Exhibit 13
2
[PICTURE]
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TO OUR SHAREHOLDERS:
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In 1999 we renewed our corporate direction with a view appropriate to the dawn
of a new century. This revitalized vision focuses us on the leadership role that
DuPont, as a global science company, can play in the decades ahead in making the
world a better place to live. Our far-reaching strategy is consistent with our
long and successful heritage. And it connects us to the boundless opportunities
available to a company dedicated to finding solutions to human needs through the
miracles of science. This is a different, better company with increased
capability and commitment to deliver value to our shareholders.
Conoco split off -- The Conoco split off marked the final chapter in our
historic relationship with Conoco. We freed up $21 billion in value for
redeployment in businesses that are strategically aligned with our future as a
global science company. Shareholders benefited from the tax-free transaction and
had the opportunity to exchange their DuPont shares for Conoco shares at a
discount.
Pioneer acquisition -- Meanwhile a new chapter opened in DuPont's history with a
stock and cash merger that resulted in DuPont's complete ownership of Pioneer
Hi-Bred International, a science and technology leader and the world's premier
producer of seeds. This was a major step in our overall strategy to more fully
integrate biology into our science and technology base. As a result, we will be
able to develop new generations of products for food and feed crops, food
ingredients, industrial applications and nutrition science.
External recognition -- In 1999 DuPont moved from number 35 to number 13 in the
Financial Times/PricewaterhouseCoopers survey of the world's most respected
companies. Our corporate reputation is a critical asset both in the conduct of
our business and in our ability to attract top talent. In the 2000 Fortune
magazine "most admired" survey, we ranked number 2 among all companies in terms
of social responsibility.
Financial performance -- Although we provided a 27 percent total shareholder
return in 1999, diluted earnings on a continuing operations basis before
nonrecurring items were $2.58 per share, up only 1 percent from the $2.55 earned
in 1998. This is our fourth consecutive year of essentially no growth in
earnings per share (EPS), excluding nonrecurring items. I personally do not
consider this lack of growth acceptable. So 2000 and 2001 will be our proof. We
must -- and we intend to -- return to double-digit growth in EPS.
New board members -- We added six new board members in the last two years. Four
are chief executive officers of global companies. Our board is diverse, global
and shareholder-driven.
A"snapshot" of DuPont in 2000 reveals a global science company that knows
how to link the modern biology of the new century to the chemistry and physics
that led to our great discoveries of the century just ended. In business terms,
we are focused on those segments of the market that value high performance
products. Typically our businesses are number one or a strong number two
globally based upon technological advantages. We combine our scientific strength
and competitive advantage with an unshakable commitment to productivity and a
unique ability, among our competitors, to establish consumer-recognized brands.
Our objective for the future is what we call "sustainable growth" --
increasing shareholder value and societal value while we reduce our
environmental footprint. To grow sustainably we need to accelerate the number of
new, differentiated, high value offerings we bring to market.
3
We have a three-part strategy: We will deliver new products through the power of
our integrated science. We will vigorously pursue knowledge intensity in all our
businesses. And we will significantly increase our productivity. Overall we have
good reason for confidence.
The power of integrated science
The first -- and in many ways the strongest and most proven -- driver in our
sustainable growth effort is integrated science. The modern DuPont company was
built on science. Historically, we have created value by integrating multiple
scientific disciplines to develop unique technology platforms. From those
technology platforms we create products tailored to diverse end-user needs. We
move our offerings to global markets through some 80 customer-focused
businesses.
We are now retooling our traditional growth engine by adding modern biology
to great chemistry, creating a truly integrated science-based company. We
believe strongly that the addition of modern biology -- usually referred to as
biotechnology -- to our existing strength in chemistry creates step-change
potential for our company.
At the same time, we are well aware that some aspects of modern biology are
controversial. We have taken a very public and global leadership role in
promoting discussion and debate about the future of biotechnology, including
genetically enhanced agricultural products.
The current public debate over biotechnology remains too narrowly focused
on the genetic enhancement of food and is primarily about risk. We believe that
this debate needs to be expanded to include the broader potential uses of
biotechnology, and to include a full discussion of benefits as well as risks. We
also believe that the concerns of the public must be addressed openly. DuPont
supports whatever steps may be necessary to ensure that biotechnology, in all
areas, is developed and used safely.
The potential applications of modern biology are too diverse for even a
company with DuPont's resources to do justice to the full spectrum. We have
chosen select areas where our traditional science, new biological tools, and our
strong market presence combine to give us unparalleled competitive advantage:
food, feed, agriculture, health care, wellness, materials, sensors and
electronics.
In food, DuPont has the leading technology position in output traits -- the
characteristics that the ultimate customer values. The U.S. Food and Drug
Administration approved health claims for soy protein in 1999. By working to
improve soy's taste and digestibility, we believe that our biotechnology will
enable soy's benefits to be enjoyed by many consumers. We have formed an
[PICTURE]
4
[PICTURE]
[PICTURE]
alliance with General Mills Inc. to develop and market soy foods. Pioneer
Hi-Bred International also brings us more than 1,000 scientists who through a
worldwide network are turning modern biology into practical products.
In bio-based materials we expect to demonstrate fully our first bio-based
polymer -- 3GT -- in first quarter 2001 and be commercially operating with unit
costs lower than petrochemical-based sources in three years. From this polymer,
we can make a new fiber with unique properties which is derived from renewable
resources and is fully recyclable. We are also beginning to explore
biotechnology for sensors, analytical devices and ultimately electronics. We
started a five-year collaboration with the Massachusetts Institute of Technology
to fully develop biotechnology for a multitude of uses outside of traditional
agriculture.
DuPont Pharmaceuticals is also in a very solid position, owing to the
blockbuster anti-hypertensive drug Cozaar(R) (losartan potassium tablets) and
the anti-HIV drug Sustiva(TM) (efavirenz). In 1999 we enhanced our
pharmaceutical R&D position with the CombiChem Inc. acquisition. CombiChem's
computational chemistry can also be leveraged within DuPont beyond
pharmaceuticals. Our pharmaceutical research is focused on HIV infection,
cardiovascular disease, central nervous system disorders, cancer and
inflammatory diseases.
While much of our science-based growth is focused on biotechnology
businesses, polymer technology still has tremendous potential. We look at each
new innovation broadly to identify how to create the most shareholder value.
We have important new technology coming along in DuPont Lycra(R) and DuPont
Corian(R), as well as Nonwovens. We also have some exciting new, polymer-based
developments in what we now call DuPont iTechnologies, a growing and profitable
business in advanced materials and systems solutions for information industries.
Our focus includes lighter, more effective displays and power supplies which
will be essential to future generations of personal information and
communications devices.
Generating value through knowledge intensity
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The second approach in our sustainable growth strategy is knowledge intensity.
This is a term we created to describe how we generate value from our
intellectual capital. We are putting our operating know-how and market knowledge
to work in novel ways. To expedite the process, we have established a "Knowledge
Intensity University" to train business teams to recognize and develop
opportunities to use market information creatively.
We are applying knowledge intensity to our traditional businesses, as well
as using our scientific strengths to build new businesses along new economic
models. But the biggest near-term payoff from our knowledge intensity thrust is
going to be in e-commerce, a major tool to realize value from our market
knowledge. DuPont is rapidly building a set of strategic alliances with leading
companies, such as yet2.com (intellectual property) and CheMatch.com (commodity
chemicals). We have six such ventures in operation or development, and five more
are in the concept stage. Our recently announced alliance with the Internet
Capital Group should allow us to "step change" our implementation and leadership
in business to business e-commerce, creating new wealth from our industry sector
expertise.
5
Step change approach to productivity
The third driver of sustainable growth is a renewed assault on productivity. In
1999 our productivity thrust included business restructurings in Polyester, Crop
Protection and Nylon; and major cost reductions associated with integrating the
Herberts operations. We will have the full-year benefit of these actions in
2000.
However, our main vehicle for productivity gains, on an ongoing basis, is
Six Sigma. We deployed Six Sigma process improvement ahead of schedule. By
year-end 1999, we had trained more "Black Belt" team leaders than planned (800
versus 600). We also achieved greater productivity per "Black Belt" in the
number of projects initiated, the pretax earnings improvement, avoided capital
investment and improved cash flow.
There is great enthusiasm in our businesses for Six Sigma. We currently
have over 1,100 projects in progress or completed. Six Sigma is about more than
cost saving. It creates additional production capacity from installed assets and
the opportunity for more revenue. We will be shifting the focus of our projects
during 2000 so that 20 percent are directly focused on revenue by the fourth
quarter, up from 5 percent in 1999. The economic value creation from Six Sigma
is huge, and we will validate and report our progress.
DuPont people help make the miracles happen
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Integrated science, knowledge intensity, and productivity are the three broad
efforts that are driving sustainable growth at DuPont. I'm absolutely convinced
they are the right three. Of course, to succeed in each of these areas our
people have to be fully engaged, and I'm confident that they are. In my visits
to sites throughout the company and around the world I am always impressed by
the enthusiasm and creativity I see applied to jobs and projects both large and
small. The conscientious effort, the pride in accomplishment and the customer
focus so evident on the part of DuPont employees assures me that we can achieve
the goals we've set for the company.
On the pages that follow this letter you will learn about some of our most
exciting science developments from the teams who are pursuing them. You'll also
get a more in-depth look at our knowledge intensity and Six Sigma efforts.
As we begin 2000, we see the global economy in its best position for DuPont
in four years. Our Asia business has recovered to record levels of sales and
earnings. In contrast to 1999, which we entered in an environment of
decelerating volume growth, 2000 promises to be a year of relatively strong
growth in demand overall. Most importantly, we have a DuPont team that is
determined to win in a highly competitive marketplace. We understand that this
requires an environment that energizes our employees, as well as the ability to
help our customers succeed in their businesses.
I believe we are a different and better company now at the beginning of a
new century than we were only a few years ago. We extracted the value in our
energy segment and redeployed it to new and exciting areas of business to better
serve our customers. Our 200th anniversary is two short years from now, and our
company is ready to seize the opportunities that we are certain lie ahead.
/s/ Chad Holliday
Chad Holliday, Chairman and CEO March 1, 2000
[PICTURE]
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
This review and discussion of financial performance should be read in
conjunction with the letter to stockholders (pages 2-5) and consolidated
financial statements (pages 43-71).
Analysis of Continuing Operations
SALES
Sales in 1999 reached a record $26.9 billion, 9 percent above 1998, principally
reflecting a $2.2 billion increase derived from business acquisitions. Excluding
portfolio additions, worldwide sales were flat, as 3 percent higher volume was
offset by 3 percent lower selling prices. The decline in the worldwide average
selling prices reflects the continuation of a downward trend started in 1995.
The Polyester Enterprise, Nylon Enterprise and Specialty Polymers segments had
the most significant downward impact on the price average. The net effect on
prices from currency fluctuations during the year was negligible. Sales in the
United States increased 5 percent, as 7 percent volume growth, including 6
percent from acquisitions, was offset by 2 percent lower prices. Excluding
acquisitions, U.S. volumes grew significantly in the Performance Coatings &
Polymers, Pharmaceuticals, and Specialty Fibers segments, while the Agriculture
& Nutrition and Polyester Enterprise segments had lower volumes. European sales
increased 13 percent reflecting the Herberts acquisition. Excluding the benefit
of Herberts, sales in the European region declined 5 percent, reflecting flat
volume and 5 percent lower prices, the latter due to currency effect. Sales in
the Asia Pacific region grew 22 percent due to volume growth. Prices were flat
as 5 percent lower local prices were offset by a 5 percent currency benefit.
Sales in 1998 were a record $24.8 billion, up 3 percent from 1997. Sales from
acquisitions added $2.1 billion during the year. Excluding the effect of
acquisitions and divestitures, sales decreased 4 percent. This reflects 2
percent lower worldwide sales volume and 2 percent lower selling prices.
Excluding currency fluctuation effects, prices would have been about flat. U.S.
sales were adversely affected by 3 percent lower sales volumes, principally
reflecting lower volumes in the Agriculture & Nutrition and Polyester Enterprise
segments. The latter was adversely affected by general market weakness and
increased competition from Asian suppliers. U.S. prices averaged 1 percent lower
for the year reflecting pricing softness in polyester, crop protection products
and commodity chemicals. Sales outside the United States were reduced 5 percent
by the currency effect of the stronger U.S. dollar. Also reducing sales were
economic weakness in Asia and South America, and slower growth in Europe.
Volumes were 7 percent lower in Asia, with Europe up only 2 percent. Prices
outside the United States, including currency fluctuation effects, were 2
percent lower. This principally reflects lower prices for polyester films and
fibers, partly offset by higher titanium dioxide prices.
EARNINGS
Net income for the year 1999 was $7,690 million compared with $4,480 million in
1998. The increase in net income principally reflects a $7,471 million after-tax
gain on disposal of discontinued business (Conoco, the company's former energy
subsidiary) versus a similar gain of $2,439 million in 1998. Partly offsetting
this increase was a reduction in income from continuing operations and the
absence of 1998 income from operations of discontinued business. Earnings per
share on a fully diluted basis were $6.99 versus $3.90 in 1998.
Income from continuing operations before extraordinary item was $219 million or
$.19 per diluted share in 1999, compared with $1,648 million or $1.43 per
diluted share in the prior year. These amounts include nonrecurring items which
were significant in both years. For 1999, nonrecurring items resulted in a net
charge of $2,624 million, or $2.39 per share. The most significant of these
were: 1)$2,186 million charge to write off in-process research and development
in connection with the acquisition of the remaining 80 percent interest in
Pioneer; 2) charges of $484 million for impairment write-downs and restructuring
activities in the Nylon Enterprise, Agriculture & Nutrition, and Polyester
Enterprise segments; and 3) a gain of $208 million recognized from the exchange
of the company's investment in WebMD for Healtheon/WebMD. For 1998, nonrecurring
charges applicable to continuing operations totaled $1,265 million.
Diluted earnings per share from continuing operations excluding nonrecurring
items in 1999 were $2.58 versus $2.55 in 1998. 1999 income from continuing
operations excluding nonrecurring items was $2,843 million versus $2,913 million
in 1998, down 2 percent. Earnings per share increased despite lower income
because of reduced average common shares outstanding in 1999 versus 1998. The
$70 million lower income excluding nonrecurring items reflects 2 percent higher
after-tax operating income (ATOI) more than offset by higher exchange losses and
corporate expenses. The increased ATOI is due to higher sales volume, reduced
variable cost per unit, and a lower effective income tax rate, partly offset by
lower selling prices and slightly higher fixed costs. The combined impact of
business portfolio changes including the addition of Herberts as well as the
increased ownership interest in DuPont Pharmaceuticals and Pioneer Hi-Bred
International Inc., was to reduce full-year ATOI by about 1 percent. Full-year
results were reduced by inclusion of Pioneer's seasonal operating losses in the
fourth quarter on a full ownership basis and amortization of acquired
intangibles.
Income from continuing operations in 1998 was $1,648 million versus $1,432
million in 1997. Both years contain significant net
DuPont
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
nonrecurring charges - $1,265 million and $1,676 million in 1998 and 1997,
respectively. Nonrecurring items for 1998 were principally the write-off of
purchased in-process research and development and charges taken in connection
with productivity initiatives partially offset by gains from asset sales. For
1997, nonrecurring items principally include the write-off of purchased
in-process research and development. Excluding net nonrecurring items from both
years, income from continuing operations was $2,913 million in 1998 versus a
record $3,108 million in 1997, down 6 percent. The decline in income from
continuing operations principally reflects 4 percent lower ATOI and higher
interest expense. ATOI was lower due to higher income taxes. Pretax operating
income from continuing operations was flat as higher sales were offset by higher
fixed and variable costs. Excluding acquisitions, sales were 4 percent lower,
fixed costs were 3 percent lower, variable costs declined 6 percent and variable
cost per unit declined 4 percent reflecting lower raw material costs.
Diluted earnings per share from continuing operations before extraordinary item
were $1.43 in 1998 versus $1.24 in the prior year. Excluding nonrecurring net
charges of $1.12 per share and $1.46 in 1998 and 1997, respectively, 1998
diluted earnings per share were $2.55, down 6 percent from $2.70 per share in
1997.
Income tax expense and effective income tax rates are as follows:
1999 1998 1997
Income tax expense (dollars in millions) $1,410 $ 941 $1,354
Effective income tax rate (EITR) 83.4% 36.0% 47.9%
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The 1999 EITR of 83 percent is significantly higher than the 1998 EITR of 36
percent primarily due to the write-off of acquired in-process research and
development for the Pioneer and Herberts transactions which reduced earnings but
had no tax effect. Excluding nonrecurring items and related tax effects, the
EITR in 1999 decreased to 32 percent from 34 percent in 1998 due to a lower
effective rate on foreign earnings. The 1998 EITR of 36 percent is significantly
lower than the 1997 EITR of 48 percent, yet higher than historic rates due to
higher taxes on foreign earnings. The 1997 EITR reflected the write-offs of
in-process research and development for the Pioneer and Protein Technologies
International, Inc. transactions that reduced earnings but had no tax effect.
Excluding nonrecurring items and related tax, the EITR in 1998 increased to 34
percent from 33 percent in 1997.
CORPORATE OUTLOOK
The company's prospects for resumption of overall stronger growth will continue
to depend most importantly on the following factors among others: 1) continuing
growth in global economies, particularly those in the North America, Europe and
Asia Pacific regions; 2) improving market conditions including profitability in
the U.S. agricultural industry, and the acceptance of new products arising from
biotechnology research and development; and 3) increasing worldwide demand and
stronger pricing for commodity chemicals and fibers. In addition to the
foregoing factors, growth in earnings will benefit from controlling fixed costs,
productivity improvements driven by Six Sigma, successful integration of
acquired businesses, and continued launching and market acceptance of new
products and services.
The growth of real gross domestic product (GDP) in the United States is expected
to slow somewhat from its recent very strong rates while GDP growth is
increasing in Europe, most of Asia, and South America. In the United States, the
industrial production sector on which the company is most dependent has resumed
more normal growth after the almost recession-like conditions in the latter part
of 1998. Worldwide demand for the company's products increased 3 percent in 1999
and increased 11 percent in a very strong fourth quarter compared with the
fourth quarter of 1998. This pace is expected to moderate, but in 2000 the
company expects to benefit from sales volume exceeding that of 1999.
The company expects to return to double-digit growth in earnings before
nonrecurring items in 2000, reflecting the volume growth described above and: 1)
benefits from restructuring activities initiated during 1999 in the Agriculture
& Nutrition, Nylon Enterprise, Performance Coatings & Polymers, and Polyester
Enterprise segments which involve in excess of 2,500 employee terminations; 2)
lower pension costs due to favorable asset returns, an increase in the long-term
investment return assumption, and a higher discount rate; and 3) increased
earnings from Cozaar(R) (losartan potassium tablets) and Sustiva(TM) (efavirenz)
in the Pharmaceuticals segment. The foregoing will be partly offset by planned
increases in research and development spending and increases in salary and wage
cost structures. In addition, the company expects higher raw material costs,
higher interest rates, and adverse currency effects from a stronger dollar.
Discontinued Operations
On September 28, 1998, the company announced that the Board of Directors had
approved a plan to divest the company's 100 percent owned petroleum business
(Conoco Inc.). 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
DuPont
16 MANAGEMENT'S DISCUSSION AND ANALYSIS
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 DuPont'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. The
1998 gain on disposal of discontinued business reflects DuPont's share of
Conoco's results of operations from October 1 to December 31, 1998, and the
$2,586 million gain recognized by DuPont from the initial public offering of
Conoco Class A common stock.
In connection with the separation from DuPont, Conoco and DuPont entered into a
tax sharing agreement. Several matters under the tax sharing agreement are
currently in dispute between Conoco and DuPont. Among other things, Conoco
claims that DuPont owes Conoco in excess of $200 million pursuant to the tax
sharing agreement. DuPont disputes that it owes this amount and believes that
any settlement of the dispute will not be material to its financial position,
liquidity or the gain on disposal of discontinued business.
Segment Reviews
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AGRICULTURE & NUTRITION
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Crop Protection
Nutrition & Health
[GRAPH]
ATOI BEFORE
NONRECURRING
SALES ($ in Billions) ATOI ($ in Millions) ITEMS ($ in Millions)
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1999 2.6 358 255
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1998 2.8 249 322
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1997 2.5 (98) 464
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See Industry Segment Information (Note 28 to Financial Statements).
The mission of the Agriculture & Nutrition businesses is to best satisfy the
world's need for food, nutrition and novel materials by transforming the ways
renewable resources are grown, processed and distributed.
Crop Protection (CP) includes global herbicide, fungicide and insecticide
businesses. CP strategies are to develop and commercialize new products;
continue to build and demonstrate the value of the broad and effective line of
existing products; leverage enhanced grower relations generated by specialty
grains; capitalize on cross-business unit growth opportunities; and capture
value from growth in generics. CP has restructured its operations to make them
more competitive in a depressed global agricultural economy.
Efforts to build Identity Preservation (IP) systems continue to show strong
growth. The CP team has worked with other business units and the grain and food
industries to develop IP systems for soybean contracting that are setting global
standards. This work has demonstrated that the agricultural industry can deliver
large quantities of identity preserved crops to meet the specifications required
by customers in Europe, Asia Pacific and Brazil.
A number of products were registered and launched in 1999 in countries
throughout the world. Of note is Famoxate(R), a new active ingredient in
fungicides now in use in 24 countries in Europe, Asia, Africa and South America.
It is used primarily on grapes, potatoes, tomatoes and cucumbers.
CP signed a multi-year supply agreement that allows DuPont to purchase
glyphosate herbicide from Monsanto Company. Glyphosate is the world's largest
crop protection chemical and this agreement gives CP immediate access to a
$3 billion global market. CP purchased the remaining shares of Agar Cross, a
leading manufacturer of agricultural products in Argentina. Also, the intention
to sell the Fortress(R) insecticide business was announced.
The Nutrition & Health (N&H) business includes Protein Technologies
International Inc. (PTI), Optimum Quality Grains and Qualicon Inc.
PTI is a world leader in the research, manufacturing and marketing of soy
protein and soy fiber ingredients. In November 1999 the U.S. Food and Drug
Administration (FDA) authorized the use of a health claim on food labels
concerning the association between soy protein and the reduced risk of coronary
heart disease. The health claim has prompted intense activity among food
companies interested in incorporating soy protein into their food offerings. PTI
continues to fund studies on additional health benefits of soy with women's
health being the primary area of research, including menopausal symptoms and
bone health. In January 2000 PTI and General Mills Inc. announced plans to
collaborate on developing and marketing new soy foods.
In 1999 Optimum established grain partner alliances with Archer Daniels Midland
Co., ConAgra Inc. and Consolidated Grain & Barge Co. to market value-enhanced
grain to international markets. The business was restructured to focus on animal
feeds (pork, poultry and beef) and downstream consumer meat markets. Despite
poor agricultural market conditions in 1999, Optimum(TM)
DUPONT
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
high oil corn remained the leading value-added grain on the market and the
company expects it to be the platform for second generation products over the
next five years. Optimum produced its first research quantities of high oleic
high oil corn in 1999, a feed with the potential to produce healthier meats with
improved taste and shelf life. Over 1 million pounds of low-saturated-fat
soybean oil were shipped to the U.S. Department of Agriculture (USDA) School
Lunch Program in 1999. Substituting this oil for conventional oils increases the
number of school lunches meeting USDA saturated fat guidelines.
Qualicon develops and markets microbial testing products that use genetic
information to address the safety and quality management needs of a wide variety
of industries. Originally focused on food safety, Qualicon has extended the
system's utility for other venues, including pharmaceuticals, hospital
epidemiology, public health, veterinary health and universities. Qualicon
products include the RiboPrinter(R) microbial characterization system - the only
automated instrument for fingerprinting the DNA of bacteria - and the BAX(R)
screening system. Qualicon has formed collaborative alliances with leaders in
microbiology around the world, including the Institut Pasteur de Lille in
France. Qualicon is working with the U.S. Centers for Disease Control and
Prevention to integrate the RiboPrinter(R) system into the Center's Foodborne
Pathogen Surveillance Network.
