2002
================================================================================
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 YEAR ENDED DECEMBER 31, 2002 COMMISSION FILE NUMBER 1-815
----------
E. I. DU PONT DE NEMOURS
AND COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0014090
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER 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
-------------------
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 [y] 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. [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE ACT). YES [y] 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 JANUARY 31, 2003, WAS APPROXIMATELY $37.0
BILLION.
AS OF JANUARY 31, 2003, 994,710,182 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.
------------
The company's Proxy Statement in connection with the
Annual Meeting of Stockholders to be held on April 30, 2003 ...... III
================================================================================
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 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 11
Executive Officers of the Registrant 11
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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 42
Item 9. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 42
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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 43
Item 13. Certain Relationships and Related Transactions 44
Item 14. Controls and Procedures 44
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PART IV
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 44
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SIGNATURES 46
CERTIFICATIONS 47
================================================================================
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 2003 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.
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,"
"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
about half of its revenues from sales inside the United States and about
half from sales outside the United States. Therefore, governmental and
quasi-governmental activities, including changes in the laws or policies of
any country in which the company operates, could affect the company's
business and profitability in that country. Also, the company's business
and profitability in a particular country could be affected by political or
economic repercussions on a domestic, country specific or global level from
acts of terrorism or war (whether or not declared) and the response to such
activities. In addition, economic factors (including a decline in U.S. or
European sales from slowing economic growth in those regions, inflation or
fluctuations in interest and foreign currency exchange rates) and
competitive factors (such as greater price competition or expiration of
patent protection) in those countries could affect the company's revenues,
expenses and results of operations.
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, particularly oil, natural gas and products derived
from oil and natural gas. The company may not be able to fully offset the
effects of higher raw material costs through price increases or
productivity improvements.
o As part of its strategy for growth, the company has made and may continue
to make acquisitions and divestitures and form strategic alliances. There
can be no assurance that these will be completed or beneficial to the
company.
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 United States occur in the
first half of the year. In addition, demand for products produced in these
segments may be affected by market acceptance of genetically enhanced
products.
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 cost savings 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 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)
3
Part I
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
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 transportation, textile, construction, motor vehicle,
agricultural, home furnishings, medical, packaging, electronics, and the
nutrition and health markets. Total worldwide employment at year-end 2002 was
about 79,000 people.
In 2002, the company strategically realigned its businesses into five market-
and technology-focused growth platforms and created DuPont Textiles & Interiors
(DTI), with the intent to separate DTI from the company by year-end 2003, market
conditions permitting. 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 specific arenas. 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.
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, hydrochlorothiazide) brands. These
antihypertensive drugs were discovered by DuPont and developed in collaboration
with Merck & Co. DuPont has exclusively licensed marketing rights for Cozaar(R)
and Hyzaar(R) to Merck. In conjunction with the sale of DuPont Pharmaceuticals,
Bristol-Myers Squibb continues to manufacture Cozaar(R) and Hyzaar(R) for
DuPont. Effective with fourth quarter 2001 results, the Pharmaceuticals segment
reflects only DuPont's share of the financial results of this ongoing
collaboration.
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:
Business Discussions, Principal Products and
Principal Markets
Introduction 20
Agriculture & Nutrition 20-23
Coatings & Color Technologies 23-24
Electronic & Communication Technologies 24-26
Performance Materials 26-28
Pharmaceuticals 28
Safety & Protection 29-30
Textiles & Interiors 30-33
Other 33
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Total Segment Sales, Transfers, After-Tax Operating
Income, and Segment Net Assets
for 2002, 2001, and 2000 F-35
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GEOGRAPHIC INFORMATION:
Net Sales and Net Property for 2002, 2001, and 2000 F-34
- --------------------------------------------------------------------------------
The company and its subsidiaries have operations in about 75 countries worldwide
and, as a result, about 50 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 assure
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.
Excluding Pioneer Hi-Bred International Inc. and the nutrition and health
businesses, which are part of the Agriculture & Nutrition segment, a substantial
portion of the production and sales in the segments' businesses is dependent
upon the availability of hydrocarbon feedstocks. 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
4
Part I
ITEM 1. BUSINESS--CONTINUED
significant portion of the company's requirements for ethylene glycol, a
hydrocarbon feedstock.
