2003
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 COMMISSION FILE NUMBER 1-815
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E. I. DU PONT DE NEMOURS
AND COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0014090
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1007 MARKET STREET
WILMINGTON, DELAWARE 19898
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 302 774-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
(EACH CLASS IS REGISTERED ON THE NEW YORK STOCK EXCHANGE, INC.):
TITLE OF EACH CLASS
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Common Stock ($.30 par value)
Preferred Stock
(without par value-cumulative)
$4.50 Series
$3.50 Series
NO SECURITIES ARE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT.
---------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE ACT).
YES [X] NO [ ]
THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NONAFFILIATES OF THE
REGISTRANT (EXCLUDES OUTSTANDING SHARES BENEFICIALLY OWNED BY DIRECTORS AND
OFFICERS AND TREASURY SHARES) AS OF JUNE 30, 2003, WAS APPROXIMATELY $41.0
BILLION.
AS OF JANUARY 31, 2004, 997,838,775 SHARES (EXCLUDES 87,041,427 SHARES OF
TREASURY STOCK) OF THE COMPANY'S COMMON STOCK, $.30 PAR VALUE, WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
(SPECIFIC PAGES INCORPORATED ARE INDICATED UNDER THE APPLICABLE ITEM HEREIN):
INCORPORATED
BY REFERENCE
IN PART NO.
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The company's Proxy Statement in connection with the
Annual Meeting of Stockholders to be held on April 28, 2004 ....... III
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E. I. DU PONT DE NEMOURS AND COMPANY
FORM 10-K
TABLE OF CONTENTS
The terms "DuPont" or the "company" as used herein refer to E. I. du Pont de
Nemours and Company and its consolidated subsidiaries (which are wholly owned or
majority-owned), or to E. I. du Pont de Nemours and Company, as the context may
indicate.
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PAGE
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PART I
Forward-Looking Statements 3
Item 1. Business 4
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders
and Executive Officers of the Registrant 10
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PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 41
Item 8. Financial Statements and Supplementary Data 43
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 43
Item 9A. Controls and Procedures 43
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PART III
Item 10. Directors and Executive Officers of the Registrant 43
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 44
Item 13. Certain Relationships and Related Transactions 44
Item 14. Principal Accountant Fees and Services 44
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PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 45
SIGNATURES 47
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NOTE ON INCORPORATION BY REFERENCE
Information pertaining to certain Items in Part III of this report is
incorporated by reference to portions of the company's definitive 2004 Annual
Meeting Proxy Statement to be filed within 120 days after the end of the year
covered by this Annual Report on Form 10-K, pursuant to Regulation 14A (the
Proxy).
2
PART I
CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
FORWARD-LOOKING STATEMENTS
This report, including "Management's Discussion and Analysis" in Item 7,
contains forward-looking statements which may be identified by their use of
words like "plans," "expects," "will," "anticipates," "intends," "projects,"
"pending," "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, 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:
o The company operates in approximately 75 countries worldwide and derives 55
percent of its revenues from sales outside the United States. Therefore,
governmental and quasi-governmental activities, including changes in the
laws or policies of any country in which the company operates, could affect
the company's business and profitability in that country. Also, the
company's business and profitability in a particular country could be
affected by political or economic repercussions on a domestic, country
specific or global level from acts of terrorism or war (whether or not
declared) and the response to such activities. In addition, economic
factors (including slowing economic growth, particularly in the U.S.,
Europe and Asia Pacific, inflation or fluctuations in interest and foreign
currency exchange rates) and competitive factors (such as greater price
competition or expiration of patent protection) could affect the company's
financial results.
o The company's growth objectives are largely dependent on its ability to
renew its pipeline of new products and services and to bring those products
and services to market. This ability may be adversely affected by
difficulties or delays in product development such as the inability to:
identify viable new products; successfully complete research and
development; obtain relevant regulatory approvals; obtain adequate
intellectual property protection; or gain market acceptance of the new
products and services.
o The company's ability to grow earnings will be affected by increases in the
cost of raw materials. The Performance Materials and Textiles & Interiors
segments are particularly affected by increases in the costs of oil,
natural gas and products derived from oil and natural gas. The company may
not be able to fully offset the effects of higher raw material costs
through price increases or productivity improvements.
o As part of its strategy for growth, the company has made and may continue
to make acquisitions and divestitures and form strategic alliances. The
successful separation of Textiles & Interiors is important to the company's
strategies to improve ongoing operations; however, there can be no
assurance that this or any other planned divestiture or acquisition will be
completed or beneficial to the company.
o To a significant degree, results in the company's Agriculture & Nutrition
segment reflect changes in agricultural conditions, including weather and
government programs. These results also reflect the seasonality of sales of
agricultural products; highest sales in the Northern Hemisphere occur in
the first half of the year. In addition, demand for products produced in
these segments may be affected by market acceptance of genetically enhanced
products.
o The company has undertaken and may continue to undertake productivity
initiatives, including organizational restructurings and Six Sigma
productivity improvement projects, to improve performance and generate cost
savings. There can be no assurance that these will be completed or
beneficial to the company. Also, there can be no assurance that any
estimated financial benefit from such activities will be realized.
o 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
3
PART I
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.
o 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 all inclusive, or necessarily in
order of importance.
ITEM 1. BUSINESS
The company's annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports are accessible on
the company's Web site at WWW.DUPONT.COM by clicking on the tab labeled
"Investor Center" and then on "SEC filings." These reports are made available,
without charge, as soon as is reasonably practicable after the company files or
furnishes them electronically with the Securities and Exchange Commission.
DuPont was founded in 1802 and was incorporated in Delaware in 1915. DuPont is a
world leader in science and technology in a range of disciplines, including
high-performance materials, synthetic fibers, electronics, specialty chemicals,
agriculture and biotechnology. The company operates globally, manufacturing a
wide range of products for distribution and sale to many different markets,
including the automotive, textile, construction, agricultural, medical,
packaging, electronics, and the nutrition and health markets. Total worldwide
employment at year-end 2003 was approximately 81,000 people.
In 2002, the company strategically realigned its businesses into five market-
and technology-focused growth platforms. The growth platforms are: Agriculture &
Nutrition; Coatings & Color Technologies; Electronic & Communication
Technologies; Performance Materials; and Safety & Protection. These growth
platforms are designed to address large, attractive market spaces that allow the
company to leverage its science and technology, products and brands, market
access, and global reach to bring innovative solutions to meet specific customer
needs. A sixth platform, Textiles & Interiors, was also formed to prepare it for
separation from the company. On November 17, 2003, the company and Koch
Industries, Inc. (Koch) announced that they had reached a definitive agreement
to sell substantially all of the net assets related to the Textiles & Interiors
segment to subsidiaries of Koch. These net assets and related businesses are
referred to as INVISTA. The sale is expected to close during the first half of
2004. The growth platforms, together with Textiles & Interiors and
Pharmaceuticals, comprise the company's seven reportable segments. The company's
nonaligned and embryonic businesses are grouped under Other.
The following information describing the business of the company can be found on
the indicated pages of this report:
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ITEM PAGE(S)
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Segment Reviews - Introduction 24
Agriculture & Nutrition 24
Coatings & Color Technologies 26
Electronic & Communication Technologies 27
Performance Materials 28
Pharmaceuticals 29
Safety & Protection 30
Textiles & Interiors 31
Other 32
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Total Segment Sales, Transfers, After-Tax Operating
Income, and Segment Net Assets
for 2003, 2002, and 2001 F-40
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GEOGRAPHIC INFORMATION:
Net Sales and Net Property for 2003, 2002, and 2001 F-39
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The company and its subsidiaries have operations in about 75 countries worldwide
and about 55 percent of consolidated net sales are made to customers outside the
United States. Subsidiaries and affiliates of DuPont conduct manufacturing, seed
production, or selling activities, and some are distributors of products
manufactured by the company.
SOURCES OF SUPPLY
The company utilizes numerous firms as well as internal sources to supply a wide
range of raw materials, energy, supplies, services and equipment. To ensure
availability, the company maintains multiple sources for fuels and most raw
materials, including hydrocarbon feedstocks. Large volume purchases are
generally procured under competitively priced supply contracts.
A substantial portion of the production and sales in the Performance Materials
and Textiles & Interiors segments is dependent upon the availability of
hydrocarbon feedstocks.
4
PART I
ITEM 1. BUSINESS-CONTINUED
Current hydrocarbon feedstock requirements are met by purchases from major
petrochemical companies. DuPont participates in a joint venture with Equistar
Chemicals, LP, which manufactures and supplies a significant portion of the
company's requirements for ethylene glycol, a hydrocarbon feedstock.
Within the Agriculture & Nutrition segment, the company's subsidiary, Pioneer,
which is in the hybrid seed industry, has seed production facilities located
throughout the world, in both the Northern and Southern Hemispheres. In the
production of its parent and commercial seed, Pioneer generally provides the
seed stock, detasseling and roguing labor, and certain other production inputs.
The balance of the labor, equipment, and inputs are supplied by independent
growers. Pioneer believes the availability of growers, parent seed stock, and
other inputs necessary to produce its commercial seed is adequate for planned
production levels. The principal risk in the production of seed is the
environment, with weather being the single largest variant. Pioneer lessens this
risk by distributing production across many locations around the world. Due to
its global presence, the company can engage in seed production year round.
Production in the nutrition and health businesses is primarily dependent upon
the availability of soy flake, which is readily available from many sources.
The major commodities, raw materials, and supplies for the company's reportable
segments in 2003 include the following:
AGRICULTURE & NUTRITION:
acetaldoxime; carbamic acid related intermediates; polyethylene; soybeans;
soy flake; 5-choroindanone; soy lecithin
COATINGS & COLOR TECHNOLOGIES:
butyl acetate; chlorine; HDI based poly alaphatic isocyanates; industrial
gases (O2/N2); ore; petroleum coke; pigments
ELECTRONIC & COMMUNICATION TECHNOLOGIES:
chloroform; fluorspar; hydrofluoric acid; kraton; oxydianiline;
perchloroethylene; polyester; polyethylene; precious metals; pyromellitic
dianhydride
PERFORMANCE MATERIALS:
adipic acid; butanediol; ethane; ethylene glycol; fiberglass;
hexamethylenediamine; methacrylic acid; methanol; natural gas; paraxylene
SAFETY & PROTECTION:
ammonia; benzene; high density polyethylene; isophthaloyl chloride;
metaphenylenediamine; methyl methacrylate; natural gas;
paraphenylenediamine; polyester fiber; polypropylene; propylene;
terephthaloyl chloride; wood pulp
TEXTILES & INTERIORS:
acetylene; adipic acid; ammonia; butadiene; cyclohexane; natural gas;
paraxylene; terephthalic acid
In addition, during 2003, the company consumed substantial amounts of
electricity and natural gas for energy.
After the completion of the pending sale of INVISTA, a subsidiary of Koch will
be the sole provider of adipic acid and hexamethylenediamine for the quantities
anticipated to be required by the Performance Materials segment.
DuPont has contracted with Computer Sciences Corporation (CSC) and Accenture LLP
to provide certain services for the company. CSC operates a majority of the
company's global information systems and technology infrastructures and provides
selected applications and software services. Accenture LLP provides enterprise
resource planning solutions designed to enhance the company's manufacturing,
marketing, distribution and customer service.
PATENTS AND TRADEMARKS
The company believes that its patent and trademark estate provides it with an
important competitive advantage. It has established a global network of
attorneys, as well as branding, advertising, and licensing professionals, to
procure, maintain, protect, enhance, and gain value from this estate.
The company owns and is licensed under various patents, which expire from time
to time, covering many products, processes and product uses. These patents
protect many aspects of the company's significant research program and the goods
and services it sells. The actual protection afforded by these patents varies
from country to country and depends upon the scope of coverage of each
individual patent as well as the
5
PART I
ITEM 1. BUSINESS-CONTINUED
availability of legal remedies in each country. The company owns approximately
22,000 worldwide patents and approximately 15,000 worldwide patent applications.
In 2003, the company was granted almost 440 U.S. patents and about 1,950
international patents. The company's rights under its patents and licenses, as
well as the products made and sold under them, are important to the company as a
whole, and to varying degrees, important to each reportable segment.
For a discussion of the importance of patents to Pharmaceuticals, see the
segment discussion on page 29 of this report.
The environment in which Pioneer and the rest of the companies within the seed
industry compete is increasingly affected by new patents, patent positions,
patent lawsuits and the status of various intellectual property rights.
Ownership of and access to intellectual property rights, particularly those
relating to biotechnology, are important to the Pioneer business and its
competitors. No single patent owned by Pioneer or its competitors is essential
to Pioneer's ability to compete. However, Pioneer will continue to address
freedom to operate issues by enforcing its own intellectual property rights,
challenging claims made by others, and where appropriate, obtaining licenses to
important technologies on commercially reasonable terms.
The company has approximately 2,100 unique trademarks for its products and
services and approximately 22,000 worldwide registrations and applications for
these trademarks. Ownership rights in trademarks do not expire if the trademarks
are continued in use and properly protected. The company has many trademarks
that have significant recognition at the consumer retail level and/or business
to business level. Significant trademarks at the consumer retail level include
the DuPont Oval and DuPontTM (the "DuPont Brand Trademarks"); Pioneer(R) brand
seeds, Teflon(R) fluoropolymers, films, fabric protectors, fibers, and
dispersions; Corian(R) solid surfaces; Kevlar(R) high strength material, and
Tyvek(R) protective material. The company is actively pursuing licensing
opportunities for selected trademarks at the retail level. For example, the
DuPont Brand Trademarks have been licensed for hard surface flooring, automotive
appearance products, air and water filtration, and lubricants. In addition, the
Teflon(R) trademark has been extended through brand licensing to personal care
products, automotive car care products, automotive wiper blades, eye glass
lenses, and home care products.
Certain patents and patent applications, as well as certain trademarks,
(including Lycra(R) brand premium stretch fibers, Stainmaster(R) carpets,
Cordura(R) nylon, Coolmax(R) fibers and Tactel(R) nylon), and the related
registrations and applications are included in the pending sale of INVISTA.
Consequently, the company expects its patent estate to decrease by about 4,200
patents and 2,600 patent applications; and its trademark estate to decrease by
about 3,700 registrations and 470 applications. In addition, the company and
Koch have entered into agreements regarding intellectual property rights,
including patent and trademark licenses.
SEASONALITY
Sales of the company's products in Agriculture & Nutrition, and to a certain
extent, Coatings & Color Technologies and Textiles & Interiors, are affected by
seasonal patterns. Agriculture & Nutrition's performance is strongest in the
first half of the year. Pioneer generally operates at a loss during the third
and fourth quarters of the year, and due to the seasonal nature of the seed
business, Pioneer's inventory is at its highest level at the end of the calendar
year and is sold down in the first and second quarters. Trade receivables in
Agriculture & Nutrition are at a low point at year-end and increase through the
selling season to peak at the end of the second quarter. Coatings & Color
Technologies' sales reflect seasonal patterns related to motor vehicle builds
and after-market refinishing. Textiles & Interiors' flooring businesses are
somewhat affected by the seasonality of the construction industry, which
experiences its highest level of activity during the summer months.
In general, businesses in the remaining segments are not significantly affected
by seasonal factors.
MARKETING
In 2003, the company formed a majority-owned venture, The Solae Company, with
Bunge Limited, comprised of the company's protein technologies business and
Bunge's North American, European and Brazilian ingredients operations. With the
exception of Pioneer and The Solae Company, most products are marketed primarily
through DuPont's sales force, although in some regions, more emphasis is placed
on sales through distributors. In North America, the majority of Pioneer(R)
brand seed is marketed through independent sales representatives. In areas
outside the traditional corn belt, seed products are often marketed through
dealers and distributors who handle
6
PART I
ITEM 1. BUSINESS-CONTINUED
other agricultural supplies. Pioneer products are marketed outside North America
through a network of subsidiaries, joint ventures, and independent
producer-distributors. Solae(R) isolated and functional soy proteins are
marketed using a combination of independent sales representatives, outside
distributors and joint ventures.
MAJOR CUSTOMERS
The company's sales are not materially dependent on a single customer or small
group of customers. Textiles & Interiors and Coatings & Color Technologies,
however, have several large customers in their respective industries that are
important to these segments' operating results.
COMPETITION
The company's businesses compete on a variety of factors such as price, product
quality and performance or specifications, continuity of supply, customer
service and breadth of product line, depending on the characteristics of the
particular market involved and the product or service provided.
Major competitors include chemical companies principally based in the United
States, Western Europe, Japan, China and Korea. In the aggregate, competitors
offer a comparable range of products from agricultural, commodity and specialty
chemicals to plastics and fibers products. The company also competes in certain
product markets with smaller, more specialized firms, as well as those with
partially or fully integrated petrochemical operations.
Agriculture & Nutrition sells hybrid seeds through Pioneer, principally for the
global production of corn and soybeans, and thus directly competes with other
hybrid seed suppliers. Agriculture & Nutrition also provides food safety
equipment and soy-based food ingredients in competition with other major grain
and food processors.
RESEARCH AND DEVELOPMENT
The company conducts research in the United States at over 40 sites in 19 states
at either dedicated research facilities or manufacturing plants. The highest
concentration of research is in the Wilmington, Delaware area at several large
research centers. Among these, the Experimental Station laboratories engage in
investigative and applied research, the Chestnut Run laboratories focus on
applications research, and the Stine-Haskell Research Center conducts
agricultural product research and toxicological research to assure the safe
manufacture, handling and use of products.
Within Agriculture & Nutrition, Pioneer, which has its largest center in
Johnston, Iowa, carries out research to develop hybrids of corn, canola, sorghum
and sunflower, and varieties of soybean, alfalfa, wheat and canola forage
additives for worldwide markets. Hybrids and varieties are developed at primary
research locations, including those in Iowa and Brazil, and tested at many other
locations. Also included in Agriculture & Nutrition is The Solae Company, which
has its largest research center in St. Louis, Missouri. Health benefit studies
are advanced in cooperation with several universities across the globe, and
product and application development is managed in technical centers located in
Denmark, Brazil, England and Russia.
DuPont, reflecting the company's global interests, operates a number of
additional research and development facilities at locations outside the United
States in countries such as Belgium, Canada, France, Germany, Japan, Luxembourg,
Mexico, the Netherlands, Spain, and Switzerland. Plans to establish a new
research and development facility in China by early 2005 were announced in late
2003.
The objectives of the company's research and development programs are to create
new technologies, processes and business opportunities in relevant fields, as
well as to improve existing products and processes. Each segment of the company
funds research and development activities that support its business mission. The
future of the company is not dependent upon the outcome of any specific research
program.
The corporate research laboratories are responsible for conducting research
programs aligned with corporate strategy as provided by the growth platforms.
All research and development activities are administered by senior research and
development management to ensure consistency with the business and corporate
strategy.
Additional information with respect to research and development, including the
amount spent during each of the last three fiscal years, is included in Item 7,
Management's Discussion and Analysis on page 16 of this report.
7
PART I
ITEM 1. BUSINESS-CONTINUED
ENVIRONMENTAL MATTERS
Information related to environmental matters is included in several areas of
this report: (1) Environmental Proceedings on pages 8-10, (2) Management's
Discussion and Analysis on pages 22 and 39-41, and (3) Notes 1 and 24 to the
Consolidated Financial Statements.
ITEM 2. PROPERTIES
DuPont's corporate headquarters are located in Wilmington, Delaware. In
addition, the company owns and operates manufacturing, processing, marketing and
research and development facilities, as well as, regional purchasing offices and
distribution centers.
Information regarding research and development facilities is incorporated by
reference to Item 1, Business - Research and Development. Additional information
with respect to the company's property, plant and equipment, and leases is
contained in Notes 14 and 24 to the company's Consolidated Financial Statements.
The company's investment in property, plant and equipment in the United States
and Puerto Rico related to operations is located at over 100 major sites, some
of which are as follows:
TEXAS DELAWARE VIRGINIA
- ---------------------------------------------------------
Bayport Edge Moor Front Royal
Beaumont Newark Hopewell
Corpus Christi Seaford* Richmond
LaPorte Wilmington Waynesboro*
Orange
Victoria
WEST VIRGINIA TENNESSEE NORTH CAROLINA
- ---------------------------------------------------------
Belle Chattanooga Fayetteville
Parkersburg Memphis Kinston*
New Johnsonville Research
Old Hickory Triangle Park
NEW JERSEY SOUTH CAROLINA NEW YORK
- ---------------------------------------------------------
Deepwater Camden* Buffalo
Parlin Charleston Niagara Falls
Florence
MICHIGAN IOWA PUERTO RICO
- ---------------------------------------------------------
Mt. Clemens Fort Madison Manati
Troy Johnston
* Included in the pending sale of INVISTA.
Property, plant and equipment outside the United States and Puerto Rico is also
located at over 100 major sites, principally in the United Kingdom, Canada,
Germany, the Netherlands, Taiwan, Spain, Singapore, Luxembourg, France, Mexico,
Brazil, Belgium, China, Argentina, Japan and Korea.
The company's plants and equipment are well maintained and in good operating
condition. Sales as a percent of capacity were 80 percent in 2003, 81 percent in
2002 and 78 percent in 2001. Properties are primarily directly owned by the
company; however, certain properties are leased. Although no title examination
of the properties has been made for the purpose of this report, the company
knows of no material defects in title to any of these properties.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION
BENLATE(R)
Information related to this matter is included in Note 24 to the company's
Consolidated Financial Statements under the heading Benlate(R).
PFOA: U.S. ENVIRONMENTAL PROTECTION AGENCY AND CLASS ACTION
Information related to this matter is included in Note 24 to the company's
Consolidated Financial Statements under the heading PFOA.
DUPONT DOW ELASTOMERS LLC
Information related to this matter is included in Note 24 to the company's
Consolidated Financial Statements under the heading DuPont Dow Elastomers LLC.
ENVIRONMENTAL PROCEEDINGS
GRAND CAL/INDIANA HARBOR SYSTEM
The Indiana Departments of Natural Resources and Environmental Management and
the United States Department of Interior are in the process of conducting a
natural resource damage assessment of the Grand Calumet River and the Indiana
Harbor Canal System under the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA), and the Oil Pollution Act. The
company's plant in East Chicago, Indiana, which discharges industrial wastewater
into these waterways, was identified as one of 17 potentially responsible
parties (PRPs) for the cost of the assessment and any determined natural
8
PART I
ITEM 3. LEGAL PROCEEDINGS-CONTINUED
resource damages. The trustees have indicated that their preferred remedy is to
dredge the entire Grand Cal/Indiana Harbor system. DuPont has joined with eight
other PRPs to contest the remedy. A settlement offer has been tendered to the
trustees and negotiations are ongoing.
PFOA: WEST VIRGINIA AND OHIO DEPARTMENTS OF ENVIRONMENTAL PROTECTION
DuPont uses perfluorooctanoic acid and its salts (PFOA) as a processing aid to
manufacture fluoropolymer resins and dispersions at its Washington Works plant
in Wood County, West Virginia. Currently, DuPont recovers or destroys over 85
percent of the PFOA that potentially could be emitted or discharged during the
manufacturing process at the Washington Works plant. By the end of 2004, the
company expects that more than 90 percent will be recovered or destroyed.
In November 2001, the West Virginia Department of Environmental Protection
(WVDEP) and DuPont signed a multimedia Consent Order (the WV Order) that
requires environmental sampling and analyses and the development of screening
levels for PFOA that is used or managed by the Washington Works plant. As a
result of this process, WVDEP issued its Final Ammonium Perfluorooctanoate
Assessment of Toxicity Team Report in August 2002. In the report, the WVDEP
established a screening level of 150 micrograms of PFOA per liter screening
level for drinking water and a soil screening level of 240 parts per million.
None of the local sources for drinking water has tested at or above the
screening level. The report established a screening level of 1 microgram per
cubic meter for air. DuPont recently submitted to the WVDEP its initial air
dispersion modeling results for the period September 2002 through August 2003
which demonstrated that the air screening level was not exceeded during the time
period.
Unless DuPont violates its terms, the WV Order does not call for sanctions.
DuPont has completed all major activities currently required by the WV Order and
has spent approximately $3.5 million through December 31, 2003, in connection
with these activities. DuPont expects to continue to monitor public drinking
water supplies in and around the Washington Works plant on a quarterly and/or
annual basis. The scope and extent of this monitoring has yet to be determined.
In addition, the company may perform other environmental monitoring as suggested
by results received from studies performed under the WV Order.
Environmental sampling of the PFOA levels in the groundwater and drinking water
has been conducted across the Ohio River pursuant to a Memorandum of
Understanding among DuPont, the Ohio Environmental Protection Agency, the WVDEP,
and the Division of Health and Human Resources (the MOU). Under the MOU, these
results were shared with the Ohio EPA. Also, DuPont is funding investigations of
ground and drinking water in that state comparable to the studies in West
Virginia, pursuant to the MOU. In addition, DuPont signed a Safe Drinking Water
Consent (SDWC) Order with EPA Region III (which includes West Virginia) and
Region V (which includes Ohio) in March 2002 to assure provision of alternative
drinking water if supplies are found to exceed screening levels established
under the WV Order. Since the PFOA concentrations in drinking water tested to
date are significantly below the screening level, it is unlikely that DuPont
will be required to provide alternative drinking water under the SDWC Order.
NEW JOHNSONVILLE, TENNESSEE
The U.S. Environmental Protection Agency (EPA) conducted a multi-media audit of
DuPont's titanium dioxide plant in New Johnsonville, Tennessee in the summer of
2001. In December 2002, the EPA alleged certain potential violations by DuPont
and its contractor under Section 608 of the Clean Air Act (CAA) regarding
refrigerant emissions.
The EPA requested substantial information and documents regarding the repair,
charging and maintenance of the refrigerant machines at the New Johnsonville
plant from DuPont's contractor responsible for the repair and maintenance of
certain refrigeration machines at the plant. A substantial number of documents
were provided to the EPA. In addition, DuPont and its contractor have had
numerous discussions with the EPA since January 2003 to obtain more specificity
regarding the alleged violations and to respond to the EPA's various inquiries.
DuPont and its contractor continue to discuss the matter with the EPA in an
effort to reach a clear understanding of the facts associated with the EPA's
alleged CAA regulatory violations. The EPA and the Department of Justice have
presented DuPont and its contractor with a proposed settlement approach. DuPont
is considering its options and anticipates resolution of this matter in 2004.
9
PART I
ITEM 3. LEGAL PROCEEDINGS-CONTINUED
FORT HILL NEW SOURCE REVIEW ENFORCEMENT ACTION
In 2003, the EPA issued a "Notice of Violation and Finding of Violation" for the
DuPont Fort Hill sulfuric acid plant in North Bend, Ohio. The EPA conducted a
review of capital projects at the plant over the past twenty years. Based on its
review, the EPA believes that two of the projects triggered a requirement to
meet the New Source Performance Standards for sulfuric acid plants and that
DuPont should have sought a permit under the New Source Review requirements of
the Clean Air Act. DuPont vigorously disagrees with the EPA's findings because
the EPA continues to change its interpretation of these rules and requirements
without going through the required process to amend them. The courts are split
on these interpretations. The company has three other sulfuric acid plants that
use similar technology.
The EPA has invited the company to begin settlement negotiations, but insists
that all four sulfuric acid plants be included. Since there can be no assurance
that the company will prevail if it litigates this matter, DuPont has accepted
the EPA's invitation. If the negotiations are successful, it is reasonably
likely that the resulting settlement would include capital expenditures as well
as penalties. However, the company cannot reasonably estimate the amount of such
costs at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list, as of March 1, 2004, of the company's executive
officers.
- -------------------------------------------------------------
Executive
Officer
Age Since
- -------------------------------------------------------------
CHAIRMAN OF THE BOARD OF DIRECTORS AND
CHIEF EXECUTIVE OFFICER:
Charles O. Holliday, Jr.* 55 1992
- -------------------------------------------------------------
OTHER EXECUTIVE OFFICERS:
James C. Borel,
Senior Vice President-
Global Human Resources 48 2003
Thomas M. Connelly, Jr.,
Senior Vice President and Chief
Science and Technology Officer 51 2000
Richard R. Goodmanson,
Executive Vice President and Chief
Operating Officer 56 1999
John C. Hodgson,
Executive Vice President and Chief
Marketing & Sales Officer 60 2002
W. Donald Johnson,
Group Vice President-
Global Operations 56 2003
Stacey J. Mobley,
Senior Vice President and Chief
Administrative Officer and
General Counsel 58 1992
Gary M. Pfeiffer,
Senior Vice President and Chief
Financial Officer 54 1997
- -------------------------------------------------------------
* Member of the Board of Directors.
The company's executive officers are elected or appointed for the ensuing year
or for an indefinite term, and until their successors are elected or appointed.
Charles O. Holliday, Jr. joined DuPont in 1970, and has advanced through various
manufacturing and supervisory assignments in product planning and marketing. He
is a former president, executive vice president, president and chairman - DuPont
Asia Pacific. Mr. Holliday became an executive officer in 1992 when he was
appointed senior vice president. He became Chief Executive Officer on February
1, 1998, and Chairman of the Board of Directors on January 1, 1999.
10
PART I
ITEM 4. EXECUTIVE OFFICERS OF THE REGISTRANT--CONTINUED
James C. Borel joined DuPont in 1978, and held a variety of product and sales
management positions for Agricultural Products. In 1993, he transferred to
Tokyo, Japan with Agricultural Products as regional manager, North Asia, and was
appointed regional director, Asia Pacific in 1994. In 1997, he was appointed
regional director, North America and was appointed president of DuPont Crop
Protection and vice president and general manager - DuPont later that year. In
January 2004, he was named to his current position, Senior Vice President -
DuPont Global Human Resources.
Thomas M. Connelly, Jr. joined DuPont in 1977 as a research engineer. Since
then, Mr. Connelly has served in various research and plant technical leadership
roles, as well as product management and business director roles. Mr. Connelly
served as vice president and general manager - DuPont Fluoroproducts from 1999
until September 1, 2000, when he was named to his current position.
Richard R. Goodmanson joined DuPont in 1999 as Executive Vice President and
Chief Operating Officer. Prior to joining DuPont, Mr. Goodmanson was president
and chief executive officer of America West Airlines from 1996 to 1999. He was
senior vice president of operations for Frito-Lay Inc. from 1992-1996, and he
was a principal at McKinsey & Company, Inc. from 1980 to 1992.
John C. Hodgson joined DuPont in 1966. Since then, Mr. Hodgson has held various
sales and product management positions and has served in several business
director roles. In 1996, he was named vice president and general manager of
Photopolymer & Electronic Materials. Prior to his promotion to Executive Vice
President, with responsibility for the company's five newly formed growth
platforms, Mr. Hodgson served as group vice president and general manager -
DuPont iTechnologies from February 2000 until he was named to his current
position in February 2002. In addition, he was named Chief Marketing & Sales
Officer in 2003.
W. Donald Johnson joined DuPont in 1974, and has advanced through a variety of
technical, manufacturing, corporate strategy and business assignments, including
global business director for Kevlar(R). In 1999, he became group vice president,
Nylon Worldwide, and later group vice president - DuPont Operations & Services
in 2001. In January 2004, he was named to his current position, Group Vice
President - Global Operations.
Stacey J. Mobley joined DuPont's legal department in 1972. He was named director
of Federal Affairs in the company's Washington, D.C. office in 1983, and was
promoted to vice president - Federal Affairs in 1986. He returned to the
company's Wilmington, Delaware headquarters in March 1992 as vice president -
Communications in External Affairs, and was promoted to Senior Vice President in
May 1992. He was named Chief Administrative Officer in May 1999, and General
Counsel in November 1999.
Gary M. Pfeiffer joined DuPont in 1974, and has held a succession of tax and
financial and business analysis positions. Mr. Pfeiffer has also served in
several director roles and prior to his promotion to Senior Vice President and
Chief Financial Officer, Mr. Pfeiffer served as vice president and general
manager, DuPont Nylon - North America from 1994 until October 1997.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The company's common stock is listed on the New York Stock Exchange, Inc.
(symbol DD) and certain non-U.S. exchanges. The number of record holders of
common stock was 111,067 at December 31, 2003, and 110,676 at January 31, 2004.
Holders of the company's common stock are entitled to receive dividends when
they are declared by the Board of Directors. While it is not a guarantee of
future conduct, the company has continuously paid a quarterly dividend since the
fourth quarter 1904. Dividends on common stock and preferred stock are usually
declared in January, April, July and October. When dividends on common stock are
declared, they are usually paid on or about the 12th of March, June, September
and December. Preferred dividends are paid on or about the 25th of January,
April, July and October. The Stock Transfer Agent and Registrar is EquiServe
Trust Company N.A.
The company's quarterly high and low trading stock prices and dividends for 2003
and 2002 are shown.
- --------------------------------------------------------------------------------
QUARTERLY HIGH/LOW
MARKET PRICES OF Market Prices Per Share
COMMON STOCK ________________________________ Dividend
High Low Declared
- --------------------------------------------------------------------------------
2003
First Quarter $45.00 $34.71 $0.35
Second Quarter 44.88 38.56 0.35
Third Quarter 45.55 39.55 0.35
Fourth Quarter 46.00 38.60 0.35
- --------------------------------------------------------------------------------
2002
First Quarter $49.80 $39.79 $0.35
Second Quarter 48.40 41.75 0.35
Third Quarter 45.75 35.02 0.35
Fourth Quarter 45.30 36.00 0.35
- --------------------------------------------------------------------------------
12
PART II
ITEM 6. SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE) 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS(1)
Net sales $ 26,996 $ 24,006 $ 24,726 $28,268 $26,918
Income from continuing operations before
income taxes and minority interests $ 143 $ 2,124 $ 6,844 $ 3,447 $ 1,690
Provision for (benefit from) income taxes $ (930) $ 185 $ 2,467 $ 1,072 $ 1,410
Income from continuing operations before cumulative
effect of changes in accounting principles $ 1,002 $ 1,841 $ 4,328 $ 2,314 $ 219
Income from discontinued operations $ -- $ -- $ -- $ -- $ 7,471(2)
Net income (loss) $ 973(3) $ (1,103)(4) $ 4,339(5) $ 2,314 $ 7,690
Adjusted net income (loss)(6) $ 973(3) $ (1,103)(4) $ 4,505(5) $ 2,482 $ 7,793
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share of common stock
Income from continuing operations before cumulative
effect of changes in accounting principles $ 1.00 $ 1.84 $ 4.17 $ 2.21 $ 0.19
Income from discontinued operations $ -- $ -- $ -- $ -- $ 6.89
Net income (loss) $ 0.97(3) $ (1.12)(4) $ 4.18(5) $ 2.21 $ 7.08
Adjusted net income (loss)(6) $ 0.97(3) $ (1.12)(4) $ 4.34(5) $ 2.37 $ 7.18
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share of common stock
Income from continuing operations before cumulative
effect of changes in accounting principles $ 0.99 $ 1.84 $ 4.15 $ 2.19 $ 0.19
Income from discontinued operations $ -- $ -- $ -- $ -- $ 6.80
Net income (loss) $ 0.96(3) $ (1.11)(4) $ 4.16(5) $ 2.19 $ 6.99
Adjusted net income (loss)(6) $ 0.96(3) $ (1.11)(4) $ 4.32(5) $ 2.35 $ 7.09
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR-END(1)
Working capital $ 5,419 $ 6,363 $ 6,734 $ 2,401 $ 1,425
Total assets $ 37,039 $ 34,621 $ 40,319 $ 39,426 $ 40,777
Borrowings and capital lease obligations
Short-term $ 6,017(7) $ 1,185 $ 1,464 $ 3,247 $ 4,941
Long-term $ 4,462(7) $ 5,647 $ 5,350 $ 6,658 $ 6,625
Stockholders' equity $ 9,781 $ 9,063 $ 14,452 $ 13,299 $ 12,875
- ------------------------------------------------------------------------------------------------------------------------------------
GENERAL
For the year
Capital expenditures $ 1,784 $ 1,416 $ 1,634 $ 2,022 $ 6,988
Depreciation $ 1,355 $ 1,297 $ 1,320 $ 1,415 $ 1,444
Research and development (R&D) expense(8) $ 1,349 $ 1,264 $ 1,588 $ 1,776 $ 1,617
Average number of shares (millions)
Basic 997 994 1,036 1,043 1,085
Diluted 1,000 999 1,041 1,051 1,098
Dividends per common share $ 1.40 $ 1.40 $ 1.40 $ 1.40 $ 1.40
At year-end
Employees (thousands) 81 79 79 93 94
Closing stock price $ 45.89 $ 42.40 $ 42.51 $ 48.31 $ 65.88
Common stockholders of record (thousands) 111 116 127 132 140
- ------------------------------------------------------------------------------------------------------------------------------------
(1) See Management's Discussion and Analysis in Item 7 and the Consolidated
Financial Statements on pages F-1 through F-43, including the quarterly
financial data in Note 32, for information relating to significant items
affecting the results of operations and financial position.
(2) Relates to the Conoco divestiture.
(3) Includes a cumulative effect of a change in accounting principle charge of
$29 and $0.03 basic and diluted per share. See Note 10 to the Consolidated
Financial Statements.
(4) Includes a cumulative effect of a change in accounting principle charge of
$2,944 and $2.96 (basic) and $2.95 (diluted) per share. See Note 10 to the
Consolidated Financial Statements.
(5) Includes a cumulative effect of a change in accounting principle benefit of
$11 and $0.01 per share, basic and diluted. See Note 10 to the Consolidated
Financial Statements.
(6) Reflects pro forma effects relating to the adoption of Statement of
Financial Accounting Standards (SFAS) No. 142 and the resulting
nonamortization of goodwill and indefinite-lived intangible assets.
See Note 15 to the Consolidated Financial Statements.