1999 versus 1998 Sales of $2.6 billion were 7 percent lower, reflecting flat
prices and 7 percent lower sales volume. ATOI was $358 million compared with
$249 million. ATOI before nonrecurring items was $255 million, down $67 million,
or 21 percent, principally reflecting lower CP earnings.
1998 versus 1997 Sales of $2.8 billion were 12 percent higher reflecting
additional sales from the acquisition of PTI partly offset by lower selling
prices for CP. ATOI was $249 million compared with a loss of $98 million in
1997. ATOI before nonrecurring items was $322 million, down $142 million or 31
percent. The earnings decline reflects lower CP revenue and higher costs.
Outlook Farmers continue to focus on controlling costs and increasing
productivity in the face of downward pressure on crop prices. As a result, the
worldwide market for crop protectants remains very competitive and market share
will continue to be critical to CP's performance. However, CP offers many high
value-in-use herbicides, insecticides and fungicides some of which are protected
from generic competition by patents. Patent protection for Ally(R) and Oust(R),
sulfonylurea herbicides, will expire during the summer of 2000. CP's strategy to
counter competitive pressures includes strong product and customer service
programs designed to add value to product brands, DuPont's agreement with
Monsanto for glyphosate and the introduction of new products. CP plans to
introduce new chemistry in Milestone(TM) herbicide for use on sugar cane,
citrus, grapes and non-crop vegetation in 2000. Steward(TM) insecticide and
Avaunt(TM) insecticide for use on vegetables and fruit will also be launched,
pending registration.
The company has been served with several hundred lawsuits in connection with the
1991 stop-sale and recall of Benlate(R) 50 DF fungicide; approximately 140 cases
are pending. 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) 50 DF claims. DuPont believes that
Benlate(R) 50 DF fungicide 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. The ultimate liabilities from Benlate(R) 50 DF lawsuits may be
significant to CP's 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.
PTI expects FDA approval of the health claim for soy protein to increase
consumer demand for a large variety of foods containing the product. Qualicon
expects the increasing globalization of the food supply, new pathogen testing
regulations, the increasing number of antibiotic-resistant strains of bacteria
and growing concerns about the risk of microbial contamination to increase
demand for its systems. In January 2000 the business introduced a line of
DNA-based tests to detect the presence of genetic modifications in foods.
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NYLON ENTERPRISE
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[GRAPH]
ATOI BEFORE
NONRECURRING
SALES ($ in Billions) ATOI ($ in Millions) ITEMS ($ in Millions)
--------------------- --------------------- ---------------------
1999 4.5 63 389
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1998 4.6 244 406
--------------------- --------------------- ---------------------
1997 4.6 372 372
--------------------- --------------------- ---------------------
See Industry Segment information (Note 28 to Financial Statements).
DuPont Nylon is the global leader in nylon intermediates, polymers and fibers
for major markets such as carpets and rugs, apparel, tire reinforcement and
numerous other industrial applications. DuPont Nylon brands include
Stainmaster(R) and Antron(R) for carpets, Tactel(R) and Supplex(R) for apparel,
and Cordura(R) for hundreds of different products including packs and bags,
boots and shoes, and apparel.
DuPont
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
The year was marked by continued facilities modernization, including apparel
fiber operations at Chattanooga, Tennessee, and Monterrey, Mexico (Dupek S.A. de
C.V. joint venture); fiber facilities at Gloucester, United Kingdom, and
Oestringen, Germany; and nylon intermediates production works at Wilton, United
Kingdom, including improvements to meet future environmental regulations. Fiber
operations at Doncaster, United Kingdom, were shut down. Carpet fiber operations
at Kingston, Ontario, were expanded. Progress continued toward elimination of
the disposal of hazardous waste in deep wells at Victoria and Orange, Texas.
Growth aspirations in the Asia Pacific region were reduced in 1999. The business
withdrew from a joint venture to produce nylon salt and polymer in China and
signed an agreement to sell the tire cord fabric manufacturing facility in
India.
Nylon introduced Tactel(R) Ispira(TM), which offers all the performance benefits
of nylon plus relaxed stretch. Fabrics made with Tactel(R) Ispira(TM) are
strong, breathable, quick-drying and abrasion-resistant, plus subtle stretch
gives garments improved fit and ease of movement. New Tactess(R) fiber enables
mills to manufacture soft, thick, wool-like and durable carpets with superior
stain and soil resistance.
1999 versus 1998 Sales of $4.5 billion were 2 percent lower, reflecting 3
percent lower prices, partly offset by 1 percent higher volume. ATOI was $63
million compared with $244 million. ATOI before nonrecurring items was $389
million versus $406 million, down 4 percent, reflecting lower revenue and higher
raw material costs, partly offset by lower fixed costs.
1998 versus 1997 Sales of $4.6 billion were essentially unchanged, as slightly
higher volumes offset modestly lower selling prices. Stronger flooring business
sales offset lower sales of textile and industrial products. ATOI was $244
million compared with $372 million in 1997. ATOI before nonrecurring items was
$406 million, up 9 percent reflecting lower costs and increased flooring
business earnings.
Outlook Prospects for Nylon Enterprise earnings growth are most dependent on
U.S. markets for nylon carpeting, European and U.S. markets for nylon
intermediates, and U.S. markets for industrial nylon applications such as
automobile air bags. Nylon carpet production is tied closely to the U.S. housing
and commercial real estate markets. Both of these sectors were performing in
1999 above 10-year trends rates. It is expected that strong growth in these
markets will be slowing during the year in response to higher interest rates.
The outlook for demand for nylon intermediates remains very good in Europe where
economic growth should surpass U.S. rates in 2000. Demand for industrial nylon
should slow gradually during 2000 in response to gradually declining U.S.
economic conditions. However, earnings are expected to grow modestly in 2000 as
higher prices, fixed cost reductions through continued modernization,
productivity gains, and restructuring in Asia more than offset the earnings
impact of lower volume.
- --------------------------------------------------------------------------------
PERFORMANCE COATINGS & POLYMERS
- --------------------------------------------------------------------------------
Engineering Polymers
Performance Coatings
DuPont Dow Elastomers
[GRAPH]
ATOI BEFORE
NONRECURRING
SALES ($ in Billions) ATOI ($ in Millions) ITEMS ($ in Millions)
--------------------- --------------------- ---------------------
1999 6.1 582 645
--------------------- --------------------- ---------------------
1998 4.6 508 525
--------------------- --------------------- ---------------------
1997 4.6 519 519
--------------------- --------------------- ---------------------
See Industry Segment information (Note 28 to Financial Statements).
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 its
largest markets. Serving customers throughout the world, the business supplies
six families of engineering resins - Zytel(R) nylon, Delrin(R) acetal, Rynite(R)
PET polyester, Crastin(R) PBT polyester, Hytrel(R) thermoplastic elastomer and
Zenite(TM) liquid crystal polymer - plus Vespel(R) polyimide parts and shapes,
Tribon composites and Tynex(R) filaments.
To meet market demand for automotive and electrical/electronics applications,
new manufacturing facilities for Hytrel(R) and Crastin(R) were started up in
Charleston, South Carolina. Outmoded facilities for these products were closed
at the company's Chambers Works facility in New Jersey.
In February 1999 Performance Coatings acquired the Herberts coatings business
from Hoechst AG for about $1.7 billion. The acquisition brought together
Herberts' leading market position in Europe for automotive coatings and its
strong position in industrial and powder coatings with DuPont's leading position
in the Americas for automotive coatings. The integration of Herberts into DuPont
and steps to eliminate redundancies in manufacturing and staff functions are
proceeding well, resulting in earnings ahead of expectations.
Performance Coatings continues to strengthen its position in the digital ink
market and explore new application opportunities.
DuPont
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
DuPont has proprietary technology for inkjet inks used in the computer printer
industry.
DuPont Dow Elastomers, a 50/50 joint venture between DuPont and The Dow Chemical
Company, is the leading global supplier of mid- and high-performance elastomers.
In 1999 DuPont Dow successfully commercialized Nordel(R) IP, a new EPDM product
line based on Dow INSITE(TM) process and catalyst technology. The business began
a capital project at Dow's Baton Rouge, Louisiana, facility to expand capacity
for Engage(R) polyolefin elastomers, DuPont Dow's fastest growing business.
1999 versus 1998 Sales of $6.1 billion were up 34 percent, reflecting a 30
percent increase attributable to the Herberts acquisition, 7 percent higher
sales volume and 3 percent lower prices. ATOI was $582 million compared with
$508 million. ATOI before nonrecurring items was $645 million versus $525
million, up $120 million or 23 percent. All businesses contributed to the
earnings increase, with about half attributable to Performance Coatings,
principally due to the Herberts acquisition.
1998 versus 1997 Sales of $4.6 billion were down 1 percent reflecting flat
selling prices and 1 percent lower volume. ATOI was $508 million compared with
$519 million in 1997. ATOI before nonrecurring items was $525 million, up 1
percent reflecting higher Engineering Polymers earnings offset principally by
lower earnings from the DuPont Dow Elastomers joint venture.
Outlook The coatings industry is experiencing consolidation, globalization and
restructuring at all levels of the supply chain as coatings producers narrow
their market segment focus. Environmental pressure is creating growth
opportunities for powder and waterborne technologies. Performance Coatings
continues to focus on the development of environmentally friendly coatings that
meet rising needs for application productivity. With the acquisition of
Herberts, DuPont now has a leading position in powder coatings that offer near-
zero emissions during application. With continued refinement of the technology -
in combination with higher-performance industrial coatings - the business is
well positioned to increase market share.
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PHARMACEUTICALS
- --------------------------------------------------------------------------------
[GRAPH]
ATOI BEFORE
NONRECURRING
SALES ($ in Billions) ATOI ($ in Millions) ITEMS ($ in Millions)
--------------------- -------------------- ---------------------
1999 1.6 230 263
--------------------- -------------------- ---------------------
1998 1.2 (668) 185
--------------------- -------------------- ---------------------
1997 0.8 234 162
--------------------- -------------------- ---------------------
See Industry Segment Information (Note 28 to Financial Statements).
DuPont Pharmaceuticals focused in 1999 on three therapeutic areas: virology,
cardiovascular/thrombosis and neurology, with a strong medical imaging business
complementing the latter two. DuPont continued its strategy to expand the
breadth and depth of its pharmaceuticals businesses by building an integrated
system of highly focused marketing and research alliances.
Pharmaceuticals gained approval to market the anti-HIV drug Sustiva(R)
(efavirenz) in Canada and Europe, significantly expanding the potential for this
medicine. Sales of the high blood pressure treatments Cozaar(R) and Hyzaar(R)
(losartan potassium tablets), owned and manufactured by Pharmaceuticals and
marketed by Merck & Co. Inc., also benefited earnings.
Strong doctor and patient support was maintained for the anticoagulant
Coumadin(R) (warfarin sodium tablets, USP) crystalline. A new drug application
was filed with the U.S. FDA for a novel, low molecular-weight heparin
(tinzaparin sodium) injection, which Pharmaceuticals plans to market under the
name innohep(R). The proposed indications are for potential treatment of deep
vein thrombosis (DVT), with or without pulmonary embolism, when used in
conjunction with warfarin, and the prevention of DVT in patients undergoing hip
or knee replacement surgery.
Pharmaceuticals supplemented its research and development activity in 1999 by
acquiring CombiChem Inc. to help drive the discovery and development of new
medicines through computational chemistry. In addition the worldwide
intellectual property rights were obtained for the ultrasound contrast agent
Definity(TM) and its back-up compounds from ImaRx Pharmaceutical Corporation. If
approved for marketing, Definity(TM) could become the first ultrasound contrast
agent for heart, liver and kidney imaging in the United States.
Pharmaceuticals faced increased generic competition in 1999 with the
introduction of new versions of warfarin sodium tablets and a generic competitor
for certain strengths of DuPont's anti-Parkinson's drug, Sinemet(R) CR.
(Sinemet(R) CR is a registered trademark of Merck & Co. Inc.) DuPont
Pharmaceuticals continues to meet competition by focusing on adding value to
doctors and patients who rely on these medicines.
1999 versus 1998 Sales of $1.6 billion were up 41 percent, reflecting 8 percent
higher sales volume, and a 33 percent increase in segment sales attributable to
the mid-1998 acquisition of Merck's 50 percent interest in The DuPont Merck
Pharmaceutical Company, resulting in 100 percent ownership by DuPont. ATOI was
$230 million compared with a loss of $668 million. ATOI before nonrecurring
items was $263 million versus
DUPONT
20 MANAGEMENT'S DISCUSSION AND ANALYSIS
$185 million, up $78 million or 42 percent, principally attributable to earnings
improvements from Sustiva(TM) and Cozaar(R), as well as the full-year benefit of
100 percent ownership.
1998 versus 1997 Sales were $1.2 billion compared with $0.8 billion in 1997. The
increase reflects the mid-year purchase of Merck's 50 percent interest in DuPont
Merck. ATOI was a loss of $668 million compared with income of $234 million in
1997. ATOI before nonrecurring items was $185 million, up 14 percent reflecting
increased sales of Coumadin(R), and the successful launch of Sustiva(TM).
Outlook Pharmaceuticals' product pipeline includes new anti-HIV compounds in
pre-clinical and Phase I development, as well as two in Phase II development.
Other compounds in Phase II development include:
. Lumaxis(TM) (roxifiban), an oral IIb/IIIa platelet receptor antagonist to
be used in the inhibition of platelet activity in cardiovascular patients;
and
. An elastase inhibitor to be used in the treatment of cystic fibrosis and
rheumatoid arthritis
Pharmaceuticals' low molecular-weight heparin (tinzaparin sodium) and ultrasound
contrast agent Definity(TM) are awaiting approval from the U.S. FDA. If
successful, all current Phase II and III projects are expected to be completed
in the period 2001 to 2005. The company also should benefit from increased
earnings expected from the Cozaar(R) profit-sharing equalization with Merck and
continued growth in Sustiva(TM).
- --------------------------------------------------------------------------------
PIGMENTS & CHEMICALS
- --------------------------------------------------------------------------------
White Pigment & Mineral Products
Chemical Solutions Enterprise
Fluorochemicals
[GRAPH]
ATOI BEFORE
NONRECURRING
SALES ($ in Billions) ATOI ($ in Millions) ITEMS ($ in Millions)
--------------------- -------------------- ---------------------
1999 3.7 626 625
--------------------- -------------------- ---------------------
1998 3.7 577 581
--------------------- -------------------- ---------------------
1997 3.8 513 513
--------------------- -------------------- ---------------------
See Industry Segment Information (Note 28 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 plants at DeLisle, Mississippi; New
Johnsonville, Tennessee; Edgemoor, Delaware; Altamira, Mexico; and Kuan Yin,
Taiwan, all of which utilize the chloride manufacturing process. DuPont
Ti-Pure(R) titanium dioxide is available to customers in slurry and powder form
in a variety of grades.
The Chemical Solutions Enterprise (CSE), formerly known as Specialty Chemicals,
develops, produces and markets a diverse range of industrial and performance
chemicals, selected services and technologies. Primary markets served are
plastics, textiles, household and industrial cleaners, mining, petroleum
refining and water treatment. Industrial chemicals produced are aniline,
hydrogen cyanide, dimethylacetamide, o,m,p-phenylene diamines, sodium, lithium
and sulfur products. Performance chemicals include Teflon(R) fabric protector,
Krytox(R) lubricants, Tyzor(R) organic titanates, Vazo(R) free radical sources,
Oxone(R) oxidizing agent and Fasloc(R) anchorage systems.
CSE enhanced its portfolio in 1999 with product introductions and capacity
expansions. A promising new polymer -poly(trimethyleneterephthalate) (3GT) - and
a key raw material for its production - 1,3-propanediol (3G) - were produced to
support new market developments. A repellent finish for cotton fabric was
commercialized with Ciba Specialty Chemicals, CSE's partner in textile repellent
finishes. Particlear(R), a silica microgel system, was introduced for
flocculating particles and clarifying industrial wastewater effluents. Capacity
expansions were completed for Oxone(R) and intermediates for Teflon(R) fabric
protectant and Stainmaster(R) carpets. CSE sold the Mypolex(R) industrial
diamonds and organosilane product lines, which were not integral to growth.
DuPont is a leading global manufacturer of industrial and specialty
fluorochemicals, including Suva(R) refrigerants, Formacel(R) foam expansion
agents, Dymel(R) propellants, Vertrel(R) solvents, Zyron(R) electronic gases,
and fire extinguishants. In 1999 capacity was increased significantly for
Suva(R) HFC-134a at the Corpus Christi, Texas, plant to meet high and increasing
demand. The business also completed the shutdown of its fluorochemical
manufacturing and related fluorspar mine in Brazil. The facility was DuPont's
last to manufacture CFCs for sale.
1999 versus 1998 Sales of $3.7 billion reflect flat prices and sales volume.
Higher sales of titanium dioxide were offset by lower sales of specialty
chemicals. ATOI was $626 million compared with $577 million. ATOI before
nonrecurring items was $625 million versus $581 million, up $44 million or 8
percent, reflecting increased earnings from White Pigment and Fluorochemicals,
partly offset by lower CSE earnings.
1998 versus 1997 Sales of $3.7 billion were down 4 percent reflecting 7 percent
lower sales volume partly offset by 3 percent higher selling prices. Higher
sales of titanium dioxide were more than offset by lower sales of specialty
chemicals. ATOI was $577 million compared with $513 million in 1997. ATOI before
DuPont
MANAGEMENT'S DISCUSSION AND ANALYSIS 21
nonrecurring items was $581 million, up 13 percent as higher earnings from
titanium dioxide more than offset lower specialty chemicals earnings. The latter
reflects lower revenue due to pricing weakness in the industrial commodity
chemicals markets.
Outlook White Pigment & Mineral Products expects the strong demand of 1999 to
continue into 2000. The business is focused on enhancing customer offerings and
renewing chloride technology. The recovery of Asian markets and strength in
other regions are expected to improve CSE industrial chemicals results in 2000.
New business and organizational models, plus a focus beyond traditional markets,
are expected to promote growth. CSE remains alert for mergers and acquisition
opportunities to continue profitable portfolio enhancement.
Continued strength in fluorochemicals markets is expected as global demand for
CFC alternatives continues to grow. HFCs, which have replaced CFCs in many
applications and which also can replace HCFCs as needed longer term, are
expected to be the product of choice because of their cost, safety, efficacy,
energy efficiency and total environmental benefit.
- --------------------------------------------------------------------------------
P I O N E E R
- --------------------------------------------------------------------------------
[GRAPH]
ATOI BEFORE
NONRECURRING
SALES ($ in Billions) ATOI ($ in Millions) ITEMS ($ in Millions)
--------------------- -------------------- ---------------------
1999 0.4 (2,309) (96)
--------------------- -------------------- ---------------------
1998 0.4 8 8
--------------------- -------------------- ---------------------
1997 0.0 (919) 16
--------------------- -------------------- ---------------------
See Industry Segment Information (Note 28 to Financial Statements).
In September 1997 DuPont purchased a 20 percent interest in Pioneer Hi-Bred
International, Inc. and on October 1, 1999, acquired the remaining 80 percent
interest. Pioneer's principal products are hybrid seed corn, soybean seed and
other plant lines for sale to customers who grow the product for sale or use.
Hybrid corn and soybean products accounted for about 90 percent of worldwide
sales and operating income over the last five years. More than 80 percent of the
world's corn is fed to livestock. The business is focused substantially on
developing superior corn hybrids for grain and silage to address the needs of
the livestock market, although products for human and industrial use also are a
significant focus of this business. These products are expected to maintain a
dominant role in Pioneer's results of operations for the foreseeable future.
Many farmers around the world currently are experiencing severe cash flow
problems because of low commodity prices. This trend is expected to continue
through 2000. Emergency government programs in the United States have helped
ease some of the cash flow problems for farmers, but most are adopting a
conservative attitude toward spending. To help alleviate current farm cash flow
pressures, Pioneer's offering includes a receivables program to provide harvest
terms to farmers. The level of competition in the seed business continues to be
intense because of consolidation throughout the industry and reduced acreage for
corn, the key driver of seed company revenues. North America corn acreage in
1999 declined because farmers planted more acres of soybeans and other crops.
U.S. corn acreage in 2000 is expected to be comparable to 1999.
The controversy over biotechnology crops has the potential to negatively affect
sales of some of Pioneer's leading products, such as corn with resistance to
European corn borer and herbicide resistant soybeans. While U.S. growers have
enthusiastically adopted this technology, they remain concerned that their
marketing opportunities could be limited by the possibility that Europe and
other areas of the world may not accept biotechnology crops.
1999 versus 1998 Sales were $422 million compared with $365 million, reflecting
the fourth quarter 1999 acquisition of the 80 percent of Pioneer not already
owned. ATOI was a loss of $2.3 billion principally due to the write-off of
acquired in-process research and development. ATOI before nonrecurring items was
a loss of $96 million versus income of $8 million in 1998, reflecting seasonal
operating losses in the fourth quarter on a full ownership basis and
amortization of acquired intangibles. 1998 results included only the company's
20 percent ownership interest in Pioneer.
1998 versus 1997 Sales were $365 million compared with $12 million, reflecting
the September 1997 acquisition of a 20 percent interest in Pioneer. ATOI was $8
million versus a loss of $919 million, the latter principally due to the 1997
write-off of acquired in-process research and development. ATOI before
nonrecurring items was $8 million versus the seasonal operating loss of $16
million in 1997.
Outlook The goal of Pioneer research and development is to help customers
produce higher yielding, more diverse crops with desirable agronomic
characteristics that produce higher customer income. To raise crop yields, work
continues to improve Pioneer's germplasm base. This work employs an inventory of
varied plant inbreds and breeding populations and the technology to combine
these products to continually create new product lines. Pioneer researchers also
are working to protect those yields by developing
DuPont
22 MANAGEMENT'S DISCUSSION AND ANALYSIS
new technologies that can protect plants from yield-robbing diseases and insect
pests, such as the European corn borer, while reducing the need for chemical
pesticides.
To make customer crops more valuable, researchers are developing grains and
oilseeds that have the potential to command a premium price. Some of the most
promising are corn hybrids with improved energy and starch components that
create value for livestock feeders and grain processors, along with oilseeds
that produce healthier oils for consumers. Also showing promise are crops that
can help the environment by reducing the amount of nitrogen and phosphorus in
livestock waste.
The Pioneer investment in research and development will sustain the trend of
releasing a significant number of new products, including an estimated 35 new
corn hybrids for North America in 2000. It is anticipated that 30 percent of
Pioneer(R) brand corn hybrid and soybean variety sales will be from products
released in 1999 and 2000.
In accordance with purchase accounting rules, Pioneer's inventories acquired on
October 1, 1999, were recorded at fair value. The increase in inventory values
above Pioneer's pre-acquisition historical cost will, under the FIFO method, be
recorded in cost of goods sold for the first inventory turn. The estimated
impact of this nonrecurring charge on ATOI in 2000 is about $360 million.
- --------------------------------------------------------------------------------
POLYESTER ENTERPRISE
- --------------------------------------------------------------------------------
Dacron(R) Fibers
Films
Resins & Intermediates
[GRAPH]
ATOI BEFORE
NONRECURRING
SALES ($ in Billions) ATOI ($ in Millions) ITEMS ($ in Millions)
--------------------- -------------------- ---------------------
1999 2.6 (119) (39)
--------------------- -------------------- ---------------------
1998 2.8 (228) (7)
--------------------- -------------------- ---------------------
1997 2.2 124 187
--------------------- -------------------- ---------------------
See Industry Segment Information (Note 28 to Financial Statements).
The businesses of DuPont's Polyester Enterprise continue their transition to a
new business model based on a network of global and regional joint ventures and
a core of technology development and licensing, branding and other
knowledge-intensive capabilities that remain within DuPont.
Three major joint ventures were formed: an Americas joint venture in staple
fiber; a global joint venture in films; and a Greater Europe joint venture for
fiber, resins and intermediates. Major restructuring within the businesses prior
to these venture formations resulted in reduced fixed costs and manufacturing
capacity.
Dacron(R) Fibers includes polyester fiberfill, specialty staple and filament
fibers for such diverse global markets as apparel, home furnishings, sleepwear,
outdoor products and transportation. Leading Dacron(R) polyester brands include
CoolMax(R) performance fabrics, Comforel(R) sleep products, Thermolite(R)
insulation fibers, Supriva(TM) fabric and Micromattique(TM) microfibers. An
improved performance fabric, CoolMax(R) Alta, was successfully introduced in
1999.