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 purchased commodities, raw materials, and supplies for the company's
reportable segments in 2002 include the following:
AGRICULTURE & NUTRITION:
acetaldoxime; carbamic acid related intermediates; polyethylene; soy flake;
5-choroindanone, methylester
COATINGS & COLOR TECHNOLOGIES:
butyl acetate; chlorine; coke; HDI based poly alaphatic isocyanates;
industrial gases (O2/N2); ore; pigments
ELECTRONIC & COMMUNICATION TECHNOLOGIES:
asaprene; chloroform; fluorspar; hydrofluoric acid; kraton; oxydianiline;
perchloroethylene; polyester; polyethylene; pyromellitic dianhydride
PERFORMANCE MATERIALS:
butanediol; ethane; fiberglass; methacrylic acid; methanol; natural gas;
paraxylene
SAFETY & PROTECTION:
ammonia; high density polyethylene; isophthalic acid; isophthaloyl
chloride; metaphenylenediamine; methanol; 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 2002, the company consumed substantial amounts of
electricity and natural gas for energy.
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 an important
competitive advantage and has established a global network of attorneys and
licensing professionals to procure, maintain and protect its 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
proprietary 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 availability of legal remedies in each
country. The company owns approximately 21,000 worldwide patents and
approximately 14,000 worldwide patent applications. In 2002, the company was
granted almost 400 U.S. patents and about 2,000 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 discussion related to the importance of patents to Pharmaceuticals, see the
segment review on page 28 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
5
Part I
ITEM 1. BUSINESS--CONTINUED
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 over 2,000 unique trademarks for its products and services and
has over 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 a number of trademarks that have
significant recognition at the consumer retail level, including DuPont(TM) and
the DuPont Oval; Lycra(R) brand premium stretch fibers; Stainmaster(R) carpets;
Teflon(R) fluoropolymers, films, fabric protectors, fibers, and dispersions;
Corian(R) surfaces; Cordura(R) nylon; Coolmax(R) fibers; Tactel(R) nylon;
Tyvek(R) and Kevlar(R) brands protective material; and Pioneer(R) brand seeds.
The company is actively pursuing licensing opportunities for selected
trademarks. For example, 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. In addition, selected
licensing opportunities are being pursued for the DuPont(TM) brand.
SEASONALITY
Sales of the company's products in Agriculture & Nutrition, and to a certain
extent, Coatings & Color Technologies and Textiles & Interiors, are affected by
seasonality. 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 materially affected by
seasonal factors.
MARKETING
With the exception of the Pioneer business, 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 other agricultural supplies. Pioneer
products are marketed outside North America through a network of subsidiaries,
joint ventures, and independent producer-distributors.
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.
Principal competitors include major chemical companies based in the United
States, Europe and Asia, principally 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.
In addition to providing crop protection products, Agriculture & Nutrition also
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
6
Part I
ITEM 1. BUSINESS--CONTINUED
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 centralized in the Wilmington, Delaware region 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 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 for
worldwide markets. Hybrids and varieties are developed at primary research
locations and tested at many other locations. Also included in Agriculture &
Nutrition is DuPont Protein Technologies, which has its largest research center
in St. Louis, Missouri. Health benefits studies are advanced in cooperation with
several universities across the globe, and product and application development
is managed in technical centers located in England and Russia.
DuPont, reflecting the company's global interests, operates a number of
additional research facilities at locations outside the United States in
countries such as Belgium, Canada, France, Germany, Japan, Luxembourg, Mexico,
the Netherlands, Spain, and Switzerland.
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 Corporate Growth
Council. All research and development activities are administered by senior
research and development management, with guidance from the appropriate
Corporate Technology Director, to ensure consistency with the business and
corporate strategy.
Additional information with respect to research and development, including the
estimated amount spent during each of the last three fiscal years, is included
in Item 7, Management's Discussion and Analysis on page 17 of this report.