(7) Includes borrowings and capital lease obligations classified as liabilities
held for sale within the Consolidated Balance Sheet.
(8) Excludes purchased in-process research and development.
13
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In early 2002, the company was reorganized into five growth platforms to extend
the global reach and competitiveness of its businesses and to bring greater
focus to attain financial targets of 6 percent revenue growth, 10 percent
earnings growth, and 1 percentage point improvement in return on investor's
capital (ROIC) per year. The company experienced 12 percent revenue growth in
2003 driven by volume increases in the five growth platforms which averaged 5
percent in 2003. Strategies are in place, including developing a more direct and
powerful connection to customers and strengthening the company's presence in
emerging high-growth markets, to deliver strong revenue growth again in 2004. A
sixth platform, the company's mature Textiles & Interiors segment, was formed to
prepare for its separation from the company. The company's seventh platform is
its Pharmaceuticals segment.
On November 17, 2003, the company and Koch Industries, Inc. (Koch) announced
that they had reached a definitive agreement to sell substantially all of the
net assets of the Textiles & Interiors segment to subsidiaries of Koch. These
net assets and related businesses are now referred to as INVISTA. The company
expects the sale to close during the first half of 2004. The successful
separation of INVISTA is an important milestone for achieving a profitable
growth strategy, and for reducing the company's exposure to the volatility of
oil and natural gas prices, which have had a significant negative impact on the
company's earnings in 2003.
In 2003, strong demand continued in housing, construction and motor vehicle
related markets which, along with production agriculture, are the most important
demand drivers for the company's products. Higher sales volumes resulted from
the economic improvement in these key markets and increased market share;
however, broad improvement in U.S. manufacturing did not materialize until late
in the year. At the same time, 2003 prices for oil and natural gas rose
substantially after hitting post-recession lows in early 2002, and remained at
significantly higher levels throughout the year. Higher hydrocarbon prices are
the single largest component of the company's raw material cost increases, and
concurrently reduced gross margins since only a small portion of raw material
cost increases were recovered through higher selling prices. Reflecting
historically high oil and natural gas prices, higher raw material costs reduced
2003 after-tax earnings by about $650 million versus 2002. A significant portion
of this impact occurred in two segments, Textiles & Interiors and Performance
Materials which, together, consume approximately 70 percent of the company's oil
and natural gas related raw materials. Earnings were also adversely affected by
a $696 million after-tax charge primarily related to the separation of INVISTA.
In addition, the company experienced increases in non-cash pension, other
postretirement benefits, and stock option costs which reduced after-tax earnings
by about $400 million versus 2002.
Therefore, despite a 12 percent increase in 2003 sales, income before the
cumulative effect of changes in accounting principles declined 46 percent to $1
billion. To restore profitability, the company announced plans to improve 2005
pretax earnings by $900 million through variable margin improvements, fixed cost
reductions, and organizational actions. Approximately $450 million of the
improvements are expected to be realized in 2004. Cost improvements targeted in
2004 will essentially offset residual costs from the separation of INVISTA and
other expected fixed cost increases, thus allowing the full measure of the
company's expected 2004 volume and price improvement to benefit operating
earnings.
In addition, the company will continue to maintain a very strong liquidity
profile. Cash balances of over $3 billion and bank credit lines of $4.1 billion
as of December 31, 2003, provide primary liquidity to support all short-term
obligations. Secondary liquidity, sufficient to meet upcoming debt maturities,
comes from excellent access to capital markets, strong cash flow generation and
the ability to sell assets.
ANALYSIS OF OPERATIONS
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
NET SALES $26,996 $24,006 $24,726
- ------------------------------------------------------------
2003 VS 2002 Consolidated net sales in 2003 increased $3 billion or 12 percent,
reflecting 5 percent higher volume, 4 percent higher U.S. dollar selling prices,
and 3 percent resulting from acquisitions, principally the formation of The
Solae Company and the purchase of the remaining interest in Griffin LLC in 2003,
as well as the purchase of ChemFirst, Inc. and Liqui-Box corporation which
occurred during 2002.
14
PART II
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
The table below shows a regional breakdown of 2003 consolidated Net sales and
percentage variances from 2002:
- -------------------------------------------------------------------------------------------------------------------------
Percent Change Due to:
2003 Percent -------------------------------------------
NET Change Local Currency
(DOLLARS IN BILLIONS) SALES vs. 2002 Price Effect Volume Other*
- -------------------------------------------------------------------------------------------------------------------------
Worldwide $27.0 12 (1) 5 5 3
- -------------------------------------------------------------------------------------------------------------------------
United States 12.1 6 0 0 2 4
- -------------------------------------------------------------------------------------------------------------------------
Europe 7.5 18 (2) 16 2 2
- -------------------------------------------------------------------------------------------------------------------------
Asia Pacific 4.5 17 (1) 3 15 0
- -------------------------------------------------------------------------------------------------------------------------
Canada, Mexico, South America 2.9 19 2 2 5 10
- -------------------------------------------------------------------------------------------------------------------------
* Includes impacts from the sale of the Clysar(R) business, acquisitions of
Liqui-Box and ChemFirst, Inc., purchases of the remaining interests in
Griffin LLC and Renpar S.A., and the formation of The Solae Company.
Higher worldwide U.S. dollar selling prices primarily reflect the beneficial
currency impact of the weaker dollar, which increased worldwide sales by 5
percent. Volume growth was largely attributable to double-digit growth in the
Asia Pacific region, reflecting increased sales of electronics-related materials
and polymers, agricultural products, and engineering polymers.
2002 VS 2001 Consolidated Net sales in 2002 were down $0.7 billion or 3 percent
below 2001, reflecting 4 percent higher volume, 3 percent lower U.S. dollar
selling prices and a 4 percent reduction principally due to the company's
divestiture of DuPont Pharmaceuticals on October 1, 2001.
The table below shows a regional breakdown of 2002 consolidated Net sales and
percentage variances from 2001:
- -------------------------------------------------------------------------------------------------------------------------
Percent Change Due to:
2002 Percent -------------------------------------------
Net Change Local Currency
(DOLLARS IN BILLIONS) Sales vs. 2001 Price Effect Volume Other*
- -------------------------------------------------------------------------------------------------------------------------
Worldwide $24.0 (3) (4) 1 4 (4)
- -------------------------------------------------------------------------------------------------------------------------
United States 11.4 (6) (3) 0 3 (6)
- -------------------------------------------------------------------------------------------------------------------------
Europe 6.3 (2) (4) 3 2 (3)
- -------------------------------------------------------------------------------------------------------------------------
Asia Pacific 3.8 6 (4) (1) 12 (1)
- -------------------------------------------------------------------------------------------------------------------------
Canada, Mexico, South America 2.5 (4) (5) (2) 7 (4)
- -------------------------------------------------------------------------------------------------------------------------
* Includes impacts from the sale of DuPont Pharmaceuticals and the Clysar(R)
business, discontinued Benlate(R) fungicide and ammonia sales, and the
acquisition of Liqui-Box and ChemFirst, Inc.
Volume growth of 4 percent was attributable to higher sales volumes across all
regions, led by a double-digit increase in Asia Pacific where there was strong
demand for materials and polymers for electronic applications, engineering
polymers, titanium dioxide, and coatings. Worldwide sales volume growth reflects
demand across most product lines, particularly those in the Textiles &
Interiors, Performance Materials, and Coatings & Color Technologies segments.
Four percent lower local currency prices reflects competitive pricing pressures,
principally in the Textiles & Interiors, Electronic & Communication
Technologies, and Coatings & Color Technologies segments.
15
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
OTHER INCOME $734 $516 $644
- ------------------------------------------------------------
2003 VS. 2002 Other income increased $218 million in 2003. This improvement is
primarily attributable to $160 million in lower exchange losses (see Note 2 to
the Consolidated Financial Statements), and a $104 million increase in income
associated with Cozaar(R)/Hyzaar(R) antihyperintensive drugs (including a $23
million benefit from favorable arbitration). Other income also benefited from a
$16 million favorable settlement related to the Unifi manufacturing alliance.
These increases were partly offset by lower earnings in equity affiliates and
lower interest income.
2002 VS. 2001 Other income decreased $128 million in 2002, primarily due to a
$265 million increase in exchange losses which is discussed in detail at Note 2
to the Consolidated Financial Statements. These losses were primarily offset by
an increase of $148 million in Cozaar(R)/Hyzaar(R) income.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
COST OF GOODS SOLD AND
OTHER OPERATING CHARGES $19,476 $16,296 $16,727
As a percent of Net sales 72% 68% 68%
- ------------------------------------------------------------
2003 VS. 2002 Cost of goods sold and other operating charges increased $3.2
billion. As a percent of Net sales, Cost of goods sold and other operating
charges was up 4 percent. This increase relative to sales reflects a $1.0
billion increase in raw material costs, principally those related to oil and
natural gas, as well as a $400 million increase in pension and stock option
expenses. 2003 also included net charges of $78 million related to Benlate(R)
litigation.
2002 VS. 2001 Cost of goods sold and other operating charges decreased $431
million in 2002. As a percent of Net sales, Cost of goods sold and other
operating charges was 68 percent in both years. 2002 includes charges of $80
million to increase the company's reserve for Benlate(R) litigation, $47 million
in product exit costs to write off inventory associated with discontinued
specialty herbicide products, and $50 million to establish a reserve related to
vitamins litigation associated with a previously divested joint venture. These
charges were partly offset by a credit of $40 million attributable to the
revisions in Pioneer acquisition costs related to accrued postemployment costs
for certain Pioneer employees. 2001 includes charges of $56 million related to
the settlement of YieldGard(R) insect resistant corn litigation with Monsanto
and $133 million in Pioneer acquisition-related charges primarily associated
with the sale of acquired Pioneer inventory, which in accordance with purchase
accounting rules, was recorded at estimated fair value at the acquisition date.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES $2,995 $2,699 $2,925
As a percent of Net sales 11% 11% 12%
- ------------------------------------------------------------
2003 VS. 2002 Selling, general and administrative (SG&A) expense in 2003
increased $296 million over 2002. This increase reflects higher non-cash pension
expenses, currency translation and the net impact of portfolio changes.
2002 VS. 2001 SG&A declined $226 million in 2002 primarily due to the company's
divestiture of DuPont Pharmaceuticals in October 2001.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
RESEARCH AND DEVELOPMENT
EXPENSE $1,349 $1,264 $1,588
As a percent of Net sales 5% 5% 6%
- ------------------------------------------------------------
2003 VS. 2002 The increase in Research and development expense in 2003 is
primarily attributable to higher non-cash pension expenses.
2002 VS. 2001 The decline in Research and development expense in 2002 is
primarily attributable to the company's divestiture of DuPont Pharmaceuticals,
its research intensive pharmaceuticals subsidiary, on October 1, 2001.
The company has broad and deep science and technology capabilities, and its
objective is to connect these capabilities to existing and new markets. Through
2003, the company is on track to meet its goal of achieving one-third of total
company revenues from new products introduced within the last five years by
2005.
The company continues to support a strong commitment to research and development
as a source of sustainable growth, and expects research and development funding
to remain at about the same level in 2004. Because of its broad array of
products and customers, the company's future financial performance
16
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
is not materially dependent on the success or failure of any single research or
development project.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
INTEREST EXPENSE $347 $359 $590
- ------------------------------------------------------------
2003 VS. 2002 Interest expense was relatively flat year over year as a result of
lower average interest rates offset by higher debt levels.
2002 VS. 2001 Interest expense in 2002 decreased $231 million over 2001. This
reflects a decrease of $252 million due to lower average debt levels and lower
interest rates, partially offset by a charge of $21 million recorded in 2002 for
the early extinguishment of outstanding debentures.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
RESTRUCTURING AND ASSET
IMPAIRMENT CHARGES $(17) $290 $1,078
- ------------------------------------------------------------
The company did not institute any significant restructuring programs in 2003. A
benefit of $17 million was recorded to reflect changes in estimates related to
prior year restructuring programs.
EXISTING PROGRAMS
Restructuring programs instituted in 2002 and 2001 further aligned resources
consistent with the specific missions of the segments, thereby improving
competitiveness, accelerating progress toward sustainable growth and addressing
weakening economic conditions. The company recorded net charges of $290 million
and $1.1 billion in 2002 and 2001, respectively. Significant components of these
programs are discussed below; additional details are contained in Note 4 to the
Consolidated Financial Statements.
2002 COATINGS & COLOR TECHNOLOGIES
A restructuring program was instituted within Coatings & Color Technologies in
the fourth quarter 2002 to terminate approximately 775 employees involved in
technical, manufacturing, marketing and administrative activities. Essentially
all employees had been terminated as of December 31, 2003, thereby completing
this portion of the program. In addition, the company shut down operating
facilities during 2003 due to transferring production to more cost effective
facilities.
In the aggregate, payments from operating cash flows to terminated employees and
to third parties, principally for dismantlement and removal activities, are
expected to total about $75 million. Over 50 percent of these cash outlays were
made in 2003, and most of the remaining payments will be made in 2004. As a
result of these activities, the company expects annual pretax cost savings of
about $55 million per year when completed with about 60 percent realized in
2003, and essentially all the remaining savings expected to be realized in 2004.
About 70 percent of these savings will result in reduced Cost of goods sold and
other operating charges, with the remaining 30 percent expected to be divided
about evenly between Selling, general and administrative expenses and Research
and development expense.
2002 TEXTILES & INTERIORS
A restructuring program was instituted within Textiles & Interiors in the second
quarter 2002 to terminate approximately 2,000 employees involved in technical,
manufacturing, marketing and administrative activities, and to shut down
operating facilities, principally due to transferring production to more cost
effective facilities. Essentially all employees had been terminated as of
December 31, 2003, thereby completing this portion of the program.
In the aggregate, payments from operating cash flows to terminated employees and
third parties for dismantlement and removal activities are expected to total
about $160 million. About 30 percent of the cash outlays were made in 2002, 40
percent in 2003, 20 percent are expected to be paid in 2004, and the remainder
is expected to be paid in 2005. The company realized annual pretax cost savings
of about $120 million per year from this restructuring program. About 20 percent
of these savings were realized in 2002, and essentially all the remaining
savings were realized in 2003. About 80 percent of these savings resulted in
reduced Cost of goods sold and other operating charges, with the remaining 20
percent divided evenly between Selling, general and administrative expenses and
Research and development expense.
17
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
2001 RESTRUCTURING INITIATIVES
Restructuring programs instituted in 2001 impacted essentially all segments.
Under the programs, the company terminated approximately 5,500 employees
involved in technical, manufacturing, marketing and administrative activities,
reduced the contractor work force by about 1,300, and shut down operating
facilities principally due to transferring production to more cost competitive
facilities.
In the aggregate, payments from operating cash flows to terminated employees and
to third parties for dismantlement and removal activities and to terminate
contracts are expected to total about $375 million. About $150 million of these
cash outlays were made in 2001, $182 million in 2002, $21 million in 2003, and
most of the remaining payments will be made in 2004. The 2003 benefit to
earnings was approximately $440 million before taxes with about 60 percent of
these savings resulting in reduced Cost of goods sold and other operating
charges, about 30 percent resulting in reduced Selling, general and
administrative expenses and the balance resulting in reduced Research and
development expense. Facility shutdown and contract cancellations resulting in
lower depreciation and lease expense contributed about $35 million of the total
cost savings.
FUTURE COST REDUCTION INITIATIVES
The company announced in December 2003 that it would take aggressive actions to
ensure its global competitiveness as a more focused, science-based company
following the separation of INVISTA. Included are variable margin improvements,
fixed cost reductions, and organizational actions that are expected to achieve a
$900 million pretax cost improvement in 2005. The company expects its actions to
yield a $450 million cost improvement in 2004, and the full $900 million in
2005. Cost improvements targeted in 2004 will essentially offset residual costs
from the separation of INVISTA and other expected fixed cost increases, thus
allowing the full measure of the company's expected 2004 volume and price
improvement to benefit operating earnings. A portion of the fixed cost savings
will come from work force reductions.
The company is in the process of developing plans to meet the
objectives announced in December and expects to publicly disclose information on
the number of position eliminations and any restructuring charges during the
first half of 2004.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
SEPARATION CHARGES--
TEXTILES & INTERIORS $1,620 -- --
- ------------------------------------------------------------
The company recorded a charge of $1.6 billion for asset impairments and other
charges primarily related to the expected sale of INVISTA. In addition, upon
reclassification to assets held for sale, the company ceased depreciation and
amortization of these assets. This is expected to improve the company's
quarterly 2004 earnings by approximately $.07 per share until separation.
Additional charges and credits related to the expected sale of INVISTA may be
recorded, some of which might be material to the company's Consolidated
Financial Statements.
The company expects to have significant continuing involvement due to ongoing
purchases and sales between INVISTA and the company, as well as other ongoing
obligations. This continuing involvement precludes the company from reporting
INVISTA results as discontinued operations in its Consolidated Financial
Statements.
Upon closing of the pending sale of INVISTA, the company will indemnify Koch
against certain liabilities primarily related to taxes, legal matters,
environmental matters, and representations and warranties. The company is
currently in the process of determining the fair value of these indemnities and
will record the fair value of these indemnities upon closing of the transaction.
Under the definitive agreement, the company's total indemnification obligation
for the majority of the representations and warranties cannot exceed
approximately $1.4 billion. The remaining indemnities are not limited to this
maximum payment amount. The company does not believe that the fair value of
these indemnities will have a material impact on the future liquidity of the
company. See Note 5 to the Consolidated Financial Statements for additional
information.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
GOODWILL IMPAIRMENT--
TEXTILES & INTERIORS $295 -- --
- ------------------------------------------------------------
In connection with the pending sale of INVISTA, the company was required to test
the related goodwill for recoverability. This test indicated that the carrying
value of goodwill exceeded fair value, and accordingly, the company recorded an
impairment
18
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
charge of $295 million to write off all of the associated goodwill. This
write-off was based on an estimate of fair value as determined by the negotiated
sales price of the INVISTA net assets.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
NONOPERATING GAIN $62 -- --
- ------------------------------------------------------------
The company recognized a $62 million gain associated with the formation of a
majority-owned venture, The Solae Company, with Bunge Limited. See Note 8 to the
Consolidated Financial Statements for additional information.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
PROVISION FOR (BENEFIT FROM)
INCOME TAXES $(930) $185 $2,467
Effective income tax rate (EITR) (650.3)% 8.7% 36.0%
- ------------------------------------------------------------
2003 VS. 2002 The 2003 EITR is significantly lower than the 2002 EITR of 8.7
percent. The change in EITR for 2003 is primarily affected by the recording of
deferred tax assets in two European subsidiaries for their tax basis investment
losses recognized on local tax returns. In addition, the impact of
jurisdictional mix and other tax benefits was magnified by the low level of
pretax earnings for the year.
The company's currentestimate of the 2004 EITR is about 25 percent, excluding
any tax effects on exchange gains/losses or special items, neither of which can
be reasonably estimated at this time.
2002 VS. 2001 The 2002 EITR of 8.7 percent is significantly lower than the 2001
EITR of 36 percent. There were four key factors driving the reduction in the
rate: (1) a greater portion of foreign earnings being generated in jurisdictions
with lower tax rates, (2) an increased utilization of foreign tax credits, (3)
tax benefits associated with losses on foreign exchange contracts, and (4) the
tax impact of the 2002 special items discussed on page 20. About 30 percent of
the decrease in the EITR relates to the first two items discussed above, another
30 percent relates to the tax benefit on foreign exchange contracts and the
balance relates to the tax impact of special items. Significant items which
contributed to the lower EITR are the sale of DuPont Pharmaceuticals,
restructuring and asset impairment charges, and agreement on certain prior year
audit issues.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES $(29) $(2,944) $11
- ------------------------------------------------------------
On January 1, 2003, the company adopted Statement of Financial Accounting
Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations," which
requires companies to record an asset and related liability for the costs
associated with the retirement of a long-lived tangible asset if a legal
liability to retire the asset exists. The adoption of this standard resulted in
a cumulative effect of a change in accounting principle after-tax charge to
income of $29 million.
The company's adoption of SFAS No. 142, "Goodwill and Other Intangible Assets,"
resulted in a cumulative effect after-tax charge to income of $2,944 million,
effective January 1, 2002. This charge was attributable to goodwill impairments
of $2,866 million in the Agriculture & Nutrition segment and $78 million in the
Textiles & Interiors segment.
On January 1, 2001, the company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. The adoption of SFAS No. 133
resulted in a cumulative effect of a change in accounting principle after-tax
benefit of $11 million.
See Note 10 to the Consolidated Financial Statements for additional information
on the adoption of these accounting standards.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
NET INCOME (LOSS) $973 $(1,103) $4,339
- ------------------------------------------------------------
Net income for the year 2003 was $973 million versus a net loss of $1,103
million in 2002. Income before the cumulative effect of changes in accounting
principles was $1,002 million in 2003 versus $1,841 million in 2002, a decrease
of $839 million or 46 percent. In 2003, special items totaled a net after-tax
charge of $667 million, representing an increase in special item net charges of
$499 million versus 2002, principally the result of 2003 charges taken in
connection with the separation of INVISTA. See table below which aids in
understanding these items and comparing results of operations over the
three-year period presented.
In addition to the impact of increased special items, the reduction in 2003
income before cumulative effect of changes in
19
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
accounting principles versus 2002 reflects a $650 million after-tax increase in
raw material costs and a $400 million after-tax increase in pension, other
postretirement benefits, and stock option expenses. The remaining operating
variances totaled a benefit of about $700 million, principally the result of
higher sales volumes, other income, and more favorable currency translation and
income tax rates.
Earnings per share on a diluted basis were $0.96 per share in 2003 versus a loss
of $1.11 in 2002.
- --------------------------------------------------------------------------------------------------------------------------
Diluted
Pretax After-Tax Earnings
SPECIAL ITEMS Benefit Benefit (Loss)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE) (Charge) (Charge)(1) Per Share
- --------------------------------------------------------------------------------------------------------------------------
2003
INVISTA related items(2) $(1,915) $ (696) $(0.69)
Benlate(R)litigation (78) (50) (0.05)
Corporate minority interest redemption (28) (17) (0.02)
Textiles & Interiors-Unifi settlement 16 10 0.01
Restructuring and asset impairment charges 17 12 0.01
Pharmaceuticals-favorable arbitration ruling 23 15 0.01
Gain on Canadian currency contract 30 18 0.02
Agriculture & Nutrition-The Solae Company nonoperating gain 62 41 0.04
- --------------------------------------------------------------------------------------------------------------------------
Total $(1,873) $ (667) $(0.67)
- --------------------------------------------------------------------------------------------------------------------------
2002
Restructuring and asset impairment charges $ (290) $ (200) $(0.19)
Litigation costs (130) (81) (0.08)
Exchange loss (Argentina mandatory conversion) (63) (63) (0.06)
Product exit costs (47) (29) (0.03)
Loss on early extinguishment of debt (21) (17) (0.02)
Tax items--net -- 65 0.06
Pioneer acquisition-related costs 40 67 0.07
Gain on asset sales 109 90 0.09
- --------------------------------------------------------------------------------------------------------------------------
Total $ (402) $ (168) $(0.16)
- --------------------------------------------------------------------------------------------------------------------------
2001
Restructuring and asset impairment charges $(1,078) $ (705) $(0.69)
Pioneer acquisition-related costs (133) (83) (0.08)
Litigation costs (56) (35) (0.04)
Gain on sale of equity securities 52 34 0.03
Gain on sale of DuPont Pharmaceuticals 6,136 3,866 3.74
- --------------------------------------------------------------------------------------------------------------------------
Total $ 4,921 $3,077 $ 2.96
- --------------------------------------------------------------------------------------------------------------------------
1 The segment impact of these special items is included in Note 31 to the
Consolidated Financial Statements.
2 Includes deferred tax benefits of $669, $0.67 per share.
20
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
Net loss for the year 2002 was $1,103 million compared with Net income of $4,339
million in 2001. Income before cumulative effect of changes in accounting
principles was $1,841 million in 2002 versus $4,328 million in 2001. 2002 Income
before cumulative effect of a change in accounting principle includes special
items totaling $168 million in net after-tax charges. 2001 includes a net
after-tax benefit of $3,077 million for special items including a $3,866 million
after-tax gain recorded on the sale of DuPont Pharmaceuticals. Special items for
each year are listed above.
In addition to the financial impact of differences in the amount of special
items in both years, the year-to-year change in income before the cumulative
effect of changes in accounting principles reflects an increase in income of
approximately $750 million resulting from higher sales volume, reductions in raw
material costs, lower fixed costs, absence of goodwill amortization, reduced
interest expense and lower income taxes. These benefits were partly offset by
the impact of lower selling prices.
Earnings per share on a diluted basis were a loss of $1.11 in 2002 versus
earnings of $4.16 in 2001.
ACCOUNTING STANDARDS ISSUED NOT YET ADOPTED
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities"
(VIEs), which is an interpretation of Accounting Research Bulletin (ARB) No. 51,
"Consolidated Financial Statements." FIN 46 addresses the application of ARB No.
51 to VIEs, and generally would require that assets, liabilities, and results of
the activity of a VIE be consolidated into the financial statements of the
enterprise that is considered the primary beneficiary. This interpretation
applies immediately to VIEs created after January 31, 2003, and to VIEs in which
a company obtains an interest after that date. The company has not created or
obtained an interest in any VIEs in 2003. In addition, the interpretation
becomes applicable on December 31, 2003, for special-purpose entities (SPEs)
created prior to February 1, 2003. As of December 31, 2003, the company had no
SPEs for which it was considered the primary beneficiary. For non-SPEs in which
a company holds a variable interest that it acquired before February 1, 2003,
the FASB has postponed the date on which the interpretation will become
applicable to March 31, 2004.
The company has identified two non-consolidated entities as VIEs where DuPont is
considered the primary beneficiary. One entity provides manufacturing services
for the company and the other entity is a real estate rental operation. The
company guarantees all debt obligations of these entities, which totaled $136
million at December 31, 2003. These amounts are included within obligations for
equity affiliates and others in Note 24 to the Consolidated Financial
Statements. In accordance with the provisions of FIN 46, the company will
consolidate these VIEs as of March 31, 2004. The company does not expect the
consolidation of these VIEs to have a material effect on the consolidated
results of operations or financial position.
On December 8, 2003, President Bush signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) into law. As permitted under
FASB Staff Position (FSP) FAS 106-1, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003", the company did not reflect the effects of this Act in its Consolidated
Financial Statements and accompanying Notes. In January 2004, the company
amended its U.S. medical plan to be secondary to Medicare for prescription drug
coverage beginning in 2006 for eligible retirees and survivors. As a result of
this plan amendment, FAS 106-1 will not apply to the company. See further
discussion of plan amendment under Long-Term Employee Benefits beginning on page
37 and Note 28 to the Consolidated Financial Statements.
In December 2003, the Staff of the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition", which
supersedes SAB No. 101. The primary purpose of SAB No. 104 is to rescind
accounting guidance contained in SAB No. 101 and the SEC's "Revenue Recognition
in Financial Statements Frequently Asked Questions and Answers" (the FAQ)
related to multiple element revenue arrangements. The company does not expect
the issuance of SAB No. 104 to impact its current revenue recognition policies.
CRITICAL ACCOUNTING ESTIMATES
The company's significant accounting policies are more fully described in Note 1
to the Consolidated Financial Statements. Management believes that the
application of these policies on a consistent basis enables the company to
provide the users of the financial statements with useful and reliable
information about the company's operating results and financial condition.
21
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts, including, but not limited to, receivable and
inventory valuations, impairment of tangible and intangible assets,
postretirement employee benefit obligations, income taxes, restructuring
reserves and litigation. Management's estimates are based on historical
experience, facts and circumstances available at the time, and various other
assumptions that are believed to be reasonable under the circumstances. The
company reviews these matters and reflects changes in estimates as appropriate.
Management believes that the following represent some of the more critical
judgment areas in the application of the company's accounting policies which
could have a material effect on the company's financial position, liquidity or
results of operations.
PENSION AND OTHER POSTRETIREMENT BENEFITS
In connection with the company's postretirement plans, the fair value of assets
in all pension plans was $18 billion at December 31, 2003, and the related
benefit obligations were $21 billion. In addition, obligations under the
company's unfunded other postretirement benefit plans were $5 billion at
December 31, 2003. Expected return on plan assets and discount rate assumptions
are particularly important when determining the company's benefit obligations
and net periodic benefit costs associated with postretirement benefits. The
following table highlights the potential impact on the company's pretax earnings
due to changes in these assumptions with respect to the company's pension and
other postretirement benefit plans, based on assets and liabilities at December
31, 2003:
- ---------------------------------------------------------------------
1/2 Percentage 1/2 Percentage
(DOLLARS IN MILLIONS) Point Increase Point Decrease
- ---------------------------------------------------------------------
Discount rate $60 $(60)
Expected rate of
return on plan pension assets 75 (75)
- ---------------------------------------------------------------------
Additional information with respect to pension and other postretirement employee
expenses and liabilities is discussed under Long-Term Employee Benefits
beginning on page 37.
ENVIRONMENTAL MATTERS
DuPont accrues for remediation activities when it is probable that a liability
has been incurred and a reasonable estimate of the liability can be made. The
company's estimates are based on a number of factors, including 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 of and financial viability of other PRPs. The
company has recorded a liability of $380 million on the Consolidated Balance
Sheet as of December 31, 2003; these accrued liabilities exclude claims against
third parties and are not discounted.
Considerable uncertainty exists with respect to environmental remediation costs
and, under adverse changes in circumstances, the potential liability may range
up to two to three times the amount accrued. Much of this liability results from
the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA, often referred to as the 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 for which it is probable that environmental
remediation will be required, but which are not currently the subject of CERCLA,
RCRA or state enforcement activities. Federal and state authorities may seek
fines and penalties for violation of the various laws and governmental
regulations, and could, among other things, impose liability on the company for
cleaning up the damage resulting from company-generated waste disposal. Over the
next two decades the company may incur significant costs under both CERCLA and
RCRA.
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 PRPs.
Therefore, it is difficult to develop accurate estimates of future site
remediation costs. A detailed discussion of environmental matters is contained
in Management's Discussion and Analysis, beginning on page 39.
LEGAL CONTINGENCIES
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 company records reserves for legal matters when
the informa-
22
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
tion available indicates that it is probable that a liability has been incurred
and the amount of the loss can be reasonably estimated. Predicting the outcome
of claims and litigation, and estimating related costs and exposure involves
substantial uncertainties that could cause actual costs to vary materially from
estimates. In making determinations of likely outcomes of litigation matters,
management considers many factors. These factors include, but are not limited
to, the nature of specific claims including unasserted claims, the company's
experience with similar types of claims, the jurisdiction in which the matter is
filed, input from outside legal counsel and the current status of the matter.
Considerable judgment is required in determining whether to establish a
litigation reserve when an adverse judgment is rendered against the company in a
court proceeding. In such situations, the company will not recognize a loss if,
based upon a thorough review of all relevant facts and information, management
believes that it is probable that the pending judgment will be successfully
overturned on appeal. A detailed discussion of significant litigation matters is
contained in Note 24 to the Consolidated Financial Statements.
INCOME TAXES
The breadth of the company's operations and the global complexity of tax
regulations require assessments of uncertainties and judgments in estimating the
ultimate taxes the company will pay. The final taxes paid are dependent upon
many factors, including negotiations with taxing authorities in various
jurisdictions, outcomes of tax litigation and resolution of disputes arising
from federal, state, and international tax audits. The resolution of these
uncertainties may result in adjustments to the company's tax assets and tax
liabilities.
Significant judgment is required in evaluating the need for and magnitude of
appropriate valuation allowances against deferred tax assets. The realization of
these assets is dependent on generating future taxable income, as well as
successful implementation of various tax planning strategies. For example,
changes in facts and circumstances that alter the probability that the company
will realize deferred tax assets would result in recording a valuation
allowance, thereby reducing the net deferred tax asset. In some situations these
changes could be material.
In 2003, DuPont recorded $669 million in deferred tax assets associated with two
European subsidiaries for their tax basis investment losses recognized on local
tax returns. Realization of these assets is expected to occur over an extended
period of time. As a result, changes in tax laws, assumptions with respect to
future taxable income and tax planning strategies could result in adjustments to
these assets.
CORPORATE OUTLOOK
The company's overall outlook for 2004 is positive. DuPont expects cyclical
recovery in major industrial economies, in addition to continuing growth in
emerging economies. This is expected to support global real GDP growth of 3.6
percent in 2004, which would be the largest full-year increase since 2000. The
company also expects that in contrast to recent years the manufacturing sectors
of the developed industrial economies will grow at rates stronger than their
regional GDP.
The major risks and uncertainties associated with this outlook are sustained
increases in oil and natural gas prices or a faltering U.S. economic expansion.
However, with the strength of the recovery and its current momentum, DuPont
believes that the economic conditions in 2004 will be positive for its
businesses.
Specific key assumptions and actions that support the company's outlook for 2004
include the following:
o In December 2003, DuPont announced a program to reduce fixed costs and
improve variable margins. The company expects its actions to yield a $450
million pretax cost improvement in 2004, and the full $900 million in 2005.
Cost improvements targeted in 2004 will essentially offset residual costs
from the separation of INVISTA and other expected fixed cost increases.
o With oil and U.S. natural gas prices remaining high, the company does not
expect any relief from hydrocarbon costs in 2004 and anticipates that
prices for raw materials will remain at or slightly above 2003 levels.
o The company's current estimate of the 2004 effective income tax rate is
about 25 percent, excluding any tax effects on exchange gains/losses or
special items, neither of which can be reasonably estimated at this time.
Accordingly, the company's outlook for 2004 is between $2.00 and $2.20 earnings
per share. This does not include estimates for any 2004 special items, including
those anticipated for restructuring and the INVISTA separation, as such items
cannot be reasonably estimated at this time.
23
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
SEGMENT REVIEWS
Segment sales include transfers and pro rata share of equity affiliate sales.
Segment after-tax operating income (ATOI) does not include corporate expenses,
interest, exchange gains (losses), corporate minority interests or the
cumulative effects of changes in accounting principles. A reconciliation of
segment sales to consolidated Net sales and segment ATOI to Income before
cumulative effect of changes in accounting principles for 2003, 2002 and 2001 is
included in Note 31 to the Consolidated Financial Statements.
AGRICULTURE & NUTRITION
- --------------------------------------------------------------------------
Segment
Sales ATOI
(DOLLARS IN BILLIONS) (DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------
2003 $5.5 $540
2002 4.5 443
2001 4.3 21
- --------------------------------------------------------------------------
Agriculture & Nutrition leverages DuPont technology, customer relationships and
industry knowledge to improve the quantity, quality and safety of the global
food supply. Global land area that can be used in agricultural production is
becoming increasingly limited. Therefore, increases in production will need to
be achieved principally through improving crop yields and productivity rather
than through increases in planted acreage. Agriculture & Nutrition delivers a
broad portfolio of products and services that are specifically targeted to
achieve gains in crop yields and productivity, including Pioneer(R) brand seed
products and well-established brands of insecticides, fungicides and herbicides.
The segment also provides global production and distribution of soy-based food
ingredients, food quality diagnostic testing equipment and services, and liquid
food packaging systems. Research and development in this segment focuses on
leveraging technology to increase grower productivity and enhance the value of
grains and soy used in feed and food through improved seed traits and the
effective use of insecticides, herbicides and fungicides.
Agriculture & Nutrition includes the company's wholly owned subsidiary, Pioneer
Hi-Bred International, Inc., which is the world's largest seed producer and the
world leader in improving crop yields with hybrid and varietal seeds that
improve grower yields and provide insect protection and herbicide tolerance. The
principal products at Pioneer are hybrid seed corn and soybean seed. During
2003, Pioneer(R) brand corn hybrids outperformed competitive hybrids in North
America by an average yield of 6.1 bushels per acre based on side-by-side
comparisons. While the commercial seed industry for major crops remained stable
in 2003, Pioneer increased market share in the European and South American seed
corn markets, with over 10 percent growth in sales in 2003.
Agriculture & Nutrition also serves the global agriculture industry with crop
protection products for the grain and specialty crop sectors as well as forestry
and vegetation management. Demand for DuPont crop protection products in 2003
increased after several years of decline, reflecting higher commodity prices and
farm income. Sales of crop protection products increased about 12 percent,
reflecting market share growth in insecticide sales for use on cotton crops in
Asia pacific; an expanded presence in the fruit and vegetable specialty market
sectors; and product registrations that support the use of existing products in
new markets. In November 2003, the company acquired Griffin Corporation's 50
percent ownership interest in Griffin LLC for $13 million, net of $18 million
cash acquired, thereby becoming the sole owner. This acquisition strengthened
the segment's product, sales, marketing and manufacturing resources and
expertise to better serve crop protection customers.
Agriculture & Nutrition's sales of soy protein experienced strong growth in
2003, largely due to the formation in early 2003 of an alliance between DuPont
and Bunge Limited. This alliance resulted in (1) a majority-owned venture, The
Solae Company, that focuses on the global production and distribution of
specialty food ingredients, including soy proteins and lecithins; (2) a
biotechnology agreement to jointly develop and commercialize soybeans with
improved quality traits; and (3) an alliance to develop a broader offering of
services and products for farmers. DuPont contributed its soy food ingredients
business to the venture for a 72 percent majority ownership interest in The
Solae Company, and Bunge contributed businesses with a fair value of $520
million for a 28 percent interest in the venture.
Through its wholly owned subsidiary, Qualicon Inc., Agriculture & Nutrition also
provides diagnostic products, including the world's leading automated instrument
for fingerprinting the DNA of bacteria to help food and health care industry
customers monitor the microbial environment in their manufacturing
24
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
processes and facilities. In addition, the segment offers systems for the
aseptic and refrigerated liquid packaging of beverages, dairy products and
pumpable foods in retail and institutional applications. Sales of these products
and systems experienced growth of almost 50 percent in 2003.