The Dacron(R) Fibers business reflected a sales and earnings decline similar to
the global textile industry which began as a result of excess supply and
challenging economic conditions in Asia Pacific in 1998. Rapidly escalating
prices in key ingredients added to the sales and earnings decline. U.S. retail
demand remained strong, creating a positive impact on branded products as the
market continued to express high interest in product freshness. However, imports
of garments, fabrics and fiber had a significant negative impact on the core
commodity business. Throughout 1999 Dacron(R) Fibers continued to focus on new
product development and productivity enhancements, the restructuring of all
business segments, and the curtailment of older, high cost production lines. The
50/50 DuPont-Akra polyester joint venture to produce and market polyester staple
fiber began operation in April 1999.
DuPont Teijin Films was formed on December 31, 1999. This 50/50 joint venture
between DuPont and Teijin Limited is the world's leading supplier of PET and PEN
polyester films, specializing in films and related products for the specialty,
industrial, packaging, electrical, electronics, advanced magnetic media and
photo systems markets. With anticipated sales in excess of $1 billion and a
production capacity of 300,000 metric tons, the company offers a portfolio of
specialty and differentiated products in every major region of the world. Brand
names include DuPont Teijin Films Mylar(R) and Melinex(R) polyester films,
Teijin(R) Tetoron(R) PET polyester film, Teonex(R) and Kaladex(R) PEN films and
Cronar(R) polyester photographic base film.
The global polyester films industry began showing signs of recovery at year-end
after one of the longest down cycles in its history. During the same period,
total market growth slowed as digital technology accelerated, causing decreased
demand in former high-volume end-uses in video and traditional imaging
applications. New uses in food packaging and specialty markets - such as smart
cards and electronic displays - are growing and helping the industry to rebound.
Throughout 1999 Films continued
DuPont
MANAGEMENT'S DISCUSSION AND ANALYSIS 23
an aggressive productivity enhancement program, optimizing newer, faster
manufacturing lines and shutting down older lines.
Resins & Intermediates includes the Melinar(R) family of polyester container
resins, Crystar(R) specialty resins, Biomax(R) hydrobiodegradable resin,
intermediates including PTA (purified terepthate acid), DMT (dimethyl
terepthalide), and ethylene glycol. The business introduced Edge Packaging
Technologies, a family of technologies designed to help brand marketers in
brewing and other beverage industries use innovative packaging to create market
growth and brand recognition.
In January 2000 DuPont and Fluor Daniel, a subsidiary of Fluor Corporation,
formed an alliance to license, design and construct the world's first industrial
plants for the production of polyester packaging resins based on DuPont's new
"next generation" technology known as NG-3. Using the NG-3 technology, these new
plants will meet growing world resin demand more efficiently by producing a
higher-quality polyester container resin at significantly lower investment than
is possible with current technology. These resins will be used in the
manufacture of plastic containers for thousands of commercial products,
including soft drinks, cosmetics, medicines and food. DuPont and Fluor will
focus initially on licensing the new technology to markets in Asia where demand
for packaging resin is increasing at the fastest rate.
A 50/50 joint venture with Haci Omer Sabanci Holding A.S. started operations
January 1, 2000, in Greater Europe for polyester fiber, resins and
intermediates. The new company, named DuPont Sabanci Polyester Europe (DuPont
SA), develops, manufactures and sells polyester filament, staple, resins,
intermediates and related products for markets throughout the European region,
the Middle East and Africa. It is the largest polyester company in the region,
with 4,500 employees and anticipated revenues of $1 billion. The joint venture
includes DuPont's PTA and resins businesses at Wilton, United Kingdom, and
Dacron(R) filament and staple businesses at Pontypool, United Kingdom, and
Uentrop, Germany. Also included is Sabanci's polyester subsidiary, SASA, with
its businesses in polyester filament, staple, resins, bottles and DMT based in
Adana and other sites in Turkey, and the Sabanci polyester filament texturizing
plants in Garforth, United Kingdom. The new company has full access to DuPont
polyester technology development and brand management resources.
1999 versus 1998 Sales of $2.6 billion were 5 percent lower, reflecting 8
percent lower prices partly offset by 3 percent higher sales volume. ATOI was a
loss of $119 million compared with a 1998 loss of $228 million. ATOI before
nonrecurring items was a loss of $39 million versus a loss of $7 million,
reflecting earnings declines in all business units. The losses were primarily
incurred in the first nine months of the year as both Dacron(R) Fibers and
Resins & Intermediates posted earnings improvements in the fourth quarter 1999.
1998 versus 1997 Sales of $2.8 billion were up 26 percent reflecting additional
sales from the acquisition of ICI's polyester films, resins and intermediates
businesses. Partly offsetting this increase were a 14 percent sales volume
decline and a 9 percent price decline for Dacron(R) Fibers reflecting weak
demand, increased competition from imports, and price pressures from worldwide
overcapacity. ATOI was a loss of $228 million compared with income of $124
million in 1997. ATOI before nonrecurring items was a loss of $7 million
compared with income of $187 million in 1997, reflecting lower Dacron(R) Fibers
earnings and losses in Films and Resins & Intermediates.
Outlook The businesses anticipate some market pick-up in 2000 for specific areas
of polyester, notably resins and PTA. Generally, the global polyester market
will remain a growth industry, but with a low-price, high-volume environment,
exacerbated by oversupply and rapid rise in raw material costs. Capacity will be
added on a "just-in-time" basis to meet rising market demand, and the focus will
be on delivering value-added offerings that differentiate the businesses in the
market. Continued strong growth in the performance fabrics market is
anticipated. Thermolite(R) Base insulating fabrics will be introduced in 2000.
- --------------------------------------------------------------------------------
SPECIALTY FIBERS
- --------------------------------------------------------------------------------
DuPont Lycra(R)
Nonwovens
Advanced Fiber Systems
[GRAPH]
ATOI BEFORE
NONRECURRING
SALES ($ in Billions) ATOI ($ in Millions) ITEMS ($ in Millions)
--------------------- --------------------- ---------------------
1999 3.4 732 731
--------------------- --------------------- ---------------------
1998 3.3 659 662
--------------------- --------------------- ---------------------
1997 3.3 708 708
--------------------- --------------------- ---------------------
See Industry Segment information (Note 28 to Financial Statements).
DuPont Lycra(R) continues to lead the development of stretch in apparel through
reinvention and renewal in the category, particularly in the ready-to-wear
segment. Lycra(R) elastane, the only consumer brand in this category, is fueling
brand building through worldwide advertising intended to educate consumers on
the difference Lycra(R) brings to garments.
Recent advances in soft polymer technology have produced a new family of fibers
- - marketed as Lycra(R) Soft - combining a
DuPont
24 MANAGEMENT'S DISCUSSION AND ANALYSIS
more consistent level of control with enhanced comfort and freedom of movement.
Lycra(R) Soft was introduced in finer deniers for hosiery, activewear and
intimate apparel. Patents also were issued for technology for sweaterknits and
for leather with Lycra(R) in footwear and other applications.
Major new capacity was brought on-stream in China, Argentina, Japan, Northern
Ireland and Singapore, the latter two being expansions utilizing new generation
technology that produced record productivities and yields. Further, DuPont is
now positioned to compete in the generic stretch markets.
Nonwoven products include Tyvek(R) brand products, Typar(R) spunbonded
polypropylene and Sontara(R) spunlaced products. In 1999 the Tyvek(R) business
formed an alliance with Mar Mac Manufacturing Inc., uniting Mar Mac's
technological and creative garment design expertise with DuPont research,
marketing and service capabilities. Tyvek(R) StuccoWrap(TM) continued to gain
acceptance among synthetic stucco manufacturers and contractors. New offerings
of Sontara(R) industrial absorbent products were launched for the automotive
refinishing, food service and aircraft assembly industries.
Advanced fibers are Kevlar(R) brand fiber, Nomex(R) brand fiber and paper, and
Teflon(R) brand fluoropolymer fiber. Advanced Fiber Systems is growing in
already strong market categories and expanding into new end uses. The adoption
of Thermount(R) brand paper in cellular phone circuit board manufacture opened
the door to growing opportunities in the electronics industry. Adoption by the
U.S. military of vests containing advanced Kevlar(R) technology for re-
outfitting the Marine Corps reflected the continuing leadership of Kevlar(R) in
life protection. Aracon(R) metal clad Kevlar(R) was introduced, targeting
shielding and conductive applications in the aerospace, automotive and consumer
industries. Nomex(R) continued to expand its global presence in protective
apparel applications requiring essential thermal solutions.
1999 versus 1998 Sales of $3.4 billion were up 5 percent, reflecting 9 percent
higher sales volume partly offset by 4 percent lower prices. ATOI was $732
million compared with $659 million. ATOI before nonrecurring items was $731
million versus $662 million, up $69 million or 10 percent. All business units
contributed to the revenue and earnings increases.
1998 versus 1997 Sales of $3.3 billion were 1 percent lower reflecting 2 percent
lower selling prices partly offset by 1 percent higher sales volumes. ATOI was
$659 million compared with $708 million in 1997. ATOI before nonrecurring items
was $662 million, down 6 percent reflecting lower revenue and slightly higher
costs.
Outlook DuPont Lycra(R) expects growth in new geographies (Asia and Eastern
Europe), new demographics (teens and men), and new uses (sweaters, shoes, jeans
and khakis). Nonwovens will increase production capacity for Tyvek(R) in
Richmond, Virginia, and for Sontara(R) in Asturias, Spain, to meet growing
market demand. Growth also is expected in Advanced Fiber Systems as new products
continue to gain momentum in the electronics, construction, personal protection
and consumer segments.
- --------------------------------------------------------------------------------
SPECIALTY POLYMERS
- --------------------------------------------------------------------------------
DuPont iTechnologies
Packaging & Industrial Polymers
Fluoropolymers
DuPont Corian(R)
[GRAPH]
ATOI BEFORE
NONRECURRING
SALES ($ in Billions) ATOI ($ in Millions) ITEMS ($ in Millions)
--------------------- --------------------- ---------------------
1999 4.3 668 666
--------------------- --------------------- ---------------------
1998 4.0 598 608
--------------------- --------------------- ---------------------
1997 4.0 575 575
--------------------- --------------------- ---------------------
See Industry Segment information (Note 28 to Financial Statements).
With the adoption of the name DuPont iTechnologies (formerly Photopolymer &
Electronic Materials), the business stated its intention to become a major
player in the global information market. For the printed, flexible and
microcircuit segments of the electronics industry, DuPont iTechnologies markets
Kapton(R) polyimide film, Riston(R) dry film photoresists, Birox(R) thick films,
Pyralux(R) flexible laminates and Fodel(R) photoimageable thick film paste. New
endeavors are underway for displays and batteries in an extensive array of
consumer electronics. For the printing industry, the business markets Cyrel(R)
flexographic printing plates and color proofing systems including WaterProof(R),
Cromalin(R) and Dylux(R).
DuPont iTechnologies acquired Krystal Holographics International Inc. to produce
a new class of optical components that will significantly enhance the
performance of electronic displays and security devices. The acquisition makes
DuPont a world leader in holographic optical components and holograms for
electronics, security and authentication applications. In addition, to validate
new technology and manufacturing processes for lithium, polymer-based,
rechargeable batteries, plans were put in place for a pilot line at Towanda,
Pennsylvania.
A 51 percent controlling interest was acquired in the Wirex Corporation, a
Taiwan-based polyimide film and flexible laminate manufacturer. This acquisition
enables further participation in the
DuPont
MANAGEMENT'S DISCUSSION AND ANALYSIS 25
adhesive-less flexible laminate materials market for high density circuitry
applications in the next generation of electronic devices such as cellular
phones, notebook PCs, Personal Digital Assistants (PDAs) and camcorders. An
alliance also was signed with the Bekaert Group of Kortrijik, Belgium, to
develop and produce thin metal laminate for flexible circuit applications.
Capacity was expanded in Bayport, Texas, for Kapton(R) polyimide film.
The Riston(R) Laser Series product line was successfully launched in 1999. These
new photoresists provide digital imaging capability with a laser writer for
imaging circuit boards, eliminating the traditional phototool process. New
specialty thick film materials have been developed for Cygnus Inc. for use in
its GlucoWatch(R) biographer, a noninvasive biosensor glucose monitor for use by
diabetics; FDA approval is expected soon.
For the printing industry, DuPont iTechnologies introduced Cyrel(R) FAST
technology, a thermally processible flexographic plate system that moves
packages from concept to market much faster while reducing the environmental
impact of the production system. Also launched in 1999 was the DuPont Color
Station(TM), the first proofing system that meets the color accuracy needs of
both the designers and printers of commercial and package printing.
Packaging & Industrial Polymers (P&IP) offers specialized, high-value polymers
in packaging and selected industrial markets. P&IP consists of Ethylene
Copolymers, Glass Laminating Products, Vinyls and Clysar(R) polyolefin shrink
film.
The business successfully launched Surlyn(R) Reflection Series(TM) molding
alloys which provide impact toughness, high gloss and excellent colorability for
automotive exteriors and related markets. The new molding resin matches body
colors and gloss levels without the need of paint, cutting environmental
emissions and other paint-related costs. P&IP also introduced SentryGlas(R) Plus
with next-generation laminating interlayer technology. SentryGlas(R) Plus
retains its structural integrity even after the glass is cracked, which is
critical in making building windows hurricane resistant and automotive side
windows secure.
DuPont markets high performance fluoropolymers to the telecommunications,
aerospace, automotive, electronics, chemical processing and housewares markets.
The largest global manufacturer of fluoropolymers, DuPont's offering includes
Teflon(R) and Tefzel(R) fluoropolymer resins, Tedlar(R) fluoropolymer films and
SilverStone(R), Autograph(R) and ScratchGuard(R) non-stick finishes. In 1999 the
business announced plans to evaluate new technology to manufacture Teflon(R)
resins at a development facility at its Fayetteville, North Carolina, plant. The
new technology is more flexible and has less environmental impact than current
processes. A new plant in Shenzhen, China, to manufacture Teflon(R) non-stick
finishes had a successful startup in 1999. Fluoropolymers also completed a
significant capacity improvement at its plant in Dordrecht, Netherlands, as part
of an ongoing effort to expand global fluoropolymer capacity. The business
continued to capitalize on the strength of the Teflon(R) brand, expanding its
licensing efforts across markets, with particular focus on data communications
cabling products.
DuPont Corian(R) introduced a new product to the premium decorative surfacing
market, Zodiaq(TM) quartz surfacing. To fill out the color palette and keep pace
with global color trends, 12 new colors of Corian(R) solid surface were
introduced, bringing the total to 81. DuPont Corian(R) continued to pursue
growth by increasing perceived brand value, reducing the installed cost to the
consumer, broadening distribution channels, and expanding its segment and
applications base.
1999 versus 1998 Sales of $4.3 billion were up 5 percent, reflecting 9 percent
higher sales volume, partly offset by 4 percent lower prices. ATOI was $668
million compared with $598 million. ATOI before nonrecurring items was $666
million versus $608 million, up $58 million or 10 percent. The earnings
improvement was driven principally by higher earnings from DuPont Corian(R) and
DuPont iTechnologies.
1998 versus 1997 Sales of $4.0 billion were flat as lower sales of Packaging &
Industrial Polymers were offset by higher sales in other businesses. ATOI was
$598 million compared with $575 million in 1997. ATOI before nonrecurring items
was $608 million, up 6 percent reflecting lower costs. Earnings growth in
Fluoropolymers and DuPont Corian(R) was partly offset by marginally lower
earnings in the other businesses.
Outlook Smaller and more powerful cell phones, pagers and laptop computers
require the advanced technology of DuPont iTechnologies' flexible, printed
circuit and microcircuit materials. The presence of P&IP is growing in emerging
economies, based on a strong technology base. Additional growth is expected from
a joint venture under development with Borealis, one of Europe's largest
producers of polyolefin plastics. Long term, growth is expected from new
technology advances such as 3GT polyester resins and the polyolefin catalyst.
Sales of Teflon(R) fluoropolymers are expected to strengthen, benefiting from a
recovering semiconductor industry and a resumption of growth in the data
communications market for local area networks following a 1999 slowdown related
to the Year 2000 changeover.
DuPont
26 MANAGEMENT'S DISCUSSION AND ANALYSIS
OTHER
This segment represents less than 2 percent of the total 1999 segment sales and
consists of the company's photomasks, safety resources, and global services
businesses, and divested businesses including certain printing and publishing
products and coal. Segment sales were $480 million in 1999 versus $542 million
in 1998. ATOI before nonrecurring items was $35 million versus $105 million in
1998, with the decline principally reflecting the absence of coal earnings.
Financial Condition
In 1999 DuPont completed three major initiatives in line with its strategic
direction. In February the acquisition of Herberts was finalized for $1.7
billion in cash paid and debt assumed. Herberts was the automotive coatings
business of Hoechst AG, and its acquisition makes DuPont Performance Coatings
the world's largest automotive coatings business. In August the company
completed its divestiture of the Conoco energy business. In a tax free split
off, DuPont shareholders tendered 147,980,872 shares of DuPont common stock in
exchange for Conoco Class B shares. This transaction culminated a strategic
shift, announced in 1998, to exit the energy business, with realization of $21
billion in value for DuPont shareholders. In October the company continued its
strategic portfolio realignment with the acquisition of the remaining 80 percent
interest in Pioneer Hi-Bred International. This transaction, valued at $7.7
billion, brings to DuPont the largest seed company in the world.
As prescribed in the Restructuring, Transfer and Separation Agreement, Conoco
was obligated to repay all outstanding debt owed to DuPont at such time as
DuPont's voting power became less than 50 percent of Conoco. At December 31,
1998, such indebtedness to DuPont was $4.6 billion, all of which was repaid by
the end of May 1999. Cash provided by operations and the debt repayments from
Conoco were largely offset by the $6.8 billion spent on investment activities
and by payment of dividends and stock repurchased. Borrowings, net of cash and
marketable securities, were $10.0 billion and $10.1 billion at year-end 1999 and
1998, respectively.
In March 1999 Standard & Poor's affirmed its rating of the company's senior,
unsecured long-term debt at AA-. In January 2000, Moody's Investors Service
(Moody's) affirmed the company's rating at Aa3. The company's commercial paper
rating remains at Prime 1 by Moody's and A-1+ by S&P.
In 1998 cash provided by operations and the $4.2 billion net proceeds from the
Conoco IPO in October were largely offset by funds spent on capital investments,
payment of dividends, and stock repurchased. As a result, borrowings, net of
cash and marketable securities, at year-end 1998 of $10.1 billion were $0.8
billion lower than the $10.9 billion at year-end 1997.
CASH PROVIDED BY CONTINUING OPERATIONS
Cash provided by continuing operations totaled $4.8 billion in 1999, $0.7
billion more than the $4.1 billion in 1998. The increase reflects $0.5 billion
due to changes in net operating assets and liabilities in 1999 as compared with
1998. Excluding acquisitions, accounts and notes receivable were flat in 1999 as
compared to an increase in 1998 and the increase in inventory in 1999 was
comparable to prior year. The benefit from higher operating liabilities in 1999
was comparable to the benefit from lower other operating assets in 1998. Net
income after adjustment for discontinued operations and noncash charges and
credits increased $0.2 billion over prior year. In both 1999 and 1998, about
$0.3 billion was transferred from the company's pension trust in the United
States to pay the company's portion of certain retiree health care costs as
permitted under federal law; these receipts are reflected as a reduction in
other operating assets.
In 1998 cash provided by continuing operations totaled $4.1 billion, $0.1
billion more than the $4.0 billion in 1997. The increase was primarily due to
smaller increases in trade receivables and other operating assets offset by $0.5
billion lower net income before nonrecurring items and after adjusting for
noncash charges and credits. The 1998 extraordinary charge from early retirement
of debt of $0.3 billion eliminates noncash charges included in net income
related to long-term debt retirement.
WORKING CAPITAL INVESTMENT
At the end of 1999 the investment in working capital (excluding cash and cash
equivalents, marketable securities, and short-term borrowings and capital lease
obligations) was $4.8 billion, an increase of $1.6 billion from the $3.2 billion
at year-end 1998. The increase was principally due to the Herberts and Pioneer
acquisitions partially offset by formation of the DuPont Teijin polyester
venture and net reductions in other businesses.
Current assets, including cash and cash equivalents and marketable securities,
increased $3.4 billion with inventories up $1.9 billion, accounts and notes
receivable up $1.1 billion, and cash and cash equivalents up $0.4 billion.
Current liabilities, excluding short-term
DuPont
MANAGEMENT'S DISCUSSION AND ANALYSIS 27
borrowings and capital lease obligations, increased $1.3 billion with $1.1
billion higher accounts and income tax payables, and $0.2 billion higher other
accrued liabilities.
In 1998 working capital investment increased $0.3 billion from $2.9 billion to
$3.2 billion. The increase was principally due to higher inventories.
The ratio of current assets to liabilities at year-end 1999 was 1.1:1 as
compared to 0.8:1 in 1998.
INVESTMENT ACTIVITIES
Purchases of property, plant and equipment, investments in affiliates, and
payments for businesses were $7.2 billion, an increase of $1.6 billion from
1998. 1999 payments for businesses (net of cash acquired) of $5.1 billion
includes $3.5 billion for the acquisition of the remaining 80 percent interest
in Pioneer and $1.6 billion for the acquisition of Herberts. The Pioneer
acquisition also included the issuance of $4.2 billion in DuPont common stock.
The Herberts acquisition also included the assumption of $0.1 billion in
Herberts debt. 1998 payments for businesses (net of cash acquired) includes $2.5
billion (net of $0.1 billion cash acquired) for the acquisition of Merck's 50
percent interest in The DuPont Merck Pharmaceutical Company, and $0.7 billion
for the acquisition of ICI's polyester films business.
Spending for purchases of property, plant and equipment, and investments in
affiliates in 1999 totaled $2.1 billion, down $0.2 billion from the $2.3 billion
spent in 1998. 1999 expenditures were made to expand capacity and build market
positions. Projects included the phased-in start-up of a new Crop Protection
product at the Mobile, Alabama, plant and the start-up of a new Hytrel(R)
manufacturing facility at the Charleston, South Carolina, site. Major expansions
and renovations were completed in support of ethylene manufacturing and
intermediates for Specialty Polymers. Expenditures were also made for integrated
enterprise software and to complete the DuPont Lycra(R) capacity expansion
projects and build market positions in Europe and Asia. The program to
modernize, consolidate and renew the cost competitiveness of DuPont Nylon
continued in 1999 with additional expenditures made in the United States and
Europe to complete upgrades in both nylon intermediates and nylon manufacturing
facilities.
In 2000 nonacquisition spending is expected to be about $2.4 billion. The $0.3
billion increase from 1999 reflects, in part, the impact of new and increased
activity in Pharmaceuticals and Pioneer. Major expansions are planned to provide
additional capacity for Protein Technologies International in the Agriculture &
Nutrition segment. Performance Coatings & Polymers will be expanding Zytel(R)
capacity in Canada. There will continue to be significant expenditures in
support of the development and implementation of integrated enterprise software.
Six Sigma initiatives will continue to be implemented to help increase capacity
from existing facilities without expending unnecessary capital resources. The
DuPont Nylon competitiveness initiatives of the past few years will continue,
but the level of capital outlays will decline in 2000. Expenditures will be made
to expand Lycra(R) capacity in South America, and also to continue capacity
additions in Asia.
Proceeds from sales of assets were $0.6 billion in 1999, principally reflecting
the cash proceeds from the formation of the DuPont Teijin Films joint venture.
Proceeds from sales of assets were $0.9 billion in 1998. These included $0.5
billion for substantially all of the remaining 50 percent interest in the CONSOL
Energy Inc. coal business, $0.3 billion for the sale of various global hydrogen
peroxide assets, and $0.1 billion related to disposition of the printing and
publishing business.
In October 1998 the initial public offering of 30.5 percent of Conoco generated
net proceeds of $4.2 billion.