ENVIRONMENTAL MATTERS
Information related to environmental matters is included in several areas of
this report: (1) Environmental Proceedings on pages 9-11, (2) Management's
Discussion and Analysis on pages 39-41, and (3) Notes 1 and 23 to the
Consolidated Financial Statements on pages F-8 and F-25, respectively.
ITEM 2. PROPERTIES
The company owns and operates manufacturing, processing, production, marketing,
and research and development facilities worldwide.
DuPont's corporate headquarters is located in Wilmington, Delaware. In addition,
the company operates sales offices, regional purchasing offices, distribution
centers, and various other specialized service locations.
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 13 and 23 to the company's Consolidated Financial Statements
on pages F-17 and F-23 of this report, respectively.
7
Part I
ITEM 2. PROPERTIES--CONTINUED
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
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Bayport Edge Moor Front Royal
Beaumont Newark Hopewell
Corpus Christi Seaford Richmond
LaPorte Wilmington Waynesboro
Orange
Victoria
WEST VIRGINIA TENNESSEE NORTH CAROLINA
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Belle Chattanooga Fayetteville
Martinsburg Memphis Kinston
Parkersburg New Johnsonville Research
Old Hickory Triangle Park
NEW JERSEY SOUTH CAROLINA NEW YORK
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Deepwater Camden Buffalo
Parlin Charleston Niagara Falls
Florence
MICHIGAN IOWA PUERTO RICO
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Mt. Clemens Fort Madison Manati
Troy Johnston
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 the Republic of Korea.
The company's plants and equipment are well maintained and in good operating
condition. Sales as a percent of capacity were 81 percent in 2002, 78 percent in
2001 and 81 percent in 2000. Properties are primarily directly owned by the
company. However, certain properties are leased, including those that are part
of the company's synthetic lease program (see page F-23 of this report). In
addition, certain properties of the company provide security related to the
company's minority interest structures (see page F-21 of the report). 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)
In 1991, DuPont began receiving claims by growers that use of Benlate(R) 50 DF
fungicide had caused crop damage. As indicated in the table below, DuPont has
since been served with several hundred lawsuits, most of which have been
disposed of through trial, dismissal or settlement.
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Status of Cases
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2002 2001 2000
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Filed 2 10 19
Resolved 5 16 45
Pending, as of December 31 104 107 113
================================================================================
Twenty of the 104 cases pending against the company at December 31, 2002, were
filed by growers who allege plant damage from using Benlate(R) 50 DF and, in
some cases, Benlate(R) WP. Fifty 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. Five 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. Finally,
one of the cases pending is a securities fraud class action.
In August 2001, a Florida jury found DuPont liable 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
approximate amount of $29 million. The judgment was later reduced to $26
million; DuPont has appealed. 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. The remaining crop cases
are in various stages of development, principally in trial and appellate courts
in Florida.
Certain 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. In January 2003, the
company settled nine cases, involving twenty plaintiffs, that had been pending
in state court in Florida (the table above does not
8
Part I
ITEM 3. LEGAL PROCEEDINGS--CONTINUED
reflect these settlements). These cases alleged that the company and its counsel
had committed fraud and misconduct in connection with the settlement of these
plaintiffs' claims in 1996. The company believes that by settling these
lawsuits, it has resolved the most significant of the reopener cases that would
have involved claims for punitive damages. In the reopener cases still pending
after January 2003, the Florida federal court dismissed the lead case of the
twenty-eight reopener cases pending before it. Plaintiffs have appealed. The
other thirteen reopener cases are in various stages of development in trial and
appellate courts in Florida and Hawaii.
There are currently five cases involving allegations that Benlate(R) caused
birth defects to children exposed in utero. One case was tried in Florida, which
resulted in a $4 million verdict against DuPont. The verdict was reversed at the
intermediate appellate level because the plaintiffs' scientific support for
causation was insufficient. The plaintiffs have appealed to the Florida Supreme
Court. The federal court in West Virginia dismissed another case on the same
grounds of insufficient scientific support for causation. It has been appealed
to the Fourth Circuit Court of Appeals. Six of the eight plaintiffs in the
remaining three cases were dismissed as their cases were not timely filed. Two
of these cases have been appealed to the Delaware Supreme Court. The remaining
case is scheduled for trial in Delaware in June 2003.
