the
Eastern District of Missouri seeking a declaration that the Aventis patents are
invalid, unenforceable and not infringed. The North Carolina action is
proceeding with pretrial discovery.
Glyphosate Tolerant Soybeans
In December 1999, the Monsanto Company filed suit in the U.S.
District Court for the Eastern District of Missouri against Pioneer claiming
that its merger with DuPont breached a 1992 license agreement granting Pioneer
the right to produce and market Roundup Ready(R) glyphosate tolerant soybeans.
Monsanto asked for damages for the breach and termination of the license.
Monsanto's complaint also alleged claims for patent infringement and trade
secret misappropriation if the license were terminated. On March 20, 2001, the
court, on motions for summary judgment, found that DuPont's acquisition of
Pioneer terminated the agreement. The court found no breach of contract and
therefore awarded no damages on this claim. It held that any claim for damages
or other relief Monsanto seeks will have to wait until the next phase of the
litigation, which involves Monsanto's patent infringement and trade secret
allegations.
The court found that its determination involved controlling questions
of law as to which there is a substantial difference of opinion and that an
immediate appeal would advance the ultimate determination of this litigation.
Those questions involve whether federal common law or state merger law should
control the transferability of patent licenses. The court has certified its
decision for immediate appeal to the U.S. Court of Appeals for the Federal
Circuit. Pioneer has filed an appeal. The company believes that the appellate
court will ultimately find that state merger law rather than federal common law
controls in merger situations and, therefore, that no prohibited license
transfer took place when DuPont acquired Pioneer. The district court has stayed
all other proceedings regarding patent infringement and trade secret claims
pending the outcome of the appeal. A favorable decision for Pioneer on appeal
will reinstate the license and preclude all other claims.
On October 1, 1999, the company acquired the approximately 80 percent
of Pioneer not previously owned for $7,684 million. An intangible asset has been
recorded to recognize the value of the 1992 license agreement. Should the
ultimate outcome of this lawsuit be adverse to the company, the value of this
intangible asset may become impaired, resulting in a one-time noncash charge to
earnings.
Management does not anticipate that the ultimate outcome of the
lawsuits discussed under the subheadings "YieldGard(R) MON 810 Bt Insect
Resistant Corn" and "Glyphosate Tolerant Soybeans" will have a material adverse
effect on the company's consolidated financial position or liquidity, although
it could be significant to the results of operations of the Agriculture &
Nutrition segment in the period recognized.
Purchased In-Process Research and Development
---------------------------------------------
No significant changes occurred during the second quarter 2001 with
respect to in-process research and development projects related to the company's
acquisitions in prior years.
25
Form 10-Q
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Benlate(R)
- ---------
In 1991, DuPont began receiving claims by growers that use of
Benlate(R) 50 DF fungicide had caused crop damage. Based on the belief that
Benlate(R) 50 DF would be found to be a contributor to the claimed damage,
DuPont began paying crop damage claims. In 1992, after 18 months of extensive
research, DuPont scientists concluded that Benlate(R) 50 DF was not responsible
for plant damage reports received since March 1991. Concurrent with these
research findings, DuPont stopped paying claims. DuPont since has been served
with several hundred lawsuits most of which were disposed of by trial, dismissal
or settlement. Approximately 120 cases are pending. Most of these lawsuits were
filed by growers who allege plant damage from using Benlate(R) 50 DF, although
some include claims for alleged damage to shrimping operations from Benlate(R)
50 OD and a smaller number of cases include claims for alleged personal
injuries. Also, many of these cases include general allegations of fraud and
misconduct.
In addition, a securities fraud class action was filed in September
1995 by a shareholder in federal district court in Florida against the company
and the then-Chairman. This action is still pending. The plaintiff in this case
alleges that DuPont made false and misleading statements and omissions about
Benlate(R) 50 DF, with the alleged effect of inflating the price of DuPont's
stock between June 19, 1993, and January 27, 1995. This district court has
certified the case as a class action. Discovery is proceeding.
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) 50 DF claims. Approximately 47 such cases are pending.