FINANCING ACTIVITIES
Dividends per share of common stock were $1.40 in 1999, $1.365 in 1998 and $1.23
in 1997. The quarterly dividend was increased from $.315 to $.35 in the second
quarter of 1998 and from $.285 to $.315 in the second quarter of 1997.
1999 acquisition of treasury stock of $690 million includes $646 million in
August to buy back 8 million shares of DuPont common stock related to the Conoco
split off. In accordance with the company's policy to offset dilution resulting
from the issuance of DuPont stock under compensation plans, the company also
spent $44 million in 1999 to purchase and retire 840,000 shares of DuPont common
stock. In 1998 the company spent $769 million to purchase and retire 12.8
million shares of DuPont common stock. Not related to the share buyback program,
the company received $65 million as a final price adjustment on shares
repurchased in 1997 under the terms of a private placement agreement in
connection with the 1997 Protein Technologies International acquisition.
1999 net cash flows from discontinued operations were $4.5 billion principally
reflecting repayment of intercompany loans from Conoco to DuPont.
DuPont
28 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 Statement
of Financial Accounting Standards 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 for purchased
in-process research and development totaling $1,478 million in 1997 with respect
to three purchase business combinations completed that year. In 1998 the company
recorded charges totaling $1,443 million with respect to two purchase business
combinations completed that year ($1,280 million) and revisions ($163 million)
of prior year estimates for two purchase business combinations completed in
December 1997. In 1999 the company recorded charges totaling $2,250 million with
respect to two purchase business combinations completed that year.
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, results of operations or liquidity.
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.
DuPont
MANAGEMENT'S DISCUSSION AND ANALYSIS 29
Cash Flows to Complete represent the estimated future research and development
costs required to complete the project, assuming the project is successful.
Significant assumptions 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 is also 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 $7,691 million
consisting of:
. $3,422 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
. $34 million representing the company's estimated acquisition related costs and
expenses.
The preliminary 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 $2,104
Property, Plant and Equipment 602
Other Assets 2,326
In-Process Research and Development 2,186
Current Liabilities (954)
Long-Term Borrowings (163)
Other Liabilities (179)
Deferred Income Taxes (833)
Minority Interests (6)
- --------------------------------------------------------------------------------
Total Identifiable Assets Less Liabilities $5,083
================================================================================
The $2,608 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) improving 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
$2,186 million estimated fair value of purchased in-process research and
development, $1,024 million represents the estimated fair value of projects
related to new product development for traditional businesses and $1,162 million
represents the estimated fair value of projects related to trait and technology
development.
DuPont
30 MANAGEMENT'S DISCUSSION AND ANALYSIS
New product development for traditional businesses consists of Pioneer's seed
research done through classical plant breeding 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. This project is expected to be completed in 2002. The
probability of technical and commercial success for this project is 85 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. This project is expected to be
completed in 2004. The probability of technical and commercial success for this
project is 80 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
DuPont
MANAGEMENT'S DISCUSSION AND ANALYSIS 31
corn rootworm. This project is expected to be completed in 2002. The probability
of technical and commercial success for this project is 65 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, high
oleic high oil corn, and nuclear male sterility in corn. These projects are
expected to be completed in 2003, 2004 and 2005, respectively. The probability
of technical and commercial success for these projects is 65 percent, 80
percent, and 70 percent, respectively.
The company expects 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 impacted 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 $11
million. The preliminary 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 $ 705
Property, Plant and Equipment 522
Other Assets 215
In-Process Research and Development 64
Liabilities (including assumed debt of $113) (665)
- --------------------------------------------------------------------------------
Total Identifiable Assets Less Liabilities $ 841
================================================================================
The $758 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 Final
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 projects 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 2004.
Management estimates the Probability of Technical and
Commercial Success for New Manufacturing Processes projects ranges from 29
percent to 49 percent. These projects are expected to be completed by 2005.
The risk-adjusted cost to complete these 29 projects is estimated to total $24
million through 2006. As of December 31, 1999, one of the projects has achieved
technical feasibility; five have been terminated and the remaining projects are
still in process.
DUPONT PHARMACEUTICALS
On July 1, 1998, the company purchased the 50 percent general partnership
interest of Merck & Co. in The DuPont Merck Pharmaceutical Company for $2,586
million cash, the assumption of approximately $282 million of liabilities, and
acquisition related costs of $8 million. As part of the transaction, the company
agreed to indemnify Merck for certain future liabilities that may arise from
events that occurred during Merck's tenure as a general partner. The business,
renamed DuPont Pharmaceuticals, is engaged in the research, development,
manufacturing and sale of human pharmaceutical and radiopharmaceutical products
and is the
DuPont
32 MANAGEMENT'S DISCUSSION AND ANALYSIS
principal component of the company's Pharmaceuticals business segment. The
purchase price was allocated to the identifiable assets acquired, based on their
estimated fair values, as follows (dollars in millions):
- --------------------------------------------------------------------------------
Current Assets $ 275
Property, Plant and Equipment 307
Other Assets 1,034
In-Process Research and Development 1,230
- --------------------------------------------------------------------------------
Total Identifiable Assets $2,846
================================================================================
The $30 million excess of the cost of the acquisition ($2,876 million) over the
estimated fair value of the identifiable assets acquired has been recorded as
goodwill.
At the date of acquisition, the business had 32 research and development
projects meeting the criteria for purchased in-process research and development.
The pharmaceuticals industry categorizes research and development activities
into phases, which represent stages of completion in the research and
development process. Successful completion of a research and development project
is deemed to occur upon receipt of regulatory approval for sale of the drug in a
major market, which is normally approval by the FDA for sale in the United
States. The following summarizes the status of the research and development
efforts in process at the date of acquisition and the allocation of purchase
price to each group (dollars in millions):
- --------------------------------------------------------------------------------
Number of
Status Projects Fair Value
- --------------------------------------------------------------------------------
Pre-Clinical Trial 20 $170
Phase 1 2 $ 40
Phase 2 4 $240
Phase 3 3 $690
New Applications for Existing Products 3 $ 90
================================================================================
Projects in the Pre-Clinical Trial phase of the research and development process
represent compounds that have demonstrated biological activity directed at
disease targets in specific therapeutic areas. Research and development
activities conducted during this phase include optimizing the pharmacological
activity, early screening for toxicity, testing and other activities that must
be performed before a new drug can be administered to humans. If successful,
projects in this phase are expected to be completed in the period 2003 to 2007.
Phase 1 involves the first clinical trials in humans to test a potential new
drug for pharmacological activity, tolerance and safety. This stage of
development typically takes about one year to complete. The two Phase 1 projects
in process at the acquisition date involve the development of second generation
nonnucleoside reverse transcriptase inhibitors to be used in combination therapy
for HIV. If successful, these projects were expected to be completed in 2001
assuming the projects would qualify for accelerated regulatory review (see
below).
Phase 2 involves clinical trials designed to determine efficacy and dosing.
Efforts to optimize manufacturing of active pharmaceutical ingredient,
formulation and packaging are also underway during this phase. This stage of
development normally takes 18 months to complete. The four Phase 2 projects in
process at the acquisition date were:
. DMP754 Lumaxis(TM) (roxifiban), an oral IIb/IIIa platelet receptor
antagonist to be used in the inhibition of platelet activity in
cardiovascular patients;
. DMP777, an elastase inhibitor to be used in the treatment of cystic
fibrosis;
. DMP543, a neurotransmitter release enhancer with the potential for use in
the treatment of Alzheimer's disease; and
. DMP444, a radiopharmaceutical agent for use in thrombus imaging.
If successful, these projects were expected to be completed in the period 2001
to 2005.
Phase 3 typically involves large multicenter clinical trials intended to gather
evidence of the effectiveness of the new drug for specific therapeutic use and
to better understand safety and drug-related adverse effects. This stage of
development normally takes two to four years plus an additional 6 to 12 months
for regulatory review. The regulatory review period can take less time if the
new drug qualifies for accelerated review. The three Phase 3 projects in process
at the date of acquisition were:
. DMP266 Sustiva(TM) (efavirenz), a nonnucleoside reverse transcriptase
inhibitor for use in combination therapy for HIV;
. DMP115 Definity(TM), a contrast imaging agent for ultrasound procedures;
and
. DMP702 innohep(R) (tinzaparin), a low-molecular weight heparin
anticoagulant.
DuPont
MANAGEMENT'S DISCUSSION AND ANALYSIS 33
At the date of acquisition, Sustiva(TM) (efavirenz) was expected to be completed
in late 1998, assuming an accelerated regulatory review and successful
completion, and Definity(TM) and innohep(R) were expected, if successful, to be
completed in 1999.
At the date of acquisition, there were two projects underway to support the
submission for regulatory approval of new therapeutic uses for Coumadin(R)
(warfarin sodium tablets, USP). These projects, if successful, were expected to
be completed in the period 2000 to 2003. A third project, the submission for
regulatory approval of Coumadin(R) for the extended (180 to 300 day) use in
treatment of deep vein thrombosis was, if successful, expected to be completed
later in 1998.
At the date of acquisition the company estimated that it would spend $1 billion,
on a risk-adjusted basis, over 10 years in its efforts to complete the above
projects. This estimate recognized the fact that not all projects would be
completed successfully. The cost of successfully taking a project from pre-
clinical development through regulatory approval is estimated to range from $250
million to $500 million. Estimates of the cost to complete a specific project
are dependent on its stage of development, the disease to be treated, the size
and structure of clinical trials required to prove improved efficacy and/or
safety versus current treatment options, and the project's Probability of
Technical and Commercial Success.
The range of Probability of Technical and Commercial Success factors used in
determining the estimated fair value of in-process research and development at
the date of acquisition is as follows:
- --------------------------------------------------------------------------------
Probability of Technical
Status & Commercial Success
- --------------------------------------------------------------------------------
Pre-Clinical Trial 5% to 9%
Phase 1 14% to 18%
Phase 2 30% to 50%
Phase 3 55% to 95%
New Applications for Existing Products 70% to 90%
================================================================================
Risk Adjusted Cash Flows were discounted to present value using a 13 percent
discount rate, which is 50 basis points higher than the estimated weighted
average cost of capital for research-based pharmaceutical companies. The higher
discount rate used to present value these risk adjusted cash flows compensates
for the increased risk associated with a finite number of projects versus a
diversified business as a whole.
Since the date of acquisition, Sustiva(TM) was granted accelerated FDA approval
in the United States in 1998, full approval in Canada and Europe in 1999 and
full FDA approval in February 2000. Definity(TM) was submitted for approval for
marketing in the United States in December 1998. innohep(R) was submitted for
approval for marketing in the United States in the second quarter of 1999, a
slight delay from earlier projections. In October 1998 management terminated the
project investigating the use of Coumadin(R) in the prevention of primary
myocardial infarction because the Thrombosis Prevention Trial was not conclusive
in demonstrating the benefits of warfarin in this therapeutic use. Clinical
trials investigating the use of Coumadin(R) in the extended treatment of deep
vein thrombosis continue and are expected to conclude in 2001. Four second
generation nonnucleoside reverse transcriptase inhibitor (NNRTI) compounds have
entered development, including the two NNRTI's that were in Phase I on the date
of acquisition. The decision whether to advance one of these compounds to Phase
III will be based on a comparison of Phase II safety and efficacy data. The
DMP444 Phase 2 project was terminated in 1999 and the DMP543 project was
terminated in January 2000. The remaining projects are still in process.
POLYESTER FILMS
In January 1998 the company purchased the global polyester films business of ICI
for $647 million cash, the assumption of $110 million of liabilities, and
acquisition related costs of $5 million. The purchase price was allocated to the
identifiable assets acquired, based on their estimated fair values, as follows
(dollars in millions):
- --------------------------------------------------------------------------------
Current Assets $ 62
Property, Plant and Equipment 501
Other Assets 73
In-Process Research and Development 50
- --------------------------------------------------------------------------------
Total Identifiable Assets $686
================================================================================
The $76 million excess of the cost of the acquisition ($762 million) over the
estimated fair value of the identifiable assets acquired has been recorded as
goodwill.
DuPont
34 MANAGEMENT'S DISCUSSION AND ANALYSIS
At the date of the acquisition, the business had 10 research and development
projects meeting the criteria for purchased in-process research and development.
These projects were of two general types (dollars in millions):
- --------------------------------------------------------------------------------
Project Type Number of Projects Fair Value
- --------------------------------------------------------------------------------
New Product Development 7 $36
Process Modification 3 $14
================================================================================
New Product Development projects were expected to be completed in the period
1998 to 1999. Management estimated the Probability of Technical and Commercial
Success for these projects ranged from 40 percent to 80 percent. Process
Modification projects were expected to be completed in the period 1998 to 1999.
Management estimated the Probability of Technical and Commercial Success for
these projects ranged from 60 percent to 70 percent.
The cost to complete these projects was estimated to total $5 million through
1999. Risk Adjusted Cash Flows were discounted to present value using a 15
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.
As of December 31, 1999, most of the seven New Product Development projects have
achieved technical feasibility. On December 31, 1999, the polyester films
business, including acquired in-process research and development projects that
had not been completed, became DuPont Teijin Films, a joint venture between
DuPont and Teijin Limited. Continuation of these projects is no longer
controlled by DuPont.
POLYESTER RESINS AND INTERMEDIATES
On December 31, 1997, the company purchased the global polyester resins and
intermediates business of ICI for $1,240 million cash, the assumption of $265
million of liabilities, and acquisition related costs of $7 million. The
purchase price was allocated to the identifiable assets acquired, based on their
estimated fair values, as follows (dollars in millions):
- --------------------------------------------------------------------------------
Current Assets $ 89
Property, Plant and Equipment 810
Other Assets 409
In-Process Research and Development 178
- --------------------------------------------------------------------------------
Total Identifiable Assets $1,486
================================================================================
The $26 million excess of the cost of the acquisition ($1,512 million) over the
estimated fair value of the identifiable assets acquired has been recorded as
goodwill.
At the date of the acquisition, the business had eight research and development
projects meeting the criteria for purchased in-process research and development.
These projects were of three general types (dollars in millions):
- --------------------------------------------------------------------------------
Project Type Number of Projects Fair Value
- --------------------------------------------------------------------------------
New Product Development 3 $26
Process Modification 4 $66
New Manufacturing Process 1 $86
================================================================================
New Product Development projects were expected to be completed in the period
1998 to 2000. Management estimated the Probability of Technical and Commercial
Success for these projects ranged from 14 percent to 72 percent. Process
Modification projects were expected to be completed in the period 2000 to 2001.
Management estimated the Probability of Technical and Commercial Success for
these projects ranged from 70 percent to 80 percent. The New Manufacturing
Process project was expected to be completed in 2002. Management estimated an 80
percent Probability of Technical and Commercial Success for this project.
The cost to complete these projects was estimated to total $20 million through
2002. Risk Adjusted Cash Flows were discounted to present value using a 12
percent discount rate, which approximates the weighted average cost of capital
for this business. Three projects are in pre-commercialization phase; completion
is expected by year-end 2000. One project was transferred to the joint venture
with Sabanci and is no longer under DuPont's control. Three projects are still
under active development. One Process Modification project (fair value $3
million) was terminated in January 1999 when DuPont and ICI ended discussions
about the formation of a joint venture in Pakistan.
PROTEIN TECHNOLOGIES INTERNATIONAL INC.
On December 1, 1997, the company acquired the stock of Protein Technologies
International (PTI), a wholly owned subsidiary of Ralston Purina Company, for
22,570,673 shares of DuPont common stock, with a fair value of $1,301 million,
in a tax-free
DuPont
MANAGEMENT'S DISCUSSION AND ANALYSIS 35
exchange. Established in 1973, the business is engaged in the research,
development, manufacturing and sale of high quality soy protein and soy fiber
ingredients for a variety of food applications and soy protein-based polymers
for the coated paper and paperboard industry. The total purchase price,
consisting of the fair value of the stock issued and liabilities assumed,
including acquisition costs of $5 million, was $1,578 million and was allocated
to the identifiable assets acquired, based on their estimated fair values, and
related deferred taxes as follows (dollars in millions):
- --------------------------------------------------------------------------------
Current Assets $ 226
Property, Plant and Equipment 443
Other Assets 544
In-Process Research and Development 560
Deferred Taxes (280)
- --------------------------------------------------------------------------------
Total Identifiable Assets and Deferred Taxes $1,493
================================================================================
The $85 million excess of the cost of the acquisition over the estimated fair
value of the identifiable assets acquired has been recorded as goodwill.
At the date of acquisition, the business had 29 research and development
projects meeting the criteria for purchased in-process research and development.
These projects were grouped into three broad categories as follows (dollars in
millions):
- --------------------------------------------------------------------------------
Project Type Number of Projects Fair Value
- --------------------------------------------------------------------------------
New Product Development
for Existing Business 14 $124
Health and Nutrition 7 $288
Biotechnology 8 $148
================================================================================
New Product Development projects are principally aimed at significantly
improving the functionality, color, taste and flavor of soy protein isolate for
use as a food ingredient in cheese, coffee whiteners, milk, egg and meat
alternatives, baking products, and nutritional/sports drink products. This
category also includes projects aimed at the conversion of process waste streams
into salable products. If successful, most of the projects in this category were
expected to be completed in the period 1998 to 2000. The Probability of
Technical and Commercial Success for these projects generally ranged from 60
percent to 80 percent.
Health and Nutrition projects principally consist of clinical trials and other
studies designed to prove the existence of certain health benefits associated
with soy protein including its effectiveness in the reduction of heart disease
and osteoporosis, relief of post-menopausal symptoms, and prevention and/or
treatment of prostate cancers. Also included are projects to control the level
of isoflavone and other components of soy protein shown to be associated with
these health benefits. If successful, these projects were expected to be
completed in the period 1998 to 2005. The Probability of Technical and
Commercial Success for projects expected to be completed in the period 1998 to
2000 ranged from 65 percent to 90 percent, whereas the Probability of Technical
and Commercial Success for projects expected to be completed in the period 2004
to 2005 ranged from 15 percent to 30 percent.
Biotechnology projects are aimed at developing new, high-value applications for
soybeans that have been genetically enhanced to modify the levels of certain
oils, proteins, amino acids and carbohydrates in order to improve the
nutritional value, taste and other characteristics of the bean. If successful,
these projects were expected to be completed in the period 2000 to 2005. The
Probability of Technical and Commercial Success for these projects generally
ranged from 50 percent to 70 percent.
The cost to complete the projects was estimated to total $65 million through
2005. Risk Adjusted Cash Flows were discounted to present value using a 15
percent discount rate. This rate is higher than the estimated weighted average
cost of capital for this business. This higher rate compensates for the risk of
projections, volatility and market uncertainty due to the limited historical
experience in certain areas of endeavor.
As of December 31, 1999, test marketing or full commercialization has been
initiated on a majority of the New Product Development projects that were in
process at the acquisition date. In May 1998 PTI submitted an initial petition
to the FDA for a health claim on isolated soy protein. In October 1999 the FDA
authorized the health claim tied specifically to the relationship between
consuming soy protein and reducing the risk of heart disease. The company is
working with major food companies to develop products meeting the claim's
requirements. The Biotechnology projects are still in process.
DuPont
36 MANAGEMENT'S DISCUSSION AND ANALYSIS
PIONEER HI-BRED INTERNATIONAL
In September 1997 the company acquired a 20 percent interest in Pioneer Hi-Bred
International for $1,711 million, including acquisition costs. For purposes of
determining equity in earnings, the purchase price was allocated to the
identifiable assets and liabilities of Pioneer, based on their estimated fair
values, as follows (dollars in millions):
- --------------------------------------------------------------------------------
Current Assets $ 235
Property, Plant and Equipment 125
In-Process Research and Development 903
Other Assets 529
Liabilities (287)
- --------------------------------------------------------------------------------
Total Identifiable Assets Less Liabilities $1,505
================================================================================
The $206 million excess of the cost of the acquisition over the estimated fair
value of the identifiable assets and liabilities was recorded as goodwill.
At the date of acquisition, Pioneer had extensive research and development
efforts underway. The projects in process at the date of this acquisition were
similar in number and scope to those discussed in conjunction with the 1999
Pioneer acquisition. Since the date of acquisition, Pioneer has successfully
commercialized the first generation of European Corn borer resistant corn
hybrids, introduced approximately 100 new corn hybrids, including high oil
products, and introduced numerous new varieties of soybeans and other seed
products. Progress has also been made in connection with the development of new
corn hybrids containing improved agronomic traits. The development of premium
value seed products containing multiple quality traits is progressing slower
than previously anticipated. In addition, weak commodity prices have contributed
to increased uncertainty over the size of the market for quality trait products
and the value of that market.
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. 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.
The company will adopt Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective
January 1, 2001. This statement establishes accounting and reporting standards
for derivatives. It requires that the company recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income. Based on
analysis to date, it is not expected that adoption of this statement will have a
material effect on the company's financial condition, results of operations or
liquidity.
See also the respective Segment Reviews on pages 16-26 for additional
information concerning current market conditions and the outlook for these
businesses
DuPont
MANAGEMENT'S DISCUSSION AND ANALYSIS 37
FOREIGN CURRENCY RISK
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 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.
Principal currency exposures and related hedge positions at December 31,1999,
were as follows (dollars in millions):
The fair value of forward exchange contracts accounted for as hedges that were
outstanding as of December 31, 1999, was $(17) million. Given the company's
balanced foreign exchange position, a 10 percent adverse change in foreign
exchange rates upon which these contracts are based would result in exchange
losses from these contracts that, net of tax, would, in all material respects,
be fully offset by exchange gains on the underlying net monetary exposures for
which the contracts are designated as hedges.
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.
- -------------------------------------------------------------------------------------------------------------------------------
After-Tax After-Tax After-Tax Open Contracts To Net
Net Monetary Net Monetary Net Monetary Buy/(Sell) Foreign Currency After-Tax
Asset (Liability) Asset/(Liability) --------------------------- Exposure
Currency Exposure Exposure Exposure Pre-Tax After-Tax Asset/(Liability)
- -------------------------------------------------------------------------------------------------------------------------------
Brazilian real $ 324 $ (216) $ 108 $ (163) $ (101) $ 7
British pound sterling $ 723 $(1,060) $ (337) $ 539 $ 334 $ (3)
Canadian dollar $ 695 $ (181) $ 514 $ (822) $ (509) $ 5
Japanese yen $ 722 $ (646) $ 76 $ (114) $ (71) $ 5
Taiwan dollar $ 103 $ (239) $ (136) $ 219 $ 136 $ -
- -------------------------------------------------------------------------------------------------------------------------------
DuPont
38 MANAGEMENT'S DISCUSSION AND ANALYSIS
INTEREST RATE RISK
The company uses a combination of financial instruments, including interest rate
swaps, interest and principal currency swaps and structured medium-term
financings, as part of its program to manage the fixed and floating 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 also involve the exchange
of floating for fixed rate interest payments to effectively convert floating
rate debt into fixed rate debt. Interest rate swaps allow the company to
maintain a target range of floating rate debt.
Under interest and principal currency swaps, the company receives predetermined
foreign currency-denominated payments corresponding, both as to timing and
amount, to the fixed or floating interest rate and fixed principal amounts to be
paid by the company under concurrently issued foreign currency-denominated
bonds. In return, the company pays U.S. dollar interest and a fixed U.S. dollar
principal amount to the counterparty thereby effectively converting the foreign
currency-denominated bonds into U.S. dollar-denominated obligations for both
interest and principal. Interest and principal currency swaps allow the company
to be fully hedged against fluctuations in currency exchange rates and foreign
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.
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 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.
The fair value of interest rate derivatives outstanding as of December 31, 1999,
was $(49). A one percentage point adverse change in the interest rates upon
which these contracts are based would not cause these instruments to have a
material impact on future earnings.
COMMODITY PRICE RISK AND TRADING
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.
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 very high correlation to the underlying commodity to hedge the
commodity price risk involved in compensating growers.
The fair value of derivative commodity instruments outstanding as of December
31, 1999, was not material. A 10 percent adverse change in the commodity prices
upon which these contracts are based would not cause these instruments to have a
material impact on future earnings.
Additional details on these and other financial instruments are set forth in
Note 25 to the financial statements.
Year 2000 Readiness Disclosure
The company accomplished its goal of maintaining business continuity and having
zero safety and environmental incidents while transitioning to the new year.