2003 VERSUS 2002 Sales of $5.5 billion were 21 percent higher as both U.S.
dollar (USD) selling prices and volumes increased 6 percent. The 21 percent
increase also includes 9 percent due to additional sales resulting from the
formation of The Solae Company and the acquisition of the remaining interest of
Griffin LLC. Higher USD selling prices resulted principally due to currency
translation, reflecting the weaker dollar. Volume growth principally reflects
increased corn seed sales in markets outside of North America, higher sales of
herbicides in North America, a significant increase in insecticide sales in Asia
Pacific, and higher worldwide sales of soy-based products.
2003 ATOI was $540 million, including an after-tax gain of $41 million
attributable to the formation of The Solae Company. This compares to ATOI of
$443 million in 2002, which included a benefit of $67 million related to
revisions in post-employment costs for Pioneer, a $25 million charge to reflect
an expected loss on the sale of a manufacturing facility in Europe, and a $29
million charge to write off inventories of discontinued herbicide products. The
improvement in 2003 ATOI also reflects the benefits of higher volumes and
favorable currency exchange rates, which were partly offset by higher non-cash
pension expense and raw material costs.
2002 VERSUS 2001 Sales of $4.5 billion were 5 percent higher, reflecting 3
percent higher volume and a 2 percent increase due to the May 2002 acquisition
of Liqui-Box, a provider of systems for aseptic and refrigerated liquid
packaging. ATOI was $443 million, which includes a benefit of $67 million
related to revisions in post-employment costs for Pioneer, a $25 million charge
to reflect an expected loss on the sale of a manufacturing facility in Europe,
and a $29 million charge to write off inventories of discontinued herbicide
products. 2002 ATOI also reflects the benefit of higher Pioneer(R), soy, and
diagnostic product sales and lower overall segment costs, primarily due to a
$108 million benefit (versus prior year) from discontinuing amortization of
goodwill and indefinite-lived intangible assets as required by new accounting
standards. 2001 ATOI of $21 million included net charges of $225 million for
employee termination costs, a write-down of assets, legal settlements, and
purchase accounting adjustments related to the sale of Pioneer inventory.
OUTLOOK The production agriculture economic environment outlook is positive for
2004 with higher commodity grain prices reflecting increased consumption and
minimal reserve supplies. North American production agriculture is expected to
remain stable in terms of farm income and cash flow, as production in the U.S.
and Canada is expected to continue at historically high levels.
An unprecedented number of new products were launched in 2003 which are expected
to benefit the 2004 planting season. The launch includes 18 new soybean
varieties and 74 new Pioneer(R) brand corn hybrids, 46 of which contain the
Roundup Ready(R) gene*. Sales of corn hybrids containing the Roundup Ready(R)
gene* were at introductory levels in 2003, with full launch planned for 2004. As
part of a complete product line offering, Pioneer also anticipates growth in
treated corn seed sales, which doubled in 2003 from 2002 levels and are expected
to nearly double again in 2004.
Agriculture & Nutrition expects to increase profitability of crop protection
products through growth in specialty markets and improved asset utilization in
2004. Significant competitive challenges are anticipated to continue as a result
of industry consolidation and the influence of insect and herbicide tolerant
crops.
The segment also anticipates strong growth in soy protein sales, as major food
companies continue to develop new mainstream products utilizing Solae(R) soy
proteins, as 8th Continent(TM) light soymilk is fully launched, and as the
venture with Bunge begins to generate new opportunities. A number of major
global food companies have introduced, or are planning to introduce, food and
beverage products containing Solae(R) soy proteins. In addition, the segment
expects to aggressively grow its food safety business in 2004 through expanded
testing capability and global utilization of the BAX(R) bacterial detection
system to detect pathogens such as salmonella, E. coli and listeria in food.
* Roundup Ready(R)is a registered trademark used under license from the Monsanto
Company.
25
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
COATINGS & COLOR TECHNOLOGIES
- --------------------------------------------------------------------------
Segment
Sales ATOI
(DOLLARS IN BILLIONS) (DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------
2003 $5.5 $477
2002 5.0 483
2001 4.9 452
- --------------------------------------------------------------------------
Coatings & Color Technologies is the world's leading automotive coatings
supplier and the world's largest manufacturer of titanium dioxide white
pigments. Products offered include high performance liquid and powder coatings
for automotive original equipment manufacturers (OEM), the automotive
aftermarket (known as refinish), and general industrial applications, which
include coatings for plastics, bridges, windmills, pipes and appliances. The
company markets its refinish products using the DuPont(TM), Standox(R), Spies
Hecker(R), and Nason(R) brand names. Standox(R) and Spies Hecker(R) are focused
on the high-end refinish markets, while Nason(R) is primarily focused on economy
coating applications. In addition, a broad line of DuPont(TM) Ti-Pure(R)
titanium dioxide products in both slurry and powder form serve the coatings,
plastic and paper industries. The segment also offers specialty products for ink
jet digital printing including the DuPont(TM) Artistri(TM) printing systems for
textiles, and products for adhesive bonding and electrical insulation.
The key markets in which Coatings & Color Technologies operates were generally
flat to down in 2003, although Asia Pacific markets continued to rapidly expand.
North American light vehicle builds, which include automobiles and light trucks,
were down 3 percent, while European builds were down about 2 percent. Although
worldwide refinish markets were flat, the company gained share in Europe.
Industrial and powder coatings demand remained depressed, with particular
softness in Europe. The coatings market in Asia Pacific grew 25 percent. As part
of the segment's strategic intent to serve its customers that have expanded
geographically into Asia Pacific, Coatings & Color Technologies formed another
venture in 2003 in China for the manufacture, supply, and technical support of
coatings products.
Since its acquisition of the global Herberts coatings business in 1999, the
segment has undertaken a series of restructuring programs to consolidate
business assets and eliminate redundancies. The most recent program, which was
announced in the fourth quarter of 2002, involved personnel reductions of about
775, principally in Europe and the United States. This program was successfully
completed in 2003.
Industry demand for titanium dioxide white pigment was essentially flat in 2003.
Demand growth of 10 percent in Asia Pacific was offset by contractions in the
North American and European markets. However, the company was able to maintain
its overall global share. Average prices for titanium dioxide white pigment
increased slightly over the course of 2003, especially in Europe, but are still
below the long-term average trend.
2003 VERSUS 2002 Sales of $5.5 billion increased 9 percent, principally due to 8
percent higher USD selling prices, which benefited from currency translation
reflecting the stronger Euro and slightly higher prices on a local currency
basis. Increased ownership interest in Renpar SA, a South American venture,
increased sales 1 percent. Sales volumes were esentially flat, as higher
worldwide sales of OEM and refinish coatings were offset by lower titanium
dioxide volumes, the latter reflecting weak demand in North America during much
of the year.
ATOI was $477 million in 2003 versus $483 million in 2002. Results in 2003 were
adversely affected by higher prices for raw materials and increased fixed costs,
principally non-cash pension expense, which more than offset the benefits of
higher revenue and more favorable currency translation.
2002 VERSUS 2001 Sales of $5.0 billion were 2 percent higher driven by increased
sales of automotive finishes. Volumes improved 5 percent while local selling
prices declined 3 percent. ATOI was $483 million in 2002 compared with $452
million in 2001. The improvement in segment ATOI reflects higher earnings in
coatings, partly offset by lower earnings in titanium dioxide products, the
latter resulting principally from lower prices. 2002 ATOI includes a $42 million
net charge for employee termination costs. 2001 includes a similar net charge
totaling $46 million.
OUTLOOK The global coatings industry will continue to provide a challenging
operating environment in 2004 as competitive conditions are expected to remain
intense. North American 2004 light vehicle builds are expected to be 2 percent
above 2003 levels, while Western European automotive production is expected to
be 1 percent higher. Continued growth is also expected in Asia Pacific. Industry
demand for titanium dioxide is expected to improve as economic conditions
rebound globally during 2004.
26
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
This growth in demand, along with improved capacity utilization, should result
in improved pricing momentum.
Given these industry outlooks, Coatings & Color Technologies expects improved
coatings results in 2004 based on growth in OEM and refinish coatings and
continued growth in Asia Pacific. The segment also expects improved results from
its titanium dioxide offerings based on growth in demand and improved pricing.
ELECTRONIC & COMMUNICATION TECHNOLOGIES
- --------------------------------------------------------------------------
Segment
Sales ATOI
(DOLLARS IN BILLIONS) (DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------
2003 $2.9 $147
2002 2.5 217
2001 2.7 291
- --------------------------------------------------------------------------
Electronic & Communication Technologies provides a broad range of advanced
materials for the electronics industry; flexographic printing and color proofing
systems; and a wide range of fluoropolymer and fluorochemical products. The
segment also continues to pursue development activities related to displays and
fuel cells.
In the electronics industry, markets served include display materials,
integrated circuit fabrication materials and packaging solutions, and printed
wire board fabrication materials. The segment meets the rapidly changing market
needs for smaller, more portable and powerful electronic devices by building on
its strength as a leading supplier of organic, flexible, and ceramic circuit
materials. Major product lines include DuPont(TM) Kapton(R) polyimide film,
Pyralux(R) flexible laminates, Riston(R) dry film photoresists, Green Tape(TM)
low temperature co-fired ceramics, Fodel(R) photoimageable composites, and
Posistrip(R) photoresist removers. In 2003, the segment announced its decision
to expand Kapton(R) polyimide film production capacity to serve the rapidly
growing flexible circuit industry in Asia. The new line will be located in Japan
at the Toray-DuPont Company, a 50/50 joint venture with Toray Industries.
Commercial production is scheduled to begin by early 2005.
Electronic & Communication Technologies is the market leader in flexography
printing and color proofing serving the packaging and commercial printing
industries. Its offerings include DuPont(TM) Cyrel(R) and Cyrel(R)FAST(TM)
flexographic printing plates, as well as color proofing systems, including
DuPont(TM) WaterProof(R), Cromalin(R), and Dylux(R). Cyrel(R) FAST(TM)
installations doubled to over 200 in 2003. Cyrel(R) FAST(TM) is the only
solvent-free thermal flexographic platemaking technology commercially available.
Electronic & Communication Technologies' color proofing business has also
doubled the number of sites to about 200 that use its Thermal 4 color Halftone
technology, which was introduced in 2001. DuPont is one of four companies
offering thermal proofing technology, one of the fastest growing technologies in
the market.
In addition, the segment is the largest global manufacturer of industrial and
specialty fluorochemicals and fluoropolymers. These products are sold to the
refrigeration, insulation, aerosol packaging, telecommunications, aerospace,
automotive, electronics, chemical processing, and housewares industries. The
company's offerings includes DuPont(TM) Suva(R) refrigerants, Teflon(R) and
Tefzel(R) fluoropolymer resins, Autograph(R) and Teflon(R) non-stick finishes,
and Teflon(R) and Tedlar(R) fluoropolymer films.
After a relatively slow start in the first half of 2003, the primary markets
served by Electronic & Communication Technologies experienced strong growth,
including double digit growth in both semiconductors and flat panel displays.
Significant research and development efforts have been focused on the displays
market, as well as targeting growth opportunities for proton exchange membrane
(PEM) fuel cells. In displays, programs related to plasma and liquid crystal
displays are progressing, while the commercialization of organic light-emitting
diode (OLED) displays has been delayed due to technical issues associated with
development and scale-up to commercial production. In fuel cells, membrane
electrode assemblies and other system components are being sold in small, but
increasing quantities to development partners. Applications targeted for PEM
fuel cell technology include automotive, personal transportation and portable
power devices. The investment in the development of PEM fuel cells is not
expected to contribute significantly to earnings near term but presents a
long-term growth opportunity.
2003 VERSUS 2002 Sales of $2.9 billion were 14 percent higher than 2002,
reflecting 10 percent volume growth as well as an increase of 4 percent
attributable to the acquisition of ChemFirst, Inc.'s integrated circuit
fabrication materials businesses in
27
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
November 2002. Increased volumes reflect higher sales of electronic materials
and fluoroproducts, including refrigerants and specialty gases, particularly in
Asia Pacific. Increased sales volumes also reflect higher worldwide sales of
flexographic printing products. These improvements were partly offset by
continuing declines in the sales of older analog proofing products.
ATOI was $147 million in 2003 versus $217 million in 2002. The decline in ATOI
principally resulted from significantly higher expenditures for the development
of OLEDs and increased selling, general and administrative expenses, reflecting,
in part, higher non-cash pension costs. The benefit to ATOI from higher revenue
was reduced somewhat by slightly higher raw material costs and a shift in
fluoroproducts sales mix to lower margin products.
2002 VERSUS 2001 Sales of $2.5 billion were 6 percent lower, reflecting 8
percent lower prices and 2 percent higher volume. Demand for many of the key
products in this segment, particularly in the electronics and telecommunications
markets, remained very weak. ATOI was $217 million in 2002 compared with $291
million in 2001. Earnings declined in all business units reflecting lower sales.
OUTLOOK Electronic & Communication Technologies expects continued strengthening
in 2004 in the majority of the markets served, led by strong growth in demand
for materials in the electronics industry. Strong growth is also expected in
demand for materials for semiconductor and flat panel displays, while modest
growth is expected in flexographic printing and the markets served by
fluoroproducts. The segment expects to achieve improved earnings due to
increased volumes and a focus on controlling fixed costs.
PERFORMANCE MATERIALS
- --------------------------------------------------------------------------
Segment
Sales ATOI
(DOLLARS IN BILLIONS) (DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------
2003 $5.4 $262
2002 4.9 479
2001 4.7 234
- --------------------------------------------------------------------------
Performance Materials provides customers with more productive, higher
performance polymer materials, systems and solutions to improve the uniqueness,
functionality and profitability of their product offerings. Performance
Materials delivers a broad materials product portfolio, including engineering
polymers that are primarily used by customers to fabricate components for
mechanical and electrical systems, as well as specialized resins and films used
in various packaging and industrial applications. These applications include
food packaging, sealants and adhesives, carpet backing, and interlayers for
laminated safety glass. Key brands include DuPont(TM) Zytel(R) nylon resins,
Surlyn(R) packaging resins, Hytrel(R) blow molding resins, Butacite(R) laminate
glass interlayers and Delrin(R) acetal resins.
The key markets served by the segment include, most importantly, the automotive
original equipment manufacturing (OEM) and associated after-market industries,
as well as electrical/electronics, packaging, construction, and consumer durable
goods.
The segment's core competency is applied materials science, focusing on
substituting traditional materials with new materials that offer advantages such
as performance and weight. New applications and processing materials into
innovative parts and systems are also areas of focus. Recent examples of this
core innovation capability include SentryGlas(R) Expressions(TM), which links
DuPont(TM) polymer materials and ink jet technologies to develop specialty
decorative interlayers for architectural applications, and DuPont(TM) HPF
polymer, which allows golf ball manufacturers to design golf balls with improved
distance, control, and feel.
In 2003, the segment announced the rationalization of its engineering polymers
compounding facilities, which includes realignment of its operations in Mexico,
expansion of its operations in China, and the shutdown of its production
facility in the Netherlands. This shutdown is expected to be completed in the
spring of 2004.
2003 VERSUS 2002 Sales of $5.4 billion were 9 percent higher than 2002,
reflecting 7 percent volume growth, largely derived from increased sales of
engineering and packaging polymers in Europe and Asia Pacific. In addition,
sales improved from 3 percent higher USD selling prices, reflecting the currency
benefit of the weaker U.S. dollar, partly offset by lower local currency selling
prices. The growth in volume and increase in USD selling prices was partially
offset by a 1 percent decrease in sales from the divestiture of the Clysar(R)
shrink film business in 2002.
28
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
ATOI was $262 million in 2003 compared with $479 million in 2002. The decrease
in ATOI is primarily due to higher oil and natural gas-related raw material
costs and recording transfers of nylon intermediates from Textiles & Interiors
at market prices rather than cost in anticipation of the separation of INVISTA.
ATOI in 2002 benefited from a $51 million gain on the sale of the Clysar(R)
business.
2002 VERSUS 2001 Sales of $4.9 billion were 4 percent higher, reflecting 8
percent higher volume and 4 percent lower prices. ATOI was $479 million compared
with $234 million. 2002 earnings benefited from higher sales volumes, a lower
effective tax rate, and lower energy-based raw material costs. 2002 also
includes a $51 million gain on the sale of the Clysar(R) shrink film business.
2001 includes a net charge of $45 million for employee termination costs and
asset impairments.
OUTLOOK Performance Materials expects to operate in an improving business
environment in 2004. North American 2004 automotive builds are expected to be
about 2 percent above 2003 levels, while Western European automotive production
is expected to be 1 percent higher, with continued growth also expected in Asia
Pacific. Globally, packaging market demand is expected to remain at current
levels. The residential construction market is expected to remain strong, and it
is anticipated that the electrical/electronics market will continue to improve.
Performance Materials expects revenue growth due to these improving industry
outlooks. However, earnings improvement will also depend on offsetting continued
high petroleum-related raw material costs through a combination of productivity
improvements and customer-driven innovations for products and processes.
PHARMACEUTICALS
- --------------------------------------------------------------------------
Segment
Sales ATOI
(DOLLARS IN BILLIONS) (DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------
2003 $ -- $ 355
2002 -- 329
2001 0.9 3,924
- --------------------------------------------------------------------------
On October 1, 2001, DuPont Pharmaceuticals was sold to the Bristol-Myers Squibb
Company. DuPont retained its interest in Cozaar(R) (losartan potassium) and
Hyzaar(R) (losartan potassium with hydrochlorothiazide). These Angiotensin II
Antagonist (AIIA) drugs were discovered by DuPont and developed in collaboration
with Merck & Co. and are used in the treatment of hypertension. DuPont has
exclusively licensed worldwide marketing rights for Cozaar(R) and Hyzaar(R) to
Merck. The U.S. patents covering the compounds, pharmaceutical formulation and
use for the treatment of hypertension, including approval for pediatric use,
will expire in 2010. In conjunction with the sale of DuPont Pharmaceuticals,
Bristol-Myers Squibb manufactured the products for DuPont until September 30,
2003, at the former DuPont Pharmaceuticals manufacturing site at Garden City,
New York. Manufacturing rights and obligations have been exclusively licensed to
Merck as of October 1, 2003.
In September 2002, the U.S. Food & Drug Administration approved Cozaar(R) to
reduce the rate of progression of nephropathy (kidney disease) in Type 2
diabetic patients with hypertension and nephropathy (hereafter referred to as
the RENAAL study). Through 2003, approvals have been granted in 43 countries,
with further approvals pending.
The Losartan Intervention For Endpoint reduction in hypertension study (LIFE)
results were reported and published in March 2002 at the annual meeting of the
American College of Cardiology. The study found that use of Cozaar(R)
significantly reduced the combined risk of cardiovascular death, heart attack
and stroke in patients with hypertension and left ventricular hypertrophy (LVH)
compared to the beta-blocker atenolol. In March 2003, the U.S. Food & Drug
Administration approved Cozaar(R) as the first and only hypertensive medicine to
help prevent stroke in patients with hypertension and LVH. In total, 30
countries have granted new regulatory licenses to Cozaar(R) based on the LIFE
study.
During 2003, two separate sets of hypertensive guidelines (the European Society
of Hypertension - European Society of Cardiology Guidelines, and the Seventh
Report of the Joint National Committee on Prevention, Detection & Treatment of
High Blood Pressure) were issued in Europe and the United States. Both support
the use of AIIAs for the treatment of certain groups of patients, based in part
on the landmark LIFE and RENAAL studies with Cozaar(R).
2003 VERSUS 2002 Worldwide marketing and sales of Cozaar(R) and Hyzaar(R) are
the responsibility of Merck. The Pharmaceuticals segment receives royalties and
net proceeds as outlined by the license agreements. The 2003 ATOI was $355
29
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
million, including $15 million of benefits resulting from a favorable
arbitration ruling. The 2002 ATOI was $329 million, including $39 million of
benefits resulting from adjustments related to the sale of DuPont
Pharmaceuticals as described below.
2002 VERSUS 2001 The 2002 ATOI was $329 million, including $39 million of
benefits resulting from adjustments related to the 2001 sale of DuPont
Pharmaceuticals. Under the terms of the sale agreement, the purchase price was
subject to adjustment for finalization of net working capital, transfer of
pension assets, and the settlement of tax liabilities, the resolution of which
resulted in the additional after-tax gain of $39 million. The 2001 ATOI was
$3,924 million, including a $3,866 million after-tax gain on the divestiture of
DuPont Pharmaceuticals on October 1, 2001.
OUTLOOK Merck has identified Cozaar(R)/Hyzaar(R) as one of their five key growth
drivers. These AIIA drugs are the first of a new class of effective and
well-tolerated blood pressure lowering medications, and are two of the leading
treatments worldwide for hypertension.
DuPont and Merck continue to support the growth of Cozaar(R) and Hyzaar(R) with
additional clinical studies designed to identify additional therapeutic benefits
for patients with hypertension and co-morbid conditions. The company expects the
ongoing Cozaar(R)/Hyzaar(R) collaboration to generate significant earnings for
the foreseeable future.
SAFETY & PROTECTION
- --------------------------------------------------------------------------
Segment
Sales ATOI
(DOLLARS IN BILLIONS) (DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------
2003 $4.1 $536
2002 3.5 490
2001 3.6 451
- --------------------------------------------------------------------------
Safety & Protection builds on DuPont's 200-year record of being one of the
safest industrial companies in the world and extends the company's knowledge and
technology to deliver worldwide solutions to protect people, property,
operations and the environment. Safety & Protection applies a wide range of
technologies, brands and know-how to expand its presence across a spectrum of
industrial, service and residential markets. Highly recognized brands are
included in its portfolio of product and service offerings, including DuPont(TM)
Kevlar(R) aramid products; Tyvek(R) nonwoven sheet structures; Oxone(R)
disinfectant; Corian(R) solid surface materials; and safety consulting services,
such as SafeReturns(TM).
The segment serves a large number of markets that range from construction,
industrial chemical, and automotive to U.S. defense, homeland security and
safety consulting. Demand increased from North American housing and construction
markets, while automotive and aircraft demand was flat, reflecting lower
production levels. Combined effects of war, terrorism and disease control
concerns led to significant increases in orders for military, law enforcement,
fire fighting and health care protective apparel. Industrial chemical markets
varied by region, but were essentially flat worldwide.
The segment delivers innovative building products and services to the global
construction market through offerings that capitalize on the company's
competency in roofing and wall weatherization systems, security windows, and
structural integrity. In 2003, sales of global Tyvek(R) weatherization products
experienced double digit growth. The North American business grew two times the
overall market growth rate due to the segment's increased market penetration and
the success of new products. Sales in Europe grew at a double digit rate in a
down market, driven by expansion in the scope of the segment's environmentally
attractive sealed roofing systems.
The segment offers a broad array of products related to personal protection,
primarily garments and other apparel for protection against chemical,
particulate, biological, thermal and cut hazards. Geographic expansion,
increased market penetration, acquisitions and diversification of these products
resulted in sales growth of about 11 percent in 2003.
Global demand for prevention of disease and improved productivity in the food,
health care, household, institutional and industrial markets continues to create
opportunities for growth related to the segment's clean and disinfect offerings.
Acquisition of UK-based Antec International, a global leader in biosecurity,
provides a broad range of safe, highly effective market-leading disinfect and
cleansing agents.
The segment is also pursuing opportunities to expand offerings to the
government, including secure environmental treatment systems, new specifications
for use of DuPontTM SentryGlas(R) Plus interlayers in bomb-blast resistant
windows, the use of pro-
30
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
tective surfaces in military housing construction programs and expanded use of
Kevlar(R). Growth in U.S. military business was supported by commercialization
of a new U.S. based Kevlar(R) brand fiber plant focused on military ballistic
and other applications.
2003 VERSUS 2002 Sales of $4.1 billion were 17 percent higher, with 6 percent
due to higher volumes, 6 percent due to higher USD selling prices and 5 percent
due to acquisitions, primarily the November 2002 purchase of ChemFirst, Inc.,
whose chemical intermediate units were integrated into this segment. Volume
growth was primarily driven by greater worldwide sales of Kevlar(R) and Nomex(R)
aramids, reflecting increased demand for military, law enforcement and
protective apparel products. Higher volume is also attributable to increased
sales of Tyvek(R) nonwovens and Corian(R) solid surfaces, reflecting strength in
residential construction and home improvement markets. Higher USD selling prices
reflect both higher local currency prices as well as the benefit of the weaker
dollar.
ATOI in 2003 was $536 million compared to $490 million in 2002, reflecting the
benefit of higher volumes and selling prices, partly offset by higher raw
material and fixed costs, primarily non-cash pension expense.
2002 VERSUS 2001 Sales of $3.5 billion were 3 percent lower, reflecting 3
percent lower volume. ATOI was $490 million compared with $451 million. 2001
included $34 million in charges for employee terminations and facility
shutdowns. 2002 earnings reflect improved results in nonwoven products, solid
surface materials, and safety consulting, which more than offset declines in
industrial chemicals and aramid products.
OUTLOOK Overall, Safety & Protection expects continued growth in revenue and
earnings in 2004. The construction industry is expected to remain strong, and
the segment anticipates solid growth related to building products due to
continued focus on increasing market penetration. Sales of protective surfaces
products are also expected to continue to grow through diversification of
products, channels and markets.
Continued strong spending in emergency response markets through U.S. federal
homeland security funding, as well as recovery in the manufacturing sector in
the U.S. and Europe, is expected to continue to support growth in personal
protective systems. U.S. and global military and law enforcement demand for
ballistic protection is expected to remain strong at least through the middle of
2004 and potentially for the entire year. General improvement in industrial
production is also expected to support growth in electrical insulation
(transformers and motors), filtration, oil and gas products. Although the
industrial chemicals product lines are also expected to benefit from this
general improvement, margins are likely to continue to be pressured by energy
related costs, pockets of overcapacity and increased competition from Asia
Pacific.
TEXTILES & INTERIORS
- --------------------------------------------------------------------------
Segment
Sales ATOI
(DOLLARS IN BILLIONS) (DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------
2003 $6.9 $(1,336)
2002 6.2 69
2001 6.4 (342)
- --------------------------------------------------------------------------
On November 17, 2003, the company and Koch Industries, Inc. (Koch) announced
that they had reached a definitive agreement for the sale of INVISTA, which
represents substantially all of the net assets related to the Textiles &
Interiors segment, to subsidiaries of Koch for approximately $4.4 billion,
including the assumption of approximately $270 million of debt. The transaction
is expected to close in the first half of 2004.
Textiles & Interiors includes the following global brands and trademarks:
Lycra(R), Stainmaster(R), Antron(R), Coolmax(R), Thermolite(R), Cordura(R),
Supplex(R), and Tactel(R), and in the specialty chemicals business, Corfree(R),
Dytek(R), ADI-Pure(R), Terathane(R) and DBE(R).
2003 VERSUS 2002 Sales of $6.9 billion were 12 percent higher than 2002. This
includes an 8 percent increase due to including transfers of nylon intermediates
to the Performance Materials segment at market prices versus cost beginning in
2003 in anticipation of the separation. Sales increased 4 percent due to a
benefit from the weaker U.S. dollar and slightly higher volumes, partly offset
by lower local selling prices.
ATOI was a loss of $1,336 million in 2003 versus earnings of $69 million in
2002. Results in 2003 include a net charge of $1,365 million, primarily
associated with the planned separation of INVISTA. This charge reflects the
write-down of various manufacturing assets, goodwill and other intangible
assets, and investments in certain joint ventures, together with a pension
31
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
curtailment loss and other separation costs. In addition, the company recorded a
$669 million deferred tax benefit attributable to tax basis investment losses,
primarily associated with the decline in the fair value of INVISTA assets; this
deferred tax benefit is excluded from segment ATOI. (Additional details are
contained in Notes 5, 6, 9 and 31 to the Consolidated Financial Statements).
Results in 2003 also reflect higher costs for raw materials, principally those
derived from petroleum, which reduced after-tax earnings by over $400 million.
These raw material price increases, combined with higher non-cash pension
expense, more than offset the favorable impact of higher sales, lower
depreciation, and other cost reductions resulting from restructuring activities.
ATOI in 2002 included a net charge of $144 million related to employee
termination costs and asset impairments.
2002 VERSUS 2001 Sales of $6.2 billion were 3 percent lower reflecting 5 percent
higher volume, more than offset by 6 percent lower prices and a 2 percent
decline due to divestitures. Intermediate and apparel products both experienced
lower sales. Sales were essentially flat for segment products sold into the
carpet, interiors and industrial fiber markets as higher volumes offset lower
prices. ATOI in 2002 was $69 million and included a net charge of $144 million
related to employee termination costs and asset impairments. In 2001, ATOI was a
loss of $342 million and included a net charge of $410 million related to
employee termination costs and asset impairments. While segment sales declined
in 2002, earnings benefited from reduced fixed costs reflecting restructuring
programs in both years, lower energy-based raw material costs, and a lower
effective tax rate.
OTHER
The company combines the results of its nonaligned and embryonic businesses
under Other. These businesses include Bio-Based Materials and Growth
Initiatives. Results related to the company's discontinued Benlate(R) fungicide
business are also included (see Benlate(R) discussion in Note 24 to the
Consolidated Financial Statements). In the aggregate, sales from these
businesses represent less than one percent of total segment sales.
2003 VERSUS 2002 Sales of $19 million were down 14 percent. ATOI was a loss of
$150 million in 2003 and included $50 million in charges related to Benlate(R)
litigation. ATOI was a loss of $164 million in 2002 and included charges of $50
million to increase the company's reserve for Benlate(R) litigation and $31
million to establish a reserve related to vitamins litigation associated with a
previously divested joint venture.
2002 VERSUS 2001 Sales of $22 million were down 85 percent, principally
reflecting the withdrawal from the Benlate(R) fungicide business in the fourth
quarter 2001. ATOI was a loss of $164 million and includes charges of $50
million to increase the company's reserve for Benlate(R) litigation and $31
million to establish a reserve related to vitamins litigation associated with a
previously divested joint venture. A 2001 ATOI loss of $95 million included a
net charge of $37 million for employee termination costs.
LIQUIDITY & CAPITAL RESOURCES
The company considers its strong financial position and financial flexibility to
be a competitive advantage. The company's credit ratings of AA- and Aa3 from
Standard & Poor's (S&P) and Moody's Investors Services, respectively, and its
commercial paper rating of A-I+ by S&P and Prime 1 by Moody's are evidence of
that strength. This advantage is based on strong business operating cash flows
over an economic cycle, and a commitment to cash discipline regarding working
capital and capital expenditures.
SOURCES OF LIQUIDITY
The company's liquidity needs can be met through a variety of independent
sources, including: cash from operations, cash and cash equivalents and
marketable securities, commercial paper markets, syndicated credit lines,
bilateral credit lines, equity and long-term debt markets, and asset sales.
The company's cash provided by operations was $2.6 billion in 2003, a $150
million increase from the $2.4 billion generated in 2002. The year-over-year
increase is a result of lower income tax payments offset by higher raw material
costs, termination of the accounts receivable securitization program and funding
of the DuPont Canada Inc. pension fund in preparation for the separation of
INVISTA. In 2002, the company's cash provided by operations was $15 million less
than the $2.5 billion generated in 2001, primarily due to increased tax
payments, related to the gain on the sale of DuPont Pharmaceuticals, and reduced
revenue partially offset by lower operating costs.
32
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
Cash and cash equivalents and marketable debt securities totaled $3.4 billion at
December 31, 2003 (including $75 million of cash classified as assets held for
sale at December 31, 2003), reflecting a $770 million decrease from December 31,
2002. The reduction is primarily attributable to the $1.1 billion of cash used
to purchase the shares in DuPont Canada Inc. from the minority owners in
connection with the company's plans to separate INVISTA.
The commercial paper market is a source of "same day" cash for the company. The
company can access this market at preferred rates given its strong credit
rating. The weighted-average interest rates before taxes on commercial paper
borrowings for 2003, 2002 and 2001, were 1.1, 1.7 and 4.1 percent, respectively.
At December 31, 2003, DuPont's commercial paper balance was $4.4 billion, a $3.7
billion increase from December 31, 2002. The year-over-year increase primarily
relates to the redemption of the corporate minority interest structures for $2.0
billion, the termination of the accounts receivable securitization and synthetic
lease programs that were financed by the commercial paper conduit for $589
million, and the buyout of certain synthetic leases (not covered under the
commercial paper conduit) for $210 million. Additional information regarding the
termination of these programs is discussed beginning on page 35.
In the unlikely event that the company would not be able to meet its short-term
liquidity needs, the company has access to approximately $4.1 billion in "same
day" credit lines with several major financial institutions. These credit lines
are split about equally between 364-day and multi-year facilities.
DuPont also has access to equity markets and to long-term debt capital markets.
The company's current relatively low long-term borrowing level, strong financial
position and credit ratings provide access to these markets.
There were no material asset sales in 2003. In 2002, proceeds from sales of
assets were $196 million, primarily reflecting $143 million received from the
sale of the Clysar(R) shrink film business. In addition, there were $122 million
of settlement payments to Bristol-Myers Squibb relating to the 2001 sale of
DuPont Pharmaceuticals. Proceeds from sales of assets in 2001 totaled $8.1
billion, of which $7.8 billion related to the sale of DuPont Pharmaceuticals.
Additional details related to the company's sales of assets are provided in Note
27 to the Consolidated Financial Statements.
The company expects to use the proceeds from the pending sale of INVISTA to
strengthen its balance sheet by reducing debt. The company will also consider
pension fund contributions and an appropriate level of share repurchases.
USES OF CASH
Purchases of property, plant and equipment, and investments in affiliates were
$1.8 billion in 2003, compared with $1.4 billion in 2002, and $1.6 billion in
2001. Expenditures for 2003 include $334 million of assets purchased under the
company's synthetic lease programs related to aircraft, rail cars, and
manufacturing and warehousing facilities. The company expects purchases of
property, plant and equipment in 2004 to be about $1.4 billion, which reflects
the expected absence of INVISTA in the second half of the year.
Payments for businesses acquired in 2003 totaled $1.5 billion, primarily
consisting of two acquisitions. In June and July 2003, the company acquired
66,704,465 shares in DuPont Canada Inc. from the minority owners for $1.1
billion. In May 2003, The Solae Company, a majority-owned subsidiary of the
company, acquired 82 percent of Bunge Limited's Brazilian ingredients operation
for $256 million with the additional 18 percent acquired in the fourth quarter
of 2003 for $44 million. Payments for businesses acquired in 2002 amounted to
$697 million which includes the acquisition of all the outstanding common shares
of Liqui-Box Corporation for $272 million, net of cash acquired, and the
acquisition of ChemFirst, Inc. for $357 million, net of cash acquired. There
were no significant payments for businesses acquired in 2001. Additional details
related to the acquisitions are provided in Note 27 to the Consolidated
Financial Statements.
The settlements of forward exchange contracts issued to hedge the company's net
exposure, by currency, related to monetary assets and liabilities resulted in
cash payments of $631 million in 2003, and $264 million in 2002, compared to
cash receipts of $93 million in 2001. The payments in 2003 and 2002 were
primarily attributable to the weaker dollar versus the Euro and larger net
monetary asset positions. These settlements were largely offset by revaluations
of the items being hedged, which are reflected in the appropriate categories in
the Consolidated Statement of Cash Flows.
33
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
The company has paid a quarterly common dividend since its first dividend in the
fourth quarter of 1904. Dividends per share of common stock were $1.40 in 2003,
2002 and 2001.
In 1998, the company's Board of Directors approved a program to purchase and
retire up to 20 million shares of DuPont common stock to offset dilution from
shares issued under compensation programs. In July 2000, the company's Board of
Directors approved an increase in the total number of shares of DuPont common
stock remaining to be purchased under the 1998 program from about 16 million
shares to the total number of shares that could be purchased for $2.5 billion.
These purchases were not limited to those needed to offset dilution from shares
issued under compensation programs. In 2002, the company completed the 1998
program by purchasing 10.8 million shares for $470 million. In addition, 43
million shares were purchased for $1.8 billion in 2001.
The company's Board of Directors authorized a $2 billion share buyback plan in
June 2001. As of December 31, 2003, no shares were purchased under this program
and management has not established a timeline for the buyback of stock under
this plan.
FINANCIAL CONDITION
At year-end 2003, the company's net debt (borrowings and capital lease
obligations less cash and cash equivalents and marketable debt securities,
including $189 million of net debt from assets and liabilities held for sale at
December 31, 2003), was $7.1 billion. The following table summarizes changes in
the company's consolidated net debt for 2001 through 2003.
- -------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- -------------------------------------------------------------------
Net debt - beginning of year $ 2,689 $ 966 $8,288
- -------------------------------------------------------------------
Cash provided by continuing
operations 2,589 2,439 2,454
Purchases of property, plant &
equipment & investment
in affiliates (1,784) (1,416) (1,634)
Net payments for businesses
acquired (1,527) (697) (78)
Proceeds from sales of assets 17 196 253
Net proceeds from sale of
DuPont Pharmaceuticals -- (122) 7,798
Forward exchange contract
settlements (631) (264) 93
Dividends paid to stockholders (1,407) (1,401) (1,460)
Acquisition of treasury stock -- (470) (1,818)
Increase (redemption) in corporate
minority interest structures (2,037) -- 1,980
Net cash flow from
discontinued operations -- -- (110)
Other 363 12 (156)
- -------------------------------------------------------------------
Decrease (increase) in net debt (4,417) (1,723) 7,322
- -------------------------------------------------------------------
Net debt - end of year $ 7,106 $2,689 $ 966
- -------------------------------------------------------------------
Cash and cash equivalents $ 3,273 $3,678 $5,763
Marketable debt securities 25 465 85
Cash and cash equivalents
held for sale 75 -- --
Borrowings and capital lease
obligations held for sale (264) -- --
- -------------------------------------------------------------------
Total borrowings and capital
lease obligations $10,215 $6,832 $6,814
- -------------------------------------------------------------------
Net debt increased $4.4 billion in 2003 as a result of the redemption of the
corporate minority interest structures, acquisition of the minority shares held
in DuPont Canada Inc., termination of the accounts receivable securitization and
synthetic lease programs that were financed by the commercial paper conduit and
buyout of certain synthetic leases (not covered under the commercial paper
conduit). In addition, net debt increased $147 million, reflecting debt balances
assumed by the company as a result of acquiring the remaining interest in
Griffin LLC. Additional information regarding the termination of the corporate
minority interest structure and the accounts receivable and synthetic lease
programs is described in sections below.