These cases are in various stages of proceedings in trial and appellate courts
in Florida and Hawaii.
Pending against the company in state court in Broward County,
Florida, are 30 cases brought by Ecuadorian shrimp farmers alleging that
Benlate(R) 50 OD, applied to banana plantations in Ecuador, ran off and was
deposited in plaintiffs' shrimp farms, causing massive numbers of shrimp to die.
Two cases were tried, in the fall of 2000 and in early 2001, which resulted in
adverse judgments of approximately $14 million and $16 million, respectively.
The company has appealed both cases. DuPont contends that the deaths of the
shrimp are attributable to a virus, Taura Syndrome Virus, and in no way involve
Benlate(R) 50 OD. The untried cases are on hold awaiting resolution of the tried
cases by the appellate court.
DuPont continues to believe 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 ongoing matters and in any additional cases
that may be filed or reopened. The ultimate liabilities from the Benlate(R)
lawsuits discussed above may be significant to the company's results of
operations, particularly in the Crop Protection business, 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.
The company's balance sheet reflects accruals for estimated costs
associated with this matter. Adverse changes in estimates for such liabilities
could result in additional future charges. In April of 2001, the company
announced that it will discontinue the manufacture of its fungicide Benomyl and
will phase out sales of Benlate(R) in all its forms from the global market. No
sales will occur after December 2001 and the company expects all product will
clear the channels of trade by the end of 2002.
26
Form 10-Q
Environmental Proceedings
- -------------------------
On September 2, 1997, the U.S. Department of Justice (DOJ) filed suit
against DuPont related to an August 1995 oleum release from DuPont's plant in
Wurtland, Kentucky. DuPont previously paid a $125,000 fine and agreed to
undertake supplemental environmental projects, related to the oleum release,
valued at $460,000. In its complaint, the DOJ alleges violations under Section
112(r) of the Clean Air Act (CAA), Section 103(a) of the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) and Section
304(a)(1) of the Emergency Planning and Community Right-to-Know Act. DOJ offered
to settle this action for $2,700,000. DuPont and the DOJ have reached a
settlement to resolve this matter. DuPont agreed to pay $650,000 for an
emergency planning computer system to be in place and operating by September
2001 for 10 counties in Kentucky, and to pay a penalty of $850,000. A Consent
Decree formalizing the settlement was filed with the Court on August 1, 2000 and
entered on September 19, 2000. DuPont completed providing the emergency planning
computer system for the 10 Kentucky counties in March 2001. DuPont is obligated
to provide annual refresher computer training for the counties for the next four
years, ending after 2005. Satisfaction of this training requirement will
complete DuPont's obligations under the Consent Decree.
On May 19, 1997, approximately 11,500 pounds of a hydrogen fluoride
(HF)/tar mixture was released from DuPont's Louisville, Kentucky fluoroproducts
facility. This release lasted about 40 minutes. There were no on-site injuries,
and only one off-site person reported any exposure. No toxic tort suits were
filed as a result of this release. DuPont's incident investigation concluded
that an inadequate valve stem design was a key factor contributing to the
release (the valve stem twisted and the valve indicated it was in a closed
position, when it was actually open). DuPont's process isolation procedures were
also reviewed and modified as a result of this incident. DOJ proposed a
settlement prior to filing its action for $1.7 million. Subsequently, by letter
dated July 13, 1999, the DOJ provided "formal notice" to DuPont that, due to the
May 1997 HF release, DOJ intended to bring a "federal court action" against
DuPont under the CAA Section 112(r) -- General Duty Clause. DuPont has contested
the proposed $1.7 million fine as excessive and unreasonable because there was
no environmental harm or human health impacts associated with the May 1997
incident. DuPont presented settlement offers to the DOJ and EPA in December 2000
and in June 2001. DuPont, DOJ and EPA continue settlement discussions.
Item 5. OTHER INFORMATION
Organization
- ------------
Effective July 1, 2001, Richard H. "Dick" Brown, chairman of the
board and chief executive officer of EDS, joined the DuPont Board of Directors.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibit index filed with this Form 10-Q is on pages 30 and
31.