Across DuPont's businesses and functional areas throughout the world, the DuPont
Year 2000 Project Team successfully prevented and managed all Year 2000-related
issues that could have interrupted business continuity or adversely impacted the
company's safety and environmental performance. As of December 31, 1999, the
company had spent approximately $310 million, about 25 percent of which reflects
internal costs, to implement its plan to become Year 2000-capable. The company
will spend about $10 million during the first quarter of 2000 primarily in
connection with its event control management centers for monitoring internal and
external Year 2000 events through February 2000. Therefore, total expenditures
to become Year 2000-capable will be approximately $320 million, which will be
funded from cash flow from operations.
DuPont
MANAGEMENT'S DISCUSSION AND ANALYSIS 39
European Monetary Union
On January 1, 1999, the 11 member countries of the European Monetary Union (EMU)
established fixed conversion rates between their existing national currencies
and adopted a common currency, the euro. During the transition period,
January 1, 1999 - January 1, 2002, both euro and national currencies will
coexist. National currencies will remain legal tender until at least January 1,
2002, but not later than July 1, 2002. In January 2002 euro notes and coins will
be introduced and become legal tender while national currencies will be
withdrawn from circulation by July 1, 2002, at the latest.
The company recognized the introduction of the euro as a significant opportunity
and organized itself to handle transactions with its business partners in euros.
The company does business in euros by preference within all EMU countries. The
introduction of the euro on January 1, 1999, did not have, nor does the company
expect the conversion to the euro to have, a material adverse impact on its
financial condition, results of operations or liquidity.
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. 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.
In 1999 DuPont spent about $180 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 $190 million in 2000.
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 new 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 $20 million
to $40 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 $10 million to $15 million over the next five years; for the
entire industry, the cost of testing is estimated to be $500 million.
Global climate change was addressed by the Kyoto Protocol adopted in December
1997. If ratified by a sufficient number of countries over the next few years,
the Kyoto Protocol would establish significant emission reduction targets for
six gases considered to have global warming potential. DuPont has a stake in a
number of these gases: CO2, N2O, HFCs and PFCs. DuPont has been reducing its
emissions of these so-called "greenhouse gases" since 1991 and is well ahead of
the target/timetable contemplated by the Protocol, on a global basis. Specific
measures to implement the Protocol are not expected to be adopted before the end
of 2000. However, individual countries are beginning to consider strategies for
meeting their specific targets.
Estimated pretax environmental expenses charged to current operations totaled
about $560 million in 1999 as compared with $560 million in 1998 and $570
million in 1997. 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 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
DuPont
40 MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 1999.
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, 1999, the
company's balance sheet included an accrued liability of $435 million as
compared with $462 million and $447 million at year-end 1998 and 1997,
respectively. Approximately 78 percent of the company's environmental reserve at
December 31, 1999, was attributable to RCRA and similar remediation liabilities,
while 22 percent was attributable to CERCLA liabilities. During 1999,
remediation accruals of $35 million were added to the reserve compared with $77
million in 1998 and $42 million in 1997.
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 $43 million in 1999, $40 million in 1998 and $46 million in 1997.
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,
1999, the company had been notified of potential liability under CERCLA or state
law at about 335 sites around the United States, with active remediation under
way at 130 of those sites. In addition, the company has resolved its liability
at 119 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 10 new sites during
1999 compared with 8 similar notices in 1998 and 11 in 1997. In 1999, 10 sites
were settled by the company. The company's expenditures associated with CERCLA
and similar state remediation activities were approximately $19 million in 1999,
$22 million in 1998 and $15 million in 1997.
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 competitive or financial position, liquidity, or results of
operations of the company.
DuPont
MANAGEMENT'S DISCUSSION AND ANALYSIS 41
Total expenditures for previously accrued remediation activities under CERCLA,
RCRA and similar state laws were $62 million in 1999, $62 million in 1998 and
$61 million in 1997. Although future remediation expenditures in excess of
current reserves is 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 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 65 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, 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 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 clinical trials of new pharmaceuticals; 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, divestitures and 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
and Pioneer segments 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, particularly the second quarter. 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, 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
42
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 December31, 1999, 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/ Charles 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 18, 2000
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 pages43-71 of
this Annual Report present fairly, in all material respects, the financial
position of E.I.duPont deNemours and Company and its subsidiaries at December31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December31, 1999, in conformity with
accounting principles generally accepted in the United States. 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, 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 the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 18, 2000
DuPont
FINANCIAL STATEMENTS 43
E.I. duPont de Nemours and Company and Consolidated Subsidiaries
Consolidated Income Statement
(Dollars in millions, except per share)
1999 1998 1997
---------------------------
Sales $26,918 $24,767 $24,089
Other Income (Note 2) 974 981 1,005
---------------------------
Total 27,892 25,748 25,094
---------------------------
Cost of Goods Sold and Other Operating Charges 16,991 15,556 15,544
Selling, General and Administrative Expenses 2,595 2,115 2,061
Depreciation 1,444 1,452 1,361
Amortization of Goodwill and Other Intangible Assets 246 108 20
Research and Development Expense 1,617 1,308 1,072
Interest Expense (Note 3) 535 520 389
Purchased In-Process Research and Development (Note 4) 2,250 1,443 1,478
Employee Separation Costs and Write-down of Assets (Note 5) 524 633 340
---------------------------
Total 26,202 23,135 22,265
---------------------------
Income from Continuing Operations Before Income Taxes and Minority Interests 1,690 2,613 2,829
Provision for Income Taxes (Note 6) 1,410 941 1,354
Minority Interests in Earnings of Consolidated Subsidiaries 61 24 43
---------------------------
Income from Continuing Operations 219 1,648 1,432
Discontinued Operations (Note 7)
Income from Operations of Discontinued Business, Net of Income Taxes - 594 973
Gain on Disposal of Discontinued Business, Net of Income Taxes 7,471 2,439 -
---------------------------
Income Before Extraordinary Item 7,690 4,681 2,405
Extraordinary Charge from Early Extinguishment of Debt, Net of Income Taxes (Note 8) - (201) -
---------------------------
Net Income $ 7,690 $ 4,480 $ 2,405
====================================================================================================================
Basic Earnings (Loss) Per Share of Common Stock (Note 9)
Continuing Operations Before Extraordinary Item $ .19 $ 1.45 $ 1.26
Discontinued Operations 6.89 2.69 .86
---------------------------
Before Extraordinary Item 7.08 4.14 2.12
Extraordinary Charge - (.18) -
---------------------------
Net Income $ 7.08 $ 3.96 $ 2.12
===========================
Diluted Earnings (Loss) Per Share of Common Stock (Note 9)
Continuing Operations Before Extraordinary Item $ .19 $ 1.43 $ 1.24
Discontinued Operations 6.80 2.65 .84
---------------------------
Before Extraordinary Item 6.99 4.08 2.08
Extraordinary Charge - (.18) -
---------------------------
Net Income $ 6.99 $ 3.90 $ 2.08
====================================================================================================================
See pages 47-71 for Notes to Financial Statements.
DuPont
44 FINANCIAL STATEMENTS
E.I. duPont de Nemours and Company and Consolidated Subsidiaries
Consolidated Balance Sheet
(Dollars in millions, except per share)
- ---------------------------------------------------------------------------------------------------------
December 31 1999 1998
- ---------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash and Cash Equivalents (Note 10) $ 1,466 $ 1,059
Marketable Securities (Note 10) 116 10
Accounts and Notes Receivable (Note 11) 5,318 4,201
Inventories (Note 12) 5,057 3,129
Prepaid Expenses 202 192
Deferred Income Taxes (Note 6) 494 645
--------------------
Total Current Assets 12,653 9,236
--------------------
Property, Plant and Equipment (Note 13) 35,416 34,728
Less: Accumulated Depreciation 20,545 20,597
--------------------
Net Property, Plant and Equipment 14,871 14,131
--------------------
Investment in Affiliates (Note 14) 1,459 1,796
Other Assets (Notes 6 and 15) 11,794 4,956
Net Assets of Discontinued Operations (Note 7) - 8,417
--------------------
Total $40,777 $38,536
- ---------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable (Note 16) $ 2,780 $ 1,929
Short-Term Borrowings and Capital Lease Obligations (Note 17) 4,941 6,629
Income Taxes (Note 6) 359 130
Other Accrued Liabilities (Note 18) 3,148 2,922
--------------------
Total Current Liabilities 11,228 11,610
Long-Term Borrowings and Capital Lease Obligations (Note 19) 6,625 4,495
Other Liabilities (Note 20) 7,872 7,640
Deferred Income Taxes (Note 6) 1,660 430
--------------------
Total Liabilities 27,385 24,175
--------------------
Minority Interests 517 407
--------------------
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 31,1999--1,139,514,154; 1998--1,140,354,154 342 342
Additional Paid-In Capital 7,941 7,854
Reinvested Earnings 11,699 6,705
Accumulated Other Comprehensive Loss (133) (432)
Common Stock Held in Trust for Unearned Employee Compensation and
Benefits (Flexitrust), at Market
(Shares: December 31, 1999--7,342,245; 1998--14,167,867) (484) (752)
Common Stock Held in Treasury at Cost
(Shares: December 31, 1999--87,041,427) (6,727) -
--------------------
Total Stockholders' Equity 12,875 13,954
--------------------
Total $40,777 $38,536
=========================================================================================================
See pages 47-71 for Notes to Financial Statements.
DuPont
FINANCIAL STATEMENTS 45
E.I. duPont de Nemours and Company and Consolidated Subsidiaries
Consolidated Statement of Stockholders' Equity (Notes 21 and 22)
(Dollars in millions, except per share)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Preferred Common Paid-In Reinvested Comprehensive Treasury Stockholders'
Stock Stock Capital Earnings Loss Flexitrust Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
1997
Balance January 1, 1997 $ 237 $ 347 $6,676 $ 4,931 $ (139) $(1,459) $ - $10,593
------------------------------------------------------------------------------------------
Net Income 2,405
Cumulative Translation Adjustment (130)
Minimum Pension Liability (28)
Total Comprehensive Income
Common Dividends ($1.23 per share) (1,391)
Preferred Dividends (10)
Treasury Stock
Acquisition (1,747)
Retirement (8) (193) (1,546) 1,747
Common Stock Issued
Flexitrust (299) 419
Businesses Acquired 7 1,317
Compensation Plans 134
Adjustments to Market Value 356 (356)
------------------------------------------------------------------------------------------
Balance December 31, 1997 $ 237 $ 346 $7,991 $ 4,389 $ (297) $(1,396) $ - $11,270
------------------------------------------------------------------------------------------
1998
Net Income 4,480
Cumulative Translation Adjustment (23)
Minimum Pension Liability (112)
Total Comprehensive Income
Common Dividends ($1.365 per share) (1,539)
Preferred Dividends (10)
Treasury Stock
Acquisition (704)
Issuance/Retirement (4) (85) (615) 704
Common Stock Issued
Flexitrust (279) 598
Businesses Acquired 4
Compensation Plans 269
Adjustments to Market Value (46) 46
------------------------------------------------------------------------------------------
Balance December 31, 1998 $ 237 $ 342 $7,854 $ 6,705 $ (432) $ (752) $ - $13,954
------------------------------------------------------------------------------------------
1999
Net Income 7,690
Cumulative Translation Adjustment 172
Minimum Pension Liability 76
Net Unrealized Gains on Securities 51
Total Comprehensive Income
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
==========================================================================================
- ----------------------------------------------------
Total
Comprehensive
Income
- ----------------------------------------------------
1997
Balance January 1, 1997
Net Income $2,405
Cumulative Translation Adjustment (130)
Minimum Pension Liability (28)
---------
Total Comprehensive Income $2,247
=========
Common Dividends ($1.23 per share)
Preferred Dividends
Treasury Stock
Acquisition
Retirement
Common Stock Issued
Flexitrust
Businesses Acquired
Compensation Plans
Adjustments to Market Value
Balance December 31, 1997
1998
Net Income $4,480
Cumulative Translation Adjustment (23)
Minimum Pension Liability (112)
---------
Total Comprehensive Income $4,345
=========
Common Dividends ($1.365 per share)
Preferred Dividends
Treasury Stock
Acquisition
Issuance/Retirement
Common Stock Issued
Flexitrust
Businesses Acquired
Compensation Plans
Adjustments to Market Value
Balance December 31, 1998
1999
Net Income $7,690
Cumulative Translation Adjustment 172
Minimum Pension Liability 76
Net Unrealized Gains on Securities 51
---------
Total Comprehensive Income $7,989
=========
Common Dividends ($1.40 per share)
Preferred Dividends
Treasury Stock
Acquisition
Businesses Acquired
Retirement
Common Stock Issued
Flexitrust
Compensation Plans
Adjustments to Market Value
Balance December 31, 1999
See pages 47-71 for Notes to Financial Statements.
DuPont
- 46 -
FINANCIAL STATEMENTS
E.I. duPont de Nemours and Company and Consolidated Subsidiaries
Consolidated Statement of Cash Flows
(Dollars in millions)
- -------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------------
Cash and Cash Equivalents at Beginning of Year $1,434/1/ $1,004 $1,066
------------------------------------
Cash Provided by Continuing Operations
Net Income 7,690 4,480 2,405
Adjustments to Reconcile Net Income to Cash Provided by Continuing Operations:
Net Income from Discontinued Operations (7,471) (3,033) (973)
Extraordinary Charge from Early Retirement of Debt (Note 8) - 275 -
Depreciation 1,444 1,452 1,361
Amortization of Goodwill and Other Intangible Assets 246 108 20
Purchased In-Process Research and Development (Note 4) 2,250 1,443 1,478
Other Noncash Charges and Credits--Net 443 (319) 569
Decrease (Increase) in Operating Assets:
Accounts and Notes Receivable (21) (580) (783)
Inventories and Other Operating Assets (384) (74) (355)
Increase (Decrease) in Operating Liabilities:
Accounts Payable and Other Operating Liabilities 185 254 (20)
Accrued Interest and Income Taxes (Notes 3 and 6) 458 126 325
------------------------------------
Cash Provided by Continuing Operations 4,840 4,132 4,027
------------------------------------
Investment Activities of Continuing Operations (Note 23)
Purchases of Property, Plant and Equipment (2,055) (2,240) (2,089)
Investments in Affiliates (48) (63) (1,920)
Payments for Businesses (Net of Cash Acquired) (5,073) (3,282) (1,238)
Proceeds from Sales of Assets 609 946 558
Net Proceeds from Sale of Interest in Petroleum Operations (Note 7) - 4,206 -
Net Decrease (Increase) in Short-Term Financial Instruments (258) 131 115
Miscellaneous--Net 14 124 552
------------------------------------
Cash Used for Investment Activities of Continuing Operations (6,811) (178) (4,022)
------------------------------------
Financing Activities
Dividends Paid to Stockholders (1,511) (1,549) (1,401)
Net Increase (Decrease) in Short-Term Borrowings (3,244) 1,574 1,737
Long-Term and Other Borrowings:
Receipts 8,420 6,335 6,462
Payments (5,612) (8,966) (5,562)
Acquisition of Treasury Stock (Note 21) (690) (704) (1,747)
Proceeds from Exercise of Stock Options 168 257 116
Increase (Decrease) in Minority Interests 105 - (56)
------------------------------------
Cash Used for Financing Activities (2,364) (3,053) (451)
------------------------------------
Net Cash Flow from Discontinued Operations/2/ 4,475 (568) 483
Effect of Exchange Rate Changes on Cash (108) 97 (99)
------------------------------------
Cash and Cash Equivalents at End of Year $1,466 $1,434/1/ $1,004
------------------------------------
Increase (Decrease) in Cash and Cash Equivalents $ 32 $ 430 $ (62)
- ------------------------------------------------------------------------------------------------------------------------------------
1 Includes cash and cash equivalents classified in the Consolidated Balance
Sheet within "Net Assets of Discontinued Operations."
2 Includes payments of direct expenses related to the Conoco initial public
offering and exchange transactions.
See pages 47-71 for Notes to Financial Statements.
DuPont
NOTES TO FINANCIAL STATEMENTS 47
(Dollars in millions, except per share)
1. Summary of Significant Accounting Policies.
DuPont observes the generally accepted accounting principles described below.
These, together with the other notes that follow, are an integral part of the
consolidated financial statements.
Basis of Consolidation
The accounts of wholly owned and majority-owned subsidiaries are included in the
consolidated financial statements. Investments in affiliates owned 20 percent or
more are accounted for under the equity method. Investments in companies owned
less than 20 percent are accounted for under the cost method. Divestiture of the
company's petroleum business was completed on August 6, 1999, and is reported as
discontinued operations and discussed in Note 7.
Revenue Recognition
Sales are generally recorded when products are shipped or when services are
rendered to customers.
Subsidiary Stock Transactions
Gains or losses arising from issuances by a subsidiary of its own stock are
recorded as nonoperating items.
Inventories
Except for inventories of the recently acquired Pioneer business, 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, when placed in
service in 1995 or thereafter, 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 internal use of computer software 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 betterments
are capitalized.
Intangible Assets
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. Goodwill is
amortized over periods up to 40 years using the straight-line method. The
company continually evaluates the reasonableness of the useful lives of its
intangibles.
Impairment of Long-Lived Assets
DuPont 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.
Investment Securities
Marketable securities and other securities and investments are classified as
available-for-sale and reported at fair value. Unrealized gains and losses are
reported, net of their related tax effects, as a component of other
comprehensive income in stockholders' equity until sold. At the time of sale,
any gains or losses calculated by the specific identification method are
recognized in other income. Other securities and investments for which market
values are not readily available are carried at cost.
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.
DuPont
48 NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
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 and/or mitigate 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.
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 as a component of other comprehensive income 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, net of their related tax effects, 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
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, net of their related tax effects, 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.
The company selectively enters into forward exchange contracts and similar
agreements to effectively convert firm foreign currency commitments to
functional currency-denominated transactions. Gains and losses on these firm
commitment hedges are deferred and included in the functional currency
measurement of the related foreign currency-denominated transactions. Changes in
the fair value of forward exchange contracts that do not qualify for hedge
accounting treatment are reflected in income in the period the change occurs.
Exchange losses associated with such contracts were $131 and $20 in 1999 and
1998, respectively.
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 income over the life of
the agreements.
The company enters into commodity futures contracts to hedge its exposure to
price fluctuations for certain raw material purchases. Gains and losses on these
hedge contracts are deferred and included in the measurement of the related
transaction.
DuPont
NOTES TO FINANCIAL STATEMENTS 49
(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 very high correlation to the underlying commodity to hedge the
commodity price risk involved in compensating growers. The hedge position gains
or losses are accounted for as inventory costs and expensed as cost of goods
sold when the associated crop inventory is sold.
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 1999
classifications.
2. Other Income
- ---------------------------------------------------------------------------
1999 1998 1997
---------------------------
Royalty income 1 $ 289 $ 159 $ 64
Interest income, net of miscellaneous
interest expense 185 2 112 131
Equity in earnings of affiliates (see Note 14) 135 278 643
Gains (losses) on sales of assets (30) 3 375 4 64
Miscellaneous income and
expenses--net 395 5 57 103
---------------------------
$ 974 $ 981 $1,005
===========================================================================
1 Increases principally reflect the change in DuPont's ownership interest of
DuPont Pharmaceuticals.
2 Includes a $80 benefit related to recalculation of interest on federal tax
refunds and liabilities.
3 Includes a $55 loss on formation of the DuPont Teijin Films joints venture.
4 Includes a $217 gain on the sale of substantially all of the company's
remaining interest in CONSOL Energy Inc.
5 Includes a $336 gain associated with exchange DuPont's investment in WebMD
for Healthon/WebMD, and a $131 exchange loss forward exchange contracts
purchase in 1998 to lock in the U.S. dollar cost of the acquisition of
Herberts.
3. Interest Expense
- -----------------------------------------------------------
1999 1998 1997
-------------------
Interest incurred $ 642 $ 640 $ 469
Less: Interest capitalized 107 120 80
-------------------
$ 535 $ 520 $ 389
===========================================================
Interest paid (net of amounts capitalized) was $471 in 1999, $553 in 1998 and
$324 in 1997.
4. 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 Statement of Financial Accounting Standards 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.
DuPont
50 NOTES TO FINANCIALSTATEMENTS
(Dollars in millions, except per share)
In 1999 estimated charges of $2,186 and $64 were recorded in conjunction with
the purchase of the remaining 80 percent interest in Pioneer Hi-Bred
International, Inc. and the purchase of the global Herberts coatings business
from Hoechst AG, respectively, based on preliminary allocations of purchase
price.
In 1998 charges of $60 and $103 were recorded to revise the preliminary
allocation for Protein Technologies International and the ICI polyester resins
and intermediates businesses, respectively, upon revision of preliminary
purchase price allocations for these acquisitions. In addition, a charge of $50
was recorded in conjunction with the 1998 acquisition of the ICI polyester films
business based on preliminary allocations of the purchase price for this
acquisition and a charge of $1,230 was recorded in conjunction with the 1998
purchase of Merck & Co.'s interest in The DuPont Merck Pharmaceutical Company,
based on preliminary allocations of purchase price.
In 1997 a charge of $903 was recorded in conjunction with the purchase of a 20
percent interest in Pioneer. In addition, charges of $500 and $75 were recorded
in conjunction with the purchase of Protein Technologies International and the
ICI polyester resins and intermediates businesses, respectively, based on
preliminary allocations of purchase price. See Note 23.
5. Employee Separation Costs and Write-down of Assets
During 1999 the company recorded a net charge of $524. Charges totaling $604
relate to restructuring and impairment activities in the following segments:
Agricultural & Nutrition - $169; Nylon Enterprise - $375; Polyester Enterprise -
$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 the respective prior years' activities.
1999 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. At December 31, 1999, approximately $20 had been settled and charged
against the related liability. Approximately 585 employees have been terminated
and another 65 employees have accepted other work assignments within the
company. The remaining restructuring charge of $79 principally relates 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 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). Dismantlement and removal activities are
expected to be completed in 2000. The effect on 1999 results of removing these
facilities from operations was not material. Totalremaining reserve balances for
this restructuring program are approximately $40 at December31, 1999.
An impairment charge of $45 was 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 will not purchase the minimum quantity and therefore will forego the right to
exclusively market the product.
Nylon Enterprise
Charges included an impairment of $252 for the write-down of a manufacturing
facility in Singapore that will continue to operate. The Nylon Enterprise
constructed a manufacturing plant designed to produce 250 million pounds of
adipic acid annually. The company has made substantial efforts to resolve
operational and technical problems that have plagued this facility. Despite
these efforts, the plant continues 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 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 their estimated net realizable value pursuant
to a sale agreement. The charge principally covers the net assets being sold and
a contractual obligation associated with exiting this business. Definitive
agreements were signed under which a third party will acquire the company's
ownership interest and certain related manufacturing equipment. The company is
currently operating this facility in trust for the buyer. In addition, the
company
DuPont
NOTES TO FINANCIAL STATEMENTS 51
(Dollars in millions, except per share)
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
termination payments of $15 to about 120 employees involved principally in
manufacturing activities at several locations. At December 31, 1999,
approximately 20 employees had been terminated, and settlement charges against
the reserve will begin in early 2000. Accordingly, the remaining reserve balance
is $15 at December 31, 1999. Also included was $13 for a manufacturing facility
in Germany that was shut down. The effect on 1999 operating results of this
shutdown was not material.
Polyester Enterprise
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. At December 31, 1999, $27 in benefits has been charged against
the related liability. Approximately 600 employees have been terminated and
another 50 employees have accepted other work assignments within the company.
Total remaining reserve balances are approximately $33 at December 31, 1999.
1998 Activities
The company recorded charges totaling $577 directly related to management
decisions to implement company-wide productivity improvement initiatives.
Charges from these initiatives reduced segment earnings as follows: Agriculture
& Nutrition - $19; Nylon Enterprise - $231; Performance Coatings & Polymers -
$25; Pigments & Chemicals - $23; Polyester Enterprise - $158; Specialty Fibers -
$6; Specialty Polymers - $47; Other - $68.