The increase in net debt was financed with commercial paper, which became a more
significant portion of the company's total debt position. The impact of the
change in the debt portfolio mix reduced the year-end average interest rate from
5.0 percent at December 31, 2002, to 3.0 percent at December 31, 2003. Interest
34
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
expense was flat year over year as a result of lower average interest
rates offset by higher debt levels. See Notes 19 and 21 to the Consolidated
Financial Statements for year-end debt balances and interest rates.
The company believes net debt provides the investor with a more realistic view
of the company's liquidity and actual debt position because the company's cash
and cash equivalents and marketable debt securities are available to pay down
debt. Net debt also allows the investor to compare debt in different periods
without adjusting for cash and the changes in cash position.
MINORITY INTEREST STRUCTURES
In 2001, the company received proceeds of $2 billion from entering into two
minority interest transactions. Costs incurred in connection with these
transactions totaled $42 million and were being amortized on a straight-line
basis over a five-year period to Minority interest in earnings of consolidated
subsidiaries in the Consolidated Income Statement. The proceeds were used to
reduce debt and were reported as Minority interests in the Consolidated Balance
Sheet.
In 2003, the company redeemed these structures for $2 billion, and recorded a
charge of $28 million primarily to write off the remaining unamortized costs
associated with the transactions.
OFF-BALANCE SHEET ARRANGEMENTS
COMMERCIAL PAPER FACILITY
In 2002, the company implemented a commercial paper conduit program to reduce
the financing costs of the company's accounts receivable securitization and
synthetic lease programs by gaining direct access to the asset-backed commercial
paper market. The conduit issued notes to third parties secured by the
receivable interests and the equipment and real estate under synthetic leases.
In 2003, the company terminated its accounts receivable securitization and
synthetic lease programs that were financed by the commercial paper conduit.
This required the company to purchase an ownership interest in the trade
accounts receivable being held under the accounts receivable securitization
program for $445 million and assets under synthetic leases for $144 million.
The trade accounts receivable were collected in 2003.
OTHER SYNTHETIC LEASES
During 2003, the company purchased the assets under its synthetic leases related
to manufacturing and warehousing facilities under construction (which were not
covered under the commercial paper conduit) for $210 million.
As of December 31, 2003, the company has one remaining synthetic lease program
relating to miscellaneous short-lived equipment valued at approximately $115
million. Lease payments for these assets totaled $43 million in 2003, $28
million in 2002, and $12 million in 2001, and were reported as operating
expenses in the Consolidated Income Statement. The leases under this program are
considered operating leases and accordingly the related assets and liabilities
are not recorded on the company's Consolidated Balance Sheet. Furthermore, the
lease payments associated with this program vary based on thirty-day LIBOR. The
company may terminate the program at any time by purchasing the assets. Should
the company decide neither to renew the leases nor to exercise its purchase
option, it must pay the owner a residual value guarantee amount, which may be
recovered from a sale of the property to a third party. Residual value
guarantees totaled $100 million at December 31, 2003.
CERTAIN GUARANTEE CONTRACTS
INDEMNIFICATIONS
In connection with acquisitions, divestitures and the formation of joint
ventures, the company has indemnified respective parties against certain
liabilities that may arise in connection with these transactions and business
activities prior to the completion of the transaction. In addition, the company
indemnifies its duly elected or appointed directors and officers to the fullest
extent permitted by Delaware law against liabilities incurred as a result of
their activities for the company such as adverse judgments relating to
litigation matters. The term of these indemnifications, which typically pertain
to environmental, tax, and product liabilities, is generally indefinite. If the
indemnified party were to incur a liability or have a liability increase as a
result of a successful claim, pursuant to the terms of the indemnification, the
company would be required to reimburse the indemnified party. The maximum amount
of potential future payments is generally unlimited. The carrying amount
recorded for all indemnifications as of December 31, 2003, is $31 million.
Although it is
35
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
reasonably possible that future payments may exceed amounts accrued, due to the
nature of indemnified items, it is not possible to make a reasonable estimate of
the maximum potential loss or range of loss. No assets are held as collateral
and no specific recourse provisions exist.
As part of the pending sale of INVISTA, the company will make certain
indemnifications. See further discussion on page 18 under Separation
Charges--Textile & Interiors.
OBLIGATIONS FOR EQUITY AFFILIATES AND OTHERS
The company has directly guaranteed various debt obligations under agreements
with third parties related to equity affiliates, customers and other
unaffiliated companies. At December 31, 2003, the company had directly
guaranteed $885 million of such obligations, excluding guarantees of certain
obligations and liabilities of Conoco, Inc. as discussed below. This represents
the maximum potential amount of future (undiscounted) payments that the company
could be required to make under the guarantees. No material loss is anticipated
by reason of such agreements and guarantees. At December 31, 2003, the
liabilities recorded for these obligations were not material.
Existing guarantees for customers arose as part of contractual sales agreements.
Existing guarantees for equity affiliates arose for liquidity needs in normal
operations. The company would be required to perform on these guarantees in the
event of default by the guaranteed party. In certain cases, the company has
recourse to assets held as collateral as well as personal guarantees from
customers.
The company has historically guaranteed certain obligations and liabilities of
Conoco, Inc., its subsidiaries and affiliates, which totaled $235 million at
December 31, 2003. 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. No
material loss is anticipated by reason of such agreements and guarantees. At
December 31, 2003, the company has no liabilities recorded for these
obligations.
Additional information with respect to the company's guarantees is included in
Note 24 to the Consolidated Financial Statements.
Historically, the company has not had to make significant payments to satisfy
guarantee obligations; however, the company believes it has the financial
resources to satisfy these guarantees should unforeseen circumstances arise.
36
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
CONTRACTUAL OBLIGATIONS
Information related to the company's significant contractual obligations is
summarized in the following table:
- --------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) Payments Due In
- --------------------------------------------------------------------------------------------------------------------------
TOTAL AT 2009
Contractual obligations (1) DECEMBER 31, 2003 2004 2005-2006 2007-2008 and beyond
- --------------------------------------------------------------------------------------------------------------------------
Long-term debt (2) $5,731 $1,323 $ 477 $960 $2,971
- --------------------------------------------------------------------------------------------------------------------------
Capital leases (2) 58 4 7 9 38
- --------------------------------------------------------------------------------------------------------------------------
Operating leases 1,063 326 329 177 231
- --------------------------------------------------------------------------------------------------------------------------
Purchase obligations (3)
Advertising/sponsorships 35 18 17 - -
Information technology services 78 17 15 5 41
Raw material obligations 608 200 269 85 54
Research and development agreements 107 58 30 12 7
Utility obligations 315 55 33 19 208
Other (4) 98 37 54 4 3
- --------------------------------------------------------------------------------------------------------------------------
Total purchase obligations 1,241 385 418 125 313
- --------------------------------------------------------------------------------------------------------------------------
Other long-term liabilities (2,5)
Workers' compensation 55 24 16 6 9
Asset retirement obligations 65 14 21 21 9
Environmental remediation 380 67 102 102 109
Litigation 4 4 - - -
Other (6) 124 14 20 18 72
- --------------------------------------------------------------------------------------------------------------------------
Total other long-term liabilities 628 123 159 147 199
- --------------------------------------------------------------------------------------------------------------------------
Total contractual obligations $8,721 $2,161 $1,390 $1,418 $3,752
==========================================================================================================================
(1) Includes certain liabilities that are classified as held for sale in the
Consolidated Balance Sheet.
(2) Included in the company's Consolidated Financial Statements.
(3) Represents enforceable and legally binding agreements in excess of $1
million to purchase goods or services that specify fixed or minimum
quantities; fixed, minimum, or variable price provisions; and the
approximate timing of the agreement.
(4) Primarily represents obligations associated with capital projects, contract
manufacturing, distribution, and health care/benefit administrative
contracts.
(5) Pension and other postretirement benefit obligations have been excluded
from the table as they are discussed below within Long-Term Employee
Benefits.
(6) Primarily represents employee related benefits other than pensions and
other postretirement benefits.
The company expects to meet its contractual obligations through its normal
sources of liquidity and believes it has the financial resources to satisfy
these contractual obligations should unforeseen circumstances arise.
LONG-TERM EMPLOYEE BENEFITS
The company also has various obligations to its employees and retirees. The
company maintains retirement-related programs in many countries that have a
long-term impact on the company's earnings and cash flows. These plans are
typically defined benefit pension plans, and medical, dental and life insurance
benefits for pensioners and survivors. About 78 percent of the company's
worldwide benefit obligation for pensions, and about 99 percent of the company's
worldwide benefit obligation for retiree medical, dental and life insurance
benefits are attributable to the benefit plans covering substantially all U.S.
employees. Where permitted by applicable law, the company reserves the right to
change, modify or discontinue its plans that provide pension and medical, dental
and life insurance benefits. Benefits under defined benefit pension plans are
based primarily on years of service and employees' pay near retirement. In the
U.S., pension benefits are paid primarily from trust funds established to comply
with U.S. federal laws and regulations. The company does not make contributions
that are in excess of federal tax deductible limits. The actuarial assumptions
and procedures utilized are reviewed periodically by the plans' actuaries to
provide reasonable assurance that there will be adequate funds for the payment
of benefits. No contributions are currently required to be made to the principal
U.S. pension plan trust fund in 2004. Although the company is permitted to make
a tax deductible discretionary contribution to the principal U.S. pension plan
trust fund in 2004, no decision has been made to make such a
37
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
contribution. Contributions beyond 2004 are not determinable since the amount of
any contribution is heavily dependent on the future economic environment and
investment returns on pension trust assets. Pension benefits that exceed federal
limitations are covered by separate unfunded plans and these benefits are paid
to pensioners and survivors from operating cash flows. Pension coverage for
employees of the company's non-U.S. consolidated subsidiaries is provided, to
the extent deemed appropriate, through separate plans.
Funding for each pension plan is governed by the rules of the sovereign country
in which it operates. Thus, there is not necessarily a direct correlation
between pension funding and pension expense. In general, however, reduced asset
valuations tend to result in higher contributions to pension plans. In 2003, the
company contributed $460 million to pension plans other than the principal U.S.
pension plan discussed above. This includes funding of the DuPont Canada Inc.
pension fund in preparation for the pending separation of INVISTA. The company
anticipates approximately $300 million in contributions in 2004 to these plans.
Generally accepted accounting principles require an adjustment to stockholders'
equity whenever the fair market value of year-end pension assets is less than
the accumulated benefit obligation. For this purpose, each of the company's
pension plans must be tested individually. At year-end 2002, a non-cash
after-tax charge of $2.5 billion to stockholders' equity was recorded in
response to lower asset valuations and somewhat higher benefit obligations as of
that date. Most of this adjustment is attributable to the principal U.S. pension
plan. In 2003, $858 million of this charge was reversed, reflecting recovering
asset values.
Medical, dental and life insurance plans are unfunded and the cost of the
approved claims is paid from operating cash flows. Pretax cash requirements to
cover actual net claims costs and related administrative expenses were $410
million, $400 million, and $423 million, for 2003, 2002, and 2001, respectively.
This amount is expected to be about $420 million in 2004. Changes in cash
requirements during this period reflect higher per capita health care costs,
demographic changes, and changes in participant premiums, co-pays and
deductibles.
The company's income is significantly affected by pension benefits as well as
retiree medical, dental and life insurance benefits. The following table
summarizes the extent to which the company's income over each of the last three
years was affected by pretax credits and charges related to long-term employee
benefits.
- --------------------------------------------------------------------------------
PRETAX (DOLLARS IN MILLIONS) 2003 2002 2001
- --------------------------------------------------------------------------------
Pension charges (credits) $554 $(217) $(374)
Other postretirement
benefit charges 290 395 347
- --------------------------------------------------------------------------------
Net (benefit) charge $844 $ 178 $ (27)
================================================================================
These expenses are determined as of the beginning of each year. The increase in
pension cost is primarily due to lower values for pension plan assets resulting
from the decline in the equity markets measured in preceding years. The decrease
in other postretirement benefit expenses is primarily due to the beneficial
effects of the medical and dental benefit limits on the company's portion of the
cost coverage plan amendments adopted in 2002, partly offset by rapidly
increasing medical costs.
In January 2004, the company amended its U.S. medical plan to be secondary to
Medicare for prescription drug coverage beginning in 2006 for eligible retirees
and survivors. The impact of this amendment is expected to benefit 2004 pretax
earnings by approximately $60 million and reduce the company's other
postretirement obligation by about $525 million.
The company's key assumptions used in calculating its long-term employee
benefits are the expected return on plan assets, the rate of compensation
increases, and the discount rate. The discount rate used in the U.S.
calculations was determined to be 6.25 percent in 2003, based on high quality
corporate bond rates. In 2003, the company experienced postretirement benefits
claims lower than the anticipated claims. As a result of these factors, and the
amendment to the U.S. other postretirement benefit plan in January 2004, it is
expected that the company's 2004 pretax earnings will be positively affected by
approximately $100 million to $150 million.
In anticipation of a significant reduction in the number of employees related to
the pending INVISTA sale, the company recorded a pretax curtailment loss of $78
million in 2003. Upon completing the sale of INVISTA, the company anticipates
that there may be a remeasurement of pension and other postretirement benefits
as well as additional charges or credits. Such amounts cannot be reasonably
determined at this time. The
38
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
company does not plan to transfer pension benefits assets/liabilities and other
postretirement benefits liabilities in the U.S., but has arranged to transfer
the assets/liabilities in the non-U.S. plans. It is expected that the employee
benefit obligation and assets will not change significantly because of the
pending sale.
The company has announced possible reductions in the number of employees in 2004
related to cost reduction initiatives. This may result in a remeasurement of
pension and other postretirement benefits as well as additional charges or
credits. Such amounts cannot be reasonably estimated at this time.
ENVIRONMENTAL MATTERS
DuPont operates global manufacturing facilities, product handling and
distribution facilities that are subject to a broad array of environmental laws
and regulations. Company policy requires that all operations fully meet or
exceed legal and regulatory requirements. In addition, DuPont implements
voluntary programs to reduce air emissions, eliminate the generation of
hazardous waste, decrease the volume of waste water discharges, increase the
efficiency of energy use and reduce the generation of persistent,
bioaccumulative and toxic (PBT) materials. The costs to comply with complex
environmental laws and regulations, as well as internal voluntary programs and
goals, are significant and will continue 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 2003, DuPont spent about $64 million on environmental capital projects either
required by law or necessary to meet the company's internal environmental goals.
The company currently estimates expenditures for environmental-related capital
projects will total $80 million in 2004 (excluding INVISTA). In the U.S.,
significant capital expenditures are expected to be required over the next
decade for treatment, storage and disposal facilities for solid and hazardous
waste and for compliance with the Clean Air Act (CAA). Until all CAA regulatory
requirements are established and known, considerable uncertainty will remain
regarding future estimates for capital expenditures. Total CAA capital costs
over the next two years are currently estimated to range from $10 million to $20
million.
The Environmental Protection Agency (EPA) challenged the U.S. chemical industry
to voluntarily conduct screening level health and environmental effects testing
on nearly 3,000 high production volume (HPV) chemicals or to make equivalent
information publicly available. An HPV chemical is a chemical listed on the 1990
Inventory Update Rule with annual U.S. cumulative production and imports of one
million pounds or more. The cost to DuPont of testing for HPV chemicals it makes
is estimated to be a total of $8 million to $10 million from 2001-2005; for the
entire chemical industry, the cost of testing is estimated to be $500 million.
Global climate change is being addressed by the Framework Convention on Climate
Change adopted in 1992. The Kyoto Protocol, adopted in December 1997, is an
effort to establish short-term actions under the Convention. The
entry-into-force of the Protocol is in question, with ratification by the
Russian Federation necessary. The Russian Federation is expected to decide
whether to ratify the Protocol during 2004. The European Union (EU) has
indicated that it intends to proceed with its emissions reduction programs even
if the Protocol does not enter into force. The United States continues to pursue
in the EU and elsewhere a less-restrictive climate policy framework, emphasizing
voluntary action. The Kyoto Protocol would establish significant emission
reduction targets for six gases considered to have global warming potential and
would drive mandatory reductions in developed nations outside the United States.
DuPont has a stake in a number of these gases - CO2, N2O, HFCs and PFCs - and
has been reducing its emissions of these gases since 1991. The company remains
well ahead of the target/timetable contemplated by the Protocol. However, on a
global basis, the company faces the possibility of country-specific restrictions
where major reductions have not yet been achieved. DuPont is working to enable
success of emissions trading mechanisms in the EU and elsewhere that could aid
in satisfying such country-specific requirements. Emission reduction mandates
within the United States are not expected in the near future, although
Congressional proposals for such mandates have been introduced.
DuPont has discovered that very low levels of dioxins (parts per trillion to low
parts per billion) and related compounds are inadvertently generated during its
titanium dioxide pigment production process. The company has launched an
extensive research and process engineering development program to identify the
cause
39
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
of the dioxin generation and to identify process modifications that will
eliminate dioxin formation. The programs implemented to date have resulted in
reductions of almost 50 percent, significant progress against DuPont's
aggressive goals to reduce such dioxin generation by 90 percent by 2007. Over 99
percent of the dioxin generated at DuPont's production plants becomes associated
with process solid wastes that are disposed in controlled landfills where public
exposure is negligible.
Pretax environmental expenses charged to current operations totaled $482 million
in 2003 compared with $480 million in 2002, and $550 million in 2001. 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. While
expenses related to the costs of environmental research activities are not a
significant component of the company's overall environmental expenses, the
company expects these costs to become proportionally greater as the company
increases its participation in businesses for which environmental assessments
are required during product development. The largest of these expenses in 2003
resulted from the operation of water pollution control facilities and solid
waste management facilities for about $134 million and $127 million,
respectively. About 79 percent of total annual environmental expenses resulted
from the operations in the United States.
REMEDIATION ACCRUALS
At December 31, 2003, the company's Consolidated Balance Sheet included an
accrued liability of $380 million as compared with $371 million at year-end
2002. Considerable uncertainty exists with respect to environmental remediation
costs and, under adverse changes in circumstances, potential liability may range
up to two to three times the amount accrued as of December 31, 2003. Of the $380
million accrued liability, approximately 15 percent is for non-U.S. facilities.
Approximately 75 percent of the company's U.S. environmental reserve at December
31, 2003, was attributable to RCRA and similar remediation liabilities, while 25
percent was attributable to CERCLA liabilities. During 2003, remediation
accruals of $47 million were added to the reserve compared with $48 million in
2002.
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. In contrast to 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 $38 million in 2003, $42 million in 2002, and $49 million in 2001.
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 PRP under CERCLA or similar 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, 2003, the company had been notified of
potential liability under CERCLA or state laws at 372 sites around the United
States, with active remediation under way at 138 of these sites. In addition,
the company has resolved its liability at 138 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 five new sites during 2003 compared with eight similar
notices in 2002, and eleven in 2001. In 2003, two sites were settled by the
company. The company's expenditures associated with CERCLA and similar state
remediation activities were approximately $22 million in 2003, $20 million in
2002, and $17 million in 2001.
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
40
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
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.
Total expenditures for previously accrued remediation activities under CERCLA,
RCRA and similar state laws were $60 million in 2003, $62 million in 2002, and
$66 million in 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL INSTRUMENTS
DERIVATIVES AND OTHER HEDGING INSTRUMENTS
Under procedures and controls established by the company's Financial Risk
Management Framework, the company enters into contractual arrangements
(derivatives) in the ordinary course of business to hedge its exposure to
foreign currency, interest rate and commodity price risks. The counterparties to
these contractual arrangements are major financial institutions and major
petrochemical and petroleum companies.
Effective January 2004, the company has elected to discontinue its broad-based
foreign currency revenue hedging program, as well as its program to hedge
natural gas purchases. The programs are being discontinued, as the costs of the
programs are no longer believed to be warranted. However, certain
business-specific foreign currency hedging programs will continue, as will
hedging of foreign currency denominated monetary assets and liabilities. In
addition, the company will continue to enter into exchange traded agricultural
commodity derivatives to hedge exposures relevant to agricultural feedstock
purchases.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the company to significant
concentrations of credit risk consist principally of cash, investments, accounts
receivable, derivatives, and certain other financial instruments.
As part of the company's risk management processes, it continuously evaluates
the relative credit standing of all of the financial institutions that service
DuPont, and monitors actual exposures versus established limits on a daily
basis. The company has not sustained credit losses from instruments held at
financial institutions.
The company maintains cash and cash equivalents, short- and long-term
investments, derivatives, and certain other financial instruments with various
financial institutions. These financial institutions are generally highly rated,
geographically dispersed, and the company has a policy to limit the dollar
amount of credit exposure with any one institution.
The company's sales are not materially dependent on a single customer or small
group of customers. No one individual customer balance represents more than 5
percent of the company's total outstanding receivables balance as of December
31, 2003. Credit risk associated with its receivables balance is representative
of the geographic, industry and customer diversity associated with the company's
global businesses.
The company also maintains strong credit controls in evaluating and granting
customer credit. As a result, it may require that customers provide some type of
financial guarantee in certain circumstances. Length of terms for granted
customer credit varies by industry and region.
FOREIGN CURRENCY RISK
The company's objective in managing exposure to foreign currency fluctuations is
to reduce earnings and cash flow volatility associated with foreign currency
rate changes. Accordingly, the company enters into various contracts that change
in value as foreign exchange rates change to protect the value of its existing
foreign currency-denominated assets, liabilities, commitments and cash flows.
The company routinely uses forward exchange contracts to hedge its net
exposures, by currency, related to the foreign currency-denominated monetary
assets and liabilities of its operations. The primary business objective of this
hedging program is to maintain an approximately balanced position in foreign
currencies so that exchange gains and losses resulting from exchange rate
changes, net of related tax effects, are minimized. In addition, option and
forward exchange contracts are used to hedge a portion of anticipated foreign
currency revenues and major raw
41
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
material purchases from vendors outside of the U.S. Gains and losses on these
contracts offset changes in the related foreign currency-denominated revenues
and costs respectively.
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.
INTEREST RATE RISK
The company uses interest rate swaps to manage the interest rate mix of the
total debt portfolio and related overall cost of borrowing.
Interest rate swaps involve the exchange of fixed for floating rate interest
payments to effectively convert fixed rate debt into floating rate debt based on
three- or six-month U.S. dollar LIBOR. Interest rate swaps allow the company to
maintain a target range of floating rate debt.
COMMODITY PRICE RISK
The company enters into exchange-traded and over-the-counter derivative
commodity instruments to hedge its exposure to price fluctuations on certain raw
material purchases.
A portion of energy feedstock purchases is hedged to reduce price volatility
using various risk management strategies. Hedged commodity purchases include
natural gas, ethane and cyclohexane. In addition, certain sales of ethylene are
also hedged.
The company contracts with independent growers to produce finished seed
inventory. Under these contracts, growers are compensated with bushel
equivalents that are marketed to the company for the market price of grain for a
period of time following harvest. Derivative instruments, such as commodity
futures that have a high correlation to the underlying commodity, are used to
hedge the commodity price risk involved in compensating growers.
The company utilizes agricultural commodity futures to manage the price
volatility of soybean meal. These derivative instruments have a high correlation
to the underlying commodity exposure and are deemed effective in offsetting
soybean meal feedstock price risk.
Additional details on these and other financial instruments are set forth in
Note 29 to the Consolidated Financial Statements.
VALUE AT RISK
A Value-at-Risk (VaR) analysis provides a forward-looking perspective of the
maximum potential loss in fair value for a defined period of time assuming
normal market conditions and a given confidence level. The company's risk
management portfolio consists of a variety of hedging instruments which provide
protection from volatility in the areas of interest rates, foreign currency,
agricultural commodities, and energy feedstock commodities. The valuations and
risk calculations for the VaR analysis were conducted using the company's risk
management portfolios as of December 31, 2003, and 2002. The average, high and
low values reflected in the table were developed from each of the four quarters
ended in 2003. The VaR analysis used a Monte Carlo simulation type model with an
exponentially weighted covariance matrix, and employed 3,000 pseudo-random
market paths including all risk factors associated with the hedging instruments
in the company's risk management portfolios. The calculations were conducted
over a 20 business day period at a 95 percent confidence level.
The following table details the results of the VaR analysis for each significant
risk management portfolio at the end of both 2003 and 2002.
- --------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 Average High Low
- --------------------------------------------------------------------------------
Foreign currency $(83) $(90) $(122) $(148) $(83)
Interest rates (32) (30) (26) (32) (23)
Energy feedstock
commodities (6) (9) (9) (18) (2)
Agricultural commodities (7) (7) (4) (7) (3)
================================================================================
The table above represents the VaR potential loss in fair value when each risk
management portfolio is valued individually. VaR for the entire risk management
portfolio is a loss of $77 million for 2003, and a loss of $80 million for 2002;
these values reflect the diversification benefits and covariance correlation of
the total portfolio. The VaR model results are only an estimate and
42
PART II
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK-CONTINUED
are not intended to forecast actual losses that may be incurred in future
periods.
Since the company's risk management programs are highly effective, the potential
loss in value for each risk management portfolio described above would be
largely offset by changes in the value of the underlying exposures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item are
included herein, commencing on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The company is in the process of implementing an Enterprise Resource Planning
(ERP) system globally. The implementation is phased and is currently planned to
be complete in 2006. Implementing an ERP system on a global basis involves
significant changes in business processes and extensive organizational training.
The phased-in approach the company is taking reduces the risks associated with
making these changes. In addition, the company is taking the necessary steps to
monitor and maintain appropriate internal controls during this period of change.
These steps include deploying resources to mitigate internal control risks and
performing additional verifications and testing to ensure data integrity.
Pursuant to rules adopted by the SEC as directed by Section 302 of the
Sarbanes-Oxley Act of 2002, the company has performed an evaluation of its
disclosure controls and procedures (as defined by Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of the end of the period covered by this report. Based on this
evaluation, the company's Chief Executive Officer and Chief Financial Officer
have concluded that these controls and procedures are effective in ensuring that
information required to be disclosed by the company is recorded, processed,
summarized and reported within the time period specified in the SEC's rules and
forms.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this Item is incorporated herein by reference to the
Proxy. Information related to directors is included within the section entitled
"Election of Directors" and information related to the Audit Committee is
included within the sections entitled "Committees of the Board" and "Committee
Membership." Information regarding executive officers is contained in Part I,
Item 4 of this report, pursuant to General Instruction G of this form.
The company has adopted a Code of Ethics for its Chief Executive Officer, Chief
Financial Officer and Controller. This Code of Ethics is filed as Exhibit 14 to
this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this Item is incorporated herein by reference to the
Proxy and is included in the sections entitled "Directors' Compensation,"
"Summary Compensation Table," "Stock Option Grants," "Option Exercises/Year-End
Values" including "Retention Arrangement," and "Retirement Benefits."
43
PART III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information with respect to Beneficial Owners is incorporated herein by
reference to the Proxy and is included in the section entitled "Ownership of
Company Stock".
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS AS OF
DECEMBER 31, 2003
- -----------------------------------------------------------------------------------------------------------------------------
Number of Securities to be Weighted-Average Number of Securities
Issued Upon Exercise of Exercise Price of Remaining Available for
Outstanding Options, Outstanding Options, Future Issuance Under
Plan Category Warrants and Rights (1) Warrants and Rights Equity Compensation Plans (2)
- -----------------------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 69,680,505 $45.05 29,606,134 (3)
Equity compensation
plans not approved by
security holders (4) 30,359,671 $44.01 --
- -----------------------------------------------------------------------------------------------------------------------------
100,040,176 $44.74 29,606,134
- -----------------------------------------------------------------------------------------------------------------------------
(1) Excludes restricted stock units or stock units deferred pursuant to the
terms of the company's Stock Performance Plan, Variable Compensation Plan
or Stock Accumulation and Deferred Compensation Plan for Directors.
(2) Excludes securities reflected in the first column.
(3) Reflects shares available under rolling five-year average pursuant to the
terms of the shareholder-approved Stock Performance Plan (see Note 26 to
the company's Consolidated Financial Statements). Does not include
indeterminate number of shares available for distribution under the
shareholder-approved Variable Compensation Plan.
(4) Includes options totaling 28,600,222 granted under the company's 1995, 1997
and 2002 Corporate Sharing Programs (see Note 26 to the company's
Consolidated Financial Statements) and 100,000 options with an exercise
price of $46.50 granted to a consultant. Also includes 1,659,449 options
from the conversion of DuPont Canada Inc. options to DuPont options in
connection with the company's acquisition of the minority interest in
DuPont Canada Inc. (see Note 27 to the Consolidated Financial Statements).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to this Item is incorporated herein by reference to the
Proxy and is included in the sections entitled "Ratification of Independent
Accountants" and "Appendix A-1."
44
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits:
1. Financial Statements (See the Index to the Consolidated Financial
Statements on page F of this report).
2. Financial Statement Schedules - none required.
The following should be read in conjunction with the previously referenced
Consolidated Financial Statements:
Financial Statement Schedules listed under SEC rules but not included in this
report are omitted because they are not applicable or the required information
is shown in the Consolidated Financial Statements or notes thereto incorporated
by reference.
Condensed financial information of the parent company is omitted because
restricted net assets of consolidated subsidiaries do not exceed 25 percent of
consolidated net assets. Footnote disclosure of restrictions on the ability of
subsidiaries and affiliates to transfer funds is omitted because the restricted
net assets of subsidiaries combined with the company's equity in the
undistributed earnings of affiliated companies does not exceed 25 percent of
consolidated net assets at December 31, 2003.
Separate financial statements of affiliated companies accounted for by the
equity method are omitted because no such affiliate individually constitutes a
20 percent significant subsidiary.
3.Exhibits
The following list of exhibits includes both exhibits submitted with this Form
10-K as filed with the SEC and those incorporated by reference to other filings:
45
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K-CONTINUED
(a) Exhibits and Financial Statement Schedules
- --------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
3.1 Company's Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 of the company's Annual Report on Form 10-K
for the year ended December 31, 2002).
3.2 Company's Bylaws, as last revised January 1, 1999.
4 The company agrees to provide the Commission, on request, copies of
instruments defining the rights of holders of long-term debt of the
company and its subsidiaries.
10.1 The DuPont Stock Accumulation and Deferred Compensation Plan for
Directors, as last amended January 23, 2002 (incorporated by
reference to Exhibit 10.13 of the company's Quarterly Report on Form
10-Q for the period ended March 31, 2002).
10.2* Company's Supplemental Retirement Income Plan, as last amended
effective June 4, 1996 (incorporated by reference to Exhibit 10.3 of
the company's Annual Report on Form 10-K for the year ended December
31, 2001).
10.3* Company's Pension Restoration Plan, as last amended effective June 4,
1996 (incorporated by reference to Exhibit 10.4 of the company's
Annual Report on Form 10-K for the year ended December 31, 2001).
10.4* Company's Stock Performance Plan, as last amended effective January
28, 1998 (incorporated by reference to Exhibit 10.1 of the company's
Quarterly Report on Form 10-Q for the period ended March 31, 2003).
10.5* Company's Variable Compensation Plan, as last amended effective April
30, 1997 (incorporated by reference to pages A1-A3 of the company's
Annual Meeting Proxy Statement dated March 21, 2002).
10.6* Company's Salary Deferral & Savings Restoration Plan effective April
26, 1994, as last amended effective January 1, 2000 (incorporated by
reference to Exhibit 10.6 of the company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2003).
10.7* Company's Retirement Income Plan for Directors, as last amended
August 1995 (incorporated by reference to Exhibit 10.7 of the
company's Annual Report on Form 10-K for the year ended December 31,
2002).
10.8* Letter Agreement and Employee Agreement, dated as of April 22, 1999,
between this company and R.R. Goodmanson (incorporated by reference
to Exhibit 10.11 of the company's Annual Report on Form 10-K for the
year ended December 31, 1999).
10.9 Company's 1995 Corporate Sharing Plan, adopted by the Board of
Directors on January 25, 1995 (incorporated by reference to Exhibit
10.8 of the company's Annual Report on Form 10-K for the year ended
December 31, 1999).
10.10 Company's 1997 Corporate Sharing Plan, adopted by the Board of
Directors on January 29, 1997 (incorporated by reference to Exhibit
10.9 of the company's Annual Report on Form 10-K for the year ended
December 31, 2001).
10.11 Company's Bicentennial Corporate Sharing Plan, adopted by the Board
of Directors on December 12, 2001 and effective January 9, 2002
(incorporated by reference to Exhibit 10.12 of the company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).
10.12 Purchase Agreement by and among the company as Seller and the Other
Sellers Identified Therein and KED Fiber Ltd. and KED Fiber LLC as
Buyers, dated as of November 16, 2003. The company agrees to furnish
supplementally a copy of any omitted schedule to the Commission upon
request.
12 Statement re computation of the ratio of earnings to fixed charges.
14 Code of Ethics for the Chief Executive Officer, Chief Financial
Officer and Controller.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
31.1 Rule 13a-14(a)/15d-14(a) Certification of the company's Principal
Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of the company's Principal
Financial Officer.
32.1 Section 1350 Certification of the company's Principal Executive
Officer. The information contained in this Exhibit shall not be
deemed filed with the Securities and Exchange Commission nor
incorporated by reference in any registration statement filed by the
registrant under the Securities Act of 1933, as amended.
32.2 Section 1350 Certification of the company's Principal Financial
Officer. The information contained in this Exhibit shall not be
deemed filed with the Securities and Exchange Commission nor
incorporated by reference in any registration statement filed by the
registrant under the Securities Act of 1933, as amended.
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Form 10-K.
(b) Reports on Form 8-K
1. On October 22, 2003, the registrant announced its consolidated financial
results for the quarter ended September 30, 2003. A copy of the registrant's
earnings news release entitled "DuPont Reports Third Quarter 2003 Earnings"
was furnished under Item 12, "Results of Operations and Financial Condition"
on October 22, 2003. The information contained in the Current Report shall
not be deemed filed with the Securities and Exchange Commission nor
incorporated by reference in any registration statement filed by the
registrant under the Securities Act of 1933, as amended.
2. On November 17, 2003, a Current Report on Form 8-K was filed under Item 5,
"Other Events." The registrant filed a news release, dated November 17, 2003,
entitled "DuPont and Koch Subsidiaries Agree on Sale of INVISTA Fibers Unit."
3. On December 1, 2003, a Current Report on Form 8-K was furnished under Item 9,
"Regulation FD Disclosure." The registrant furnished a news release, dated
December 1, 2003, entitled "DuPont Takes Actions to Achieve $900 Million
Annualized Cost Improvement in 2005." The information contained in the
Current Report shall not be deemed filed with the Securities and Exchange
Commission nor incorporated by reference in any registration statement filed
by the registrant under the Securities Act of 1933, as amended.
46
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Date: March 3, 2004 E. I. DU PONT DE NEMOURS AND COMPANY
By: /s/ G. M. PFEIFFER
------------------------------------
G. M. Pfeiffer
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
-------------------------------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT IN
THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE(S) DATE
Chairman of the Board and March 3, 2004
/s/ C. O. HOLLIDAY, JR. Chief Executive Officer and
- -------------------------------------------------- Director (Principal Executive Officer)
C. O. Holliday, Jr.
/s/ A. J. P. BELDA Director March 3, 2004
- --------------------------------------------------
A. J. P. Belda
/s/ R. H. BROWN Director March 3, 2004
- --------------------------------------------------
R. H. Brown
/s/ C. J. CRAWFORD Director March 3, 2004
- --------------------------------------------------
C. J. Crawford
/s/ L. C. DUEMLING Director March 3, 2004
- --------------------------------------------------
L. C. Duemling
/s/ E. B. DU PONT Director March 3, 2004
- --------------------------------------------------
E. B. du Pont
/s/ D. C. HOPKINS Director March 3, 2004
- --------------------------------------------------
D. C. Hopkins
/s/ L. D. JULIBER Director March 3, 2004
- --------------------------------------------------
L. D. Juliber
/s/ M. NAITOH Director March 3, 2004
- --------------------------------------------------
M. Naitoh
/s/ W. K. REILLY Director March 3, 2004
- --------------------------------------------------
W. K. Reilly
/s/ H. R. SHARP, III Director March 3, 2004
- --------------------------------------------------
H. R. Sharp, III
/s/ C. M. VEST Director March 3, 2004
- --------------------------------------------------
C. M. Vest
47
E. I. DU PONT DE NEMOURS AND COMPANY
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------
PAGE(S)
- ---------------------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS:
Responsibility for Financial Reporting F-1
Report of Independent Auditors F-1
Consolidated Income Statement for 2003, 2002 and 2001 F-2
Consolidated Balance Sheet as of December 31, 2003 and December 31, 2002 F-3
Consolidated Statement of Stockholders' Equity for 2003, 2002 and 2001 F-4
Consolidated Statement of Cash Flows for 2003, 2002 and 2001 F-5
Notes to Consolidated Financial Statements F-6-F-43
- ---------------------------------------------------------------------------------------------
F
RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the Consolidated Financial Statements and the
other financial information contained in this Annual Report on Form 10-K. The
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America and are 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 its internal control system. This policy
sets forth management's commitment to conduct business worldwide with the
highest ethical standards and in conformity with applicable laws. The business
ethics policy also requires that the documents supporting all transactions
clearly describe their true nature and that all transactions be properly
reported and classified in the financial records. The system is monitored by an
extensive program of internal audit, and management believes that the system of
internal controls at December 31, 2003, meets the objectives noted above.