(b) Reports on Form 8-K
1. On April 2, 2001, a Current Report on Form 8-K, pursuant to
Regulation FD, was filed in connection with Debt and/or
Equity Securities that may be offered on a delayed or
continuous basis under Registration Statements on Form S-3
(No. 33-53327, No. 33-61339, No. 33-60069, and No.
333-86363). Under Item 5, "Other Events," the Registrant
filed a news release, dated April 2, 2001, entitled "DuPont
Plans Targeted Reductions To Improve Competitiveness."
27
Form 10-Q
2. On April 19, 2001, a Current Report on Form 8-K, pursuant to
Regulation FD, was filed in connection with Debt and/or Equity
Securities that may be offered on a delayed or continuous basis
under Registration Statements on Form S-3 (No. 33-53327, No.
33-61339, No. 33-60069, and No. 333-86363). Under Item 5, "Other
Events," the Registrant filed a news release, dated April 19,
2001, entitled "DuPont To Phase Out Sale Of Benlate(R)."
3. On April 24, 2001, a Current Report on Form 8-K, pursuant to
Regulation FD, was filed in connection with Debt and/or Equity
Securities that may be offered on a delayed or continuous basis
under Registration Statements on Form S-3 (No. 33-53327, No.
33-61339, No. 33-60069, and No. 333-86363). Under Item 5, "Other
Events," the Registrant filed a news release, dated April 24,
entitled "DuPont Reports First Quarter 2001 Earnings."
4. On May 24, 2001, a Current Report on Form 8-K, pursuant to
Regulation FD, was filed in connection with Debt and/or Equity
Securities that may be offered on a delayed or continuous basis
under Registration Statements on Form S-3 (No. 33-53327, No.
33-61339, No. 33-60069, and No. 333-86363). Under Item 5, "Other
Events," the Registrant filed a news release, dated May 23, 2001,
entitled "DuPont Chief Operating Officer Addresses Goldman Sachs
Chemical Investors Forum."
5. On June 8, 2001, a Current Report on Form 8-K, pursuant to
Regulation FD, was filed in connection with Debt and/or Equity
Securities that may be offered on a delayed or continuous basis
under Registration Statements on Form S-3 (No. 33-53327, No.
33-61339, No. 33-60069, and No. 333-86363). Under Item 5, "Other
Events," the Registrant filed a news release, dated June 7, 2001,
entitled "DuPont to Sell Pharmaceuticals Unit to Bristol-Myers
Squibb Company for $7.8 Billion; Board Authorizes New Share
Buyback Program."
6. On June 15, 2001, a Current Report on Form 8-K, pursuant to
Regulation FD, was filed in connection with Debt and/or Equity
Securities that may be offered on a delayed or continuous basis
under Registration Statements on Form S-3 (No. 33-53327, No.
33-61339, No. 33-60069, and No. 333-86363). Under Item 5, "Other
Events," the Registrant filed a news release, dated June 14,
2001, entitled "DuPont to Sell Selected U.S. Polyester Businesses
to Alpek S.A. de C.V.; Sale Includes Manufacturing Assets in
North Carolina and South Carolina."
7. On July 3, 2001, a Current Report on Form 8-K, pursuant to
Regulation FD, was filed in connection with Debt and/or Equity
Securities that may be offered on a delayed or continuous basis
under Registration Statements on Form S-3 (No. 33-53327, No.
33-61339, No. 33-60069, and No. 333-86363). Under Item 5, "Other
Events," the Registrant filed a news release, dated July 2, 2001,
entitled "Global Economic Slowdown Affects DuPont Second Quarter
Earnings."
8. On July 25, 2001, a Current Report on Form 8-K, pursuant to
Regulation FD, was filed in connection with Debt and/or Equity
Securities that my be offered on a delayed or continuous basis
under Registration Statements on Form S-3 (No. 33-53327, No.
33-61339, No. 33-60069, and No. 333-86363). Under Item 5, "Other
Events," the Registrant filed a news release, dated July 25,
2001, entitled "DuPont Reports Second Quarter 2001 Earnings."