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. As
of December 31, 1999, about 4,000 employees have been terminated and the
remaining employees have accepted other work assignments within the company
thereby completing this program. About $257 in benefits has been charged against
the related liability. A net benefit of $27 was recorded in 1999 to reflect
changes in estimates related to this program principally in the following
segments: Agriculture & Nutrition - $3; Nylon Enterprise - $14; Pigments &
Chemicals -$4; Polyester Enterprise - $4. Total remaining reserve balances are
approximately $26 at December 31, 1999.
The remaining charge of $267 related to write-downs of property, plant and
equipment, principally due to the shutdown of excess production capacity. The
charge covers the net book value of the facilities ($232) and estimated
dismantlement and removal costs less estimated proceeds from the sale of
equipment and scrap ($35). The largest component, $114, covers the shutdown of
polyester manufacturing lines at Circleville, Ohio; Cooper River, South
Carolina; Kinston, Cape Fear and Cedar Creek, North Carolina; and Luxembourg. In
addition, $78 represents the shutdown of nylon manufacturing operations at
Martinsville, Virginia; Doncaster, United Kingdom; and Bayswater, Australia.
Other charges are principally attributable to the shutdown of manufacturing and
other facilities within the Pigments & Chemicals and Other segments. The effect
of these shutdowns on operating results was not material. All facilities have
been shut down and approximately $21 in dismantlement and removal costs have
been paid. A net benefit of $26 was recorded in 1999 to reflect changes in
estimates related to this program principally in the Nylon Enterprise ($15) and
Polyester Enterprise ($9) segments. The remaining reserve balance of
approximately $19 at December 31, 1999, will be used to complete dismantlement
and removal activities in 2000.
In the fourth quarter of 1998 the company also recorded a charge of $56 relating
to the impairment of certain intangible assets held for use by the
Pharmaceuticals segment when it was determined that future undiscounted cash
flows associated with these assets were insufficient to recover their carrying
value. The impaired assets principally represent the company's historical
ownership interest in product rights and license agreements contributed in 1991
by Merck & Co. Inc. to The DuPont Merck Pharmaceutical Company. The assets were
written down to fair value, which was determined on the basis of discounted cash
flows.
1997 Activities
During 1997 DuPont and the Agfa-Gevaert Group (Agfa) signed an agreement under
which Agfa would acquire DuPont's global graphic arts and offset printing plates
businesses. Agfa agreed to purchase the company's inventory, manufacturing
facilities in Germany and the United Kingdom, and provide employment to
DuPont
52 NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
most of the 2,200 employees working in these businesses. A decision was made to
dispose of these businesses, which are a component of the Other segment, after
it became apparent that the company would not be a leader in this industry. In
connection with the sale, the company recorded a charge of $340 in third quarter
1997. This included $233 to write down assets held for sale to their estimated
net realizable value based on the agreement with Agfa, $53 for employee
separation and other people related costs, and $54 to provide for other expenses
associated with exiting these businesses. The 1997 loss from operations from
these businesses was not material. The transaction closed during the first
quarter of 1998. The number of people terminated was less than 250. Charges in
1999 reflect a $14 benefit due to a favorable adjustment of a reserve balance
established in connection with the sale of this business. There are no
outstanding reserve balances for this divestiture.
Other Activities
In 1999 the company also reflected a benefit of $13 due to favorable adjustment
of reserve balances established in connection with the sale of Endo Laboratories
and the Medical Products businesses. These adjustments resulted from lower than
expected costs associated with exiting these businesses. There are no
outstanding reserve balances for these divestitures.
6. Provision for Income Taxes
- --------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------
Current tax expense:
U.S. federal $ 536 $ 526 $ 841
U.S. state and local 14 (15) 45
International 480 447 398
----------------------------------------
Total 1,030 958 1,284
----------------------------------------
Deferred tax expense:
U.S. federal 322 (129) 110
U.S. state and local (4) 21 3
International 62 91 (43)
----------------------------------------
Total 380 (17) 70
----------------------------------------
Provision for income taxes 1,410 941 1,354
Stockholders' equity
Stock compensation 1 (55) (82) (96)
Minimum pension liability 2 7 (81) (18)
Net unrealized gains on securities 3 35 - -
Extraordinary loss - (74) -
Discontinued operations 153 195 921
----------------------------------------
Total $ 1,550 $ 899 $ 2,161
================================================================================
1 Represents tax benefit of certain stock compensation amounts that are
deductible for income tax purposes but do not affect net income.
2 Represents deferred tax charge for minimum pension liability recorded in
stockholders' equity. See Note 21.
3 Represents deferred tax charge associated with available-for-sale
securities that are marked to market and recorded as a component of other
comprehensive income in stockholders' equity. See Note 21.
Total income taxes paid on continuing operations worldwide were $1,015 in 1999,
$782 in 1998 and $1,094 in 1997.
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:
- --------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------
Depreciation $120 $185 $96
Accrued employee benefits 67 71 63
Other accrued expenses 36 19 9
Inventories 31 54 (36)
Unrealized exchange gains (losses) (10) (11) (6)
Investment in subsidiaries and
affiliates 51 (73) (38)
Amortization of intangibles 32 (504)* (2)
Other temporary differences 74 158 61
Tax loss/tax credit carryforwards 3 35 (50)
Valuation allowance change -- net (24) 49 (27)
-------------------------------------
$380 $(17) $70
================================================================================
* Amortization of intangibles includes the write-off of in-process research
and development for DuPont Pharmaceuticals, Polyester Films, and Polyester
Resins & Intermediates.
DuPont
NOTES TO FINANCIAL STATEMENTS 53
(Dollars in millions, except per share)
The significant components of deferred tax assets and liabilities at
December 31, 1999 and 1998, are as follows:
- --------------------------------------------------------------------------------
1999 1998
----------------------------------------------
Deferred Tax Asset Liability Asset Liability
- --------------------------------------------------------------------------------
Depreciation $ - $1,812 $ - $1,578
Accrued employee benefits 3,098 1,149 3,075 1,143
Other accrued expenses 457 2 454 3
Inventories 253 329 278 63
Unrealized exchange gains 17 3 8 8
Tax loss/tax credit
carryforwards 125 - 118 -
Investment in subsidiaries
and affiliates 43 52 77 35
Amortization of intangibles 513 1,148 519 178
Other 336 1,149 227 921
----------------------------------------------
Total $4,842 $5,644 $4,756 $3,929
========== ==========
Less: Valuation
allowance 204 220
---------- ----------
Net $4,638 $4,536
================================================================================
Current deferred tax liabilities (included in the Consolidated Balance Sheet
caption "Income Taxes") were $303 and $14 at December 31, 1999 and 1998,
respectively. In addition, deferred tax assets of $463 and $406 were included in
Other Assets at December 31, 1999 and 1998, respectively (see Note 15).
An analysis of the company's effective income tax rate follows:
- --------------------------------------------------------------------------------
1999 1998 1997
----------------------------------
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
International operations 4.2 2.0 (3.5)
Lower effective tax rate on export sales (2.2) (1.9) (2.2)
In-process research and development* 46.6 1.7 17.9
Other--net (0.2) (0.8) 0.7
----------------------------------
Effective income tax rate 83.4% 36.0% 47.9%
================================================================================
* Charges associated with the 1999 Pioneer transaction and the 1997 Pioneer
and PTI transactions were not tax effected because these purchases were
stock acquisitions rather than asset purchases. See Note 4.
Income from continuing operations before income taxes and minority interests
shown following 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 U.S.
or international does not correspond to the earnings shown in the following
table:
- --------------------------------------------------------------------------------
1999 1998 1997
------------------------------------
United States (including exports) $ 463 $1,388 $1,820
International 1,227 1,225 1,009
------------------------------------
$1,690 $2,613 $2,829
================================================================================
At December 31, 1999, unremitted earnings of subsidiaries outside the United
States totaling $6,666 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, 1999, the tax
effect of such carryforwards approximated $125. Of this amount, $72 has no
expiration date and $46 expires after 2000 but before 2005 and $7 expires after
2005.
7. Discontinued Operations
On September 28, 1998, the company announced that the Board of Directors had
approved a plan to divest the company's 100 percent-owned petroleum business
(Conoco Inc.). 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's consolidated financial statements and notes report its former
petroleum business as discontinued operations. Prior periods have been restated.
Income from operations of discontinued business reflects Conoco's operations
through September 30, 1998. Effective October 1, 1998, through August 6, 1999,
Conoco's results are reported as part of gain on disposal of discontinued
business, and include gains recognized by the company from completion of the
Conoco exchange offer in 1999 and the IPO in 1998. 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
DuPont
54 NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
book basis and tax basis of its investment in Conoco's common stock because this
basis difference was not subject to tax. For 1998 gain on disposal of
discontinued business is $2,439. This includes a loss from Conoco's operations
of $147 (after a tax benefit of $116) and reflects nonrecurring charges of $164;
principally $127 for compensation expense for options granted by Conoco in
substitution for DuPont options held by Conoco employees, $69 for employee
separation costs and property impairments, partially offset by $32 of asset
sales. In addition, net gain from sale of stock by subsidiary includes charges
of $40 that are a direct result of the decision to divest Conoco. Also, 1998
results of income from operations of discontinued business includes a $31 tax
benefit related to the sale of an international subsidiary, partly offset by a
$28 litigation accrual in the United States. The year ended December 31, 1997,
includes charges of $112 for impairment of nonrevenue producing properties and
$55 for a write-down of an office building held for sale, substantially offset
by a $161 gain on the sale of certain North Sea producing and exploration
properties.
- --------------------------------------------------------------------------------
Income from operations of
discontinued business 1999 1998 1 1997
- --------------------------------------------------------------------------------
Net sales - $14,446 $20,990
Income before income taxes and
minority interests 2 - 921 1,918
Provision for income taxes - 311 921
Minority interests - 16 24
---------------------------------------
Income from operations,
net of Income taxes - $ 594 $ 973
================================================================================
1 1998 results are nine months ended September 30, 1998.
2 Includes net interest expense allocations (based on the ratio of net assets
of discontinued operations to consolidated net assets plus debt) of $240
through September 30, 1998, and $248 for 1997.
- --------------------------------------------------------------------------------
Gain on disposal of discontinued business 1999 1 1998 2
- --------------------------------------------------------------------------------
Net sales $12,015 $ 4,737
Income (loss) before income taxes and minority
interests 3 453 (308)
Provision (benefit) for income taxes 164 (116)
Minority interests 124 (45)
---------------------------
Income (loss) from operations, net of income
taxes 165 (147)
Net gain from exchange offer 7,306 -
Net gain from sale of stock by subsidiary - 2,586
---------------------------
Gain on disposal of discontinued business,
net of income taxes $ 7,471 $ 2,439
================================================================================
1 Through August 6, 1999.
2 Three months ended December 31, 1998.
3 Includes interest expense allocation (based on specific debt to be assumed)
of $93 for both 1999 and 1998. Conoco repaid this debt in second quarter
1999.
- --------------------------------------------------------------------------------
Net assets of discontinued operations 1999 1998
- --------------------------------------------------------------------------------
December 31
Cash and cash equivalents - $ 375
Other current assets - 2,864
Property, plant and equipment - net - 11,438
Other assets - 2,011
Current liabilities - (2,473)
Other liabilities - (4,115)
Minority interests - (1,683)
-------------------------
Net assets of discontinued operations - $ 8,417
================================================================================
Net assets of discontinued operations reflects divestiture of Conoco Inc. in the
third quarter 1999. See Note 26 regarding contingent tax liabilities.
8. Extraordinary Charge from Early Extinguishment of Debt
In September 1998 the company redeemed various outstanding notes and debentures
with an aggregate principal value of $1,633. The extraordinary charge of $201,
net of a tax benefit of $74, principally represents call premium and unamortized
discount. The effective income tax rate of 26.9 percent reflects the mix of U.S.
and international operations.
9. 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. For 1998 this effect was anti-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:
- --------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------
Basic 1,084,537,228 1,128,826,525 1,130,755,483
Diluted 1,097,970,329 1,145,347,028 1,149,803,450
================================================================================
DuPont
NOTES TO FINANCIAL STATEMENTS 55
(Dollars in millions, except per share)
Average stock options of 4,453,943, 5,527,629 and 4,930,300 are not included in
the diluted earnings per share calculation for the years 1999, 1998 and 1997,
respectively.
Shares held by the Flexitrust and treasury stock are not considered as
outstanding in computing the weighted-average number of common shares. See Notes
21 and 22.
10. Cash and Cash Equivalents and Marketable Securities
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 maturity of these instruments. Cash
and cash equivalents are used in part to support a portion of the company's
commercial paper program.
Marketable 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 available-for-sale securities and reported at fair value.
11. Accounts and Notes Receivable
- --------------------------------------------------------------------------------
December 31 1999 1998
- --------------------------------------------------------------------------------
Trade--net of allowances of $177 in 1999
and $101 in 1998 $4,509 $3,591
Miscellaneous 809 610
------------------------
$5,318 $4,201
================================================================================
Accounts and notes receivable are carried at amounts that approximate fair value
and include $146 for 1999 and $109 for 1998 due from equity affiliates.
See Note 28 for a description of business segment markets and associated
concentrations of credit risk.
12. Inventories
- --------------------------------------------------------------------------------
December 31 1999 1998
- --------------------------------------------------------------------------------
Finished products $3,322 $2,209
Semifinished products 1,518 836
Raw materials and supplies 823 749
------------------------
Total 5,663 3,794
Less: Adjustment of inventories to a last-in,
first-out (LIFO) basis 606 665
------------------------
$5,057 $3,129
================================================================================
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 80 percent and 88 percent of consolidated
inventories before LIFO adjustment at December31, 1999 and 1998, respectively.
Pioneer inventories of $1,637 at December 31, 1999, are valued under the FIFO
method. In accordance with purchase accounting rules, these inventories include
a $757 adjustment above Pioneer's pre-acquisition historical cost so that they
are reported at estimated fair value.
13. Property, Plant and Equipment
- --------------------------------------------------------------------------------
December 31 1999 1998
- --------------------------------------------------------------------------------
Buildings $ 4,622 $ 3,889
Equipment 28,764 28,485
Land 494 288
Construction 1,536 2,066
-------------------------
$35,416 $34,728
================================================================================
Property, plant and equipment includes gross assets acquired under capital
leases of $146 and $120 at December 31, 1999 and 1998, respectively; related
amounts included in accumulated depreciation were $57 and $56 at December 31,
1999 and 1998, respectively.
14. 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, 1999, are DuPont Dow Elastomers LLC and DuPont Teijin Films, both
of which are owned 50 percent by DuPont. The joint venture with Teijin was
formed on December 31, 1999. Dividends received from equity affiliates were $168
in 1999, $239 in 1998 and $676 in 1997.
DuPont
56 NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
- -------------------------------------------------------------------------------
Year Ended December 31
----------------------------------
Results of operations 1999 1 1998 2 1997
- -------------------------------------------------------------------------------
Sales 3 $6,512 $8,656 $7,778
Earnings before income taxes 400 863 1,166
Net income 249 689 1,027
----------------------------------
DuPont's equity in earnings of affiliates
Partnerships 4 $ 114 $ 162 $ 493 5
Corporate joint ventures (after
income taxes) 21 116 150
----------------------------------
$ 135 $ 278 $ 643
===============================================================================
1 Effective October 1, 1999, DuPont purchased the remaining 80 percent
interest in Pioneer and results are fully consolidated.
2 Effective July 1, 1998, DuPont purchased Merck's 50 percent interest in
DuPont Merck and results are fully consolidated. Effective November 5,
1998, substantially all of DuPont's 50 percent interest in CONSOL Energy
Inc. was sold.
3 Includes sales to DuPont of $572 in 1999, $614 in 1998 and $685 in 1997.
4 Income taxes are reflected in the company's provision for income tax.
5 Includes a benefit of $115 from the gain on the sale by DuPont Merck of its
generic and multisource product lines.
- --------------------------------------------------------------------------------
Financial position at December 31 1999 1998
- --------------------------------------------------------------------------------
Current assets $3,241 $3,428
Noncurrent assets 3,658 3,838
------------------------
Total assets $6,899 $7,266
------------------------
Short-term borrowings* $1,293 $1,022
Other current liabilities 1,424 1,569
Long-term borrowings* 802 679
Other long-term liabilities 174 231
------------------------
Total liabilities $3,693 $3,501
------------------------
DuPont's investment in affiliates
(includes advances) $1,459 $1,796
================================================================================
* DuPont's pro rata interest in total borrowings was $1,013 in 1999 and $705
in 1998 of which $464 in 1999 and $207 in 1998 was guaranteed by the
company. These amounts are included in the guarantees disclosed in Note 26.
15. Other Assets
- --------------------------------------------------------------------------------
December 31 1999 1998
- --------------------------------------------------------------------------------
Prepaid pension cost $ 1,452 $ 1,362
Goodwill - net of accumulated amortization
of $97 in 1999 and $69 in 1998 3,829 1 317
Intangible assets - net of accumulated amortization
of $403 in 1999 and $156 in 1998 4,895 2 2,249
Other securities and investments 565 3 84
Deferred income taxes (see Note 6) 463 406
Miscellaneous 590 538
-------------------------
$11,794 $ 4,956
================================================================================
1 Includes $2,608 of goodwill before amortization related to the acquisition
of the remaining 80 percent interest in Pioneer and $758 related to the
acquisition of Herberts. These amounts are being amortized over 40 years
and 20 years, respectively.
2 Includes $2,159 of intangible assets before amortization related to the
acquisition of the remaining 80 percent interest in Pioneer and $78 related
to the acquisition of Herberts. Intangibles, principally purchased
technology, are amortized over their estimated useful lives. Useful lives
for Pioneer and Herberts range from 10 years to 40 years and 7 years to 20
years, respectively.
3 Includes equity securities classified as available-for-sale with an
original cost of $425 and a fair value of $511 as of December 31, 1999.
During 1999 gross unrealized holding gains were $129 and gross unrealized
holding losses were $43. The remainder principally represents numerous
small investments in securities for which there are no quoted market prices
and for which it is not practicable to determine fair value. Such
securities are reported at cost.
16. Accounts Payable
- --------------------------------------------------------------------------------
December 31 1999 1998
- --------------------------------------------------------------------------------
Trade $1,844 $1,206
Payables to banks 181 162
Compensation awards 180 216
Miscellaneous 575 345
------------------------
$2,780 $1,929
================================================================================
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 maturity of these obligations.
17. Short-Term Borrowings and Capital Lease Obligations
- --------------------------------------------------------------------------------
December 31 1999 1998
- --------------------------------------------------------------------------------
Commercial paper $3,457 $5,978
Non-U.S. bank borrowings 267 180
Medium-term notes payable within one year 779 140
Long-term borrowings payable within one year 300 300
6.25% Swiss franc notes due 2000* 103 -
Industrial development bonds payable on demand 26 26
Capital lease obligations 9 5
------------------------
$4,941 $6,629
================================================================================
* Represents notes denominated as 150 million Swiss francs with a 6.25
percent Swiss franc fixed interest rate. Concurrent with the issuance of
these notes, the company entered into an interest and principal currency
swap that effectively established a $103 fixed principal amount with a 6.9
percent U.S. dollar fixed interest rate.
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
DuPont
NOTES TO FINANCIAL STATEMENTS 57
(Dollars in millions, except per share)
offered to the company for debt of the same remaining maturities, was $5,000 and
$6,700 at December 31, 1999 and 1998, respectively. The change in estimated fair
value in 1999 was primarily due to changes in short-term borrowing levels.
Unused short-term bank credit lines were approximately $5,300 and $7,400 at
December 31, 1999 and 1998, respectively. These lines support short-term
industrial development bonds, a portion of the company's commercial paper
program and other borrowings.
The weighted-average interest rate on short-term borrowings outstanding at
December 31, 1999 and 1998, was 6.0 percent and 5.4 percent, respectively.
18. Other Accrued Liabilities
- --------------------------------------------------------------------------------
December 31 1999 1998
- --------------------------------------------------------------------------------
Payroll and other employee-related costs $ 760 $ 744
Accrued postretirement benefits cost (see Note 24) 361 302
Miscellaneous 2,027 1,876
------------------------
$3,148 $2,922
================================================================================
19. Long-Term Borrowings and Capital Lease Obligations
- --------------------------------------------------------------------------------
December 31 1999 1998
- --------------------------------------------------------------------------------
U.S. dollar:
Industrial development bonds due 2007-2029 $ 336 $ 309
Medium-term notes due 2001-2048 1 635 653
9.15% notes due 2000 - 301
6.50% notes due 2002 499 499
6.75% notes due 2002 300 300
8.00% notes due 2002 251 252
8.50% notes due 2003 2 140 141
6.75% notes due 2004 997 -
8.13% notes due 2004 331 331
8.25% notes due 2006 282 282
6.75% notes due 2007 499 499
5.88% notes due 2009 3 398 -
6.88% notes due 2009 987 -
8.25% debentures due 2022 49 49
7.95% debentures due 2023 38 38
6.50% debentures due 2028 298 298
7.50% debentures due 2033 23 23
6.25% Swiss franc notes due 2000 4 - 103
Other loans (various currencies)
due 2001-2009 492 363
Capital lease obligations 70 54
------------------------
$6,625 $4,495
================================================================================
1 Average interest rates at December 31, 1999 and 1998, were 6.3 percent and
6.4 percent, respectively.
2 The company entered into an interest rate swaption agreement as part of the
program to manage the fixed and floating interest rate mix of total
borrowings. The agreement gives the swaption counterparty the one-time
option to put the company into an interest rate swap with a notional amount
of $300, whereby the company would, over the remaining term of the note,
receive fixed rate payments essentially equivalent to the fixed interest
rate of the underlying note, and pay the counterparty a floating rate of
interest essentially equivalent to the rate the company pays on its
commercial paper. If exercised, the swaption would effectively convert the
note to a floating rate obligation over the remaining maturity of the note.
The premium received from the counterparty for this swaption is being
amortized to income, using the effective interest method, over the
remaining maturity of the note. The interest rate swaption agreement was
reduced to a notional amount of $141 in September 1998. The fair value of
the swaption at December 31, 1999 and 1998, was not material.
3 The company entered into interest rate swap agreements as part of the
program to manage the fixed and floating interest rate mix of total
borrowings. The agreements, totaling a notional amount of $400, put the
company into an interest rate swap, whereby the company, over the remaining
term of the 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 reset semiannually based on six month U.S. Dollar LIBOR. The fair
value of the swaps at December 31, 1999, was $(36).
4 Represents notes denominated as 150 million Swiss francs with a 6.25
percent Swiss franc fixed interest rate. Concurrent with the issuance of
these notes, the company entered into an interest and principal currency
swap that effectively established a $103 fixed principal amount with a 6.9
percent U.S. dollar fixed interest rate.
Average interest rates on industrial development bonds and on other loans
(various currencies) were 6.0 percent and 6.4 percent, respectively, at
December 31, 1999, and 6.1 percent and 7.0 percent at December 31, 1998,
respectively.
Maturities of long-term borrowings, together with sinking fund requirements for
years ending after December 31, 2000, are $146, $1,214, $375 and $1,361 for the
years 2001, 2002, 2003 and 2004, 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 $6,600 and $4,900 at December 31, 1999 and 1998,
respectively. The change in estimated fair value in 1999 was primarily due to
changes in borrowing levels.
DuPont
58 NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
20. Other Liabilities
- --------------------------------------------------------------------------------
December 31 1999 1998
- --------------------------------------------------------------------------------
Accrued postretirement benefits cost $5,470 $5,555
Reserves for employee-related costs 906 921
Miscellaneous 1,496 1,164
------------------------
$7,872 $7,640
================================================================================
21. Stockholders' Equity
In January 1997 the company approved plans to purchase and retire up to 20
million shares of common stock to offset dilution resulting from shares issued
under its compensation programs. In 1997 the company spent $327 to purchase and
retire 5,833,100 shares of DuPont common stock under this program. In 1998 the
company spent $769 to purchase 12,814,162 shares, of which 6 million shares were
purchased in a private placement transaction. Under the terms of this private
placement agreement, the final settlement payment resulted in the issuance of
333,862 treasury shares valued at $20. In 1998, 12,480,300 shares were retired.
In 1999 the company spent $44 to purchase and retire 840,000 shares.
In 1997, 509,778 shares were issued for 100 percent of the capital stock of
Pfister Hybrid Corn Company. Also in 1997, 22.5 million shares were issued for
100 percent of the capital stock of Protein Technologies International (PTI).