The financial statements have been audited by the company's independent
auditors, 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 Audit Committee of
the Board of Directors assists the Board in fulfilling its oversight
responsibilities with respect to the external reporting process and the adequacy
of the company's internal controls. This committee also has responsibility for
appointing the independent auditors, 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 auditors and the internal
auditors have direct access to the Audit Committee, and they meet with the
committee on a periodic basis, 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 20, 2004
REPORT OF INDEPENDENT AUDITORS
TO THE STOCKHOLDERS AND THE BOARD OF DIRECTORS OF
E. I. DU PONT DE NEMOURS AND COMPANY
In our opinion, the Consolidated Financial Statements listed in the accompanying
index present fairly, in all material respects, the financial position of E. I.
du Pont de Nemours and Company and its subsidiaries at December 31, 2003 and
2002, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Effective January 1, 2003, the company adopted Statement of Financial Accounting
Standards (SFAS)No. 143, "Accounting for Asset Retirement Obligations" and the
fair value recognition provisions of SFAS No. 123, "Accounting for Stock Based
Compensation," as amended. Effective January 1, 2002, the Company adopted SFAS
No. 142, "Goodwill and Other Intangible Assets." These changes are discussed in
Note 1 to the Consolidated Financial Statements.
/s/ PRICEWATERHOUSECOOPERS LLP
- -----------------------------------
PricewaterhouseCoopers LLP
Two Commerce Square, Suite 1700
2001 Market Street
Philadelphia, Pennsylvania 19103
February 20, 2004
F-1
E. I. DU PONT DE NEMOURS AND COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENT
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
- ------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
NET SALES $26,996 $24,006 $24,726
Other income (Note 2) 734 516 644
- ------------------------------------------------------------------------------------------------------------------------
Total 27,730 24,522 25,370
- ------------------------------------------------------------------------------------------------------------------------
Cost of goods sold and other operating charges 19,476 16,296 16,727
Selling, general and administrative expenses 2,995 2,699 2,925
Depreciation 1,355 1,297 1,320
Amortization of goodwill and other intangible assets (Note 15) 229 218 434
Research and development expense 1,349 1,264 1,588
Interest expense (Note 3) 347 359 590
Restructuring and asset impairment charges (Note 4) (17) 290 1,078
Separation charges - Textiles & Interiors (Note 5) 1,620 - -
Goodwill impairment - Textiles & Interiors (Note 6) 295 - -
Gain on sale of DuPont Pharmaceuticals (Note 7) - (25) (6,136)
Gain on sale of interest by subsidiary - nonoperating (Note 8) (62) - -
- ------------------------------------------------------------------------------------------------------------------------
Total 27,587 22,398 18,526
- ------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 143 2,124 6,844
Provision for (benefit from) income taxes (Note 9) (930) 185 2,467
Minority interests in earnings of consolidated subsidiaries 71 98 49
- ------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 1,002 1,841 4,328
Cumulative effect of changes in accounting principles, net of income taxes (Note 10) (29) (2,944) 11
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 973 $(1,103) $ 4,339
- ------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK (Note 11)
Income before cumulative effect of changes in accounting principles $ 1.00 $ 1.84 $ 4.17
Cumulative effect of changes in accounting principles (0.03) (2.96) 0.01
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.97 $ (1.12) $ 4.18
- ------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK (Note 11)
Income before cumulative effect of changes in accounting principles $ 0.99 $ 1.84 $ 4.15
Cumulative effect of changes in accounting principles (0.03) (2.95) 0.01
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.96 $ (1.11) $ 4.16
- ------------------------------------------------------------------------------------------------------------------------
SEE PAGES F-6-F-43 FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
E. I. DU PONT DE NEMOURS AND COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
- -------------------------------------------------------------------------------------------------------------------------
December 31 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,273 $3,678
Marketable debt securities 25 465
Accounts and notes receivable, net (Note 12) 4,218 3,884
Inventories (Note 13) 4,107 4,409
Prepaid expenses 208 175
Income taxes (Note 9) 1,141 848
Assets held for sale (Note 5) 5,490 -
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 18,462 13,459
- -------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT (Note 14) 24,149 33,732
Less: Accumulated depreciation 14,257 20,446
- -------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 9,892 13,286
- -------------------------------------------------------------------------------------------------------------------------
GOODWILL (Note 15) 1,939 1,167
OTHER INTANGIBLE ASSETS (Note 15) 2,986 3,109
INVESTMENT IN AFFILIATES (Note 16) 1,304 2,047
OTHER ASSETS (Notes 9 and 17) 2,456 1,553
- -------------------------------------------------------------------------------------------------------------------------
TOTAL $37,039 $34,621
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable (Note 18) $ 2,412 $2,727
Short-term borrowings and capital lease obligations (Note 19) 5,914 1,185
Income taxes (Note 9) 60 47
Other accrued liabilities (Note 20) 2,963 3,137
Liabilities held for sale (Note 5) 1,694 -
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 13,043 7,096
- -------------------------------------------------------------------------------------------------------------------------
LONG-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS (Note 21) 4,301 5,647
OTHER LIABILITIES (Note 22) 8,909 9,829
DEFERRED INCOME TAXES (Note 9) 508 563
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities 26,761 23,135
- -------------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS (Note 23) 497 2,423
- -------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 24)
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, 2003 - 1,084,325,552; 2002 - 1,080,981,877 325 324
Additional paid-in capital 7,522 7,377
Reinvested earnings 10,185 10,619
Accumulated other comprehensive income (loss) (1,761) (2,767)
Common stock held in treasury, at cost
(Shares: December 31, 2003 and 2002 - 87,041,427) (6,727) (6,727)
- -------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,781 9,063
- -------------------------------------------------------------------------------------------------------------------------
TOTAL $37,039 $34,621
- -------------------------------------------------------------------------------------------------------------------------
SEE PAGES F-6-F-43 FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
E. I. DU PONT DE NEMOURS AND COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Note 25)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Additional Other Total Comprehensive
Preferred Common Paid-In Reinvested Comprehensive Treasury Stockholders' Income
Stock Stock Capital Earnings Income (Loss) Flexitrust Stock Equity (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
2001
Balance January 1, 2001 $237 $339 $7,659 $12,153 $(188) $(174) $(6,727) $13,299
- ------------------------------------------------------------------------------------------------------------------------
Net income 4,339 4,339 $ 4,339
Cumulative translation adjustment (19) (19) (19)
Cumulative effect of a change in
accounting principle 6 6 6
Net revaluation and clearance of
cash flow hedges to earnings (32) (32) (32)
Minimum pension liability (16) (16) (16)
Net unrealized loss on securities (24) (24) (24)
------------
Total comprehensive income $ 4,254
------------
Common dividends ($1.40 per share) (1,450) (1,450)
Preferred dividends (10) (10)
Treasury stock
Acquisition (1,818) (1,818)
Retirement (12) (291) (1,515) 1,818 -
Common stock issued
Flexitrust (47) 165 118
Compensation plans 59 59
Adjustments to market value (9) 9 -
- ------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2001 $237 $327 $7,371 $13,517 $(273) $ - $(6,727) $14,452
- ------------------------------------------------------------------------------------------------------------------------
2002
Net loss (1,103) (1,103) $(1,103)
Cumulative translation adjustment 61 61 61
Net revaluation and clearance of
cash flow hedges to earnings (7) (7) (7)
Minimum pension liability (2,532) (2,532) (2,532)
Net unrealized loss on securities (16) (16) (16)
------------
Total comprehensive loss $(3,597)
------------
Common dividends ($1.40 per share) (1,391) (1,391)
Preferred dividends (10) (10)
Treasury stock
Acquisition (470) (470)
Retirement (3) (73) (394) 470 -
Common stock issued 24 24
Compensation plans 55 55
- ------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2002 $237 $324 $7,377 $10,619 $(2,767) $ - $(6,727) $9,063
- ------------------------------------------------------------------------------------------------------------------------
2003
Net income 973 973 $ 973
Cumulative translation adjustment 114 114 114
Net revaluation and clearance of
cash flow hedges to earnings 25 25 25
Minimum pension liability 858 858 858
Net unrealized gain on securities 9 9 9
------------
Total comprehensive income $ 1,979
------------
Common dividends ($1.40 per share) (1,397) (1,397)
Preferred dividends (10) (10)
Treasury stock
Acquisition - -
Retirement - - - - -
Common stock issued 1 65 66
Compensation plans 80 80
- ------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2003 $237 $325 $7,522 $10,185 $(1,761) $ - $(6,727) $ 9,781
- ------------------------------------------------------------------------------------------------------------------------------------
SEE PAGES F-6-F-43 FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
E. I. DU PONT DE NEMOURS AND COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
- ---------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATIONS
Net income (loss) $ 973 $(1,103) $4,339
Adjustments to reconcile net income to cash provided by operations:
Cumulative effect of changes in accounting principles (Note 10) 29 2,944 (11)
Depreciation 1,355 1,297 1,320
Amortization of goodwill and other intangible assets 229 218 434
Separation charges - Textiles & Interiors (Note 5) 1,620 - -
Goodwill impairment - Textiles & Interiors (Note 6) 295 - -
Gain on sale of DuPont Pharmaceuticals (Note 7) - (25) (6,136)
Other noncash charges and credits - net 334 833 1,000
Decrease (increase) in operating assets:
Accounts and notes receivable (852) 468 435
Inventories and other operating assets (125) (476) (362)
Increase (decrease) in operating liabilities:
Accounts payable and other operating liabilities (51) (158) (408)
Accrued interest and income taxes (Notes 3 and 9) (1,218) (1,559) 1,843
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by operations 2,589 2,439 2,454
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,713) (1,280) (1,494)
Investments in affiliates (71) (136) (140)
Payments for businesses (net of cash acquired) (1,527) (697) (78)
Proceeds from sales of assets 17 196 253
Net cash flows related to sale of DuPont Pharmaceuticals (Note 7) - (122) 7,798
Purchase of beneficial interest in securitized trade receivables (445) - -
Maturity/repayment of beneficial interest in securitized trade receivables 445 - -
Net decrease (increase) in short-term financial instruments 458 (318) (2)
Forward exchange contract settlements (631) (264) 93
Miscellaneous - net 92 29 (117)
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) investing activities (3,375) (2,592) 6,313
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividends paid to stockholders (1,407) (1,401) (1,460)
Net increase (decrease) in short-term (less than 90 days) borrowings 3,824 607 (1,588)
Long-term and other borrowings:
Receipts 553 934 904
Payments (954) (1,822) (2,342)
Acquisition of treasury stock (Note 25) - (470) (1,818)
Proceeds from exercise of stock options 52 34 153
Increase in minority interests (Note 23) - - 1,980
Redemption of minority interest structures (Note 23) (2,037) - -
- ---------------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities 31 (2,118) (4,171)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash flow from discontinued operations(1) - - (110)
Effect of exchange rate changes on cash 425 186 (263)
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (330) $(2,085) $4,223
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,678 5,763 1,540
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,348(2) $3,678 $5,763
- ---------------------------------------------------------------------------------------------------------------------------
See pages F-6-F-43 for Notes to Consolidated Financial Statements.
(1) Payment of direct expenses related to the Conoco divestiture.
(2) Includes cash classified as assets held for sale within the Consolidated
Balance Sheet (Note 5).
F-5
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DuPont follows accounting principles generally accepted in the United States of
America. The significant accounting policies described below, together with the
other notes that follow, are an integral part of the Consolidated Financial
Statements.
BASIS OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the company and
all of its subsidiaries in which a controlling interest is maintained. For those
consolidated subsidiaries in which the company's ownership is less than 100
percent, the outside stockholders' interests are shown as Minority interests.
Investments in affiliates over which the company has significant influence but
not a controlling interest are carried on the equity basis. This includes
majority-owned entities for which the company does not consolidate because a
minority investor holds substantive participating rights. Investments in
affiliates over which the company does not have significant influence are
accounted for by the cost method.
REVENUE RECOGNITION
The company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer in accordance with
terms of the agreement, title and risk of loss have been transferred,
collectibility is reasonably assured, and pricing is fixed or determinable.
Accruals are made for sales returns and other allowances based on the company's
experience. The company accounts for cash sales incentives as a reduction in
sales and noncash sales incentives as a charge to cost of goods sold at the time
revenue is recorded. Royalty income is recognized in accordance with agreed upon
terms, when performance obligations are satisfied, the amount is fixed or
determinable, and collectibility is reasonably assured.
AFFILIATE AND SUBSIDIARY STOCK TRANSACTIONS
Gains or losses arising from issuances by an affiliate or a subsidiary of its
own stock are recorded as nonoperating items.
CASH AND CASH EQUIVALENTS
Cash equivalents represent investments with maturities of three months or less
from time of purchase. They are carried at cost plus accrued interest, which
approximates fair value because of the short-term maturity of these instruments.
INVESTMENTS IN SECURITIES
Marketable debt securities represents investments in fixed and floating rate
financial instruments with maturities of twelve months or less from time of
purchase. They are classified as held-to-maturity and recorded at amortized
cost.
Other assets includes long-term investments in securities, which comprises
marketable equity securities and other securities and investments for which
market values are not readily available. Marketable equity securities are
classified as available-for-sale and reported at fair value. Fair value is based
on quoted market prices as of the end of the reporting period. Unrealized gains
and losses are reported, net of their related tax effects, as a component of
Accumulated other comprehensive income (loss) in stockholders' equity until
sold. At the time of sale, any gains or losses calculated by the specific
identification method are recognized in Other income. Losses are also recognized
in income when a decline in market value is deemed to be other than temporary.
Other securities and investments for which market values are not readily
available are carried at cost. See Note 17.
INVENTORIES
Except for Pioneer inventories, substantially all inventories are valued at
cost, as determined by the last-in, first-out (LIFO) method; in the aggregate,
such valuations are not in excess of market. For Pioneer, inventories are valued
at the lower of cost, as determined by the first-in, first-out (FIFO) method, or
market.
Elements of cost in inventories include raw materials, direct labor, and
manufacturing overhead. Stores and supplies are valued at cost or market,
whichever is lower; cost is generally determined by the average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (PP&E) is carried at cost and is depreciated using
the straight-line method. PP&E placed in service prior to 1995 is depreciated
under the sum-of-the-years' digits method or other substantially similar
methods. Substantially all equipment and buildings are depreciated over useful
lives ranging from 15 to 25 years. Capitalizable costs associated with computer
software for internal use are amortized on a straight-line basis over 5 to 7
years. When assets are surrendered, retired, sold or otherwise disposed of,
their gross carrying values and related accumulated depreciation are
F-6
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
removed from the accounts and included in determining gain or loss on such
disposals.
Maintenance and repairs are charged to operations; replacements and improvements
are capitalized. In situations where significant maintenance activities are
planned at manufacturing facilities, the company accrues in advance the costs
expected to be incurred. Historically, the company's accruals for maintenance
activities have not been significant.
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the company no longer amortizes goodwill and
indefinite-lived intangible assets. Goodwill and indefinite-lived intangible
assets are tested for impairment at least annually, however, these tests are
performed more frequently when events or changes in circumstances indicate the
carrying value may not be recoverable. The company's fair value methodology is
based on quoted market prices, if available. If quoted market prices are not
available, an estimate of fair market value is made based on prices of similar
assets or other valuation methodologies including present value techniques.
Impairment losses are included in income from operations.
Definite-lived intangible assets, such as purchased technology, patents, and
customer lists are amortized over their estimated useful lives, generally for
periods ranging from 5 to 20 years. The company continually evaluates the
reasonableness of the useful lives of these assets.
IMPAIRMENT OF LONG-LIVED ASSETS
The company evaluates the carrying value of long-lived assets to be held and
used 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 are separately
identifiable and are 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. The company's fair value methodology is
based on quoted market prices, if available. If quoted market prices are not
available, an estimate of fair market value is made based on prices of similar
assets or other valuation methodologies including present value techniques.
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.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
Accruals for environmental matters are recorded in operating expenses when it is
probable that a liability has been incurred and the amount of the liability can
be reasonably estimated. Accrued liabilities do not include claims against third
parties and are not discounted.
Costs related to environmental remediation are charged to expense. Other
environmental costs are also charged to expense unless they increase the value
of the property or reduce or prevent contamination from future operations, in
which case, they are capitalized.
ASSET RETIREMENT OBLIGATIONS
On January 1, 2003, the company adopted Statement of Financial Accounting
Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations," which
requires the company to record an asset and related liability for the costs
associated with the retirement of long-lived tangible assets when a legal
liability to retire the asset exists. This includes obligations incurred as a
result of acquisition, construction, or normal operation of a long-lived asset.
Asset retirement obligations are recorded at fair value at the time the
liability is incurred. Accretion expense is recognized as an operating expense
using the credit-adjusted risk-free interest rate in effect when the liability
was recognized. The associated asset retirement obligations are capitalized as
part of the carrying amount of the long-lived asset and depreciated over the
estimated remaining useful life of the asset, generally for periods ranging from
1 to 20 years.
INSURANCE/SELF-INSURANCE
The company self-insures certain risks where permitted by law or regulation,
including workers' compensation, vehicle liability, and employee related
benefits. Liabilities associated with these risks are estimated in part by
considering historical claims experience, demographic factors, and other
actuarial assumptions. For other risks, the company uses a combination of
insurance and self-insurance, reflecting comprehensive reviews of relevant
risks.
INCOME TAXES
The provision for income taxes is determined using the asset and liability
approach of accounting for income taxes. Under this
F-7
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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
operations. For subsidiaries where the U.S. dollar is the functional currency,
all foreign currency asset and liability amounts are remeasured into U.S.
dollars at end-of-period exchange rates, except for inventories, prepaid
expenses, property, plant and equipment, and intangible assets, which are
remeasured at historical rates. Foreign currency income and expenses are
remeasured at average exchange rates in effect during the year, except for
expenses related to balance sheet amounts remeasured at historical exchange
rates. Exchange gains and losses arising from remeasurement of foreign
currency-denominated monetary assets and liabilities are included in income in
the period in which they occur.
For subsidiaries where the local currency is the functional currency, assets and
liabilities denominated in local currencies are translated into U.S. dollars at
end-of-period exchange rates, and the resultant translation adjustments are
reported, net of their related tax effects, as a component of Accumulated other
comprehensive income (loss) in stockholders' equity. Assets and liabilities
denominated in other than the local currency are remeasured into the local
currency prior to translation into U.S. dollars, and the resultant exchange
gains or losses are included in income in the period in which they occur. Income
and expenses are translated into U.S. dollars at average exchange rates in
effect during the period.
STOCK-BASED COMPENSATION
The company has stock-based employee compensation plans which are described more
fully in Note 26. Prior to January 1, 2003, the company accounted for these
plans under the recognition and measurement provisions of Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations. Accordingly, no compensation expense had been
recognized for fixed options granted to employees.
Effective January 1, 2003, the company adopted the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended, prospectively for all new awards granted to employees on or after
January 1, 2003. Most awards under the company's plans vest over a three-year
period. Therefore, the cost related to stock-based employee compensation
included in the determination of Net income (loss), is less than that which
would have been recognized if the fair value based method had been applied to
all awards since the original effective date of SFAS No. 123. The following
table illustrates the effect on Net income (loss) and earnings (loss) per share
as if the fair value based method had been applied in each period.
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Net income (loss),
as reported $973 $(1,103) $4,339
Add: Stock-based employee
compensation expense
included in reported
net income (loss),
net of related tax effects 31 3 2
Deduct: Total stock-based
employee compensation
expense determined
under fair value based
method for all awards, net
of related tax effects 125 171 110
- --------------------------------------------------------------------------------
Pro forma net income (loss) $879 $(1,271) $4,231
- --------------------------------------------------------------------------------
Earnings (loss) per share:
Basic-as reported $0.97 $(1.12) $4.18
- --------------------------------------------------------------------------------
Basic-pro forma $0.87 $(1.29) $4.07
- --------------------------------------------------------------------------------
Diluted-as reported $0.96 $(1.11) $4.16
- --------------------------------------------------------------------------------
Diluted-pro forma $0.87 $(1.28) $4.05
- --------------------------------------------------------------------------------
HEDGING AND TRADING ACTIVITIES
Derivative instruments are reported on the balance sheet at their fair values.
For derivative instruments designated as fair value
F-8
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
hedges, changes in the fair values of the derivative instruments will generally
be offset on the income statement by changes in the fair value of the hedged
items. For derivative instruments designated as cash flow hedges, the effective
portion of any hedge is reported in Accumulated other comprehensive income
(loss) until it is cleared to earnings during the same period in which the
hedged item affects earnings. The ineffective portion of all hedges is
recognized in current period earnings. Changes in the fair values of derivative
instruments that are not designated as hedges are recorded in current period
earnings.
In the event that a derivative designated as a hedge of a firm commitment or an
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.
Cash flows from derivative instruments are generally reported as investing
activities in the Consolidated Statement of Cash Flows. However, cash flows from
derivative instruments accounted for as either fair value hedges or cash flow
hedges are reported in the same category as the cash flows from the items being
hedged.
See Note 29 for additional discussion regarding the company's objectives and
strategies for derivative instruments.
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 2003
classifications.
ACCOUNTING STANDARDS ISSUED NOT YET ADOPTED
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities"
(VIEs), which is an interpretation of Accounting Research Bulletin (ARB) No. 51,
"Consolidated Financial Statements." FIN 46 addresses the application of ARB No.
51 to VIEs, and generally would require that assets, liabilities, and results of
the activity of a VIE be consolidated into the financial statements of the
enterprise that is considered the primary beneficiary. This interpretation
applies immediately to VIEs created after January 31, 2003, and to VIEs in which
a company obtains an interest after that date. The company has not created or
obtained an interest in any VIEs in 2003. In addition, the interpretation
becomes applicable on December 31, 2003 for special purpose entities (SPEs)
created prior to February 1, 2003. As of December 31, 2003, the company had no
SPEs for which it was considered the primary beneficiary. For non-SPEs in which
a company holds a variable interest that it acquired before February 1, 2003,
the FASB has postponed the date on which the interpretation will become
applicable to March 31, 2004.
The company has identified two non-consolidated entities as VIEs where DuPont is
considered the primary beneficiary. One entity provides manufacturing services
for the company and the other entity is a real estate rental operation. The
company guarantees all debt obligations of these entities, which totaled $136 at
December 31, 2003. These amounts are included within obligations for equity
affiliates and others in Note 24. In accordance with the provisions of FIN 46,
the company will consolidate these VIEs as of March 31, 2004. The company does
not expect the consolidation of these VIEs to have a material effect on the
consolidated results of operations or financial position.
On December 8, 2003, President Bush signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) into law. As permitted under
FASB Staff Position (FSP) FAS 106-1, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003", the company did not reflect the effects of this Act in its Consolidated
Financial Statements and accompanying Notes. In January 2004, the company
amended its U.S. medical plan to be secondary to Medicare for prescription drug
coverage beginning in 2006 for eligible retirees and survivors. As a result of
this plan amendment, FAS 106-1 will not apply to the company. See further
discussion of plan amendment at Note 28.
F-9
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
In December 2003, the Staff of the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition," which
supersedes SAB No. 101. The primary purpose of SAB No. 104 is to rescind
accounting guidance contained in SAB No. 101 and the SEC's "Revenue Recognition
in Financial Statements Frequently Asked Questions and Answers" (the FAQ)
related to multiple element revenue arrangements. The company does not expect
the issuance of SAB No. 104 to significantly impact its current revenue
recognition policies.
2. OTHER INCOME
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Royalty income(1) $ 141 $128 $155
Interest income, net of miscellaneous
interest expense 70 97 146
Equity in earnings (losses) of
affiliates (Note 16) 10 36 (43)
Net gains on sales of assets 17 30 47
Net exchange losses (134)(2) (294)(2) (29)
Cozaar(R)/Hyzaar(R)income 573 469 321
Miscellaneous income and
expenses - net 57 50 47
- --------------------------------------------------------------------------------
$ 734 $516 $644
- --------------------------------------------------------------------------------
(1) Excludes Cozaar(R)/Hyzaar(R)royalties which are reported within
Cozaar(R)/Hyzaar(R)income.
(2) 2003 and 2002 include net exchange losses of $164 and $231, respectively,
which resulted from hedging an increased net monetary asset position and a
weakening U.S. dollar. Such losses are largely offset by associated tax
benefits. 2003 also includes an exchange gain of $30 from a currency
contract purchased to offset movement in the Canadian dollar in connection
with the company's acquisition of the minority shareholders' interest in
DuPont Canada Inc. (see Note 27). 2002 includes an exchange loss of $63 due
to the mandatory conversion of the company's U.S. dollar denominated trade
receivables to Argentine pesos and moving from a preferential to a free
market exchange rate.
3. INTEREST EXPENSE
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Interest incurred $376 $404 $652
Interest capitalized (29) (45) (62)
- --------------------------------------------------------------------------------
$347 $359 $590
- --------------------------------------------------------------------------------
Interest incurred in 2002 includes a charge of $21 for the early extinguishment
of $242 of outstanding debentures; this charge principally represents premiums
paid to investors.
Interest paid was $357 in 2003, $402 in 2002, and $641 in 2001.
4. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
2003 ACTIVITIES
During 2003, the company did not institute any significant restructuring
programs. Benefits of $17 were recorded for changes in estimates related to
restructuring initiatives undertaken in prior years.
2002 ACTIVITIES
During 2002, the company recorded a net charge of $290. Charges of $353 relate
to restructuring programs instituted in 2002 in Coatings & Color Technologies
and Textiles & Interiors, as well as asset write-downs in Agriculture &
Nutrition and Textiles & Interiors. These charges reduced segment earnings as
follows: Agriculture & Nutrition - $37; Coatings & Color Technologies - $69;
Textiles & Interiors - $247. These charges were partially offset by a benefit of
$63 related to revisions in estimates associated with 2001 and 2000 in the
amounts of $31 and $2, respectively (discussed below), as well as $30 resulting
from a favorable litigation settlement discussed below under Other Activities.
AGRICULTURE & NUTRITION
Within Agriculture & Nutrition, an impairment charge of $37 was recorded in
connection with the company reaching a definitive agreement to sell a European
manufacturing facility that was no longer required under the strategic business
plan. This charge principally covered the write-down of the net book value of
the facilities to fair value less costs to sell. The sale was completed in 2003
with a net benefit of $1 reflecting an adjustment to the original impairment
charge.
COATINGS & COLOR TECHNOLOGIES
A restructuring program was instituted within Coatings & Color Technologies to
enhance its position as a leader in the highly competitive global coatings
industry, to align its businesses with accelerating structural changes, and to
become a more competitive integrated enterprise. Charges of $69 relate to
employee termination payments for approximately 775 employees involved in
technical, manufacturing, marketing and administrative activities. The
termination program was authorized and benefits were communicated to employees
in the fourth quarter 2002, and such benefits may be settled over time or at the
time of termination. At December 31, 2003, approximately $30 had been settled
and charged against the related liability. Essentially all employees
F-10
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
had been terminated as of December 31, 2003, thereby completing this portion of
the program. In 2003, a net benefit of $4 was recorded to reflect lower
estimated benefit settlements to terminate employees.
TEXTILES & INTERIORS
A restructuring program was initiated within Textiles & Interiors to better
align the business with accelerating structural changes to become a more
competitive integrated enterprise and to respond to continuing weakening
economic conditions, particularly in the U.S. textile industry. Charges
resulting from these activities totaled $208. The charges include $153 related
to termination payments for approximately 2,000 employees involved in technical,
manufacturing, marketing and administrative activities. The termination program
was authorized and benefits were communicated to employees in the second quarter
2002, and such benefits may be settled over time or at the time of termination.
At December 31, 2003, approximately $104 had been settled and charged against
the related liability. Essentially all employees had been terminated as of
December 31, 2003, thereby completing this portion of the program. In 2003, a
net benefit of $5 was recorded to reflect lower estimated benefit settlements to
terminate employees.
Charges of $55 relate to the write-down of operating facilities that were shut
down during the second quarter principally due to transferring production to
more cost competitive facilities. These charges cover the net book value of
facilities in the United States and South America of $42 and the estimated
dismantlement and removal costs less proceeds from the sale of equipment and
scrap of $13. Dismantlement and removal activities were completed in 2003. At
December 31, 2003, approximately $13 had been settled and charged against the
liability for dismantlement and removal. The effect of these shutdowns on
operating results was not material.
The company also recorded a charge of $39 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.
Account balances and activity for the 2002 restructuring programs are summarized
below:
- --------------------------------------------------------------------------------
Write- Employee Other
down Separation Exit
of Assets Costs Costs Total
- --------------------------------------------------------------------------------
Charges to income in 2002 $118 $222 $ 13 $353
Changes to accounts
Employee separation
settlements (42) (42)
Facility shutdowns (118) (118)
Other expenditures (7) (7)
- --------------------------------------------------------------------------------
Balance at
December 31, 2002 $ - $180 $ 6 $186
- --------------------------------------------------------------------------------
Changes to accounts
Credits to income in 2003 (1) (9) (10)
Employee separation
settlements (92) (92)
Facility shutdowns 1 1
Other expenditures (6) (6)
- --------------------------------------------------------------------------------
Balance at
December 31, 2003 $ - $ 79 $ - $ 79
- --------------------------------------------------------------------------------
2001 ACTIVITIES
During 2001, the company recorded a net charge of $1,078. Charges of $1,087 are
discussed below. These charges were partially offset by a benefit of $9 to
reflect changes in estimates related to restructuring initiatives discussed
below under Other Activities.
Restructuring programs were instituted in 2001 to further align resources
consistent with the specific missions of the company's segments thereby
improving competitiveness, accelerating progress toward sustainable growth and
addressing weakening economic conditions, particularly in the United States. In
addition, write-downs of assets were recorded in Agriculture & Nutrition and
Textiles & Interiors. Charges related to these activities totaling $1,087
reduced segment earnings as follows: Agriculture & Nutrition - $154; Coatings
& Color Technologies - $67; Electronic & Communication Technologies - $40;
Performance Materials - $71; Safety & Protection - $51; Textiles & Interiors -
$647; and Other - $57. These charges were partially offset by a net benefit in
2002 of $31 that increased earnings principally in Agriculture & Nutrition - $4;
Coatings & Color Technologies - $2; Performance Materials - $4; Safety &
Protection - $4; Textiles & Interiors - $14; and Other - $2. In 2003, an
additional net benefit of $6 increased earnings in Agriculture & Nutrition - $1;
Electronic & Communication Technologies - $2; Textiles & Interiors - $2; and
Other - $1.
F-11
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
These charges included $432 related to termination payments for approximately
5,500 employees involved in technical, manufacturing, marketing and
administrative activities. Charges have been reduced by estimated reimbursements
pursuant to a manufacturing alliance with a third party. These charges reduced
segment earnings as follows: Agriculture & Nutrition - $64; Coatings & Color
Technologies - $38; Electronic & Communication Technologies - $40; Performance
Materials - $48; Safety & Protection - $33; Textiles & Interiors - $152; and
Other - $57. The termination program was authorized and benefits were
communicated to employees in the second quarter 2001, and such benefits may be
settled over time or at the time of termination. A net benefit of $15 was
recorded in 2002 to reflect lower estimated benefit settlements to terminated
employees principally in Agriculture & Nutrition - $2; Coatings & Color
Technologies - $2; Safety & Protection - $2; Textiles & Interiors - $5; and
Other - $2. An additional net benefit of $6 was recorded in 2003 to reflect
lower estimated benefit settlements to terminated employees in Agriculture &
Nutrition - $1; Electronic & Communication Technologies - $2; Textile &
Interiors - $2; and Other - $1. At December 31, 2003, approximately $390 had
been settled and charged against the related liability. At June 30, 2002,
essentially all employees had been terminated, thereby completing this portion
of the program.
These charges also included $293 related to the write-down of operating
facilities that were shut down principally due to transferring production to
more cost competitive facilities. The charge covers the net book value of the
facilities of $214 and the estimated dismantlement and removal costs less
proceeds from the sale of equipment and scrap and reimbursements from third
parties of $79. The largest component which totals $225 relates to the shutdown
of Textiles & Interiors manufacturing facilities in Argentina; Germany; Camden,
South Carolina; Chattanooga, Tennessee; Seaford, Delaware; and Wilmington and
Kinston, North Carolina. Other charges of $68 are principally related to the
shutdown of operating facilities in Agriculture & Nutrition, Performance
Materials and Safety & Protection. A net benefit of $16 was recorded in 2002
principally to reflect lower dismantlement and removal costs in Agriculture &
Nutrition - $2; Performance Materials - $3; Safety & Protection - $2; and
Textiles & Interiors - $8. At December 31, 2003, $63 had been settled and
charged against the liability for dismantlement and removal, thereby completing
this portion of the program. The effect of these shutdowns on operating results
was not material.
In connection with the final integration of the Herberts acquisition by Coatings
& Color Technologies, a charge of $20 relates to the cancellation of contractual
agreements which had been settled and charged against this liability at December
31, 2003. Termination of services under these contractual agreements were
completed in 2002. The effect of these contract terminations on operating
results was not material.
An additional charge of $342 relates to the write-down of assets to their net
realizable values. A charge of $270 was recorded in Textiles & Interiors in
connection with the company's announcement that it had reached a definitive
agreement to sell its U.S. polymer grade TPA (terephthalic acid) and Melinar(R)
PET container resins businesses along with their associated manufacturing assets
in Wilmington and Fayetteville, North Carolina, and Charleston, South Carolina,
and to exit a polyester staple fiber joint venture. The transaction closed in
July 2001. This reflects a continuation of the company's previously announced
strategy to reshape its polyester investment. In addition, the company recorded
charges totaling $72 to write down intangible assets in Agriculture & Nutrition.
A charge of $30 was recorded pursuant to a sale of intellectual property that
closed in July 2001. The company had previously established an intangible asset
in connection with acquired patents principally related to wheat-based food
ingredients. Due to significantly lower than expected opportunities in the
specialty food ingredient market, the company has exited this market segment. An
additional charge of $42 was recorded in Agriculture & Nutrition to write down
an intangible asset due to a deteriorating market outlook that resulted in
discontinuing development efforts for high oil corn products using the
TOPCROSS(R) system. As a result, an impairment charge was recorded to write down
the intangible asset to its estimated fair value based on the present value of
future cash flows.
F-12
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Account balances and activity for the 2001 programs are summarized below:
- --------------------------------------------------------------------------------
Write- Employee Other
down Separation Exit
of Assets Costs Costs Total
- --------------------------------------------------------------------------------
Charges to income in 2001 $556 $432 $99 $1,087
Changes to accounts
Asset impairments (342) (342)
Employee separation
settlements (217) (217)
Facility shutdowns (214) (214)
Other expenditures (28) (28)
- --------------------------------------------------------------------------------
Balance at
December 31, 2001 $ - $215 $71 $ 286
- --------------------------------------------------------------------------------
Changes to accounts
Credits to income
in 2002 (15) (16) (31)
Employee separation
settlements (154) (154)
Other expenditures (53) (53)
- --------------------------------------------------------------------------------
Balance at
December 31, 2002 $ - $ 46 $ 2 $ 48
- --------------------------------------------------------------------------------
Changes to accounts
Credits to income in 2003 (6) (6)
Employee separation
settlements (19) (19)
Other expenditures (2) (2)
- --------------------------------------------------------------------------------
Balance at
December 31, 2003 $ - $ 21 $ - $ 21
- --------------------------------------------------------------------------------
OTHER ACTIVITIES
During 2000 and 1999, the company implemented activities involving employee
terminations and write-downs of assets. For the 2000 activities, a benefit of $2
was recorded in 2002 to reflect higher than expected proceeds from the sale of
business assets, and an additional benefit of $2 was recorded in 2001 to reflect
lower than expected costs associated with contract cancellations, both of which
were related to Coatings & Color Technologies. For the 1999 activities, a net
benefit of $7 was recorded in 2001 to reflect lower than expected costs,
principally in Agriculture & Nutrition. Both year's programs are now complete.
The remaining employee separation settlements totaling $5 largely represent
stipulated installment payments to terminated employees. Also, in 2002 the
company recorded a benefit of $30 in Textiles & Interiors, and an additional
benefit of $1 in 2003 resulting principally from a favorable litigation
settlement associated with the company's exit from a joint venture in China in
1999.
5. SEPARATION ACTIVITIES - TEXTILES & INTERIORS
The company recorded charges of $1,620 related to the separation of
substantially all of the net assets of the Textiles & Interiors segment as
described below.
On November 17, 2003, the company and Koch Industries, Inc. (Koch), announced
that they had reached a definitive agreement to sell substantially all of the
net assets related to the Textiles & Interiors segment to subsidiaries of Koch
for approximately $4,400. These net assets and related businesses are referred
to as INVISTA. This $4,400 includes the assumption of approximately $270 of debt
by the buyer. In addition, the company is involved in ongoing negotiations to
sell certain other Textiles & Interiors segment assets. The company wrote down
these assets to be sold to estimated fair market value and recorded other
separation charges as follows: property, plant and equipment of $1,168;
intangible assets (excluding goodwill, see Note 6) of $57; equity affiliates of
$293; a pension curtailment loss of $78 and other separation costs of $24. The
write-downs were based on estimated fair values as determined through a
combination of negotiations to sell the assets and cash flow projections.
Additional charges and credits related to the sale of these assets could occur.
The company expects the transaction with Koch to close during the first half of
2004.