The twenty-eight 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 that was applied to
banana plantations in Ecuador ran-off and was deposited in the plaintiffs'
shrimp farms, causing massive numbers of shrimp to die. Two cases were tried in
the fall of 2000 and in early 2001, which resulted in adverse judgments of
approximately $14 million in each case. DuPont contends that the injuries
alleged are attributable to a virus, Taura Syndrome Virus, and in no way involve
Benlate(R) OD. The company has appealed both cases. DuPont has not established
an accrual for either case because the company has concluded that it is not
probable that the adverse judgments ultimately will be upheld. The twenty-six
untried cases are on hold pending the resolution of the appeal of the case tried
in the fall of 2000. Oral arguments on this appeal took place at the
intermediate appellate court in October 2002.
A securities fraud class action was filed in September 1995 by a shareholder in
federal district court in Florida against the company and the then-Chairman.
This action is still pending. The plaintiffs in this case allege 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 has certified the case as a class
action. Discovery has concluded. Trial is set for June 2003.
DuPont believes that Benlate(R) did not cause the damages alleged in these cases
and denies the allegations of fraud and misconduct. DuPont continues to defend
itself in ongoing matters. To date, DuPont has incurred costs and expenses of
approximately $1.7 billion associated with these matters, of which approximately
$200 million has been recovered through insurance. The company has established
reserves in its financial statements to cover estimated future costs. During
fourth quarter 2002, the company recorded a charge of $80 million to increase
its litigation reserves for Benlate(R). While management recognizes that it is
reasonably possible that additional losses may be incurred, a range of such
losses cannot be reasonably estimated at this time.
ENVIRONMENTAL PROCEEDINGS
HYDROGEN FLUORIDE RELEASE
On May 19, 1997, approximately 11,500 pounds of a hydrogen fluoride (HF)/tar
mixture was released from DuPont's Louisville, Kentucky fluoroproducts facility.
This release lasted about forty minutes. There were no on-site injuries, and
only one person off-site reported any exposure. No toxic tort suits were filed
as a result of this release. DuPont's incident investigation concluded that an
inadequate valve stem design was a key factor contributing to the release (the
valve stem twisted and the valve indicated it was in a closed position, when it
was actually open). DuPont's process isolation procedures were also reviewed and
modified as a result of this incident. The Department of Justice (DOJ) proposed
a settlement prior to filing its action for $1,700,000. Subsequently, by letter
dated July 13, 1999, the DOJ provided formal notice to DuPont, that due to the
May 1997 HF release, the DOJ intended to bring a federal court action against
DuPont under the Clean Air Act Section 112(r) - General Duty Clause. DuPont
contested the proposed $1,700,000 fine as excessive and unreasonable because
there was no environmental harm or human health
9
Part I
ITEM 3. LEGAL PROCEEDINGS--CONTINUED
impacts associated with the May 1997 incident. DuPont presented a settlement
offer to the DOJ and the Environmental Protection Agency (EPA) in December 2000.
DuPont has reached an agreement with DOJ and EPA to settle this matter for
$1,102,000. This settlement consists of $552,000 in supplemental environmental
projects supporting local Louisville governmental and nongovernmental
environmental agencies and $550,000 as a cash penalty. The DOJ has prepared a
Consent Decree and Complaint that DuPont is currently reviewing. Settlement is
expected to be completed sometime in the second quarter of 2003.
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 seventeen potentially responsible parties
(PRPs) for the cost of the assessment and any determined natural resource
damages. The trustees recently 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.
AMMONIUM PERFLUOROOCTANATE (APFO)
The West Virginia Department of Environmental Protection (WVDEP) and DuPont
signed a Multimedia Order in November of 2001 that required sampling, analyses
and the development of screening levels for the surfactant ammonium
perfluorooctanoate, or APFO, used by DuPont's Washington Works plant in Wood
County, West Virginia. The Order required that DuPont investigate the levels of
APFO in the local environment and drinking water and fund a study by
toxicologists, supervised by the WVDEP, to determine acceptable levels of APFO
in the environment and drinking water. Through this process, a screening level
of 150 micrograms of APFO per liter of drinking water was established in May
2002. None of the local sources of drinking water has tested near the screening
level.