Immediately subsequent to the PTI transaction, 22.5 million shares were
repurchased for $1,420 ($63.13 a share) in two private placement transactions.
The purchase price for one transaction for 16 million shares was subject to
adjustment under terms of the private placement agreement. The company received
$65 in 1998 as a final settlement payment associated with this transaction. The
remaining 6.5 million shares were purchased from the DuPont Pension Trust Fund
for $410. Also in 1998, 72,326 shares valued at $4 were issued for final
settlement of 1997 acquisitions, principally PTI.
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 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 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 (compensation plans) includes $85, $66 and $38 at
December 31, 1999, 1998 and 1997, respectively, related to amounts accrued for
variable options.
Shares held by the Flexitrust are used to satisfy existing employee compensation
and benefit programs.
Set forth below is a reconciliation of common stock share activity for the three
years ended December 31, 1999:
- -------------------------------------------------------------------------------
Shares of common stock Held In
--------------------------------
Issued Flexitrust Treasury
- -------------------------------------------------------------------------------
Balance January 1, 1997 1,158,085,450 (30,991,590) -
- -------------------------------------------------------------------------------
Businesses acquired 23,009,778
Issued 7,745,843
Treasury stock
Acquisition (28,333,100)
Retirement (28,333,100) 28,333,100
- -------------------------------------------------------------------------------
Balance December 31, 1997 1,152,762,128 (23,245,747) -
- -------------------------------------------------------------------------------
Businesses acquired 72,326
Issued 9,077,880 333,862
Treasury stock
Acquisition (12,814,162)
Retirement (12,480,300) 12,480,300
- -------------------------------------------------------------------------------
Balance December 31, 1998 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)
===============================================================================
The pretax, tax and after-tax effects of the components of other comprehensive
income (loss) are shown below:
- --------------------------------------------------------------------------------
Other comprehensive income (loss) Pretax Tax After-tax
--------------------------------------
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
--------------------------------------
1998
Cumulative translation adjustment $ (23) $ - $ (23)
Minimum pension liability adjustment (193) 81 (112)
--------------------------------------
Other comprehensive income (loss) $(216) $ 81 $(135)
--------------------------------------
1997
Cumulative translation adjustment $(130) $ - $(130)
Minimum pension liability adjustment (46) 18 (28)
--------------------------------------
Other comprehensive income (loss) $(176) $ 18 $(158)
================================================================================
DuPont
NOTES TO FINANCIAL STATEMENTS 59
(Dollars in millions, except per share)
Balances of related after-tax components comprising accumulated other
comprehensive loss are summarized below:
- --------------------------------------------------------------------------------
Accumulated other comprehensive loss 1999 1998 1997
- --------------------------------------------------------------------------------
December 31
Foreign currency translation adjustment $ (4) $(176) $(153)
Minimum pension liability adjustment* (180) (256) (144)
Net unrealized gains on securities 51 - -
-----------------------------------
$(133) $(432) $(297)
================================================================================
* Includes $0, $79 and $25 for Conoco for 1999, 1998 and 1997, respectively.
22. 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 57,203,985 for 1999, 60,949,492
for 1998 and 56,842,462 for 1997.
Awards for 1999 under the DuPont Stock Performance Plan (granted to key
employees in 2000) consisted of 5,753,065 fixed options to acquire DuPont common
stock at the market price ($61.00 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, 1997 49,366,128 $25.73 - -
- --------------------------------------------------------------------------------
Granted 22,937,612 $52.82 4,926,900 $52.66
Exercised 9,719,982 $24.47 - -
Forfeited 1,373,884 $47.85 95,600 $52.50
- --------------------------------------------------------------------------------
December 31, 1997 61,209,874 $35.58 4,831,300 $52.66
- --------------------------------------------------------------------------------
Granted 5,697,539 $59.96 101,000 $64.90
Reclassified 2,387,650 $52.51 (2,387,650) $52.51
Exercised 8,345,303 $33.70 - -
Forfeited 1 8,786,328 $39.74 629,800 $52.50
- --------------------------------------------------------------------------------
December 31, 1998 52,163,432 $38.62 1,914,850 $53.55
- --------------------------------------------------------------------------------
Granted 2 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
================================================================================
1 Includes both forfeitures and those options cancelled as part of the Conoco
IPO.
2 Includes options granted in exchange for outstanding vested options under
Pioneer's employee stock option plan.
Options exercisable and weighted-average exercise price at the end of the last
three years and the weighted-average fair value of options granted are as
follows:
- --------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------
Fixed Options:
Number of shares at year-end 45,117,694 47,462,223 40,037,649
Weighted-avg. price at year-end $38.20 $36.54 $26.50
Weighted-avg. fair value of
options granted during year $19.44 $14.30 $12.91
- --------------------------------------------------------------------------------
Variable Options:
Number of shares at year-end - - -
Weighted-avg. price at year-end - - -
Weighted-avg. fair value of
options granted during year - $15.79 $13.08
================================================================================
DuPont
60 NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
The fair value of options granted is calculated using the Black-Scholes option
pricing model. Assumptions used were as follows:
- --------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------
Fixed Variable Fixed Variable Fixed Variable
---------------------------------------------------------
Dividend yield 3.2% _ 2.1% 2.1% 2.2% 2.2%
Volatility 23.4% _ 19.8% 19.9% 18.8% 18.6%
Risk-free
interest rate 5.3% _ 5.5% 5.6% 6.4% 6.4%
Expected life
(years) 5.3 _ 5.7 5.8 5.6 5.7
================================================================================
The following table summarizes information concerning currently outstanding and
exercisable options:
- --------------------------------------------------------------------------------
Exercise Exercise Exercise Exercise
Price Price Price Price
$18.00- $27.75- $42.25- $63.47-
December 31, 1999 $27.00 $41.63 $63.38 $82.09
- --------------------------------------------------------------------------------
Fixed Options
Options outstanding 12,681,913 12,900,712 27,402,763 1,181,634
Weighted-avg. remaining
contractual life (years) 2.6 5.4 7.6 8.3
Weighted-avg. price $22.03 $31.07 $53.80 $74.07
Options exercisable 12,681,913 12,900,712 19,385,042 150,027
Weighted-avg. price $22.03 $31.07 $53.26 $73.83
- --------------------------------------------------------------------------------
Variable Options
Options outstanding - - 1,826,850 88,000
Weighted-avg. remaining
contractual life (years) - - 7.1 7.9
Weighted-avg. price - - $52.79 $69.07
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. Statement of Financial Accounting Standards (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 majority-owned 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
and Conoco had adopted these recognition provisions; the effect on reported net
income of applying these recognition provisions to majority-owned subsidiaries
other than Conoco is not material.
The pro forma 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 1999 1998 1997
- --------------------------------------------------------------------------------
Net income
As reported $7,690 $4,480 $2,405
Pro forma $7,683 $4,584 $2,206
Earnings per share - basic
As reported $ 7.08 $ 3.96 $ 2.12
Pro forma $ 7.08 $ 4.05 $ 1.94
Earnings per share - diluted
As reported $ 6.99 $ 3.90 $ 2.08
Pro forma $ 6.99 $ 3.99 $ 1.91
================================================================================
Compensation expense recognized in income for stock-based employee compensation
awards was $71 ($53 excluding Conoco) for 1999, $174 ($15 excluding Conoco) for
1998 and $65 ($40 excluding Conoco) for 1997.
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 ability to succeed to more
important managerial responsibility. Such awards were $188 for 1999, $182 for
1998 and $268 ($223 excluding Conoco) for 1997. 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 $180 in
1999, $188 in 1998 and $265 ($221 excluding Conoco) in 1997. Awards made and
amounts credited under the Variable Compensation Plan for 1999 relate solely to
employees of continuing operations. In accordance with the terms of the Variable
Compensation Plan and similar plans of subsidiaries, 1,051,038 shares of common
stock are awaiting delivery from awards for 1999 and prior years.
23. Investment Activities
On October 1, 1999, the company acquired the approximately 80 percent of Pioneer
Hi-Bred International not previously owned by the company for $7,691 consisting
of $3,422 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 estimated direct acquisition costs and expenses
of $34. The purchase price specified in the merger agreement with Pioneer was
not subject to contingent payments,
DuPont
NOTES TO FINANCIAL STATEMENTS 61
(Dollars in millions, except per share)
options or commitments. 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 is being accounted for as a purchase. The preliminary allocation
of purchase price to the identifiable assets acquired and liabilities assumed,
based on their estimated fair values is as follows: current assets $2,104;
noncurrent assets $5,536; in-process research and development $2,186; current
liabilities $954; long term borrowings $163; other liabilities $179; deferred
income taxes $833; and minority interests $6. Noncurrent assets includes $2,608
of goodwill, which is being amortized over 40 years.
From September 30, 1997 through September 30, 1999, the company accounted for
its approximate 20 percent ownership interest in Pioneer under the equity
method. Pioneer's results were fully consolidated beginning October 1, 1999. The
following unaudited pro forma data presents information as if the approximately
80 percent of Pioneer acquired on October 1, 1999, had been acquired as of
January 1, 1999 and 1998, respectively. The unaudited pro forma data give effect
to actual operating results of Pioneer prior to the acquisition, adjusted to
include the estimated effects of DuPont stock and options issued, interest
expense, amortization of identifiable intangibles and goodwill, and income
taxes. The 1998 unaudited pro forma income from continuing operations and net
income data includes a $2,186 charge for purchased in-process research and
development. Pro forma sales include $373 in 1999 and $386 in 1998 resulting
from consolidated reporting of the company's historical approximate 20 percent
equity method investment in Pioneer and its Optimum joint venture with Pioneer.
Under purchase accounting, inventories at the date of acquisition are recorded
at their estimated fair value, which is higher than Pioneer's historical cost.
Under the FIFO method used by Pioneer, a nonrecurring charge equal to the excess
of fair value over Pioneer's historical cost of inventory will be charged to
cost of goods sold as the acquired inventories are sold. Pro forma income from
continuing operations and net income for 1999 and 1998 exclude the estimated
$360 nonrecurring charge that is expected to be recorded in the 12-month period
immediately following the acquisition as a result of this inventory accounting
requirement. The unaudited pro forma data does not necessarily reflect the
actual results that would have occurred nor is it necessarily indicative of
future results of operations of the combined companies.
- --------------------------------------------------------------------------------
Unaudited Pro forma: 1999 1998
--------------------------
Sales $28,708 $26,619
================================================================================
Income (loss) from Continuing Operations $ 290 $ (621)
Income and gains on Discontinued Operations 7,471 3,033
Extraordinary loss - (201)
--------------------------
Net Income $ 7,761 $ 2,211
================================================================================
Earnings (loss) per share
Basic
Continuing Operations $ 0.26 $ (0.52)
Discontinued Operations 6.57 2.54
Extraordinary loss - (0.18)
--------------------------
Net Income $ 6.83 $ 1.84
Diluted
Continuing Operations $ 0.25 $ (0.52)
Discontinued Operations 6.49 2.51
Extraordinary loss - (0.18)
--------------------------
Net Income $ 6.74 $ 1.81
================================================================================
On February 26, 1999, the company purchased the global Herberts coatings
business from Hoechst AG for a cash payment of $1,588, acquisition related costs
of $11, and assumed debt of $113. For accounting purposes, the acquisition has
been treated as a purchase. The preliminary allocation of purchase price is as
follows: current assets $705; noncurrent assets $1,495; in-process research and
development $64; and assumed liabilities $665. Noncurrent assets include $758 of
goodwill, which is being amortized over 20 years. Assumed liabilities include
$39 in employee separation costs and $37 in other exit costs pursuant to a
restructuring plan the company began to formulate as of the acquisition date.
Under this plan, nearly 1,300 employees will be terminated as manufacturing
facilities are shut down and other business activities are reorganized.
The company purchased Merck's 50 percent interest in The DuPont Merck
Pharmaceutical Company on July 1, 1998, for a cash payment of $2,586. As part of
the purchase, the company agreed to indemnify Merck for certain liabilities that
may arise from events that occurred during Merck's tenure as a general partner
(see Note 26). In addition, related costs of $8 were incurred. The company now
operates as DuPont Pharmaceuticals Company. For accounting purposes, the
acquisition has been treated as a purchase. The allocation of purchase price is
as follows: other current assets $275; noncurrent assets $1,371; in-process
research and development $1,230; and liabilities $282. Noncurrent assets
includes $30 of goodwill, which is being amortized over 20 years.
DuPont
62 NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
The company purchased ICI's global polyester films business on January 31, 1998,
for a cash payment of $647; in addition, related costs of $5 were incurred and
liabilities of $110 were assumed, including $54 in employee separation costs and
$6 in other costs pursuant to an exit plan the company began to formulate as of
the acquisition date. For accounting purposes, the acquisition has been treated
as a purchase. The allocation of purchase price is as follows: current assets
$62; noncurrent assets $650; and in-process research and development $50.
Noncurrent assets includes $76 of goodwill, which is being amortized over 20
years.
Investment in affiliates in 1997 includes $1,711 for the September 1997 purchase
of a 20 percent interest in Pioneer Hi-Bred International. For accounting
purposes, the acquisition has been treated as a purchase. Of the $1,711 purchase
price, $903 was allocated to purchased in-process research and development and
the remainder was allocated based on fair values to assets and liabilities of
Pioneer, principally intangible assets (including $206 of goodwill to be
amortized over 40 years), for purposes of determining equity in earnings. The
1997 allocation of purchase price was revised in 1998 with finalization of
purchase accounting.
Protein Technologies International was purchased on December 1, 1997. PTI is a
global supplier of soy proteins and applied technology to the food and paper
processing industries. Total consideration consisted of 22,570,673 shares of
DuPont common stock with a fair value of $1,301. In addition, related costs of
$5 were incurred. For accounting purposes, the acquisition has been treated as a
purchase. The purchase price was allocated as follows: cash $47; other current
assets $179; noncurrent assets $1,072; in-process research and development $560;
deferred tax liability $280; and other liabilities $272. Noncurrent assets
includes $85 of goodwill, which is being amortized over 25 years.
The company purchased ICI's global polyester resins and intermediates businesses
on December 31, 1997, for a cash payment of $1,240; in addition, related costs
of $7 were incurred. For accounting purposes, the acquisition has been treated
as a purchase. The purchase price was allocated as follows: current assets $89;
noncurrent assets $1,245; in-process research and development $178; and
liabilities $265, including $15 in employee separation costs pursuant to an exit
plan the company began to formulate as of the acquisition date. Noncurrent
assets includes $26 of goodwill, which is being amortized over 20 years.
Note 4 provides information on purchased in-process research and development in
connection with the Pioneer, Herberts, PTI, ICI and DuPont Merck transactions.
Proceeds from sales of assets in 1999 included $537 related to the formation of
the DuPont Teijin films joint venture. In 1998 proceeds from sales of assets
principally included: (a) $500 from the sale of substantially all of DuPont's 50
percent interest in CONSOL Energy Inc.; (b) $279 from the sale of the global
hydrogen peroxide business; and (c) $86 from the sale of the printing and
publishing businesses.
Proceeds from sales of assets in 1997 principally included: (a) $175 from
collection of a note from The Sterling Group Inc. received in connection with
its purchase of the Diagnostic Imaging business in 1996; (b) $125 from DuPont
Merck for sale of its generic and multisource product lines; and (c) $62 from
the sale of the NEN Life Sciences Products to Genstar Capital LLC.
24. 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 law 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:
DuPont
NOTES TO FINANCIAL STATEMENTS 63
(Dollars in millions, except per share)
- --------------------------------------------------------------------------------
Pension Benefits Other Benefits
-----------------------------------------------
1999 1998 1999 1998
-----------------------------------------------
Change in Benefit Obligation
Benefit obligation at
beginning of year $19,271 $17,133 $ 4,765 $ 4,590
Service cost 412 355 60 61
Interest cost 1,192 1,121 305 310
Plan participants'
contributions 16 17 32 28
Actuarial (gain) loss (2,336) 1,586 (199) 245
Foreign currency exchange
rate changes (194) 43 3 (4)
Benefits paid (1,309) (1,236) (393) (330)
Amendments 57 7 6 (167)
Business combinations 611 389 48 32
Divestiture (1) (144) - -
-----------------------------------------------
Benefit obligation at end
of year $17,719 $19,271 $ 4,627 $ 4,765
===============================================
Change in Plan Assets
Fair value of plan assets
at beginning of year $19,829 $18,697 $ - $ -
Actual return on
plan assets 3,091 2,411 - -
Foreign currency exchange
rate changes (125) 9 - -
Employer contributions 175 189 361 302
Plan participants'
contributions 16 17 32 28
Benefits paid (1,309) (1,236) (393) (330)
Retiree health care pension
assets transfer (264) (249) - -
Special termination payments (38) (159) - -
Business combinations 479 244 - -
Divestiture 7 (94) - -
-----------------------------------------------
Fair value of plan assets
at end of year $21,861 $19,829 $ - $ -
===============================================
Funded Status $ 4,142 $ 558 $(4,627) $(4,765)
Unrecognized prior
service cost 574 572 (671) (752)
Unrecognized actuarial
(gain) loss (3,559) 201 (533) (340)
Unrecognized transition
asset (475) (622) - -
-----------------------------------------------
Net amount recognized $ 682 $ 709 $(5,831) $(5,857)
===============================================
Amounts recognized in the
statement of financial
position consist of:
Prepaid (accrued) benefit cost $ 770 $ 798 $(5,831) $(5,857)
Accrued benefit liability (422) (448) - -
Intangible asset 41 61 - -
Accumulated other
comprehensive income 293 298 - -
-----------------------------------------------
Net amount recognized $ 682 $ 709 $(5,831) $(5,857)
================================================================================
- --------------------------------------------------------------------------------
Weighted-average Pension Benefits Other Benefits
assumptions as of --------------------------------------------
December 31 1999 1998 1999 1998
--------------------------------------------
Discount rate 7.75% 6.5% 7.75% 6.5%
Expected return on plan assets 9.0% 9.0% - -
Rate of compensation increase 5.0% 5.0% 5.0% 5.0%
================================================================================
The above assumptions are for U.S. plans only. For non-U.S. plans, no one of
which was material, assumptions reflect economic assumptions applicable to each
country. The expected return on U.S. plan assets has been increased to 9.5
percent for year 2000.
For measurement purposes, a 7.5 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2000. The rate was
assumed to decrease gradually to 4 percent for 2004 and remain at that level
thereafter.
- --------------------------------------------------------------------------------
Components of Pension Benefits Other Benefits
Net Periodic -------------------------------------------------------------
Benefit Cost 1999 1998 1997 1999 1998 1997
-------------------------------------------------------------
Service cost $ 412 $ 355 $ 328 $ 60 $ 61 $ 55
Interest cost 1,192 1,121 1,123 305 310 334
Expected return
on plan assets (1,719) (1,581) (1,417) - - -
Amortization of
transition asset (150) (150) (150) - - -
Amortization of
unrecognized
(gain) loss 49 56 35 (6) (25) (21)
Amortization of
prior service
cost 50 53 54 (75) (65) (65)
Curtailment/
settlement loss 2 6 - - - -
-------------------------------------------------------------
Net periodic
benefit cost
(credit) $ (164) $ (140) $ (27) $ 284 $ 281 $ 303
================================================================================
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were $1,497, $1,163, and $165, respectively, as of
December 31, 1999, and $2,364, $1,968, and $990, respectively, as of
December 31, 1998. The special termination benefit of $38 was provided to U.S.
employees terminated under company-wide productivity improvement initiatives.
(These initiatives are described in Note 5.) U.S. pension assets consist
principally of common stocks, including 9,468,864 shares of DuPont at
December 31, 1999, and U.S. government obligations.
DuPont
64 NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
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 $ 42 $ (34)
Effect on postretirement
benefit obligation $447 $(368)
================================================================================
25. Derivatives and Other Hedging Instruments
The company enters into contractual arrangements (derivatives) in the ordinary
course of business to hedge its exposure to currency, interest rate and
commodity price risks. The company has established an overlying Financial Risk
Management Framework for risk management and derivative activities. 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 financial institutions. 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.
The company's accounting policies with respect to these financial instrument
transactions are set forth in Note 1.
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.
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, 1999, 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 $(73), $(31) and $146 for the years 1999, 1998 and 1997,
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 uses a combination of financial instruments, including interest rate
swaps, interest and principal currency swaps and structured medium-term
financings, as part of its program to manage the fixed and floating 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. Interest rate swaps also involve the exchange of
floating for fixed rate interest payments that are fully integrated with
commercial paper or other floating rate borrowings to effectively convert
DuPont
NOTES TO FINANCIAL STATEMENTS 65
(Dollars in millions, except per share)
floating rate debt into fixed rate debt. Both types of interest rate swaps are
denominated in U.S. dollars. Interest rate swaps allow the company to maintain a
target range of floating rate debt.
In 1999, the company entered into interest rate swap agreements as part of the
program to manage the fixed and floating interest rate mix of total borrowings.
The agreements, totaling a notional amount of $400, put the company into an
interest rate swap, 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 reset semi-annually based on six-month U.S. Dollar LIBOR. The fair value of
the swaps at December 31, 1999, was $(36).
Under interest and principal currency swaps, the company receives predetermined
foreign currency-denominated payments corresponding, both as to timing and
amount, to the fixed or floating interest rate and fixed principal amount to be
paid by the company under concurrently issued foreign currency-denominated
bonds. In return, the company pays a U.S. dollar-denominated fixed or floating
interest rate and a U.S. dollar-denominated fixed principal amount to the
counterparty, thereby effectively converting the foreign currency-denominated
bonds into U.S. dollar-denominated obligations for both interest and principal.
Interest and principal currency swaps allow the company to be fully hedged
against fluctuations in currency exchange rates and foreign 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.
An interest and principal currency swap was outstanding at December 31, 1999 and
1998, that effectively converted a 150 million Swiss franc borrowing with a 6.25
percent Swiss franc fixed interest rate and a maturity of 2000 to a U.S. dollar
fixed principal amount of $103 with a 6.9 percent U.S. dollar fixed interest
rate. The fair value of this swap at December 31, 1999 and 1998, was not
material. Both this swap and the associated note matured on January 11, 2000.
Structured medium-term financings consist of: (a) a structured medium-term note
with interest and/or principal payments (denominated in either U.S. dollars or
foreign currencies) determined using a specified calculation incorporating
changes in currency exchange rates or other financial indexes, and (b) a
concurrently executed structured medium-term swap that, for any and all
calculations of the note's interest and/or principal payments over the term of
the note, provides a fully hedged transaction such that the note is effectively
converted to a U.S. dollar-denominated fixed or floating interest rate with a
U.S. dollar-denominated fixed principal amount. 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.
The face amount of structured medium-term financings outstanding was $50 at
December 31,1999 and 1998. The weighted-average interest rate and
weighted-average maturity was 5.6 percent and 5.1 percent, and 5.8 years and 6.8
years, at December 31, 1999 and 1998, respectively. The fair value of the
structured medium-term swap associated with these financings at December 31,
1999 and 1998, was not material.
It is the company's policy that structured medium-term notes will not be issued
unless a hedge of the market risks inherent in such borrowings is executed
simultaneously with a management-approved, highly creditworthy counterparty to
provide a fully hedged transaction.
Interest rate financial instruments did not have a material effect on the
company's overall cost of borrowing at December 31, 1999 and 1998.
See also Notes 17 and 19 for additional descriptions of interest rate financial
instruments.
Summary of Outstanding Derivative Financial Instruments
Set forth below is a summary of the notional amounts, estimated fair values and
carrying amounts of outstanding financial instruments at December 31, 1999 and
1998.
Notional amounts represent the face amount of the contractual arrangements and
are not a measure of market or credit exposure. Estimated fair value of forward
exchange contracts is based on market prices for contracts of comparable time to
maturity. Carrying amounts represent the receivable (payable) recorded in the
Consolidated Balance Sheet. See also Notes 10, 11, 15, 16, 17 and 19 for fair
values and carrying amounts of other financial instruments.