The following represents the major classes of assets and liabilities held for
sale:
- --------------------------------------------------------------------------------
December 31,
2003
- --------------------------------------------------------------------------------
Cash and cash equivalents $ 75
Accounts and notes receivable 967
Inventories 661
Property, plant & equipment (net) 3,128
Other intangible assets (net) 193
Investment in affiliates 329
Prepaid expenses and other assets 137
- --------------------------------------------------------------------------------
Assets held for sale $5,490
- --------------------------------------------------------------------------------
Accounts payable $ 510
Borrowings and capital lease obligations 264
Net deferred tax liability 316
Other liabilities 511
Minority interests 93
- --------------------------------------------------------------------------------
Liabilities held for sale $1,694
- --------------------------------------------------------------------------------
Upon closing of the pending sale of INVISTA, the company will indemnify Koch
against certain liabilities primarily related to taxes, legal matters,
environmental matters, and representa-
F-13
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
tions and warranties. The company is currently in the process of determining the
fair value of these indemnities and will record the fair value of these
indemnities upon closing of the transaction. Under the definitive agreement, the
company's total indemnification obligation for the majority of the
representations and warranties cannot exceed approximately $1,400. The remaining
indemnities are not limited to this maximum payment amount. The company does not
believe that the fair value of these indemnities will have a material impact on
the future liquidity of the company.
6. GOODWILL IMPAIRMENT - TEXTILES & INTERIORS
In connection with the pending sale of INVISTA, the company was required to test
the related goodwill for recoverability. This test indicated that the carrying
value of goodwill exceeded its fair value, and accordingly, the company recorded
an impairment charge of $295 to write off all of the associated goodwill. This
write-off was based on an estimate of fair value as determined by the negotiated
sales price of the INVISTA net assets.
7. GAIN ON SALE OF DUPONT PHARMACEUTICALS
On October 1, 2001, the company sold substantially all of the net assets of
DuPont Pharmaceuticals to Bristol-Myers Squibb Company and recorded net proceeds
of $7,798. The company has retained its interest in the collaboration relating
to Cozaar(R)/Hyzaar(R) antihypertensive drugs.
The unaudited results of operations for the business sold to Bristol-Myers
Squibb for the nine months ended September 30, 2001, were as follows:
- --------------------------------------------------------------------------------
2001
- --------------------------------------------------------------------------------
Sales $902
After-tax operating loss* (289)
- --------------------------------------------------------------------------------
* Excludes corporate expenses, interest, exchange gains (losses) and corporate
minority interests.
As a result of this transaction, the company recorded a pretax gain in 2001 of
$6,136 ($3,866 after-tax), which included charges that were a direct result of
the decision to divest DuPont Pharmaceuticals. Under the terms of the sale
agreement, the purchase price was subject to adjustment for finalization of net
working capital, transfer of pension assets, and settlement of tax liabilities.
The resolution of these matters in 2002 resulted in an additional pretax gain of
$25 ($39 after-tax) on the sale.
8. GAIN ON SALE OF INTEREST BY SUBSIDIARY - NONOPERATING
In April 2003, the company formed a majority-owned venture, The Solae Company,
with Bunge Limited, comprised of the company's protein technologies business and
Bunge's North American and European ingredients operations. As a result of this
transaction, the company's ownership interest in the protein technologies
business was reduced from 100 percent to 72 percent. The company recorded a
nonoperating pretax gain of $62, as the fair market value of the businesses
contributed by Bunge exceeded the net book value of the 28 percent ownership
interest acquired by Bunge. See Note 27 for additional information.
9. PROVISION FOR INCOME TAXES
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Current tax expense (benefit):
U.S. federal $ 14 $ 20 $1,384
U.S. state and local (1) (62) 120
International 297 225 376
- --------------------------------------------------------------------------------
310 183 1,880
- --------------------------------------------------------------------------------
Deferred tax expense (benefit):
U.S. federal (642) (71) 565
U.S. state and local 15 37 22
International (613) 36 -
- --------------------------------------------------------------------------------
(1,240) 2 587
Provision for income taxes $ (930) $ 185 $2,467
- --------------------------------------------------------------------------------
Stockholders' equity:
Stock compensation (1) (11) (12) (38)
Cumulative effect of a change in
accounting principle (2) - - 4
Net revaluation and clearance of
cash flow hedges to earnings (2) 16 (4) (20)
Minimum pension liability (2) 453 (1,237) (10)
Net unrealized gains (losses)
on securities (2) (1) (1) (15)
- --------------------------------------------------------------------------------
$ (473) $(1,069) $2,388
- --------------------------------------------------------------------------------
(1) Represents deferred tax benefits for certain stock compensation amounts
that are deductible for income tax purposes but do not affect net income.
(2) Represents deferred tax charges (benefits) recorded as a component of
Accumulated other comprehensive income (loss) in stockholders' equity. See
Note 25.
Total income taxes paid on worldwide operations were $278 in 2003, $1,691 in
2002, and $456 in 2001.
F-14
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Deferred income taxes result from temporary differences between the financial
and tax basis 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:
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Depreciation $ (131) $ 29 $ (3)
Accrued employee benefits 14 119 202
Other accrued expenses 93 (85) (14)
Inventories (17) 17 63
Unrealized exchange gain (loss) 17 - (2)
Investment in subsidiaries and affiliates (340) 31 31
Amortization of intangibles (11) (168) 296
Other temporary differences (275) 166 30
Tax loss/tax credit carryforwards (1,537) (114) (38)
Valuation allowance change - net 947 7 22
- --------------------------------------------------------------------------------
$(1,240) $ 2 $587
- --------------------------------------------------------------------------------
The significant components of deferred tax assets and liabilities at December
31, 2003, and 2002, are as follows:
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Deferred Tax Asset Liability Asset Liability
- --------------------------------------------------------------------------------
Depreciation $ - $1,602 $ - $1,975
Accrued employee benefits 2,695 364 3,157 379
Other accrued expenses 363 4 502 2
Inventories 184 177 173 196
Unrealized exchange gains 6 50 23 6
Tax loss/tax credit
carryforwards 1,749 - 362 -
Investment in subsidiaries
and affiliates 190 - 2 188
Amortization of intangibles 70 734 89 774
Other 626 520 417 536
- --------------------------------------------------------------------------------
$ 5,883 $3,451 $4,725 $4,056
Valuation allowance (1,083) (239)
- --------------------------------------------------------------------------------
$ 4,800 $4,486
- --------------------------------------------------------------------------------
The change in the net deferred tax position from 2002 to 2003 is principally due
to the recording of a deferred tax asset in two European subsidiaries for their
tax basis investment losses and the reclassification of certain INVISTA deferred
tax assets and liabilities to assets and liabilities held for sale.
Current deferred tax assets of $863 and $594 at December 31, 2003, and 2002,
respectively, are included in the caption Income taxes within current assets of
the Consolidated Balance Sheet. In addition, deferred tax assets of $1,054 and
$441 are included in Other assets at December 31, 2003, and 2002, respectively.
See Note 17. Deferred tax liabilities of $60 and $42 at December 31, 2003, and
2002, respectively, are included in the caption Income taxes within current
liabilities of the Consolidated Balance Sheet.
An analysis of the company's effective income tax rate (EITR) follows:
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
Separation charges related to INVISTA 83.8 - -
Tax basis investment losses on foreign
subsidiaries (467.5) - -
International operations, including
settlements (238.8) (19.0) (0.8)
Lower effective tax rate on export sales (23.8) (2.2) (0.6)
Domestic operations (45.2) (2.1) 1.0
Postemployment costs - (2.3) -
State taxes 6.2 (0.7) 1.4
- --------------------------------------------------------------------------------
(650.3)% 8.7% 36.0%
- --------------------------------------------------------------------------------
The change in EITR for 2003 is primarily impacted by the recording of deferred
tax assets in two European subsidiaries for their tax basis investment losses
recognized on local tax returns. In addition, the impact of jurisdictional mix
and other tax benefits was magnified by the low level of pretax earnings for the
year.
Income before income taxes and minority interests shown below is based on the
location of the corporate unit to which such earnings are attributable. However,
since such earnings are often subject to taxation in more than one country, the
income tax provision shown above as United States or international does not
correspond to the earnings shown in the following table:
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
United States (including exports) $(174) $1,227 $6,131
International 317 897 713
- --------------------------------------------------------------------------------
$ 143 $2,124 $6,844
- --------------------------------------------------------------------------------
At December 31, 2003, unremitted earnings of subsidiaries outside the United
States totaling $13,464 were deemed to be permanently reinvested. 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, 2003, the tax
effect of such carryforwards approximated $1,749. Of this amount, $1,310 has no
expiration date, $44 expires after 2003 but before the end of 2008, and $395
expires after 2008.
F-15
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
10. CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
On January 1, 2003, the company adopted SFAS No. 143, which requires the company
to record an asset and related liability for the costs associated with the
retirement of long-lived tangible assets when a legal liability to retire the
asset exists.
The company has recorded asset retirement obligations primarily associated with
closure, reclamation, and removal costs for mining operations related to the
production of titanium dioxide in the Coatings & Color Technologies segment. The
adoption of SFAS No. 143 resulted in a charge of $46 ($29 after-tax) which has
been reported as a cumulative effect of a change in accounting principle. Such
amount represents the difference between assets and liabilities recognized prior
to the application of this statement and the net amounts recognized pursuant to
this statement.
The estimated asset retirement obligation would have been $56 on January 1,
2002, and $60 on December 31, 2002, had this statement been applied as of
January 1, 2002. Set forth below is a reconciliation of the company's estimated
asset retirement obligations from January 1, 2003 through December 31, 2003.
- --------------------------------------------------------------------------------
Balance - January 1, 2003 $60
- --------------------------------------------------------------------------------
Liabilities incurred 1
Accretion expense 4
Revisions in estimated cash flows (2)
Liabilities settled in 2003 (1)
- --------------------------------------------------------------------------------
BALANCE - December 31, 2003 $62
- --------------------------------------------------------------------------------
Had the provisions of SFAS No. 143 been applied as of January 1, 2001, the pro
forma effects for the period ended December 31, 2002, and 2001, on Income before
cumulative effect of changes in accounting principles and Net income for the
periods would have been immaterial.
On January 1, 2002, the company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which resulted in a cumulative effect charge to income of
$2,944. This charge was attributable to goodwill impairments of $2,866 in the
Agriculture & Nutrition segment and $78 in the Textiles & Interiors segment. As
there was no tax benefit associated with this charge (goodwill arose in
connection with the acquisition of stock versus a purchase of assets), both the
pretax and after-tax amounts are the same. A variety of fair valuation methods
were used in measuring for impairment, including discounted net cash flow and
comparable company multiples of revenues and EBITDA (earnings before interest,
taxes, depreciation and amortization). The primary factors that resulted in the
impairment charge in Agriculture & Nutrition were the difficult economic
environment in the agriculture sector, slower than expected development of and
access to traits based on biotechnology, and a slower than expected rate of
acceptance by the public of new agricultural products based on biotechnology.
On January 1, 2001, the company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. The adoption of SFAS No. 133
resulted in a cumulative effect of a change in accounting principle benefit of
$19 ($11 after-tax). The primary component of this gain is related to the
company's position in certain stock warrants, which were previously accounted
for as available-for-sale securities for which changes in fair value had been
reflected in Accumulated other comprehensive income (loss). The company also
recorded a pretax increase to Accumulated other comprehensive income (loss) of
$10 ($6 after-tax). The increase in Accumulated other comprehensive income
(loss) is primarily due to unrealized gains in agricultural commodity hedging
programs.
F-16
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
11. EARNINGS PER SHARE OF COMMON STOCK
Set forth below is a reconciliation of the numerator and denominator for basic
and diluted earnings per share calculations for the periods indicated:
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Numerator:
Income before
cumulative effect
of changes in
accounting
principles $1,002 $ 1,841 $4,328
Preferred dividends (10) (10) (10)
- --------------------------------------------------------------------------------
Income available
to common stock-
holders before
cumulative effect
of changes in
accounting
principles 992 1,831 4,318
Cumulative effect
of changes in
accounting
principles (29) (2,944) 11
- --------------------------------------------------------------------------------
Net income (loss)
available to
common
stockholders $ 963 $(1,113) $4,329
- --------------------------------------------------------------------------------
Denominator:
Weighted-average
number of common
shares - Basic* 996,717,845 994,355,229 1,035,992,748
Dilutive effect of the
company's
employee compen-
sation plans 3,292,348 4,381,811 5,171,881
- --------------------------------------------------------------------------------
Weighted average
number of common
shares - Diluted 1,000,010,193 998,737,040 1,041,164,629
- --------------------------------------------------------------------------------
* Excludes treasury stock and shares held by the Flexitrust. During 2001,
shares in the Flexitrust were depleted and the trust arrangement was
terminated.
The following average stock options are antidilutive, and therefore, are not
included in the diluted earnings per share calculation:
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Average Stock
Options 69,532,336 53,988,901 41,302,525
- --------------------------------------------------------------------------------
12. ACCOUNTS AND NOTES RECEIVABLE
- --------------------------------------------------------------------------------
December 31 2003 2002
- --------------------------------------------------------------------------------
Trade - net of allowances of $187 in 2003
and $194 in 2002 $3,427 $2,913
Miscellaneous 791 971
- --------------------------------------------------------------------------------
$4,218 $3,884
- --------------------------------------------------------------------------------
Accounts and notes receivable are carried at amounts that approximate fair value
and include amounts due from equity affiliates of $148 for 2003, and $176 for
2002.
In 2000, the company entered into an accounts receivable securitization program
to sell an interest in a revolving pool of its trade accounts receivable.
Subsequently, the company implemented a commercial paper conduit financing
program to reduce the financing costs of the accounts receivable securitization
program by gaining direct access to the asset backed commercial paper market.
During 2003, the company terminated this program and purchased the interest in
the revolving pool of trade accounts receivable for $445. These trade accounts
receivable were collected in 2003.
Expenses incurred in connection with the accounts receivable securitization
program totaled $4, $10, and $27 in 2003, 2002, and 2001, respectively, and are
included in Other income. Miscellaneous receivables include an
over-collateralization of $214 at December 31, 2002, as provided for under terms
of the program.
13. INVENTORIES
- --------------------------------------------------------------------------------
December 31 2003 2002
- --------------------------------------------------------------------------------
Finished products $2,401 $2,734
Semifinished products 1,241 1,239
Raw materials and supplies 767 880
- --------------------------------------------------------------------------------
4,409 4,853
Adjustment of inventories to a LIFO basis (302) (444)
- --------------------------------------------------------------------------------
$4,107 $4,409
- --------------------------------------------------------------------------------
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 82 percent and 79 percent of
consolidated inventories before LIFO adjustment at December 31, 2003, and 2002,
respectively. Pioneer inventories of $927 and $826 at December 31, 2003, and
2002, respectively, were valued under the FIFO method.
F-17
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
14. PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------------------------------------------------
December 31 2003 2002
- --------------------------------------------------------------------------------
Buildings $ 4,121 $4,366
Equipment 18,540 27,663
Land 412 477
Construction 1,076 1,226
- --------------------------------------------------------------------------------
$24,149 $33,732
- --------------------------------------------------------------------------------
Property, plant and equipment includes gross assets acquired under capital
leases of $108 and $128 at December 31, 2003 and 2002, respectively; related
amounts included in accumulated depreciation were $60 and $54 at December 31,
2003 and 2002, respectively.
15. GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL:
Upon adoption of SFAS No. 142 on January 1, 2002, amortization of goodwill was
discontinued. Changes in Goodwill for the period ended December 31, 2003 were as
follows:
- ---------------------------------------------------------------------------------------------------------------------------
Balance Goodwill Balance
as of Adjustments as of
December 31, and Goodwill December 31,
Segment 2002 Acquisitions(1) Impairment 2003
- ---------------------------------------------------------------------------------------------------------------------------
Agriculture & Nutrition $ 233 $ 360 (2) $ - $ 593
Coatings & Color Technologies 718 88 - 806
Electronic & Communication Technologies 117 61 - 178
Performance Materials 2 218 - 220
Safety & Protection 85 41 (3) - 126
Textiles & Interiors 10 285 (295) (4) -
Other 2 14 - 16
- ---------------------------------------------------------------------------------------------------------------------------
Total $1,167 $1,067 $(295) $1,939
- ---------------------------------------------------------------------------------------------------------------------------
(1) Includes the allocation of goodwill associated with the purchase of shares
from minority owners of DuPont Canada Inc. as follows:
- --------------------------------------------------------------------------------
Agriculture & Nutrition $ (7) (5)
Coatings & Color Technologies 86
Electronic & Communication Technologies 60
Performance Materials 218
Safety & Protection 17
Textiles & Interiors 281
Other 14
- --------------------------------------------------------------------------------
Total $669
- --------------------------------------------------------------------------------
(2) Includes $346 related to the formation of the majority-owned venture, The
Solae Company and $21 related to Griffin LLC ($1 related to the acquisition
of the remaining 50 percent interest in Griffin LLC and $20 related to the
reclassification of equity method goodwill). See Note 27.
(3) Includes $20 related to the acquisition of Antec International.
(4) Result of goodwill impairment charge. See Note 6.
(5) Reflects the allocation of $30 in goodwill, and the write-off of $37 in
pre-existing goodwill attributable to the minority interest in DuPont
Canada Inc.
F-18
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
OTHER INTANGIBLE ASSETS:
The adoption of SFAS No. 142 established two broad categories of intangible
assets: definite-lived intangible assets which are subject to amortization and
indefinite-lived intangible assets which are not subject to amortization. The
gross carrying amounts and accumulated amortization in total and by major class
of other intangible assets are as follows:
- -----------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003
- -----------------------------------------------------------------------------------------------------------------------
Accumulated
Gross Amortization Net
- -----------------------------------------------------------------------------------------------------------------------
INTANGIBLE ASSETS SUBJECT TO AMORTIZATION (DEFINITE-LIVED)
- -----------------------------------------------------------------------------------------------------------------------
Purchased technology $2,097 $ (856) $1,241
Patents 150 (30) 120
Trademarks 74 (11) 63
Other (1) 540 (136) 404
2,861 (1,033) 1,828
- -----------------------------------------------------------------------------------------------------------------------
INTANGIBLE ASSETS NOT SUBJECT TO AMORTIZATION (INDEFINITE-LIVED)
- -----------------------------------------------------------------------------------------------------------------------
Trademarks/Tradenames 183 - 183
Pioneer Germplasm 2 975 - 975
- -----------------------------------------------------------------------------------------------------------------------
1,158 - 1,158
- -----------------------------------------------------------------------------------------------------------------------
$4,019 $(1,033) $2,986
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
December 31, 2002
- -----------------------------------------------------------------------------------------------------------------------
Accumulated
Gross Amortization Net
- -----------------------------------------------------------------------------------------------------------------------
INTANGIBLE ASSETS SUBJECT TO AMORTIZATION (DEFINITE-LIVED)
- -----------------------------------------------------------------------------------------------------------------------
Purchased technology $2,378 $(785) $1,593
Patents 77 (22) 55
Trademarks 55 (9) 46
Other (1) 395 (126) 269
- -----------------------------------------------------------------------------------------------------------------------
2,905 (942) 1,963
- -----------------------------------------------------------------------------------------------------------------------
INTANGIBLE ASSETS NOT SUBJECT TO AMORTIZATION (INDEFINITE-LIVED)
Trademarks/Tradenames 171 - 171
Pioneer Germplasm (2) 975 - 975
- -----------------------------------------------------------------------------------------------------------------------
1,146 - 1,146
- -----------------------------------------------------------------------------------------------------------------------
$4,051 $(942) $3,109
- -----------------------------------------------------------------------------------------------------------------------
(1) Primarily consists of sales and grower networks, customer lists, marketing
and manufacturing alliances, mineral rights and noncompetition agreements.
Totals at December 31, 2003 include those intangibles obtained through the
acquisitions of the remaining interest in Griffin LLC and DuPont Canada
Inc., and the formation of The Solae Company (see Note 27).
(2) Pioneer germplasm is the pool of genetic source material and body of
knowledge gained from the development and delivery stage of plant breeding.
The company recognized germplasm as an intangible asset upon the
acquisition of Pioneer Hi-Bred International, Inc. This intangible asset is
expected to contribute to cash flows beyond the foreseeable future and
there are no legal, regulatory, contractual, or other factors which limit
its useful life. Prior to the adoption of SFAS No. 142, the company
amortized germplasm on a straight-line basis over a period of forty years,
the maximum period previously allowed under generally accepted accounting
principles.
F-19
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The aggregate amortization expense for definite-lived intangible assets was $229
for 2003, and is estimated to be $210, $206, $201, $174, and $156 for each of
the next five years, respectively.
PRO FORMA EFFECTS OF ADOPTION OF SFAS NO. 142:
The following data is provided to assist users of financial statements in making
meaningful comparisons between years subsequent to the adoption of SFAS No. 142
(2003 and 2002) and the year preceding the adoption of SFAS No. 142 (2001).
Amortization expense of $183 (pretax) and $166 (after-tax) was recorded in 2001
related to goodwill and indefinite-lived intangible assets that are no longer
being amortized due to adoption of SFAS No. 142. Segment detail related to these
amounts (after-tax) is shown below:
- --------------------------------------------------------------------------------
Segment 2001
- --------------------------------------------------------------------------------
Agriculture & Nutrition $108
Coatings & Color Technologies 40
Electronic & Communication Technologies 4
Performance Materials 1
Pharmaceuticals 4*
Safety & Protection 1
Textiles & Interiors 8
- --------------------------------------------------------------------------------
$166
- --------------------------------------------------------------------------------
* REPRESENTS AMORTIZATION PRIOR TO DIVESTITURE OF DUPONT PHARMACEUTICALS, WHICH
OCCURRED ON OCTOBER 1, 2001.
The following table provides a reconciliation of reported Net income (loss) to
adjusted net income (loss) and reported earnings (loss) per share to adjusted
earnings (loss) per share amounts for the years 2001 through 2003 as if the
nonamortization provisions of SFAS No. 142 had been applied as of January 1,
2001:
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Reported net income (loss) $973 $(1,103) $4,339
Add back: Goodwill amortization - - 140
Add back: Equity method goodwill
amortization - - 7
Add back: Indefinite-lived
intangible asset amortization - - 19
- --------------------------------------------------------------------------------
Adjusted net income (loss) $973 $(1,103) $4,505
- --------------------------------------------------------------------------------
Basic earnings (loss) per share
Reported net income (loss) $0.97 $ (1.12) $ 4.18
Add back: Goodwill amortization - - 0.13
Add back: Equity method goodwill
amortization - - 0.01
Add back: Indefinite-lived
intangible asset amortization - - 0.02
- --------------------------------------------------------------------------------
$0.97 $ (1.12) $ 4.34
- --------------------------------------------------------------------------------
Diluted earnings (loss) per share
Reported net income (loss) $0.96 $ (1.11) $ 4.16
Add back: Goodwill amortization - - 0.13
Add back: Equity method goodwill
amortization - - 0.01
Add back: Indefinite-lived
intangible asset amortization - - 0.02
- --------------------------------------------------------------------------------
$0.96 $ (1.11) $ 4.32
- --------------------------------------------------------------------------------
16. 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, 2003, are DuPont Dow Elastomers LLC, DuPont Teijin Films, and
DuPont Sabanci Polyester Europe B.V., all of which are owned 50 percent by
DuPont. Dividends received from equity affiliates were $58 in 2003, $84 in 2002
and $50 in 2001.
F-20
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
- --------------------------------------------------------------------------------
Year Ended December 31
- --------------------------------------------------------------------------------
Results of operations 2003 2002 2001
- --------------------------------------------------------------------------------
Net sales (1) $7,052 $6,850 $7,071
Earnings (losses) before income taxes (19) 155 19
Net income (loss) (118)(2) 39 60
- --------------------------------------------------------------------------------
DuPont's equity in earnings (losses)
of affiliates:
Partnerships (3) $ 18 $45 $(21)
Corporate joint ventures
(after income taxes) (8) (9) (22)
- --------------------------------------------------------------------------------
$ 10 $36 $(43)
- --------------------------------------------------------------------------------
(1) Includes sales to DuPont of $1,002 in 2003, $911 in 2002 and $799 in 2001.
(2) Includes losses of $120 in DuPont Photomasks, Inc., an equity affiliate in
which DuPont has a 20 percent ownership interest.
(3) Income taxes are reflected in the company's provision for income tax.
- --------------------------------------------------------------------------------
Financial position at December 31 2003 2002
- --------------------------------------------------------------------------------
Current assets $3,367 $3,463
Noncurrent assets 5,441 5,814
- --------------------------------------------------------------------------------
Total assets $8,808 $9,277
- --------------------------------------------------------------------------------
Short-term borrowings (1) $1,339 $1,178
Other current liabilities 1,814 1,756
Long-term borrowings (1) 915 1,199
Other long-term liabilities 628 730
- --------------------------------------------------------------------------------
Total liabilities $4,696 $4,863
- --------------------------------------------------------------------------------
DuPont's investment in affiliates
(includes advances) $1,304(2) $2,047
- --------------------------------------------------------------------------------
(1) DuPont's pro rata interest in total borrowings was $1,004 in 2003 and
$1,098 in 2002, of which $639 in 2003 and $681 in 2002 were guaranteed by
the company. These amounts are included in the guarantees disclosed in Note
24.
(2) Reflects a $293 reduction in carrying values due to impairment charges
recorded in 2003. In addition, $329 is excluded from the 2003 balance and
reported as Assets held for sale on the Consolidated Balance Sheet.
17. OTHER ASSETS
- --------------------------------------------------------------------------------
December 31 2003 2002
- --------------------------------------------------------------------------------
Prepaid pension cost (Note 28) $ 635 $ 146
Intangible pension asset (Note 28) 292 405
Long-term investments in securities 141 143
Deferred income taxes (Note 9) 1,054 441
Miscellaneous 334 418
- --------------------------------------------------------------------------------
$2,456 $1,553
- --------------------------------------------------------------------------------
Included within long-term investments in securities are securities for which
market values are not readily available of $97 and $110 at December 31, 2003 and
2002, respectively. Also included in long-term investments in securities are
securities classified as available-for-sale as follows:
- --------------------------------------------------------------------------------
December 31 2003 2002
- --------------------------------------------------------------------------------
Cost $48 $45
Gross unrealized gains 6 4
Gross unrealized losses (10) (16)
- --------------------------------------------------------------------------------
Fair value $44 $33
- --------------------------------------------------------------------------------
2003, 2002 and 2001 proceeds from the sale of equity securities were not
material.
18. ACCOUNTS PAYABLE
- --------------------------------------------------------------------------------
December 31 2003 2002
- --------------------------------------------------------------------------------
Trade payables $1,691 $1,859
Payables to banks 181 160
Compensation awards 134 200
Miscellaneous 406 508
- --------------------------------------------------------------------------------
$2,412 $2,727
- --------------------------------------------------------------------------------
Trade payables includes $70 for 2003 and $178 for 2002 due to equity affiliates.
Payables to banks represent checks issued on certain disbursement accounts but
not presented to the banks for payment. The reported amounts shown above
approximate fair value because of the short-term maturity of these obligations.
19. SHORT-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
- --------------------------------------------------------------------------------
December 31 2003 2002
- --------------------------------------------------------------------------------
Commercial paper $4,422 $668
Other loans--various currencies 201 289
Medium-term notes payable within one year 1,262 200
Industrial development bonds payable on demand 26 26
Capital lease obligations 3 2
- --------------------------------------------------------------------------------
$5,914 $1,185
- --------------------------------------------------------------------------------
The estimated fair value of the company's short-term borrowings, including
interest rate financial instruments, based on quoted market prices for the same
or similar issues, or on current rates offered to the company for debt of the
same remaining maturities, was $6,000 and $1,200 at December 31, 2003 and 2002,
respectively. The change in estimated fair value in 2003 was due to an increase
in short-term debt, primarily commercial paper and notes due within one year.
Unused short-term bank credit lines were approximately $4,100 and $3,900 at
December 31, 2003 and 2002, respectively. These lines support short-term
borrowings.
The weighted-average interest rate on short-term borrowings outstanding at
December 31, 2003 and 2002, was 2.0 percent and 3.5 percent, respectively.
F-21
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
20. OTHER ACCRUED LIABILITIES
- --------------------------------------------------------------------------------
December 31 2003 2002
- --------------------------------------------------------------------------------
Payroll and other employee-related costs $ 598 $663
Accrued postretirement benefits cost (Note 28) 410 400
Miscellaneous 1,955 2,074
- --------------------------------------------------------------------------------
$2,963 $3,137
- --------------------------------------------------------------------------------
Miscellaneous other accrued liabilities principally includes employee separation
costs in connection with the company's restructuring programs, advance customer
payments, discounts and rebates, accrued environmental remediation costs
(short-term), and forward hedge liabilities.
21. LONG-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
- --------------------------------------------------------------------------------
December 31 2003 2002
- --------------------------------------------------------------------------------
U.S. dollar:
Industrial development bonds due 2007-2029 $ 309 $309
Medium-term notes due 2003-2048 (1) 611 596(2)
6.75% notes due 2004 (3) 946(2) 958
8.13% notes due 2004 (3) 316(2) 328
8.25% notes due 2006 (3) 213 217
6.75% notes due 2007 (3) 487 487
3.375% notes due 2007 (3) 401 412
5.75% notes due 2009 200 200
5.88% notes due 2009 (3) 442 453
6.88% notes due 2009 (3) 883 881
4.75% notes due 2012 400 400
7.95% debentures due 2023 (3) - 38
6.50% debentures due 2028 298 298
7.50% debentures due 2033 (3) - 23
Other loans (various currencies) due 2005-2009 17 198
Capital lease obligations 40 49
- --------------------------------------------------------------------------------
$5,563 $5,847
- --------------------------------------------------------------------------------
Less short-term portion of long-term debt 1,262 200
- --------------------------------------------------------------------------------
Total $4,301 $5,647
- --------------------------------------------------------------------------------
(1) Average interest rates at December 31, 2003 and 2002, were 3.6 percent and
4.9 percent, respectively.
(2) Includes long-term debt due within one year.
(3) The company has outstanding interest rate swap agreements with notional
amounts totaling $2,310. Over the remaining terms of the notes and
debentures, the company will receive fixed payments equivalent to the
underlying debt and pay floating payments based on U.S. dollar LIBOR. The
fair value of the swaps at December 31, 2003 and 2002, was $76 and $120,
respectively.
Average interest rates on industrial development bonds were 5.8 percent for
December 31, 2003 and 2002. Average interest rates on other loans (various
currencies) were 4.7 percent at December 31, 2003 and 5.7 percent at December
31, 2002.
Maturities of long-term borrowings, together with sinking fund requirements, are
$168, $214, $907 and $1 for the years 2005, 2006, 2007 and 2008, respectively,
and $2,971 thereafter.
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 $4,700 and $6,200 at December 31, 2003 and 2002,
respectively. The change in estimated fair value in 2003 was primarily due to a
reduction in long-term debt.
22. OTHER LIABILITIES
- --------------------------------------------------------------------------------
December 31 2003 2002
- --------------------------------------------------------------------------------
Accrued postretirement benefits cost (Note 28) $5,109 $5,228
Reserves for employee-related costs 1,647 2,473
Accrued environmental remediation costs 313 299
Miscellaneous 1,840 1,829
- --------------------------------------------------------------------------------
$8,909 $9,829
- --------------------------------------------------------------------------------
23. MINORITY INTERESTS
In 2001, the company received proceeds of $2,037 from entering into two minority
interest transactions. Costs incurred in connection with these transactions
totaled $42 and were being amortized on a straight-line basis over a five-year
period to Minority interests in earnings of consolidated subsidiaries in the
Consolidated Income Statement. The net proceeds adjusted for amortized costs
were reported as Minority interests in the Consolidated Balance Sheet.
In 2003, the company redeemed these structures for $2,037, and recorded a charge
of $28 primarily to write off the remaining unamortized costs associated with
the transactions.
24. COMMITMENTS AND CONTINGENT LIABILITIES
GUARANTEES
On January 1, 2003, the company adopted FASB Interpretation No. (FIN) 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Guarantees of Indebtedness of Others," which modifies existing disclosure
requirements for most guarantees and requires that at the time a company issues
a guarantee, the company must recognize an initial liability for the fair value
of the obligation it assumes under that guarantee. The fair value of guarantees
is initially determined by consideration of data in observable markets,
comparable transactions and the utilization of probability-weighted
F-22
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
discounted net cash flow models. The fair value of guarantees issued or modified
from January 1, 2003 through December 31, 2003 was not material.
Information related to the company's guarantees is summarized in the following
table:
- --------------------------------------------------------------------------------
December 31, December 31,
Guarantees 2003 2002
- --------------------------------------------------------------------------------
Product warranty liability (1) $ 22 $ 22
Indemnification liability (1) 31 31
Obligations for equity affiliates and others 1,120 1,145
Residual value guarantees (2) 100 335
Liquidity support (3) - 128
- --------------------------------------------------------------------------------
$1,273 $1,661
- --------------------------------------------------------------------------------
(1) Included in the company's Consolidated Financial Statements.
(2) Applicable to the company's synthetic lease programs.
(3) Applicable to the company's accounts receivable securitization program,
which was terminated in 2003. See Note 12.
Disclosures about each group of similar guarantees are provided below.
PRODUCT WARRANTY LIABILITY
The company warrants to the original purchaser of its products that it will, at
its option, repair or replace, without charge, such products if they fail due to
a manufacturing defect. The term of these warranties varies (30 days to 10
years) by product. The estimated product warranty liability for the company's
products as of December 31, 2003 is $22. The company has recourse provisions for
certain products that would enable recovery from third parties for amounts paid
under the warranty. The company accrues for product warranties when, based on
available information, it is probable that customers will make claims under
warranties relating to products that have been sold, and a reasonable estimate
of the costs (based on historical claims experience relative to sales) can be
made.
Set forth below is a reconciliation of the company's estimated product warranty
liability for 2003:
- --------------------------------------------------------------------------------
Balance - December 31, 2002 $22
Settlements (cash & in kind) (29)
Aggregate changes - issued 2003 29
Aggregate changes - preexisting -
- --------------------------------------------------------------------------------
Balance - December 31, 2003 $ 22
- --------------------------------------------------------------------------------
INDEMNIFICATIONS
In connection with acquisitions, divestitures and the formation of joint
ventures, the company has indemnified respective parties against certain
liabilities that may arise in connection with these transactions and business
activities prior to the completion of the transaction. In addition, the company
indemnifies its duly elected or appointed directors and officers to the fullest
extent permitted by Delaware law, against liabilities incurred as a result of
their activities for the company, such as adverse judgments relating to
litigation matters. The term of these indemnifications, which typically pertain
to environmental, tax, and product liabilities, is generally indefinite. If the
indemnified party were to incur a liability or have a liability increase as a
result of a successful claim, pursuant to the terms of the indemnification, the
company would be required to reimburse the indemnified party. The maximum amount
of potential future payments is generally unlimited. The carrying amount
recorded for all indemnifications as of December 31, 2003 and 2002 is $31.
Although it is reasonably possible that future payments may exceed amounts
accrued, due to the nature of indemnified items, it is not possible to make a
reasonable estimate of the maximum potential loss or range of loss. No assets
are held as collateral and no specific recourse provisions exist.
OBLIGATIONS FOR EQUITY AFFILIATES & OTHERS
The company has directly guaranteed various debt obligations under agreements
with third parties related to equity affiliates, customers and other
unaffiliated companies. At December 31, 2003, the company had directly
guaranteed $885 of such obligations, excluding guarantees of certain obligations
and liabilities of Conoco, Inc. as discussed below. This represents the maximum
potential amount of future (undiscounted) payments that the company could be
required to make under the guarantees.
Of the $885 directly guaranteed obligations, $61 is for short-term (less than
one year) bank loans related to customers, $41 is for long-term (1-5 years) bank
loans related to customers, $386 is for short-term (less than one year) bank
borrowings related to equity affiliates, $253 is for long-term (1-6 years) bank
borrowings related to equity affiliates, $103 is for historical obligations of a
previously divested subsidiary (term 7 years), $28 is for revenue bonds (1-12
years), and $13 is for leases on equipment and facilities for external customers
and equity affiliates. Existing guarantees for customers arose as part of
contractual sales agreements. Existing guarantees for equity affiliates arose
for liquidity needs in normal operations. The company would be required to
perform on these guarantees in the event of default by the guaranteed party. In
certain cases, the company has
F-23
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
recourse to assets held as collateral as well as personal guarantees from
customers. Assuming liquidation, these assets are estimated to cover
approximately 25 percent of the $107 of guaranteed obligations of customers. No
material loss is anticipated by reason of such agreements and guarantees. At
December 31, 2003, the liabilities recorded for these obligations were not
material.
The company has historically guaranteed certain obligations and liabilities of
Conoco, Inc., its subsidiaries and affiliates, which totaled $235 as of December
31, 2003. 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. No material loss
is anticipated by reason of such agreements and guarantees. At December 31,
2003, the company had no liabilities recorded for these obligations.
RESIDUAL VALUE GUARANTEES
As of December 31, 2003, the company had residual value guarantees of $100
related to short-lived equipment under its synthetic lease programs. See further
discussion under Operating Leases below.
OPERATING LEASES
The company uses various leased facilities and equipment in its operations. The
terms for these leased assets vary depending on the lease agreement.
During 2003, the company exercised its purchase options in the synthetic lease
programs related to corporate aircraft, rail cars, and manufacturing and
warehousing facilities, thereby terminating these programs. As a result of these
transactions, the company recorded assets of $334 net of a $20 deferred gain
associated with the initial sale and leaseback transaction.