In August 2002, the WVDEP issued the Final Ammonium Perfluorooctanoate
Assessment of Toxicity Team Report. It affirmed the 150 micrograms screening
level for drinking water and a soil screening level of 240 parts per million. It
further provided a screening level of 1 microgram per cubic meter for air, as
based upon the inhalation reference concentration. The WVDEP is expected to
issue guidance on the implementation of the air screening level. Unless DuPont
violates its terms, the Multimedia Order does not call for sanctions. The cost
of the DuPont activities pursuant to the Order is likely to exceed $3 million.
DuPont has completed more than 75 percent of the work required by the Order.
Sampling across the Ohio River has disclosed APFO levels in groundwater and
drinking water in Ohio, and these results were shared with the Ohio EPA.
Although the MultiMedia Order does not apply in Ohio, DuPont is funding
investigations of ground and drinking water in that state comparable to the
studies in West Virginia. In addition, DuPont signed a Safe Drinking Water
Consent (SDWC) Order with the U. S. Environmental Protection Agency in March of
2002 to assure provision of alternative drinking water if supplies are found to
exceed the screening levels established under the MultiMedia Order. Since the
screening level has been established, it is unlikely that DuPont will be
required to provide alternative drinking water to anyone under the SDWC Order
since the levels of APFO in drinking water tested to date are well below the
screening level. During the fourth quarter of 2002, the U.S. EPA announced that
it would conduct a hazard assessment of APFO.
A class action has been 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 affects from exposure to APFO in drinking water.
The class has been defined as anyone who has consumed drinking water affected by
APFO from operation of the Washington Works Plant, which could include tens of
thousands of people. DuPont does not believe that consumption of drinking water
with low levels of APFO has caused, or will cause, deleterious health affects.
Trial has been scheduled for the third quarter of 2003; DuPont intends to defend
itself vigorously.
AUTOMOTIVE REFINISH
The San Joaquin Valley Unified Air Pollution Control District has recently filed
a complaint in California Superior Court for the County of Fresno. The complaint
alleges that DuPont dis-
10
Part I
ITEM 3. LEGAL PROCEEDINGS--CONTINUED
tributed non-compliant automotive refinish coatings for sale throughout the year
of 1999 in violation of District Rule 4602. The District is seeking a permanent
injunction against future sales and civil penalties of $75,000 per day. District
Rule 4602 permits the sale of "non-compliant" coatings within the District as
long as the coatings are clearly labeled as non-compliant and are used only in
districts in which the coatings would be deemed compliant. DuPont labeled its
coatings in compliance with District Rule 4602 and provided educational material
about the District Rule to coatings users. DuPont intends to vigorously defend
itself in this action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list, as of February 28, 2003, of the company's executive
officers. These officers serve as members of the company's Office of the Chief
Executive.
- --------------------------------------------------------------------------------
Executive
Officer
Age Since
- --------------------------------------------------------------------------------
CHAIRMAN OF THE BOARD OF DIRECTORS AND
CHIEF EXECUTIVE OFFICER:
Charles O. Holliday, Jr.* 54 1992
- --------------------------------------------------------------------------------
OTHER EXECUTIVE OFFICERS:
Thomas M. Connelly, Jr., Senior
Vice President and Chief
Science and Technology Officer 50 2000
Richard R. Goodmanson, Executive
Vice President and Chief
Operating Officer 55 1999
John C. Hodgson, Executive
Vice President 59 2002
Stacey J. Mobley, Senior Vice
President and Chief
Administrative Officer and
General Counsel 57 1992
Gary M. Pfeiffer, Senior Vice
President and Chief Financial Officer 53 1997
Dennis Zeleny, Senior Vice President -
Global Human Resources 47 2001
================================================================================
* 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 to product planning and marketing
positions. 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.