DuPont
66 NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
Notional Amount, Estimated Fair Value and Carrying Amount of Outstanding
Derivative Financial Instruments
- --------------------------------------------------------------------------------
Notional Estimated Carrying
Type of instrument Amount Fair Amount
- --------------------------------------------------------------------------------
Forward exchange contracts
December 31, 1999 $ 4,873 $ (17) $ (19)
1998 11,389 (43) (41)
================================================================================
Estimated fair values shown above only represent the value of the hedge
component of these transactions, and thus are not indicative of the fair value
of the company's overall hedged position. The estimated fair value of the
company's total debt portfolio, 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 $11,600 at December 31, 1999 and 1998.
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, 1999 and 1998, was not material.
26. Commitments and Contingent Liabilities
The company uses various leased facilities and equipment in its operations.
Future minimum lease payments under noncancelable operating leases are $172,
$140, $107, $86 and $65 for the years 2000, 2001, 2002, 2003 and 2004,
respectively, and $294 for subsequent years, and are not reduced by
noncancelable minimum sublease rentals due in the future in the amount of $15.
Rental expense under operating leases was $198 in 1999, $214 in 1998 and $250 in
1997.
In June 1997 DuPont formed alliances with Computer Sciences Corporation (CSC)
and Andersen Consulting. CSC operates a majority of DuPont's global information
systems and technology infrastructure and provides selected applications and
software services. Andersen Consulting 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: $208, $172, $164, $157 and
$153 for the years 2000, 2001, 2002, 2003 and 2004, respectively, and a total of
$360 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 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 consolidated financial position or
liquidity of the company.
DuPont has been served with several hundred lawsuits in connection with the 1991
stop-sale and recall of Benlate(R) 50 DF fungicide; approximately 140 cases are
pending. The majority of these lawsuits were filed by growers who allege plant
damage from using Benlate(R) 50 DF and have been 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) 50 DF claims. DuPont believes that
Benlate(R) 50 DF 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. DuPont and other major defendants have been served with lawsuits,
including several class actions, which claim damages from allegedly defective
plumbing systems made with polybutylene pipe and acetal fittings. In the fourth
quarter of 1995, the company settled two of the class actions limiting its
liability to 10 percent of the cost of repairing the allegedly defective
plumbing systems up to a total company payout of $120. Other lawsuits, including
the unsettled class actions, are pending in several states and Canada. The
related liability for each of these
DuPont
NOTES TO FINANCIAL STATEMENTS 67
(Dollars in millions, except per share)
matters included in the Consolidated Balance Sheet is not reduced by the amount
of any expected insurance recoveries. Adverse changes in estimates for such
costs could result in additional future charges.
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 Note1. At December 31, 1999, such accrual amounted to $435
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 consolidated financial position or liquidity of
the company.
The company has indirectly 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, 1999,
these indirect guarantees totaled $19, and the company had directly guaranteed
$821 of the obligations of certain affiliated companies and others. No material
loss is anticipated by reason of such agreements and guarantees.
As part of the company's purchase of Merck's 50 percent interest in The DuPont
Merck Pharmaceutical Company, the company agreed to indemnify Merck for certain
liabilities that may arise from events that occurred during Merck's tenure as
general partner. As this contingency is resolved and if additional consideration
is paid, the amount of such payments will be recorded as additional cost of the
acquired business and will increase the amount of goodwill recorded for this
acquisition. Amounts paid in 1999 under the indemnity were not material.
In addition, the company has historically guaranteed certain obligations and
liabilities of Conoco Inc., its subsidiaries and affiliates. The company has
guaranteed $924, 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. Several matters under the tax sharing agreement are
currently in dispute between Conoco and DuPont. Among other things, Conoco
claims that DuPont owes Conoco in excess of $200 pursuant to the tax sharing
agreement. DuPont disputes that it owes this amount and believes that any
settlement of the dispute will not be material to its financial position,
liquidity or the gain on disposal of discontinued business.
DuPont
68 NOTES TO FINANCIAL STATEMENTS
(Dollars in millions, except per share)
27. Geographic Information
- --------------------------------------------------------------------------------------------------------------
1999 1998 1997
Net Net Net Net Net Net
Sales* Property Sales* Property Sales* Property
----------------------------------------------------------------------------
North America
United States $13,656 $ 8,977 $13,075 $ 8,454 $12,802 $ 7,469
Canada 989 482 881 459 867 559
Mexico 500 146 421 117 402 118
Other 114 150 93 135 65 74
----------------------------------------------------------------------------
Total 15,259 9,755 14,470 9,165 14,136 8,220
Europe, Middle East and Africa
Germany 1,743 887 1,450 388 1,300 384
France 979 195 904 181 863 174
United Kingdom 960 941 988 1,078 925 759
Italy 884 10 902 5 818 5
Other 2,598 1,202 2,108 1,188 2,029 1,102
----------------------------------------------------------------------------
Total 7,164 3,235 6,352 2,840 5,935 2,424
Asia Pacific
Japan 928 138 820 159 914 77
Taiwan 690 769 591 707 396 688
China 361 146 398 208 373 205
Singapore 112 379 86 635 85 584
Other 1,393 197 947 244 1,157 212
----------------------------------------------------------------------------
Total 3,484 1,629 2,842 1,953 2,925 1,766
South America
Brazil 594 100 659 83 642 106
Other 417 152 444 90 451 85
----------------------------------------------------------------------------
Total 1,011 252 1,103 173 1,093 191
----------------------------------------------------------------------------
Total $26,918 $14,871 $24,767 $14,131 $24,089 $12,601
==============================================================================================================
*Sales are attributed to countries based on location of customer.
28. Industry 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 nine reportable segments including
Agriculture & Nutrition, Nylon Enterprise, Performance Coatings & Polymers,
Pharmaceuticals, Pigments & Chemicals, Pioneer, Polyester Enterprise, Specialty
Fibers and Specialty Polymers. The company's ongoing photomasks, safety
resources, and global services businesses, and the divested businesses of
printing and publishing and coal are included in Other. Major products by
segment include: Agriculture & Nutrition (herbicides, fungicides, insecticides,
soy protein and value-enhanced grains); Nylon Enterprise (flooring systems,
textiles, industrial fibers and intermediates); Performance Coatings & Polymers
(automotive finishes, engineering polymers and elastomers); Pharmaceuticals
(prescription pharmaceuticals and radiopharmaceuticals); Pigments & Chemicals
(white pigment and mineral products, specialty chemicals and fluorochemicals);
Pioneer (hybrid seed corn and soybean seed); Polyester Enterprise (Dacron(R)
polyester, high-performance films and resins and intermediates); Specialty
Fibers (Lycra(R) elastane, nonwovens and aramids); and Specialty Polymers
(photopolymers and electronic materials, packaging and industrial polymers,
Corian(R) solid surfaces and fluoropolymers). 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, Pharmaceuticals and Nylon Enterprise segments have several
large customers in their respective industries that are important to these
segments' operating results.
DuPont
NOTES TO FINANCIAL STATEMENTS 69
(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 year data
have been restated to reflect the 1999 organizational structure. Sales include
pro rata equity affiliate sales and intersegment transfers. After-tax operating
income does not include corporate expenses, interest and exchange gains
(losses). 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 intangible assets, excluding
write-down of assets discussed in Note 5. Expenditures for long-lived assets
excludes investments in affiliates and includes payments for property, plant and
equipment as part of business acquisitions. See Note 23 for discussion of
strategic acquisitions in the segments.
- -----------------------------------------------------------------------------------------------------------------------------------
Agriculture Performance Pigments
& Nylon Coatings & Pharma- & Polyester Specialty
Nutrition Enterprise Polymers ceuticals Chemicals Pioneer Enterprise Fibers
--------------------------------------------------------------------------------------------------
1999
Total Segment Sales $2,598 $4,487 $6,111 $1,630 $3,660 $ 422 $2,649 $3,448
Intersegment Transfers - 35 9 - 237 - 188 80
After-Tax Operating Income 2 358 63 582 230 626 (2,309) (119) 732
Depreciation and Amortization 142 241 225 121 191 85 226 229
Equity in Earnings of Affiliates 2 43 60 - 2 20 (13) 28
Provision for Income Taxes 50 220 416 102 312 (54) (40) 361
Segment Net Assets 3,184 3,004 4,061 1,939 1,811 7,762 2,679 2,734
Affiliate Net Assets 123 572 404 31 63 - 770 135
Expenditures for Long-Lived Assets 262 377 759 101 144 786 126 251
===================================================================================================================================
1998
Total Segment Sales $2,791 $4,594 $4,563 $1,156 $3,659 $ 365 $2,797 $3,296
Intersegment Transfers - 39 9 - 228 - 175 86
After-Tax Operating Income 3 249 244 508 (668) 577 8 (228) 659
Depreciation and Amortization 133 236 149 60 242 - 252 230
Equity in Earnings of Affiliates 2 35 16 77 (3) 8 (1) 25
Provision for Income Taxes 41 189 302 (317) 337 8 (80) 363
Segment Net Assets 3,070 3,082 2,214 1,843 1,768 999 3,142 2,574
Affiliate Net Assets 170 551 281 23 62 999 174 134
Expenditures for Long-Lived Assets 214 493 229 655 190 - 706 361
===================================================================================================================================
1997
Total Segment Sales $2,501 $4,582 $4,622 $ 775 $3,812 $ 12 $2,215 $3,320
Intersegment Transfers - 26 9 - 228 - 169 70
After-Tax Operating Income 4 (98) 372 519 234 513 (919) 124 708
Depreciation and Amortization 73 231 157 - 241 - 126 240
Equity in Earnings of Affiliates 6 42 67 232 - (919) 3 23
Provision for Income Taxes 7 222 303 142 262 (5) 96 344
Segment Net Assets 2,395 2,928 2,043 404 1,887 836 3,156 2,332
Affiliate Net Assets 46 507 262 437 68 836 158 127
Expenditures for Long-Lived Assets 499 490 258 - 203 - 1,131 285
===================================================================================================================================
- ------------------------------------------------------------------------
Specialty
Polymers Other Total 1
-----------------------------------
1999
Total Segment Sales $4,255 $ 480 $29,740
Intersegment Transfers 152 32 733
After-Tax Operating Income 2 668 51 882
Depreciation and Amortization 172 59 1,691
Equity in Earnings of Affiliates 27 (4) 165
Provision for Income Taxes 365 31 1,763
Segment Net Assets 2,328 238 29,740
Affiliate Net Assets 248 - 2,346
Expenditures for Long-Lived Assets 270 125 3,201
========================================================================
1998
Total Segment Sales $4,040 $ 542 $27,803
Intersegment Transfers 155 37 729
After-Tax Operating Income 3 598 183 2,130
Depreciation and Amortization 165 58 1,525
Equity in Earnings of Affiliates 12 81 252
Provision for Income Taxes 356 89 1,288
Segment Net Assets 2,166 243 21,101
Affiliate Net Assets 237 - 2,631
Expenditures for Long-Lived Assets 264 136 3,248
========================================================================
1997
Total Segment Sales $4,037 $1,133 $27,009
Intersegment Transfers 192 60 754
After-Tax Operating Income 4 575 (223) 1,805
Depreciation and Amortization 174 68 1,310
Equity in Earnings of Affiliates 21 67 (458)
Provision for Income Taxes 320 (155) 1,536
Segment Net Assets 1,996 388 18,365
Affiliate Net Assets 199 249 2,889
Expenditures for Long-Lived Assets 311 145 3,322
========================================================================
DuPont
70 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
- --------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------
Total Segment Sales $ 29,740 $ 27,803 $ 27,009
Elimination of Intersegment
Transactions (733) (729) (754)
Elimination of Equity Affiliate Sales (2,092) (2,263) (2,226)
Miscellaneous 3 (44) 60
----------------------------------------
Total Sales $ 26,918 $ 24,767 $ 24,089
================================================================================
After-Tax Operating Income to Income from Continuing Operations
- --------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------
Total Segment ATOI $ 882 $2,130 $1,805
Interest and Exchange Gains (Losses) (362)* (292) (226)
Corporate Expenses (301) (190) (147)
----------------------------------------
Income from Continuing Operations $ 219 $1,648 $1,432
================================================================================
* 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.
Segment Net Assets to Total Assets
- --------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------
Total Segment Net Assets $29,740 $21,101 $18,365
Corporate Assets 5,654 4,768 5,296
Liabilities included in Net
Assets 5,383 4,250 4,630
Net Assets of Discontinued Operations - 8,417 8,398
----------------------------------------
Total Assets $40,777 $38,536 $36,689
================================================================================
Other Items
- --------------------------------------------------------------------------------
Segment Consolidated
Totals Adjustments Totals
------------------------------------------
1999
Depreciation and Amortization $1,691 $ (1) $1,690
Equity in Earnings of Affiliates 165 (30) 135
Provision for Income Taxes 1,763 (353) 1,410
Affiliate Net Assets 2,346 (887) 1,459
Expenditures for Long-Lived
Assets 3,201 177 3,378
1998
Depreciation and Amortization $1,525 $ 35 $1,560
Equity in Earnings of Affiliates 252 26 278
Provision for Income Taxes 1,288 (347) 941
Affiliate Net Assets 2,631 (835) 1,796
Expenditures for Long-Lived
Assets 3,248 135 3,383
1997
Depreciation and Amortization $1,310 $ 71 $1,381
Equity in Earnings of Affiliates (458) 1,101 * 643
Provision for Income Taxes 1,536 (182) 1,354
Affiliate Net Assets 2,889 (517) 2,372
Expenditures for Long-Lived
Assets 3,322 118 3,440
================================================================================
* Includes a charge of $903 for Pioneer in-process research and development
reported in Note 4.
2 Includes the following (charges) benefits:
- --------------------------------------------------------------------------------
Agriculture & Nutrition a b $ 103
Nylon Enterprise a c (326)
Performance Coatings & Polymers a d (63)
Pharmaceuticals a e (33)
Pigments & Chemicals a 1
Pioneer f (2,213)
Polyester Enterprise a g (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 Enterprise - $11; Performance Coatings & Polymers -
$1; Pharmaceuticals - $3; Pigments & Chemicals - $1; Polyester Enterprise -
$10; Specialty Fibers - $1; Specialty Polymers - $2; and Other - $16.
b Includes a $208 gain associated with exchanging the company's investment in
WebMD for Healtheon/WebMD partly offset by charges 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.
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 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.
g 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.
DuPont
NOTES TO FINANCIAL STATEMENTS 71
(Dollars in millions, except per share)
3 Includes the following (charges) benefits:
- --------------------------------------------------------------------------------
Agriculture & Nutrition a $ (73)
Nylon Enterprise b (162)
Performance Coatings & Polymers b (17)
Pharmaceuticals c (853)
Pigments & Chemicals b (4)
Polyester Enterprise d (221)
Specialty Fibers b (3)
Specialty Polymers b (10)
Other e 78
-------------
$ (1,265)
================================================================================
a Includes a $60 charge to adjust the preliminary allocation of purchased
in-process research and development for PTI and a $13 charge related to
productivity improvement initiatives.
b Includes charges associated with productivity improvement initiatives.
c Includes a $799 charge for purchased in-process research and development
associated with the purchase of Merck's 50 percent interest in The DuPont
Merck Pharmaceutical Company and a $54 impairment write-down to fair value
of certain Pharmaceuticals assets.
d Includes a $123 charge for adjustments to the preliminary allocation of
purchased in-process research and development for the purchase of the ICI
polyester businesses and a $98 charge associated with productivity
improvement initiatives.
e Includes a $121 gain on the sale of CONSOL Energy Inc. and a $43 charge
related to productivity improvement initiatives.
4 Includes the following (charges) benefits:
- --------------------------------------------------------------------------------
Agriculture & Nutrition a $ (562)
Pharmaceuticals b 72
Pioneer c (903)
Polyester Enterprise d (63)
Other e (220)
-------------
$ (1,676)
================================================================================
a Includes charges of $500 for acquired in-process research and development
relating to the PTI transaction and $62 associated with the Benlate(R)50 DF
fungicide recall.
b Includes a benefit of $72 from the gain on the sale by DuPont Merck of its
generic and multisource product lines.
c Includes a charge of $903 for acquired in-process research and development
related to the Pioneer transaction.
d Includes a charge of $63 for acquired in-process research and development
relating to the ICI polyester resins and intermediates transaction.
e Includes a charge of $220 associated with the divestiture of certain
printing and publishing businesses.
See Segment Reviews on pages 16-26 for a description of each industry segment.
Products are transferred between segments on a basis intended to reflect as
nearly as practicable the "market value" of the products.
DuPont
72 QUARTERLY FINANCIAL DATA
(Dollars in millions, except per share)
- ----------------------------------------------------------------------------------------------------------------------
Quarter Ended March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------------
1999
Sales $ 6,295 $ 7,024 $ 6,459 $ 7,140
Cost of Goods Sold and Other Expenses 1 5,141 5,858 6,087 8,581
Income (Loss) from Continuing Operations 628 2 846 3 181 4 (1,436) 5
Income from Discontinued Operations 35 71 7,349 16
Net Income (Loss) 663 917 7,530 (1,420)
Basic Earnings Per Share of Common Stock 6
Income (Loss) from Continuing Operations .55 .75 .17 (1.38)
Income from Discontinued Operations .04 .06 7.08 .02
Net Income (Loss) .59 .81 7.25 (1.36)
Diluted Earnings Per Share of Common Stock 6
Income (Loss) from Continuing Operations .55 .74 .17 (1.38)
Income from Discontinued Operations .03 .06 6.98 .02
Net Income (Loss) .58 .80 7.15 (1.36)
Dividends Per Share of Common Stock .35 .35 .35 .35
Market Price of Common Stock 7
High 60 1/8 75 3/16 75 1/16 69 7/16
Low 50 1/16 57 3/16 58 58 1/16
- ----------------------------------------------------------------------------------------------------------------------
1998
Sales $ 6,194 $ 6,432 $ 6,042 $ 6,099
Cost of Goods Sold and Other Expenses 1 5,302 5,272 6,874 5,167
Income (Loss) from Continuing Operations 637 8 794 9 (564)10 781 11
Income from Discontinued Operations 269 165 160 2,439
Net Income (Loss) 906 959 (404)12 3,220
Basic Earnings Per Share of Common Stock 6
Income (Loss) from Continuing Operations .56 .70 (.50) .69
Income from Discontinued Operations .24 .15 .14 2.17
Net Income (Loss) .80 .85 (.36)12 2.86
Diluted Earnings Per Share of Common Stock 6
Income (Loss) from Continuing Operations .55 .69 (.50) .68
Income from Discontinued Operations .24 .14 .14 2.14
Net Income (Loss) .79 .83 (.36) 12 2.82
Dividends Per Share of Common Stock .315 .35 .35 .35
Market Price of Common Stock 7
High 70 7/16 84 7/16 79 1/2 66 1/2
Low 52 5/8 67 1/8 52 1/4 51 11/16
======================================================================================================================
1 Excludes interest expense and provision for income taxes.
2 Includes a charge of $121 ($.11 per share-diluted) reflecting a loss of $81
on forward exchange contracts and a charge of $40 associated with acquired
in-process research and development.
3 Includes a charge of $40 ($.04 per share-diluted) related to employee
separation costs within the Polyester Enterprise.
4 Includes a net charge of $444 ($.42 per share-diluted) related to
impairment charges and restructuring activities within Nylon Enterprise and
Agriculture & Nutrition.
5 Includes a net charge of $2,019 ($1.93 per share-diluted) principally
reflecting a charge of $2,186 to write off acquired in-process research and
development relating to the Pioneer acquisition partly offset by a $208
gain associated with exchanging the company's investment in WebMD for
Healtheon/WebMD.
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 $145 ($.13 per share-diluted) reflecting: a charge
of $85 for the modernization program for global nylon operations; and a
charge of $60 to revise a prior estimate for the 1997 write-off of acquired
in-process research and development relating to the PTI transaction.
9 Includes a net charge of $45 ($.04 per share-diluted) reflecting a charge
principally for the modernization program for global nylon operations.
10 Includes a net charge of $1,174 ($1.03 per share-diluted) reflecting: a
charge of $954 associated with acquired in-process research and
development; a charge of $256 related to productivity improvement
initiatives; a benefit of $36 related to the sale of hydrogen peroxide
assets.
11 Includes a net benefit of $99 ($.08 per share-diluted) reflecting: a gain
of $121 on the sale of substantially all of the company's remaining
interest in CONSOL Energy Inc.; a charge of $54 associated with the
impairment write-down to fair value of certain pharmaceutical assets; and a
net benefit of $32 to revise prior estimates of acquired in-process
research and development.
12 Before effect of extraordinary item.
DuPont
FIVE-YEAR FINANCIAL REVIEW/1/
(Dollars in millions, except per share) 73
- ---------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Sales $26,918 $24,767 $24,089 $23,644 $24,500
Income from Continuing Operations Before Income Taxes
and Minority Interests $ 1,690 $ 2,613 $ 2,829 $ 4,387 $ 4,319
Provision for Income Taxes $ 1,410 $ 941 $ 1,354 $ 1,416 $ 1,432
Income from Continuing Operations $ 219 $ 1,648 $ 1,432 $ 2,931 $ 2,858
Income from Discontinued Operations $ 7,471 $ 3,033 $ 973 $ 705 $ 435
Net Income $ 7,690 $ 4,681/2/ $ 2,405 $ 3,636 $ 3,293
------------------------------------------------------------------------
Basic Earnings Per Share of Common Stock
Income from Continuing Operations $ 0.19 $ 1.45 $ 1.26 $ 2.60 $ 2.43
Income from Discontinued Operations $ 6.89 $ 2.69 $ 0.86 $ 0.63 $ 0.38
Net Income $ 7.08 $ 4.14/2/ $ 2.12 $ 3.23 $ 2.81
Diluted Earnings Per Share of Common Stock
Income from Continuing Operations/3/ $ 0.19 $ 1.43 $ 1.24 $ 2.56 $ 2.41
Income from Discontinued Operations $ 6.80 $ 2.65 $ 0.84 $ 0.62 $ 0.36
Net Income $ 6.99 $ 4.08/2/ $ 2.08 $ 3.18 $ 2.77
------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR END
Working Capital $ 1,425 $(2,374) $(2,110) $ 15 $(2,116)
Total Assets $40,777 $38,536 $36,689 $32,342 $32,748
Borrowings and Capital Lease Obligations
Short Term $ 4,941 $ 6,629 $ 6,152 $ 3,907 $ 6,152
Long Term $ 6,625 $ 4,495 $ 5,897 $ 5,052 $ 5,646
Stockholders' Equity $12,875 $13,954 $11,270 $10,593 $ 8,323
------------------------------------------------------------------------
GENERAL
For the Year
Capital Expenditures $ 6,988/4/ $ 5,480/4/ $ 7,075/4/ $ 1,783 $ 1,810
Depreciation $ 1,444 $ 1,452 $ 1,361 $ 1,526 $ 1,643
Research and Development Expense $ 1,617/5/ $ 1,308/5/ $ 1,072/5/ $ 990 $ 1,031
As Percent of Sales 6.0% 5.3% 4.5% 4.2% 4.2%
Average Number of Shares (millions)
Basic 1,085 1,129 1,131 1,121 1,170
Diluted 1,098 1,145 1,150 1,140 1,183
Dividends Per Common Share $ 1.40 $ 1.365 $ 1.23 $ 1.115 $ 1.015
Common Stock Prices
High $ 75 3/16 $ 84 7/16 $ 69 3/4 $ 49 11/16 $ 36 1/2
Low $ 50 1/16 $ 51 11/16 $ 46 3/8 $ 34 13/16 $ 26 5/16
Year-End Close $ 65 7/8 $ 53 1/16 $ 60 1/16 $ 47 1/16 $ 34 15/16
At Year End
Employees (thousands)/6/ 94 101 98 97 105
Common Stockholders of Record (thousands) 140 145 154 158 166
Book Value Per Common Share $ 12.09 $ 12.18 $ 9.77 $ 9.19 $ 7.28
- ----------------------------------------------------------------------------------------------------------------------------------
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 extraordinary item (Note 8).
3 Earnings from continuing operations before nonrecurring items-diluted were
$2.58, $2.55, $2.70, $2.61 and $2.47 for the years 1999, 1998, 1997, 1996 and
1995, respectively.
4 Includes strategic acquisitions as discussed in Note 23.
5 Excludes purchased in-process research and development.
6 Includes employees of discontinued operations prior to 1999.