As of December 31, 2003 the company had one remaining synthetic lease program
relating to short-lived equipment. In connection with this synthetic lease
program, the company had residual value guarantees in the amount of $100 at
December 31, 2003. The guarantee amounts are tied to the unamortized lease
values of the assets under synthetic lease and are due should the company decide
neither to renew these leases nor to exercise its purchase option. At December
31, 2003, the company had no liabilities recorded for these obligations. Any
residual value guarantee amounts paid to the lessor may be recovered by the
company from the sale of the assets to a third party.
Future minimum lease payments (including residual value guarantee amounts) under
noncancelable operating leases are $326, $198, $131, $100, and $77 for the years
2004, 2005, 2006, 2007, and 2008, respectively, and $231 for subsequent years,
and are not reduced by noncancelable minimum sublease rentals due in the future
in the amount of $23. Net rental expense under operating leases was $269 in
2003, $247 in 2002, and $223 in 2001.
LITIGATION
BENLATE(R)
In 1991, DuPont began receiving claims by growers that use of Benlate(R) 50 DF
fungicide had caused crop damage. DuPont has since been served with several
hundred lawsuits, most of which have been disposed of through trial, dismissal
or settlement. The status of Benlate(R) cases is indicated in the table below:
- --------------------------------------------------------------------------------
Status of Cases At December 31,
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Filed 3 2 10
Resolved 11 5 16
Pending 96 104 107
- --------------------------------------------------------------------------------
Twenty-one of the 96 cases pending against the company at December 31, 2003,
were filed by growers who allege plant damage from using Benlate(R) 50 DF and,
in some cases, Benlate(R) WP. Forty-three of the pending cases seek to reopen
settlements with the company by alleging that the company committed fraud and
misconduct, as well as violations of federal and state racketeering laws. Four
of the pending cases include claims for alleged personal injuries arising from
exposure to Benlate(R) 50 DF and/or Benlate(R) WP. Twenty-eight of the pending
cases include claims for alleged damage to shrimping operations from Benlate(R)
OD.
In one of the 21 cases alleging plant damage, a Florida jury found DuPont liable
in August 2001 under Florida's racketeering statute and for product defect
involving alleged crop damage. In March 2002, pursuant to DuPont's motion, the
judge withdrew the jury's finding of liability under the racketeering statute
and entered judgment for the plaintiffs in the amount of $29. The judgment was
later reduced to $26. DuPont has appealed. Oral argument of DuPont's appeal was
heard on January 8, 2004, and the com-
F-24
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
pany is awaiting the court's decision. The company has concluded that it is not
probable that the adverse judgment in this case will ultimately be upheld;
therefore, DuPont has not established a reserve for this matter. A case tried in
state court in Florida in 2001 involving alleged damage to orchids, resulted in
a jury verdict in favor of DuPont. In November, 2003, the intermediate appellate
court reversed the case and ordered a new trial. DuPont has moved for rehearing
of that decision. The remaining crop cases are in various stages of development,
principally in trial and appellate courts in Florida.
In 43 cases, plaintiffs who previously settled with the company seek to reopen
their settlements through cases alleging fraud and other misconduct relating to
the litigation and settlement of their Benlate(R) 50 DF claims. The Florida
federal court has dismissed the lead case of the 28 reopener cases pending
before it. The dismissal has been affirmed by the 11th Circuit Court of Appeals.
The 15 remaining reopener cases are in various stages of development in trial
and appellate courts in Florida and Hawaii.
There are currently 4 cases pending involving allegations that Benlate(R) caused
birth defects to children exposed in utero. Of these 4 cases, the federal court
in West Virginia dismissed one case on the grounds of insufficient scientific
support for causation. On January 27, 2004, the Fourth Circuit Court of Appeals
affirmed the dismissal. The remaining 3 cases are pending in Delaware. Two of
these cases were dismissed for not being timely filed and were appealed to the
Delaware Supreme Court. In April of 2003, the Delaware Supreme Court reversed
the dismissals and remanded these 2 cases, involving six plaintiffs, to the
trial court for further proceedings. In the third case pending in Delaware,
DuPont argued its motion to dismiss the case due to insufficient scientific
support for causation. The court has not yet ruled on the motion. The case is
expected to be scheduled for trial in the second or third quarter of 2004. A
fifth case was tried in Florida resulting in a $4 verdict against DuPont. The
verdict was reversed at the intermediate appellate level because the plaintiffs'
scientific support for causation was insufficient. The case was appealed to the
Florida Supreme Court and the verdict for the plaintiffs was reinstated with
interest. Further appellate review was denied and the judgment of approximately
$6.8 has been paid and the case closed. DuPont does not expect the Florida
Supreme Court's decision to have precedential value in the 3 cases pending in
Delaware since Florida uses a different standard to determine admissibility.
The 28 cases involving damage to shrimp are pending against the company in state
court in Broward County, Florida. These cases were brought by Ecuadorian shrimp
farmers who allege that Benlate(R) OD applied to banana plantations in Ecuador
ran-off and was deposited in plaintiffs' shrimp farms, causing massive numbers
of shrimp to die. DuPont contends that the injuries alleged are attributable to
a virus, Taura Syndrome Virus, and in no way involve Benlate(R) OD. One case was
tried in the fall of 2000 and another in early 2001. Both trials resulted in
adverse judgments of approximately $14 each. The company appealed the judgments
in both cases. On September 17, 2003, the intermediate appellate court reversed
the adverse verdict against DuPont in the first case and the plaintiffs sought
review of this ruling by the Florida Supreme Court. On February 11, 2004 the
Florida Supreme Court declined to review the matter. The company will seek entry
of judgment in its favor by the trial court. The intermediate appellate court
heard oral arguments on the company's appeal of the second case on July 2, 2003,
but it has not yet rendered a decision. An accrual has not been established for
either case because the company has concluded that it is not probable that the
adverse judgments at the trial level ultimately will be upheld. The 26 untried
cases are on hold pending the resolution of the appeal of the case tried in the
fall of 2000.
A securities fraud class action was filed in September 1995 by a shareholder in
federal district court in Florida against the company and the then-Chairman. The
plaintiffs in this case alleged that DuPont made false and misleading statements
and omissions about Benlate(R) 50 DF, with the alleged effect of inflating the
price of DuPont's stock between June 19, 1993, and January 27,1995. The district
court certified the case as a class action. In March 2003, DuPont entered into
an agreement to settle this case for $77.5. The court granted final approval of
the settlement on May 30, 2003. The settlement amount has been paid and the case
has been closed.
DuPont does not believe that Benlate(R) caused the damages alleged in each of
these cases and denies the allegations of fraud and misconduct. DuPont continues
to defend itself in ongoing matters. As of December 31, 2003, DuPont has
incurred costs and expenses of approximately $1,900 associated with these
matters. The company has recovered approximately $250 of its costs and expenses
through insurance. While manage-
F-25
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
ment recognizes that it is reasonably possible that additional losses may be
incurred, a range of such losses cannot be reasonably estimated at this time.
PFOA
DuPont uses perfluorooctanoic acid and its salts (collectively referred to as
PFOA), as processing aids to manufacture fluoropolymer resins and dispersions at
various sites around the world, including its Washington Works plant in West
Virginia. DuPont purchased PFOA from a third party until it began manufacturing
PFOA in North Carolina in the fall of 2002. Some of the wastestream from the
manufacture of PFOA is treated at DuPont's Chambers Works site in New Jersey.
DuPont also manufactures fluorinated telomers that are used in soil, stain and
grease repellants for the paper, apparel, upholstery and carpet industries.
DuPont does not use PFOA as a processing aid in the manufacture of these
telomers, although there is evidence indicating that telomer chemistry can form
small trace amounts of PFOA.
On April 14, 2003, the United States Environmental Protection Agency (EPA)
issued a preliminary risk assessment on PFOA. It indicates potential exposure of
the U.S. general population to PFOA at very low levels and states that there
could be a potential risk of developmental and other effects associated with
PFOA exposure. The EPA states that there remains considerable scientific
uncertainty regarding potential risks associated with PFOA. However, the EPA has
said that it does not believe there is any reason for consumers to stop using
any consumer or industrial-related products because of questions about PFOA. The
EPA also started a public process to identify and generate additional
information to develop a more accurate risk assessment and to identify what
voluntary or regulatory mitigation or other actions, if any, might be
appropriate. In addition, the EPA invited interested parties to participate in
publicly negotiated agreements, known as enforceable consent agreements or ECAs,
with the EPA to develop information that enhances the understanding of the
sources of PFOA in the environment and the pathways by which human exposure to
PFOA is occurring. The result of the process that the EPA has put in place will
be a refined risk assessment, including comments and recommendations by the
agency's Science Advisory Board, and a determination as to what, if any,
regulations are appropriate regarding PFOA. DuPont expects that this process
will continue well into 2004.
Based on over fifty years of industry experience and extensive scientific study,
DuPont believes there is no evidence that PFOA causes any adverse human health
effects or harms the environment. However, DuPont respects the EPA's position
raising questions about exposure routes and the potential toxicity of PFOA and
is undertaking voluntary programs concerning PFOA and fluorinated telomers.
DuPont, as well as other companies, have outlined plans for continued research,
emission reductions activities, and product stewardship activities to help
address the EPA's questions.
A class action was filed in West Virginia state court against DuPont and the
Lubeck Public Service District. The action alleges that the class has or may
suffer deleterious health effects from exposure to PFOA in drinking water and
seeks medical monitoring. In addition, the class seeks diminution of property
values, and punitive damages plus injunctive relief to stop releases of PFOA.
The class has been defined as anyone who has consumed drinking water
contaminated by PFOA from operations of the Washington Works plant, which could
be as large as fifty thousand individuals. The Lubeck Public Service District
and plaintiffs recently reached a settlement agreement that has been approved by
the court. DuPont does not believe that consumption of drinking water with low
levels of PFOA has caused or will cause deleterious health effects. On May 1,
2003, the court entered an order requiring that DuPont sample and analyze the
blood for PFOA of the individual class members electing to participate. In
addition, the court made certain findings of fact including a finding that PFOA
is toxic and hazardous to humans. In response to DuPont's appeal, the West
Virginia Supreme Court set aside the trial court's order, including the findings
of fact. DuPont intends to defend itself vigorously in this matter. Since DuPont
does not believe that its use of PFOA has caused or will cause any deleterious
health effects, the company has not established a reserve related to the final
outcome of the lawsuit. September 20, 2004 has been set as the trial date for
this action.
While management recognizes that it is reasonably possible that losses related
to PFOA may be incurred, a range of such losses cannot be reasonably estimated
at this time.
F-26
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
DUPONT DOW ELASTOMERS LLC
Authorities in the United States, the European Union and Canada are
investigating the synthetic rubber markets for possible antitrust violations.
DuPont Dow Elastomers LLC (DDE), a 50/50 joint venture in the Performance
Materials segment, has been subpoenaed in connection with these investigations.
Related civil litigation has been filed against DDE and others, including
DuPont. Management recognizes that it is probable that DDE will incur a loss as
a result of the investigations and civil litigation; however, a range of such
losses cannot be reasonably estimated at this time.
In addition, management recognizes that it is reasonably possible that DuPont
may incur a loss in connection with these matters; however, a range of such
losses cannot be reasonably estimated at this time.
GENERAL
The company is subject to various lawsuits and claims arising out of the normal
course of business. These lawsuits and claims include actions based on alleged
exposures to products, intellectual property and environmental matters; and
contract and antitrust claims. The company accrues for contingencies when a loss
is probable and the amounts can be reasonably estimated. While the ultimate
liabilities resulting from such lawsuits and claims may be significant to
results of operations in the period recognized, management does not anticipate
they will have a material adverse effect on the company's consolidated financial
position or liquidity.
ENVIRONMENTAL
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 of the environment of prior disposal practices or releases
of chemical or petroleum substances by the company or other parties. The company
accrues for environmental remediation activities consistent with the policy set
forth in Note 1. Much of this liability results from the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA, often referred
to as Superfund), the Resource Conservation and Recovery Act (RCRA), and similar
state laws. These laws require the company to undertake certain investigative
and remedial activities at sites where the company conducts or once conducted
operations or at sites where company-generated waste was disposed. The accrual
also includes estimated costs related to a number of sites identified by the
company for which it is probable that environmental remediation will be
required, but which are not currently the subject of CERCLA, RCRA or state
enforcement activities.
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 responsible parties. At December 31, 2003, the company's
Consolidated Balance Sheet includes a liability of $380 relating to these
matters and, in management's opinion, is appropriate based on existing facts and
circumstances. The average time frame over which the accrued or presently
unrecognized amounts may be paid, based on past history, is estimated to be
15-20 years. Considerable uncertainty exists with respect to these costs and,
under adverse changes in circumstances, potential liability may range up to two
to three times the amount accrued as of December 31, 2003.
OTHER
The company has continued its long-term relationship with Computer Sciences
Corporation (CSC) and Accenture LLP. CSC operates a majority of DuPont's global
information systems and technology infrastructure and provides selected
applications and software services. Accenture provides enterprise resource
planning solutions designed to enhance DuPont's manufacturing, marketing,
distribution and customer service. In April 2003, the contract with CSC was
revised, resulting in the elimination of the future minimum payments due under
the original contract.
The company has various purchase commitments incident to the ordinary conduct of
business. In the aggregate, such commitments are not at prices in excess of
current market.
25. STOCKHOLDERS' EQUITY
In 1998, the company's Board of Directors approved a program to purchase and
retire up to 20 million shares of DuPont common stock to offset dilution from
shares issued under compensation programs. In July 2000, the Board of Directors
approved an increase in the total number of shares remaining to be purchased
under the 1998 program from about 16 million shares to
F-27
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
the total number of shares of DuPont common stock that could be purchased for
$2,500. These purchases were not limited to those needed to offset dilution from
shares issued under compensation programs. In 2002, the company completed the
1998 program, purchasing 10.8 million shares for $470. In addition, 43 million
shares were purchased for $1,818 in 2001.
The company's Board of Directors authorized a $2,000 share buyback plan in June
2001. As of December 31, 2003, no shares were purchased under this program.
Shares held by the Flexitrust were previously used to satisfy existing employee
compensation and benefit programs. During 2001, shares in the Flexitrust were
depleted and the trust arrangement was terminated.
Set forth below is a reconciliation of common stock share activity for the three
years ended December 31, 2003:
- --------------------------------------------------------------------------------
Held In
- --------------------------------------------------------------------------------
Shares of common stock Issued Flexitrust Treasury
- --------------------------------------------------------------------------------
Balance January 1, 2001 1,129,973,354 (3,601,199) (87,041,427)
- --------------------------------------------------------------------------------
Issued 2,035,601 3,601,199
Treasury stock
Acquisition (43,014,166)
Retirement (43,014,166) 43,014,166
- --------------------------------------------------------------------------------
Balance December 31, 2001 1,088,994,789 - (87,041,427)
- --------------------------------------------------------------------------------
Issued 2,805,484
Treasury stock
Acquisition (10,818,396)
Retirement (10,818,396) 10,818,396
- --------------------------------------------------------------------------------
Balance December 31, 2002 1,080,981,877 - (87,041,427)
- --------------------------------------------------------------------------------
Issued 3,343,890
Treasury stock
Acquisition (215)
Retirement (215) 215
- --------------------------------------------------------------------------------
Balance December 31, 2003 1,084,325,552 - (87,041,427)
- --------------------------------------------------------------------------------
The pretax, tax and after-tax effects of the components of Accumulated other
comprehensive income (loss) are shown below:
- --------------------------------------------------------------------------------
Pretax Tax After-tax
- --------------------------------------------------------------------------------
2003
Cumulative translation adjustment $ 114 $ - $ 114
Net revaluation and clearance of
cash flow hedges to earnings 41 (16) 25
Minimum pension liability adjustment 1,311 (453) 858
Net unrealized gains on securities 8 1 9
- --------------------------------------------------------------------------------
Other comprehensive income $ 1,474 $ (468) $ 1,006
- --------------------------------------------------------------------------------
2002
Cumulative translation adjustment $ 61 $ - $ 61
Net revaluation and clearance of
cash flow hedges to earnings (11) 4 (7)
Minimum pension liability adjustment (3,769) 1,237 (2,532)
Net unrealized losses on securities (17) 1 (16)
- --------------------------------------------------------------------------------
Other comprehensive income (loss) $(3,736) $1,242 $(2,494)
- --------------------------------------------------------------------------------
2001
Cumulative translation adjustment $ (19) $ - $ (19)
Cumulative effect of a change in
accounting principle 10 (4) 6
Net revaluation and clearance of
cash flow hedges to earnings (52) 20 (32)
Minimum pension liability adjustment (26) 10 (16)
Net unrealized losses on securities (39) 15 (24)
- --------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS) $ (126) $ 41 $ (85)
- --------------------------------------------------------------------------------
Balances of related after-tax components comprising Accumulated other
comprehensive income (loss) are summarized below:
- --------------------------------------------------------------------------------
December 31 2003 2002 2001
- --------------------------------------------------------------------------------
Cumulative translation adjustment $ 114 $ - $ (61)
Cumulative effect of a change in
accounting principle - - 6
Net revaluation and clearance of
cash flow hedges to earnings (8) (33)* (32)
Minimum pension liability adjustment (1,866) (2,724) (192)
Net unrealized gains (losses)
on securities (1) (10) 6
- --------------------------------------------------------------------------------
$(1,761) $(2,767) $(273)
- --------------------------------------------------------------------------------
* Includes cumulative effect of prior year's adoption of SFAS No. 133.
Unrealized losses reported in Accumulated other comprehensive income (loss)
relate exclusively to available-for-sale securities and total $(6) after taxes
at the end of 2003. The fair value of these investments is $23. Unrealized
losses with a duration of less than one year are not material, and have an
associated fair value of $4 while unrealized losses with a duration of one year
or longer total $(6) and have an associated fair value of $19. All unrealized
losses are deemed to be temporary as market prices of the investments have
generally improved during 2003,
F-28
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
and the company believes the business outlook for the entities supports the
underlying investments.
26. 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.
In January 2002, the Board of Directors approved a 2002 Bicentennial Corporate
Sharing Program and awarded, to all eligible employees, a one-time "fixed and
determinable" grant to acquire 200 shares of DuPont common stock at the fair
market value on the date of grant ($44.50 per share). During all but the last
six months of the ten-year option term, these options cannot be exercised until
a market price of $53.40 per share of DuPont common stock is achieved for a
period of five consecutive trading days. 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" 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. This condition was never met for the options with a $90 per share
hurdle price and, as a result, these options were forfeited in January 2002.
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 or restricted stock units were
29,606,134 for 2003, 31,243,286 for 2002 and 40,458,505 for 2001.
The DuPont Stock Performance Plan provides for grants of stock options and
restricted stock units to key employees. Stock option grants in 2004 consisted
of 7,276,932 fixed nonqualified options to acquire DuPont common stock at the
market price ($43.62 per share) on the date of grant. The options serially vest
over a three-year period and carry a six-year option term. Grants of 694,882
time-based restricted stock units were issued to participants at the market
price ($43.62 per unit). The units serially vest over a three-year period, and
at vesting both the original unit grant plus dividend equivalent units credited
during the restriction period will be delivered as DuPont common stock. The
company also granted 244,400 performance-based restricted stock units at the
market price ($43.62 per unit) to senior leadership. Vesting is based upon
attainment of established corporate objectives at the conclusion of the
three-year performance period. The actual award, delivered as DuPont common
stock, can range from 0 percent to 200 percent of the original grant. Dividend
equivalents will also be granted as shares of DuPont common stock upon vesting.
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, 2001 64,645,098 $43.64 1,861,900 $53.56
Granted 12,452,832 $43.30 - -
Exercised 4,913,247 $20.65 - -
Forfeited 886,601 $42.78 - -
- --------------------------------------------------------------------------------
December 31, 2001 71,298,082 $45.18 1,861,900 $53.56
- --------------------------------------------------------------------------------
Granted 24,608,353 $43.65 - -
Exercised 2,330,741 $25.19 - -
Forfeited 1,318,085 $46.85 1,861,900 $53.56
- --------------------------------------------------------------------------------
December 31, 2002 92,257,609 $45.25 - -
- --------------------------------------------------------------------------------
Granted 12,079,909 $37.14 - -
Exercised 2,337,712 $25.98 - -
Forfeited 1,959,630 $44.37 - -
- --------------------------------------------------------------------------------
December 31, 2003 100,040,176 $44.74 - -
- --------------------------------------------------------------------------------
F-29
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Fixed options exercisable and weighted-average exercise prices at the end of the
last three years and the weighted-average fair values of fixed options granted
are as follows:
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Number of shares at year-end 48,498,026 49,651,316 42,525,102
Weighted-avg. price at year-end $45.11 $44.63 $43.67
Weighted-avg. fair value of
options granted during year $8.98 $10.98 $10.73
- --------------------------------------------------------------------------------
The fair value of fixed options granted is calculated using the Black-Scholes
option pricing model. Assumptions used were as follows:
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Dividend yield 3.6% 3.2% 3.2%
Volatility 28.1% 27.2% 26.4%
Risk-free interest rate 3.4% 4.9% 5.1%
Expected Life (Years) 6.2 6.5 6.5
- --------------------------------------------------------------------------------
The following table summarizes information concerning currently outstanding and
exercisable options:
- --------------------------------------------------------------------------------
Exercise Exercise Exercise Exercise Exercise
Price Price Price Price Price
$12.06- $21.87- $32.88- $49.59- $75.00-
December 31, 2003 $18.09 $32.81 $49.32 $74.39 $82.09
- --------------------------------------------------------------------------------
Fixed options
Options
outstanding 143,841 10,355,969 58,087,908 30,688,040 764,418
Weighted-avg.
remaining
contractual life
(years) 1.33 1.24 7.51 4.09 4.93
Weighted-avg.
price $14.63 $27.21 $41.93 $55.35 $75.38
Options
exercisable 143,841 10,355,969 12,287,573 24,963,325 747,318
Weighted-avg.
price $14.63 $27.21 $40.64 $54.00 $75.38
- --------------------------------------------------------------------------------
Restricted stock or stock units may also be granted as a component of
competitive long-term compensation. Typically, restricted stock vests over
periods ranging from two to five years. The number and weighted-average
grant-date fair value of restricted stock awards are as follows:
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Number of restricted stock awards 256,115 184,300 12,200
Weighted-avg. grant-date fair value $37.76 $42.63 $45.63
- --------------------------------------------------------------------------------
Awards under the company's Global Variable Compensation Plan may be granted in
stock and/or cash to employees who have contributed most to the company's
success, with consideration being given to the ability to succeed to more
important managerial responsibility. Such awards were $137 for 2003, $187 for
2002 and $108 for 2001. Amounts credited to the Global Variable Compensation
Fund are dependent on company earnings and are subject to maximum limits as
defined by the plan. In accordance with the terms of the Global Variable
Compensation Plan, 1,150,141 shares of common stock are awaiting delivery from
awards for 2003 and prior years.
In addition, the company has other variable compensation plans under which cash
awards may be granted. The most significant of these plans are the company's
U.S. Regional Variable Compensation Plan and Pioneer's Annual Reward Program
Plan. Such awards were $82 for 2003, $74 for 2002 and $58 for 2001.
27. INVESTMENT ACTIVITIES
2003 ACQUISITIONS
GRIFFIN LLC
On November 6, 2003, the company acquired for a cash payment of $13 (net of $18
cash acquired) Griffin Corporation's 50 percent ownership interest in Griffin
LLC thereby becoming the sole owner. The results of Griffin LLC's operations
have been included in the Consolidated Financial Statements since that date.
Prior to November 6, 2003, Griffin LLC was accounted for as an equity affiliate.
The business has been integrated into the company's Agriculture & Nutrition
segment.
The following table summarizes the preliminary estimated fair values of the 50
percent of assets acquired and liabilities assumed at the date of acquisition.
These estimates are subject to refinement.
- --------------------------------------------------------------------------------
Current assets $ 76
Property, plant & equipment 43
Intangible assets 30
Goodwill 1
Other non-current assets 3
- --------------------------------------------------------------------------------
Total assets 153
- --------------------------------------------------------------------------------
Current liabilities 66
Long-term debt 63
Long-term liabilities 11
- --------------------------------------------------------------------------------
Net assets $ 13
- --------------------------------------------------------------------------------
The acquired intangible assets have a weighted-average useful life of
approximately 18 years. This includes product registrations of $13 (8-year
weighted-average useful life), trademarks of
F-30
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
$8 (38-year weighted-average useful life), patents of $5 (11-year
weighted-average useful life) and other intangibles of $4 (33-year
weighted-average useful life).
The $1 of goodwill was assigned to the Agriculture & Nutrition segment and is
non-deductible for tax purposes. Factors that contributed to a purchase price
resulting in the recognition of goodwill included strengthening the business
position with customers, full integration of Griffin LLC's product portfolio
with the existing business while significantly reducing operating costs and
improved revenue and profit margins.
DUPONT CANADA INC.
On April 17, 2003, DuPont commenced a tender offer to acquire the 66,704,465
shares of DuPont Canada Inc. not then owned by DuPont. These shares represented
23.88 percent of the outstanding shares of DuPont Canada Inc. Pursuant to the
tender offer, DuPont acquired 47,141,872 shares of DuPont Canada Inc. on June
16, 2003 for $767 and effectively converted the remaining 19,562,593 DuPont
Canada Inc. shares not owned by DuPont to a cash obligation of $318 that was
satisfied on July 28, 2003. Acquisition related costs were $10. As a controlled
majority-owned subsidiary, the results of operations of DuPont Canada Inc. were
included in the Consolidated Financial Statements of DuPont prior to the
acquisition of the non-controlling minority interest, and the outside
stockholders' interests were shown as Minority interests.
The following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition.
- --------------------------------------------------------------------------------
Current assets* $ 233
Property, plant & equipment 213
Intangible assets 84
In-process research & development 4
Goodwill 706
Other non-current assets 48
- --------------------------------------------------------------------------------
Total assets 1,288
- --------------------------------------------------------------------------------
Current liabilities 44
Non-current liabilities 149
- --------------------------------------------------------------------------------
Net assets $1,095
- --------------------------------------------------------------------------------
* Includes cash and cash equivalents of $57.
Acquired indefinite-lived intangible assets of $4 related to trademarks that are
not subject to amortization. $80 of acquired definite-lived intangible assets
have a weighted-average useful life of approximately 13 years. This includes
customer relationships of $58 (12-year weighted-average useful life), patents of
$3 (8-year weighted-average useful life), purchased technology of $18 (18-year
weighted-average useful life) and other intangible assets of $1 (4-year
weighted-average useful life).
$4 was allocated to purchased in-process research and development. In accordance
with SFAS No. 2, "Accounting for Research and Development Costs," as interpreted
by FASB Interpretation No. 4, the amounts assigned to purchased in-process
research and development meeting the prescribed criteria were charged to Cost of
goods sold and other operating charges at the date of acquisition.
$706 of goodwill was assigned as follows: Agriculture & Nutrition - $30;
Coatings & Color Technologies - $86; Electronic & Communication Technologies -
$60; Textiles & Interiors - $281; Performance Materials - $218; Safety &
Protection - $17 and Other - $14. The goodwill is non-deductible for tax
purposes. Factors that contributed to a purchase price resulting in the
recognition of goodwill included the protective rights of minority shareholders
under Canadian law, the potential impact such rights would have had on the
company's plans to separate INVISTA, and the strengthening of the Canadian
dollar versus the U.S. dollar from the date the tender offer commenced to the
date shares were acquired.
THE SOLAE COMPANY
In April 2003, the company formed a majority-owned venture, The Solae Company,
with Bunge Limited, comprised of the company's protein technologies business and
Bunge's North American and European ingredients operations. The results of these
Bunge operations have been included in the Consolidated Financial Statements
since that date. The transaction was accounted for as an acquisition under SFAS
No. 141, "Business Combinations," with Bunge contributing businesses with a fair
value of $520. As a result of this transaction, the company's ownership interest
in the protein technologies business was reduced from 100 percent to 72 percent.
The company recorded a nonoperating pretax gain of $62 in 2003 as the fair
market value of the businesses contributed by Bunge exceeded the net book value
of the 28 percent ownership interest acquired by Bunge. See Note 8.
In May 2003, as part of the plan of formation, The Solae Company acquired
approximately 82 percent of Bunge Limited's Brazilian ingredients operations for
$256. The results of these Bunge operations have been included in the
Consolidated
F-31
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Financial Statements since that date. Pursuant to a tender offer, The Solae
Company acquired an additional 16 percent ownership interest for $42 in November
2003. The remaining shares were acquired for approximately $2 in December 2003.
Acquisition related costs were $3. During the first three years of the venture,
Bunge has an option to increase its ownership to 40 percent. Additional minority
interest would be recorded should Bunge choose to exercise the option.
The following table summarizes the preliminary estimated fair values of the
assets acquired and liabilities assumed at the date of acquisition. These
estimates are subject to refinement.
- --------------------------------------------------------------------------------
Current assets $143
Property, plant & equipment 301
Intangible assets 148
Goodwill 346
Other non-current assets 1
- --------------------------------------------------------------------------------
Total assets 939
- --------------------------------------------------------------------------------
Current liabilities 60
Long-term liabilities 56
- --------------------------------------------------------------------------------
Net assets $823
- --------------------------------------------------------------------------------
The $148 of acquired intangible assets have a weighted-average useful life of
approximately 11 years. This includes customer relationships of $96, (10-year
weighted-average useful life), purchased technology of $48 (15-year
weighted-average useful life), and other intangible assets of $4 (10-year
weighted-average useful life).
$346 of goodwill was assigned to Agriculture & Nutrition and is non-deductible
for tax purposes. Factors that contributed to a purchase price resulting in the
recognition of goodwill included improved revenue and profit growth rates, an
expanded geographic manufacturing base and product portfolio, and significant
operating synergies.
2002 ACQUISITIONS
LIQUI-BOX CORPORATION
The company acquired all of the outstanding common shares of Liqui-Box
Corporation on May 31, 2002, for a cash payment of $268 (net of $12 cash
acquired) and acquisition related costs of $4. The results of Liqui-Box's
operations have been included in the Consolidated Financial Statements since
that date. The results of this business are reported in Agriculture & Nutrition.
The following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition:
- --------------------------------------------------------------------------------
Current assets $ 45
Property, plant & equipment 72
Intangible assets 92
Goodwill 155
Other non-current assets 3
- --------------------------------------------------------------------------------
Total assets 367
- --------------------------------------------------------------------------------
Current liabilities 48
Long-term liabilities 47
- --------------------------------------------------------------------------------
Net assets $272
- --------------------------------------------------------------------------------
Of the $92 of acquired intangible assets, $15 was allocated to trademarks that
are not subject to amortization. The remaining $77 of acquired intangible assets
have a weighted-average useful life of approximately 16 years. This includes
customer relationships of $43 (15-year weighted-average useful life), purchased
technology of $28 (20-year weighted-average useful life), and other intangible
assets of $6 (5-year weighted-average useful life).
$155 of goodwill which was assigned to Agriculture & Nutrition is non-deductible
for tax purposes.
CHEMFIRST, INC.
On November 6, 2002, the company acquired all of the outstanding shares of
ChemFirst, Inc. for a cash payment of $351 (net of $65 cash acquired), and
acquisition related costs of $6. The results of ChemFirst, Inc.'s operations
have been included in the Consolidated Financial Statements since that date.
ChemFirst, Inc.'s two semiconductor fabrication businesses operate as EKC
Technology and Electronic Polymers, and its chemical intermediates unit operates
as First Chemical Corporation. EKC Technology and Electronic Polymers were
integrated into DuPont's Electronic & Communication Technologies segment, and
First Chemical Corporation was integrated into DuPont's Safety & Protection
segment.
The following table summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition:
- --------------------------------------------------------------------------------
Current assets $131
Property, plant & equipment 162
Intangible assets 106
In-process research and development 7
Goodwill 140
- --------------------------------------------------------------------------------
Total assets 546
- --------------------------------------------------------------------------------
Current liabilities 83
Long-term liabilities 106
- --------------------------------------------------------------------------------
Net assets $357
- --------------------------------------------------------------------------------
F-32
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
Of the $106 of acquired intangible assets, $6 was allocated to trademarks that
are not subject to amortization. The remaining $100 of acquired intangible
assets have a weighted-average useful life of approximately 12 years. This
includes customer relationships of $63 (14-year weighted-average useful life),
patents of $21 (11-year weighted-average useful life), purchased technology of
$10 (15-year weighted-average useful life), and other intangible assets of $6
(10-year weighted-average useful life).
$7 was allocated to purchased in-process research and development. In accordance
with SFAS No. 2, "Accounting for Research and Development Costs," as interpreted
by FASB Interpretation No. 4, the amounts assigned to purchased in-process
research and development meeting the prescribed criteria were charged to Cost of
goods sold and other operating charges at the date of acquisition.
$79 of goodwill was assigned to the Electronic & Communication Technologies
segment and $61 was assigned to the Safety & Protection segment. The goodwill is
non-deductible for tax purposes.
PROCEEDS FROM SALES OF ASSETS
Proceeds from sales of assets in 2003 were not significant.
Proceeds from sales of assets in 2002 were $196 and principally included $143
from the sale of DuPont's Clysar(R) shrink film business. As a result of this
transaction, the company recorded a pretax gain of $84, which is included in
Other income.
Net proceeds in 2001 from the sale of DuPont Pharmaceuticals were $7,798 (see
Note 7). Other proceeds from sales of assets were $253 and principally included
$104 related to the company's sale of a portion of its interest in DuPont
Photomasks, Inc. and $95 related to the sale of polyester businesses and
associated manufacturing assets.
28. EMPLOYEE BENEFITS
In 2003, the company adopted SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This Statement
retains the disclosure requirement contained in the original standard and
requires additional disclosures about the assets, obligations, cash flows and
net periodic cost of defined pension plans and other defined benefit
postretirement plans. As permitted by the statement, disclosures regarding the
plan asset information for non-U.S. pension plans and estimated future benefit
payments for both pension and other postretirement benefit plans worldwide will
be delayed until 2004.
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.
The company uses a December 31 measurement date for its employee benefit plans.
PENSIONS
The company has both funded and unfunded noncontributory defined benefit pension
plans covering substantially all U.S. employees. The benefits under these plans
are based primarily on years of service and employees' pay near retirement. The
company's funding policy is consistent with the funding requirements of federal
laws and regulations.
Pension coverage for employees of the company's non-U.S. consolidated
subsidiaries is provided, to the extent deemed appropriate, through separate
plans. Obligations under such plans are systematically provided for by
depositing funds with trustees, under insurance policies, or by book reserves.
OTHER POSTRETIREMENT BENEFITS
The parent company and certain subsidiaries provide medical, dental, and life
insurance benefits to pensioners and survivors. The associated plans are
unfunded and the cost of the approved claims are paid from company funds. The
majority of the cost and liabilities are attributable to the U.S. parent company
plans. These plans are contributory with pensioners and survivors' contributions
adjusted annually to achieve a 50/50 target sharing of cost increases between
the company and pensioners and survivors. In addition, limits are applied to the
company's portion of the medical and dental cost coverage.
F-33
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
OBLIGATIONS AND FUNDED STATUS AT DECEMBER 31
Summarized information on the company's postretirement plans is as follows:
- -------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
- -------------------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $19,555 $18,769 $ 5,280 $ 5,832
Service cost 342 343 44 60
Interest cost 1,223 1,219 334 386
Plan participants' contributions 14 11 89 57
Actuarial (gain) loss 1,320 213 (133) 724
Foreign currency exchange rate changes 590 332 12 -
Benefits paid (1,453) (1,385) (499) (457)
Amendments 10 - (1) (1,322)(1)
Net effects of acquisitions/divestitures (405) 54 (62) -
Special termination benefits - (1) - -
- -------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $21,196 $19,555 $ 5,064 $ 5,280
- -------------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $15,110 $17,923 $ - $ -
Actual gain (loss) on plan assets 3,452 (1,921) - -
Foreign currency exchange rate changes 394 274 - -
Employer contributions 460 172 410 400
Plan participants' contributions 14 11 89 57
Benefits paid (1,453) (1,385) (499) (457)
Net effects of acquisitions/divestitures (10) 36 - -
- -------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $17,967 $15,110 $ - $ -
- -------------------------------------------------------------------------------------------------------------------------
Funded status:
U.S. plans with plan assets $(1,561) $(2,589) $ - $ -
Non-U.S. plans with plan assets (374) (706) - -
All other plans (1,294)(2) (1,150)(2) (5,064) (5,280)
- -------------------------------------------------------------------------------------------------------------------------
Total $(3,229) $(4,445) $(5,064) $(5,280)
Unrecognized prior service cost 288 397 (1,574) (1,727)
Unrecognized actuarial loss 4,906 6,127 1,119 1,379
Unrecognized transition asset (18) (23) - -
- -------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 1,947 $ 2,056 $(5,519) $(5,628)
- -------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the Consolidated Balance Sheet consist of:
Prepaid benefit cost $ 635 $ 146 $ - $ -
Accrued benefit cost (1,750) (2,576) (5,519) (5,628)
Intangible asset 292 405 - -
Accumulated other comprehensive income (loss) 2,770 4,081 - -
- -------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 1,947 $ 2,056 $(5,519) $(5,628)
- -------------------------------------------------------------------------------------------------------------------------
(1) In October 2002, the company amended its U.S. other postretirement medical
and dental plans to establish limits on the company's portion of the cost
coverage. The amendments reduced the company's obligations on its U.S.
other postretirement benefit plans.
(2) Includes pension plans maintained around the world where full funding is
not permissible or customary.
F-34
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
The accumulated benefit obligation for all pension plans is $19,342 and $17,631
at December 31, 2003, and 2002, respectively.