28
Form 10-Q
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
E. I. DU PONT DE NEMOURS AND COMPANY
(Registrant)
Date: August 7, 2001
-----------------------------------------
By /s/ John P. Jessup
-----------------------------------------
John P. Jessup
Vice President - Finance & Controller
(As Duly Authorized Officer and
Chief Accounting Officer)
29
Form 10-Q
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------------------------------------------------------------
3.1 Company's Restated Certificate of Incorporation, filed May 29,
1997 (incorporated by reference to the company's filing on Form
8-K on June 13, 1997.)
3.2 Company's Bylaws, as last revised January 1, 1999 (incorporated
by reference to Exhibit 3.2 of the company's Annual Report on
Form 10-K for the year ended December 31, 1998).
4 The company agrees to provide the Commission, on request, copies
of instruments defining the rights of holders of long-term debt
of the company and its subsidiaries.
10.1* Company's Corporate Sharing Plan, as last amended August 28, 1991
(incorporated by reference to Exhibit 10.1 of the company's
Annual Report on Form 10-K for the year ended December 31, 1996).
10.2* The DuPont Stock Accumulation and Deferred Compensation Plan for
Directors, as last amended April 29, 1998 (incorporated by
reference to Exhibit 10.3 of the company's Quarterly Report on
Form 10-Q for the period ended March 31, 1998).
10.3* Company's Supplemental Retirement Income Plan, as last amended
effective June 4, 1996 (incorporated by reference to Exhibit 10.3
of the company's Annual Report on Form 10-K for the year ended
December 31, 1996).
10.4* Company's Pension Restoration Plan, as last amended effective
June 4, 1996 (incorporated by reference to Exhibit 10.4 of the
company's Annual Report on Form 10-K for the year ended December
31, 1996).
10.5* Company's Stock Performance Plan, as last amended effective
January 28, 1998 (incorporated by reference to Exhibit 10.1 of
the company's Quarterly Report on Form 10-Q for the period ended
March 31, 1998).
10.6* Company's Variable Compensation Plan, as last amended effective
April 30, 1997 (incorporated by reference to Exhibit 10.7 of the
company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997).
10.7* Company's Salary Deferral & Savings Restoration Plan, as last
amended September 20, 2000, effective January 1, 2000
(incorporated by reference to Exhibit 10.7 of the company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2001).
10.8* Company's 1995 Corporate Sharing Plan, adopted by the Board of
Directors on January 25, 1995 (incorporated by reference to
Exhibit 10.8 of the company's Annual Report on Form 10-K for the
year ended December 31, 1999).
- -----------------------------------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-Q.
30
Form 10-Q
EXHIBIT INDEX
(continued)
Exhibit
Number Description
- -------- -----------------------------------------------------------------
10.9* Company's 1997 Corporate Sharing Plan, adopted by the Board of
Directors on January 29, 1997 (incorporated by reference to
Exhibit 10.11 of the company's Annual Report on Form 10-K for the
year ended December 31, 1996).
10.10* Company's Retirement Income Plan for Directors, as last amended
August 1995 (incorporated by reference to Exhibit 10.12 of the
company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997).
10.11* Letter Agreement and Employee Agreement, dated as of April 22,
1999, between the company and R. R. Goodmanson (incorporated by
reference to Exhibit 10.11 of the company's Annual Report on Form
10-K for the year ended December 31, 1999).
10.12 Company's Tax Sharing Agreement dated October 27, 1998, by and
among the company and Conoco Inc., formerly known as Conoco
Energy Company (incorporated by reference to Exhibit 10.13 of the
company's Annual Report on Form 10-K for the year ended December
31, 1998).
10.13 Company's Purchase Agreement dated June 7, 2001, by and among the
company, DuPont Pharma, Inc., DuPont Pharmaceuticals Company,
DuPont Electronic Materials, Inc., DuPont Diagnostics, Inc., and
Bristol-Myers Squibb Company.
12 Computation of Ratio of Earnings to Fixed Charges.
- -----------------------------------------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-Q.
31