- --------------------------------------------------------------------------------
INFORMATION FOR PENSION PLANS WITH PROJECTED
BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS 2003 2002
- --------------------------------------------------------------------------------
Projected benefit obligation $19,960 $19,555
Fair value of plan assets 16,517 15,110
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INFORMATION FOR PENSION PLANS WITH ACCUMULATED
BENEFIT OBLIGATIONS IN EXCESS OF PLAN ASSETS 2003 2002
- --------------------------------------------------------------------------------
Accumulated benefit obligation $18,178 $17,130
Fair value of plan assets 16,505 14,597
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Pension Benefits
COMPONENTS OF NET PERIODIC --------------------------------
BENEFIT COST 2003 2002 2001
- --------------------------------------------------------------------------------
Service cost $ 342 $ 343 $ 335
Interest cost 1,223 1,219 1,244
Expected return on plan assets (1,368) (1,729) (1,874)
Amortization of transition asset (8) (151) (151)
Amortization of unrecognized (gain) loss 237 50 (13)
Amortization of prior service cost 51 49 50
Curtailment/settlement (gain) loss 77 2 35
- --------------------------------------------------------------------------------
Net periodic benefit cost (credit) $ 554 $ (217) $ (374)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Other Benefits
COMPONENTS OF NET PERIODIC --------------------------------
BENEFIT COST 2003 2002 2001
- --------------------------------------------------------------------------------
Service cost $ 44 $ 60 $ 57
Interest cost 334 386 385
Amortization of unrecognized (gain) loss 64 33 8
Amortization of prior service cost (153) (84) (73)
Curtailment/settlement (gain) loss 1 - (30)
- --------------------------------------------------------------------------------
Net periodic benefit cost $ 290 $ 395 $ 347
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Pension Benefits
---------------------------------
CHANGE IN MINIMUM PENSION LIABILITY 2003 2002
- --------------------------------------------------------------------------------
Increase (decrease) in minimum liability
included in other comprehensive income $(1,311) $3,769
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMP-
TIONS USED TO DETERMINE Pension Benefits Other Benefits
BENEFIT OBLIGATIONS AT -------------------------------------------------
DECEMBER 31 (U.S. PLANS) 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Discount rate 6.25% 6.75% 6.25% 6.75%
Rate of compensation
increase 4.5% 4.5% 4.5% 4.5%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMP-
TIONS USED TO DETERMINE NET
PERIODIC BENEFIT COST FOR Pension Benefits Other Benefits
YEARS ENDED DECEMBER 31 -------------------------------------------------
(U.S. PLANS) 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Discount rate 6.75% 7.00% 6.75% 7.00%
Expected return on plan
assets 9.0% 9.5% - -
Rate of compensation
increase 4.5% 5.0% 4.5% 5.0%
- --------------------------------------------------------------------------------
In anticipation of a significant reduction in the number of employees related to
the pending INVISTA sale, the company recorded a pretax curtailment loss of $78
in 2003, and remeasured the pension liabilities at September 30, 2003, using a
6.5 percent discount rate for U.S. parent plans. For non-U.S. plans, no one of
which was material, assumptions reflect economic assumptions applicable to each
country.
The long-term rate of return on assets in the U.S. was selected from within the
reasonable range of rates determined by (a) historical real returns (net of
inflation) for the asset classes covered by the investment policy, and (b)
projections of inflation over the long-term period during which benefits are
payable to plan participants.
- --------------------------------------------------------------------------------
ASSUMED HEALTH CARE COST
TREND RATES AT DECEMBER 31 2003 2002
- --------------------------------------------------------------------------------
Health care cost trend rate assumed for next year 10% 10%
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate) 5% 5%
Year that the rate reaches the ultimate trend rate 2009 2008
- --------------------------------------------------------------------------------
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 $ 33 $ (28)
Effect on postretirement
benefit obligation 372 (321)
- --------------------------------------------------------------------------------
PLAN ASSETS
The strategic asset allocation targets of the company's U.S. pension plans as of
December 31, 2003, and the weighted-average asset allocation of these plans at
December 31, 2003, and 2002, by asset category are as follows:
- --------------------------------------------------------------------------------
Plan Assets
at December 31
Strategic ---------------
ASSET CATEGORY Target 2003 2002
- --------------------------------------------------------------------------------
Equity securities 60% 63% 64%
Debt securities 25% 24% 22%
Real estate 6% 4% 5%
Other 9% 9% 9%
- --------------------------------------------------------------------------------
Total 100% 100% 100%
- --------------------------------------------------------------------------------
The general principles guiding investment of U.S. pension assets are those
embodied in the Employee Retirement Income Security Act of 1974 (ERISA). These
principles include discharging
F-35
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
the company's investment responsibilities for the exclusive benefit of plan
participants and in accordance with the "prudent expert" standard and other
ERISA rules and regulations. The company establishes strategic asset allocation
percentage targets and appropriate benchmarks for significant asset classes with
the aim of achieving a prudent balance between return and risk. The interaction
between plan assets and benefit obligations is periodically studied to assist in
establishing such strategic asset allocation targets. The company's pension
investment professionals have discretion to manage the assets within established
asset allocation ranges approved by senior management of the company. The
company's U.S. pension assets are invested in U.S. and non-U.S. markets.
Investment professionals are permitted to enter into certain contractual
arrangements generally described as "derivatives". Derivatives may not be used
in a manner that leverages assets of the fund.
The total value of plan assets for U.S. pension plans is $14,595 and $12,739 as
of December 31, 2003, and 2002, respectively. U.S. pension assets include
company common stock in the amounts of $454 (3 percent of total plan assets),
and $420 (3 percent of total plan assets) at December 31, 2003, and 2002,
respectively. "Other" consists principally of private equity and private debt.
CASH FLOW
No contributions are currently required to be made to the principal U.S. pension
plan trust fund by funding regulations or laws in 2004. Although the company is
permitted to make a tax deductible discretionary contribution to the principal
U.S. pension plan trust fund in 2004, no decision has been made to make such a
contribution. Worldwide, the company expects to contribute approximately $300 to
its pension plans other than the principal U.S. pension plan and $420 to its
other postretirement benefit plans in 2004.
SUBSEQUENT EVENT
On December 8, 2003, President Bush signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) into law. The Act introduces
a prescription drug benefit under Medicare (Medicare Part D) as well as a
federal subsidy to companies which sponsor retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent to Medicare Part
D. As permitted under FASB Staff Position (FSP) FAS 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003", the company did not reflect the effects of this
Act in its Consolidated Financial Statements and accompanying Notes. In January
2004, the company amended its U.S. medical plan to be secondary to Medicare for
prescription drug coverage beginning in 2006 for eligible retirees and
survivors. As a result of this plan amendment FAS 106-1 will not apply to the
company. The impact of this amendment is expected to benefit 2004 pretax
earnings by approximately $60 and reduce the company's other postretirement
obligation by about $525.
DEFINED CONTRIBUTION PLAN
The company sponsors several defined contribution plans, which cover
substantially all U.S. employees. The most significant is The Savings and
Investment Plan (the Plan). This Plan includes a non-leveraged Employee Stock
Ownership Plan (ESOP). Employees are not required to participate in the ESOP,
and those who do are free to diversify out of the ESOP. The purpose of the Plan
is to provide additional retirement savings benefits for employees and to
provide employees an opportunity to become stockholders of the company. The Plan
is a tax qualified contributory profit sharing plan and any eligible employee of
the company may participate. The company will contribute an amount equal to 50
percent of the first 6 percent of the employee's contribution election. The
company's contributions to the Plan were $60, $58, and $61 for years ended
December 31, 2003, 2002, and 2001, respectively. The company's contributions
vest 100 percent upon contribution.
29. DERIVATIVES AND OTHER HEDGING INSTRUMENTS
OBJECTIVES AND STRATEGIES FOR HOLDING DERIVATIVE INSTRUMENTS
Under procedures and controls established by the company's Financial Risk
Management Framework, the company enters into contractual arrangements
(derivatives) in the ordinary course of business to reduce its exposure to
foreign currency, interest rate and commodity price risks. The framework has
established a variety of approved derivative instruments to be utilized in each
risk management program, as well as varying levels of exposure coverage and time
horizons based on an assessment of risk factors related to each hedging program.
Derivative instruments utilized during the period include forwards, options,
futures and swaps. The company has not designated any nonderivatives as hedging
instruments.
F-36
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
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 and major petrochemical and
petroleum companies. The company is exposed to credit loss in the event of
nonperformance by these counterparties. The company manages this exposure to
credit loss through the aforementioned credit approvals, limits, and monitoring
procedures and, to the extent possible, by restricting the period over which
unpaid balances are allowed to accumulate. The company does not anticipate
nonperformance by counterparties to these contracts, and no material loss would
be expected from such nonperformance. Market and counterparty credit risks
associated with these instruments are regularly reported to management.
Effective in January 2004, the company has elected to discontinue its
broad-based foreign currency revenue hedging program, as well as its programs to
hedge natural gas purchases. The programs are being discontinued as the costs of
the programs are no longer believed to be warranted. However, certain
business-specific foreign currrency hedging programs will continue, as will
hedging of foreign currency denominated assets and liabilities. In addition, the
company will continue to enter into exchange traded agricultural commodity
derivatives to hedge exposures relevant to agricultural feedstock purchases.
FAIR VALUE HEDGES
During the year ended December 31, 2003, the company has maintained a number of
interest rate swaps that involve the exchange of fixed for floating rate
interest payments that allow the company to maintain a target range of floating
rate debt. All interest rate swaps qualify for the shortcut method of hedge
accounting, thus there is no ineffectiveness related to these hedges. Changes in
the fair value of derivatives that hedge interest rate risk are recorded in
Interest expense each period. The offsetting changes in the fair values of the
related debt are also recorded in Interest expense. The company maintains no
other fair value hedges.
CASH FLOW HEDGES
The company maintains a number of cash flow hedging programs to reduce risks
related to foreign currency and commodity price risk. Foreign currency programs
involve hedging a portion of foreign currency-denominated revenues and major raw
material purchases from vendors outside of the United States. Commodity price
risk management programs serve to reduce exposure to price fluctuations on
purchases of inventory such as natural gas, ethane, ethylene, corn, cyclohexane,
soybeans, and soybean meal. While each risk management program has a different
time horizon, most programs currently do not extend beyond the next two-year
period. One exception is an inventory purchase program with currency risk, which
has been partially hedged through the first quarter of 2006.
Hedges of foreign currency-denominated revenues are reported on the Net sales
line of the Consolidated Income Statement, and the effects of hedges of
inventory purchases are reported as a component of Cost of goods sold and other
operating charges.
Cash flow hedge results are reclassified into earnings during the same period in
which the related exposure impacts earnings. Reclassifications are made sooner
if it appears that a forecasted transaction will not materialize. Cash flow
hedge ineffectiveness reported in earnings for 2003 is a pretax gain of $3.
During 2003, there were no pretax gains (losses) excluded from the assessment of
hedge effectiveness. The amount reclassified to earnings for forecasted
transactions that did not occur was not material. Accumulated other
comprehensive income (loss) activity during 2003 consists of a beginning balance
of $(33) after-tax. Revaluation of cash flow hedges of $(38) after-tax, and
clearance of cash flow hedge results to earnings of $(63) after-tax during the
period yielded an after-tax ending balance of $(8). The portion of the ending
balance of Accumulated other comprehensive income (loss) that is expected to be
reclassified into earnings over the next 12 months is $(8).
HEDGES OF NET INVESTMENT IN A FOREIGN OPERATION
During the year ended December 31, 2003, the company has not maintained any
hedges of net investment in a foreign operation.
DERIVATIVES NOT DESIGNATED IN HEDGING RELATIONSHIPS
The company uses forward exchange contracts to reduce its net exposure, by
currency, related to foreign currency-denominated monetary assets and
liabilities. The netting of such expo-
F-37
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
sures precludes the use of hedge accounting. However, the required revaluation
of the forward contracts and the associated foreign currency-denominated
monetary assets and liabilities results in a minimal earnings impact, after
taxes. Several small equity affiliates have risk management programs, mainly in
the area of foreign currency exposure, for which they have elected not to pursue
hedge accounting. In addition, the company maintains a few small risk management
programs for agricultural commodities that do not qualify for hedge accounting
treatment. Also, the company owns stock warrants in a few companies for
strategic purposes.
In addition, in conjunction with the acquisition of the 23.88 percent minority
interest in DuPont Canada Inc. (see Note 27), the company entered into option
contracts to purchase 1.0 billion Canadian dollars for about $700. The business
purpose of the contracts was to protect against adverse movements in the U.S.
dollar/Canadian dollar exchange rate. The changes in fair values of these
contracts were included in income in the period the change occurred. The
contracts expired during the second quarter 2003 resulting in a pretax exchange
gain of $30.
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.
Option and forward exchange contracts are routinely used to offset a portion of
the company's exposure to foreign currency-denominated revenues. The objective
of this hedge program is to reduce earnings and cash flow volatility related to
changes in foreign currency exchange rates.
In addition, the company 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.
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.
INTEREST RATE RISK
The company primarily uses interest rate swaps to manage the interest rate mix
of the total debt portfolio and related overall cost of borrowing.
Interest rate swaps involve the exchange of fixed for floating rate interest
payments that are fully integrated with underlying fixed-rate bonds or notes to
effectively convert fixed rate debt into floating rate debt based on three- or
six-month U.S. dollar LIBOR.
At December 31, 2003, the company had entered into interest rate swap agreements
with total notional amounts of $2,310, whereby the company, over the remaining
terms of the underlying notes, will receive a fixed rate payment equivalent to
the fixed interest rate of the underlying note and pay a floating rate of
interest that is based on three- or six-month U.S. dollar LIBOR.
Interest rate swaps did not have a material effect on the company's overall cost
of borrowing at December 31, 2003 and 2002.
See Note 21 for additional descriptions of interest rate swaps.
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, the company enters into exchange-traded
derivative commodity instruments to hedge the commodity price risk associated
with agricultural commodity exposures.
F-38
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
30. GEOGRAPHIC INFORMATION
- --------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Net Net Net Net Net Net
Sales(1) Property(2) Sales(1) Property Sales(1) Property
- --------------------------------------------------------------------------------------------------------------------------
NORTH AMERICA
United States $12,108 $ 7,452 $11,422 $ 8,282 $12,054 $ 8,167
Canada 894 676 859 601 918 536
Mexico 568 169 546 172 559 164
Other 76 143 64 82 82 85
- --------------------------------------------------------------------------------------------------------------------------
Total $13,646 $ 8,440 $12,891 $ 9,137 $13,613 $ 8,952
- --------------------------------------------------------------------------------------------------------------------------
EUROPE, MIDDLE EAST AND AFRICA
Germany $ 1,946 $ 528 $ 1,609 $ 552 $ 1,590 $585
France 982 133 859 126 929 170
Italy 959 29 767 27 854 25
United Kingdom 710 714 626 701 704 709
Other 2,825 1,245 2,451 1,205 2,354 1,243
- --------------------------------------------------------------------------------------------------------------------------
Total $ 7,422 $ 2,649 $ 6,312 $ 2,611 $ 6,431 $ 2,732
- --------------------------------------------------------------------------------------------------------------------------
ASIA PACIFIC
China/Hong Kong $ 1,232 $ 232 $ 941 $ 150 $ 819 $ 134
Japan 899 81 840 73 906 75
Taiwan 792 547 707 582 663 632
Korea 509 51 434 49 395 50
Singapore 128 343 108 285 110 325
Other 982 69 817 76 764 76
- --------------------------------------------------------------------------------------------------------------------------
Total $ 4,542 $ 1,323 $ 3,847 $ 1,215 $ 3,657 $ 1,292
- --------------------------------------------------------------------------------------------------------------------------
SOUTH AMERICA
Brazil $ 860 $ 481 $ 573 $ 227 $ 576 $ 187
Argentina 221 85 176 73 223 102
Other 305 42 207 23 226 22
- --------------------------------------------------------------------------------------------------------------------------
Total $ 1,386 $ 608 $ 956 $ 323 $ 1,025 $ 311
- --------------------------------------------------------------------------------------------------------------------------
TOTAL $26,996 $13,020 $24,006 $13,286 $24,726 $13,287
- --------------------------------------------------------------------------------------------------------------------------
(1) Net sales are attributed to countries based on location of customer.
(2) Includes property, plant and equipment classified as Assets held for sale
in the Consolidated Balance Sheet. See Note 5.
31. SEGMENT INFORMATION
The company's reporting segments include five market- and technology-focused
growth platforms, Textiles & Interiors, substantially all of the assets and
liabilities which are held for sale, and Pharmaceuticals. The growth platforms
are Agriculture & Nutrition; Coatings & Color Technologies; Electronic &
Communication Technologies; Performance Materials; and Safety & Protection. The
company reports results of its nonaligned businesses and embryonic businesses as
Other.
Major products by segment include: Agriculture & Nutrition (hybrid seed corn and
soybean seed, herbicides, fungicides, insecticides, value enhanced grains, and
soy protein); Coatings & Color Technologies (automotive finishes, industrial
coatings and white pigments); Electronic & Communication Technologies
(fluorochemicals, fluoropolymers, photopolymers, and electronic materials);
Performance Materials (engineering polymers, packaging and industrial polymers,
films, and elastomers); Pharmaceuticals (representing the company's interest in
the collaboration relating to Cozaar(R)/Hyzaar(R) antihypertensive drugs, which
is reported as Other income); Safety & Protection (specialty and industrial
chemicals, nonwovens, aramids, and solid surfaces); Textiles & Interiors
(flooring systems, industrial fibers, polyester fibers, branded and unbranded
elastane, textiles, and intermediates). 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. Coatings & Color
Technologies and Textiles & Interiors, however, have several large customers in
their respective industries that are important to these segments' operating
results.
F-39
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
In general, the accounting policies of the segments are the same as those
described in the Summary of Significant Accounting Policies. Exceptions are
noted as follows and are shown in the reconciliations below. Prior years' data
have been reclassified to reflect the 2003 organizational structure. Sales
include transfers and pro rata share of equity affiliate sales. Products are
transferred between segments on a basis intended to reflect, as nearly as
practicable, the market value of the products. After-tax operating income (loss)
does not include corporate expenses, interest, exchange gains (losses),
corporate minority interests and the cumulative effect of changes in accounting
principles. 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 borrowing and other
long-term liabilities. Depreciation and amortization includes depreciation on
research and development facilities and amortization of goodwill and other
intangible assets, excluding write-down of assets discussed in Note 4. The
adoption of SFAS No. 142 on January 1, 2002 eliminated the amortization of
goodwill and indefinite-lived intangible assets; see Note 15 for segment
details. Expenditures for long-lived assets exclude investments in affiliates
and include payments for property, plant and equipment as part of business
acquisitions. See Note 27 for discussion of acquisitions in the segment.
- ------------------------------------------------------------------------------------------------------------------------------------
Agriculture Coatings & Electronic & Safety Textiles
& Color Communication Performance Pharma- & &
Nutrition Technologies Technologies Materials ceuticals Protection Interiors Other Total(1)
- ------------------------------------------------------------------------------------------------------------------------------------
2003
Segment sales $5,470 $5,503 $2,892 $5,376 $ - $4,071 $6,937 $ 19 $30,268
Transfers - 52 40 133 - 122 588 5 940
After-tax operating
income (loss)(2) 540 477 147 262 355 536 (1,336) (150) 831
Depreciation and amortization 425 227 156 161 - 173 356 6 1,504
Equity in earnings
of affiliates (7) 3 8 9 - 14 (277) - (250)
Provision for income taxes 123 253 35 143 216 271 (569) (70) 402
Segment net assets 6,508 3,641 2,408 3,806 140 2,527 4,923 135 24,088
Affiliate net assets 33 46 324 1,201 38 100 1,049 - 2,791
Expenditures for
long-lived assets 593 217 129 167 - 303 580 7 1,996
- ------------------------------------------------------------------------------------------------------------------------------------
2002
Segment sales $4,516 $5,026 $2,540 $4,926 $ - $3,477 $6,221 $ 22 $26,728
Transfers - 41 41 94 - 110 84 5 375
After-tax operating
income (loss)(3) 443 483 217 479 329 490 69 (164) 2,346
Depreciation and amortization 367 196 136 175 - 156 436 9 1,475
Equity in earnings
of affiliates (6) (3) 10 33 - 10 (4) - 40
Provision for income taxes 15 272 69 283 164 269 (17) (104) 951
Segment net assets 5,965 3,235 2,190 3,283 118 1,940 5,569 (3) 22,297
Affiliate net assets 114 41 302 1,203 37 85 1,461 - 3,243
Expenditures for
long-lived assets 228 298 227 139 - 285 256 4 1,437
- ------------------------------------------------------------------------------------------------------------------------------------
2001
Segment sales $4,295 $4,917 $2,688 $4,727 $ 902 $3,569 $6,443 $148 $27,689
Transfers - 41 44 90 - 200 84 21 480
After-tax operating
income (loss)(4) 21 452 291 234 3,924 451 (342) (95) 4,936
Depreciation and amortization 502 236 136 173 100 151 458 5 1,761
Equity in earnings
of affiliates (13) (6) 11 (16) - 10 (33) - (47)
Provision for income taxes (104) 309 160 195 2,275 294 (178) (64) 2,887
Segment net assets 9,064 3,284 1,929 3,291 102(5) 1,692 6,191 114 25,667
Affiliate net assets 125 87 306 1,210 34 75 1,541 - 3,378
Expenditures for
long-lived assets 186 182 196 155 50 187 335 5 1,296
- ------------------------------------------------------------------------------------------------------------------------------------
F-40
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 net sales 2003 2002 2001
- --------------------------------------------------------------------------------
Total segment sales $30,268 $26,728 $27,689
Elimination of transfers (940) (375) (480)
Elimination of equity affiliate sales (2,332) (2,351) (2,493)
Miscellaneous - 4 10
- --------------------------------------------------------------------------------
Net sales $26,996 $24,006 $24,726
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
After-tax operating income to
income before cumulative effect
of changes in accounting principles 2003 2002 2001
- --------------------------------------------------------------------------------
Total segment ATOI $ 831 $2,346 $4,936
Interest and exchange (losses) (126)(a) (196)(b) (311)
Corporate expenses 328(c) (268)(d) (281)
Corporate minority interest(e) (31)(f) (41) (16)
- --------------------------------------------------------------------------------
Income before cumulative
effect of changes in
accounting principles $1,002 $1,841 $4,328
- --------------------------------------------------------------------------------
(a) Includes an exchange gain of $18 resulting from a currency contract
purchased to offset movement in the Canadian dollar in connection with the
company's acquisition of minority shareholders' interest in DuPont Canada
Inc.
(b) Includes an exchange loss of $63 resulting from the mandatory conversion of
the company's U.S. dollar-denominated trade receivables to Argentine pesos
and moving from a preferential to a free-market exchange rate, and a charge
of $17 associated with the early extinguishment of outstanding debentures.
(c) Reflects a benefit of $669 associated with recording deferred tax assets in
two European subsidiaries for their tax basis investment losses recognized
on local tax returns.
(d) Includes a net $65 non-cash benefit, principally due to agreement on
certain prior year audit issues previously reserved for, partly offset by
the establishment of a reserve for an additional tax contingency.
(e) Represents a rate of return to minority interest investors who made capital
contributions during 2001 to consolidated subsidiaries.
(f) Includes a charge of $17 for the early extinguishment of the company's
minority interest structures in preparation for the planned separation of
INVISTA.
- --------------------------------------------------------------------------------
Segment net assets to total assets 2003 2002 2001
- --------------------------------------------------------------------------------
Total segment net assets $24,088 $22,297 $25,667
Corporate assets 8,149 7,404 10,507*
Liabilities included in net assets 4,802 4,920 4,145
- --------------------------------------------------------------------------------
Total assets $37,039 $34,621 $40,319
- --------------------------------------------------------------------------------
* Reflects an increase in cash and cash equivalents related primarily to the
sale of DuPont Pharmaceuticals.
- --------------------------------------------------------------------------------
Segment Consolidated
Other items Totals Adjustments Totals
- --------------------------------------------------------------------------------
2003
Depreciation and amortization $1,504 $80 $1,584
Equity in earnings of affiliates (250) 260(a) 10
Provision for income taxes 402 (1,332)(b) (930)
Affiliate net assets 2,791 (1,487) 1,304
Expenditures for long-lived
assets 1,996 479 2,475
- --------------------------------------------------------------------------------
2002
Depreciation and amortization $1,475 $40 $1,515
Equity in earnings of affiliates 40 (4) 36
Provision for income taxes 951 (766) 185
Affiliate net assets 3,243 (1,196) 2,047
Expenditures for long-lived
assets 1,437 220 1,657
- --------------------------------------------------------------------------------
2001
Depreciation and amortization $1,761 $(7) $1,754
Equity in earnings of affiliates (47) 4 (43)
Provision for income taxes 2,887 (420) 2,467
Affiliate net assets 3,378 (1,333) 2,045
Expenditures for long-lived
assets 1,296 198 1,494
- --------------------------------------------------------------------------------
(a) Includes impairment charge of $293 in connection with the planned
separation of INVISTA.
(b) Includes a benefit of $669 associated with recording deferred tax assets in
two European subsidiaries for their tax basis investment losses recognized
on local tax returns.
2 2003 includes the following benefits (charges):
- --------------------------------------------------------------------------------
Agriculture & Nutrition(a,b) $ 42
Coatings & Color Technologies(a) 3
Electronic & Communication Technologies(a) 1
Performance Materials(a) -
Pharmaceuticals(c) 15
Safety & Protection(a) -
Textiles & Interiors(a,d) (1,349)
Other(a,e) (49)
- --------------------------------------------------------------------------------
$(1,337)
- --------------------------------------------------------------------------------
(a) Includes net benefits of $12 resulting from changes in estimates related to
prior year restructuring programs, principally in the following segments:
Agriculture & Nutrition - $1; Coatings & Color Technologies - $3;
Electronic & Communication Technologies - $1; Textiles & Interiors - $6.
(b) Includes a $41 non-operating gain associated with the formation of a
majority-owned venture, The Solae Company, with Bunge Limited.
(c) Includes a $15 benefit resulting from a favorable arbitration ruling.
(d) Includes a charge of $1,365 in connection with the planned separation of
INVISTA which reflects the write-down to estimated fair market value of
various manufacturing and other intangible assets held for sale as well as
investments in certain joint ventures, write-off of goodwill, and pension
curtailment losses, partly offset by a benefit of $10 from the favorable
settlement of arbitration related to the Unifi Alliance.
(e) Includes charges of $66 to increase the company's reserve for Benlate(R)
litigation, partly offset by $16 in insurance proceeds.
F-41
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
3 2002 includes the following benefits (charges):
- --------------------------------------------------------------------------------
Agriculture & Nutrition (a,b) $ 16
Coatings & Color Technologies (a,c) (42)
Electronic & Communication Technologies (a) 1
Performance Materials (a,d) 53
Pharmaceuticals (e) 39
Safety & Protection (a) 3
Textiles & Interiors (a,f) (144)
Other (a,g) (79)
- --------------------------------------------------------------------------------
$(153)
- --------------------------------------------------------------------------------
(a) Includes net benefits of $22 resulting from changes in estimates related to
prior year restructuring programs, principally in the following segments:
Agriculture & Nutrition - $3; Coatings & Color Technologies - $2;
Performance Materials - $2; Safety & Protection - $3; Textiles & Interiors
- $9.
(b) Includes a benefit of $67 related to revisions in postemployment costs for
certain Pioneer employees, a charge of $29 to write off inventory
associated with discontinued specialty herbicide products and a charge of
$25 associated with an expected loss on the sale of a European
manufacturing facility.
(c) Includes a charge of $44 related to employee termination costs for about
775 employees.
(d) Includes a gain of $51 resulting from the sale of the Clysar(R) shrink film
business.
(e) Includes benefits of $27 principally related to adjustments of prior year
tax accruals in connection with the gain on the sale of DuPont
Pharmaceuticals and $12 to reflect final settlement with Bristol-Myers
Squibb in connection with the sale of DuPont Pharmaceuticals.
(f) Includes charges of $100 related to employee termination costs for
approximately 2,000 employees, $43 related to facility shutdowns and $29 to
withdraw from a polyester joint venture in China, partly offset by a gain
of $19 resulting principally from a favorable litigation settlement
associated with exiting a nylon joint venture in China.
(g) Includes charges of $50 to increase the company's reserve for Benlate(R)
litigation and $31 to establish a reserve related to vitamins litigation
associated with a previously divested joint venture.
4 2001 includes the following benefits (charges):
- --------------------------------------------------------------------------------
Agriculture & Nutrition (a,b,c) $ (225)
Coatings & Color Technologies (a,b) (46)
Electronic & Communication Technologies (a,b,d) 8
Performance Materials (a,b,e) (45)
Pharmaceuticals (f) 3,866
Safety & Protection (b) (34)
Textiles & Interiors (a,b) (410)
Other (a,b) (37)
- --------------------------------------------------------------------------------
$3,077
- --------------------------------------------------------------------------------
(a) Includes net benefits of $21 resulting from changes in estimates related to
restructuring programs, principally in the following seg ments: Agriculture
& Nutrition - $6; Coatings & Color Technologies - $2; and Textiles &
Interiors - $10.
(b) Includes charges of $679 resulting from employee terminations, facility
shutdowns and asset impairments in the following segments: Agriculture &
Nutrition - $80; Coatings & Color Technologies - $48; Electronic &
Communication Technologies - $27; Performance Materials - $31; Safety &
Protection - $34; Textiles & Interiors - $420; and Other - $39.
(c) Includes a charge of $32 to write down intangible assets related to the
TOPCROSS(R) high oil corn business due to a decision to discontinue
development research efforts, primarily as a result of a deteriorating
commercial market outlook, a charge of $83 resulting from the sale of
acquired Pioneer inventories and a charge of $35 related to settlement of
litigation with Monsanto.
(d) Includes a gain of $34 resulting from the company's sale of stock that
reduced its ownership interest in DuPont Photomasks, Inc.
(e) Includes a charge of $15 resulting from the shutdown of polyester assets at
the Circleville, Ohio site.
(f) Represents a gain of $3,866 associated with the sale of DuPont
Pharmaceuticals to Bristol-Myers Squibb, including an associated deferred
tax benefit of $49.
5 Represents segment net assets after the sale of certain assets to
Bristol-Myers Squibb on October 1, 2001.
F-42
E. I. DU PONT DE NEMOURS AND COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
NOTE 32. QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------------------------------------------------------------
2003
Net sales $7,008 $7,369 $6,142 $6,477
Cost of goods sold and other expenses (1) 6,285 6,609 6,122 6,371
Income (loss) before income taxes and minority interests 820(2) 881(3) (1,456)(4) (102)(5)
Income (loss) before cumulative effect of a change in accounting principle 564 675 (873) 636
Net income (loss) 535 675 (873) 636
Basic earnings (loss) per share of common stock before cumulative
effect of a change in accounting principle (6) 0.56 0.67 (0.88) 0.64
Basic earnings (loss) per share of common stock (6) 0.53 0.67 (0.88) 0.64
Diluted earnings (loss) per share of common stock before cumulative
effect of a change in accounting principle (6) 0.56 0.67 (0.88) 0.63
Diluted earnings (loss) per share of common stock (6) 0.53 0.67 (0.88) 0.63
- -----------------------------------------------------------------------------------------------------------------------------------
2002
Net sales $6,142 $6,700 $5,482 $5,682
Cost of goods sold and other expenses (1) 5,281 6,025 5,163 5,595
Income before income taxes and minority interests 828(7) 609(8) 495(9) 192(10)
Income before cumulative effect of a change in accounting principle 479 543 469 350
Net income (loss) (2,465) 543 469 350
Basic earnings per share of common stock before cumulative
effect of a change in accounting principle (6) 0.48 0.54 0.47 0.35
Basic earnings (loss) per share of common stock (6) (2.48)(7) 0.54 0.47 0.35
Diluted earnings per share of common stock before cumulative
effect of a change in accounting principle (6) 0.48 0.54 0.47 0.35
Diluted earnings (loss) per share of common stock (6) (2.46)(7) 0.54 0.47 0.35
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Excludes interest expense and nonoperating items.
(2) Includes a charge of $78 to provide for the settlement of the 1995
Benlate(R) shareholder litigation case.
(3) Includes a $62 nonoperating gain associated with the formation of a
majority-owned venture, The Solae Company, with Bunge Limited; a benefit of
$16 from the favorable settlement of arbitration related to the Unifi
Alliance; an exchange gain of $30 resulting from a currency contract
purchased to offset movement in the Canadian dollar in connection with the
company's acquisition of minority shareholders' interest in DuPont Canada
Inc.; and a charge of $28 for the early extinguishment of the company's
minority interest structures in preparation for the sale of INVISTA.
(4) Includes a $25 benefit from insurance proceeds related to the settled 1995
Benlate(R) class action suit, a $23 benefit resulting from a favorable
arbitration ruling in the Pharmaceuticals segment, and asset impairment
charges of $1,236, pension curtailment charges of $78 and goodwill
impairment charges of $291 primarily related to the pending sale of
INVISTA.
(5) Includes a charge of $25 to increase the company's reserve for Benlate(R)
litigation, a benefit of $17 to reflect changes in estimates related to
prior year restructuring programs, an additional goodwill impairment charge
of $4 resulting from the finalization of the purchase price allocation
associated with the company's acquisition of minority shareholders'
interest in DuPont Canada Inc. and an additional charge of $306 associated
with the expected separation of INVISTA.
(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) Amounts differ from those reported in the company's report on Form 10-Q for
the quarter ended March 31, 2002, due to the adoption of SFAS No. 142,
which resulted in a cumulative effect of a change in accounting principle
charge of $2,944 and $2.96 (basic) and $2.94 (diluted) per share. The net
loss also includes an exchange loss of $63 resulting from the mandatory
conversion of the company's U.S.dollar denominated trade receivables to
Argentine pesos and moving from a preferential to a free-market exchange
rate; a charge of $39 to withdraw from a polyester joint venture in China;
and a gain of $30 resulting principally from a favorable litigation
settlement associated with exiting a nylon joint venture in China.
(8) Includes a noncash charge of $209 related to restructuring activities, a
charge of $37 to write down a manufacturing facility to be sold to fair
value less costs to sell, a charge of $47 to write off inventory related to
a discontinued product, a charge of $50 to establish a litigation reserve
related to a previously divested business, a charge of $21 related to the
early extinguishment of outstanding debentures and a benefit of $19 related
to an increase to the gain on the sale of DuPont Pharmaceuticals based on
final settlement with Bristol-Myers Squibb.
(9) Includes a gain of $84 related to the sale of the Clysar(R) shrink film
business and a benefit of $23 resulting from changes in estimates related
to restructuring activities.
(10) Includes a charge of $80 to increase the reserve for Benlate(R) litigation,
a credit of $40 due to revisions in postemployment costs for certain
Pioneer employees, a charge of $69 related to restructuring activities, a
benefit of $11 due to changes in estimates related to restructuring
activities, and a benefit of $6 related to the sale of DuPont
Pharmaceuticals.
F-43
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[This Page Intentionally Left Blank]
INFORMATION FOR INVESTORS
CORPORATE HEADQUARTERS
E. I. du Pont de Nemours and Company
1007 Market Street
Wilmington, DE 19898
Telephone: 302 774-1000
E-mail: FIND.INFO@USA.DUPONT.COM
2004 ANNUAL MEETING
The annual meeting of the shareholders will be held at 10:30 a.m., Wednesday,
April 28, in The DuPont Theatre in the DuPont Building, 1007 Market Street,
Wilmington, Delaware.
STOCK EXCHANGE LISTINGS
DuPont common stock is listed on the New York Stock Exchange, Inc. (Symbol DD)
and on certain foreign exchanges. Quarterly high and low market prices are shown
in Item 5 of the Form 10-K.
DuPont preferred stock is listed on the New York Stock Exchange, Inc. (Symbol
DDPrA for $3.50 series and Symbol DDPrB for $4.50 series).
DIVIDENDS
Common and preferred dividends are usually declared in January, April, July and
October. Dividends on common stock are usually paid on or about the 12th of
March, June, September and December. Preferred dividends are paid on or about
the 25th of January, April, July and October.
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
Two Commerce Square, Suite 1700
2001 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICES
Inquiries from shareholders about stock accounts, transfers, certificates,
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transfer agent:
EquiServe Trust Company N.A.
P.O. Box 43069
Providence, RI 02940-3069
or call: in the United States and Canada -
888 983-8766 (toll-free)
other locations - 781 575-2724
for the hearing impaired -
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or visit EquiServe's home page at
HTTP://WWW.EQUISERVE.COM
INVESTOR RELATIONS
Institutional investors and other representatives of financial institutions
should contact:
E. I. du Pont de Nemours and Company
DuPont Investor Relations
1007 Market Street - D-11018
Wilmington, DE 19898
or call 302 774-4994
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E. I. du Pont de Nemours and Company
DuPont Finance
1007 Market Street - D-8028
Wilmington, DE 19898
or call 302 774-3086
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Financial results, news and other information about DuPont can be accessed
from the company's Web site at HTTP://WWW.DUPONT.COM. This site includes
important information on products and services, financial reports, news
releases, environmental information and career opportunities. The company's
periodic and current reports filed with the SEC are available on its Web
site, free of charge, as soon as reasonably practicable after being filed.
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From the United States and Canada:
800 441-7515 (toll-free)
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E-mail: FIND.INFO@USA.DUPONT.COM
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PRINTED REPORTS AVAILABLE TO SHAREHOLDERS
The following company reports may be obtained, without charge:
1. 2003 Annual Report to the Securities and Exchange Commission,
filed on Form 10-K;
2. Quarterly reports to the Securities and Exchange Commission,
filed on Form 10-Q;
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Requests should be addressed to:
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CRP705-GS25
P.O. Box 80705
Wilmington, DE 19880-0705
or call 302 774-5991
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Sign up at these Internet sites:
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