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.
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.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS--CONTINUED
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.
Dennis Zeleny joined DuPont in 2001 as Senior Vice President - Global Human
Resources. Prior to joining DuPont, Mr. Zeleny was vice president, Worldwide
Human Resources for Honeywell, a position he held since 2000, following the
merger of Allied Signal with Honeywell. From 1995 to 2000, Mr. Zeleny served as
vice president, human resources, in several capacities for Allied Signal, and
from 1978 to 1995, Mr. Zeleny held a number of human resources positions at
PepsiCo.
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 116,340 at December 31, 2002, and 115,126 at January 31, 2003.
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 of 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 March 14, June 12,
September 12 and December 14. 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 2002
and 2001 are shown below.
- --------------------------------------------------------------------------------
QUARTERLY HIGH/LOW
MARKET PRICES OF Market Prices Per Share
COMMON STOCK ----------------------- Dividend
High Low Declared
- --------------------------------------------------------------------------------
2002
First Quarter $49.80 $39.79 $.35
Second Quarter 48.40 41.75 .35
Third Quarter 45.75 35.02 .35
Fourth Quarter 45.30 36.00 .35
- --------------------------------------------------------------------------------
2001
First Quarter $49.56 $39.86 $.35
Second Quarter 49.88 40.00 .35
Third Quarter 48.93 32.64 .35
Fourth Quarter 45.75 36.28 .35
================================================================================
12
Part II
ITEM 6. SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE) 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS(1)
Net sales $24,006 $24,726 $28,268 $26,918 $24,767
Income from continuing operations before
income taxes and minority interests $ 2,124 $ 6,844 $ 3,447 $ 1,690 $ 2,613
Provision for income taxes $ 185 $ 2,467 $ 1,072 $ 1,410 $ 941
Income from continuing operations before cumulative
effect of changes in accounting principles $ 1,841 $ 4,328 $ 2,314 $ 219 $ 1,648
Income from discontinued operations $ -- $ -- $ -- $ 7,471 $ 3,033
Net income (loss) $(1,103)(2) $ 4,339(3) $ 2,314 $ 7,690 $ 4,480(4)
Adjusted net income (loss)(5) $(1,103)(2) $ 4,505(3) $ 2,482 $ 7,793 $ 4,528(4)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share of common stock
Income from continuing operations before cumulative
effect of changes in accounting principles $ 1.84 $ 4.17 $ 2.21 $ 0.19 $ 1.45
Income from discontinued operations $ -- $ -- $ -- $ 6.89 $ 2.69
Net income (loss) $ (1.12)(2) $ 4.18(3) $ 2.21 $ 7.08 $ 3.96(4)
Adjusted net income (loss)(5) $ (1.12)(2) $ 4.34(3) $ 2.37 $ 7.18 $ 4.00(4)
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share of common stock
Income from continuing operations before cumulative
effect of changes in accounting principles $ 1.84 $ 4.15 $ 2.19 $ 0.19 $ 1.43
Income from discontinued operations $ -- $ -- $ -- $ 6.80 $ 2.65
Net income (loss) $ (1.11)(2) $ 4.16(3) $ 2.19 $ 6.99 $ 3.90(4)
Adjusted net income (loss)(5) $ (1.11)(2) $ 4.32(3) $ 2.35 $ 7.09 $ 3.95(4)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR-END(1)
Working capital $ 6,363 $ 6,734 $ 2,401 $ 1,425 $(2,374)
Total assets $34,621 $40,319 $39,426 $40,777 $38,536
Borrowings and capital lease obligations
Short-term $ 1,185 $ 1,464 $ 3,247 $ 4,941 $ 6,629
Long-term $ 5,647 $ 5,350 $ 6,658 $ 6,625 $ 4,495
Stockholders' equity $ 9,063 $14,452 $13,299 $12,875 $13,954
- ------------------------------------------------------------------------------------------------------------------------------------
GENERAL
For the year
Capital expenditures $ 1,416 $ 1,634 $ 2,022 $ 6,988 $ 5,480
Depreciation $ 1,297 $ 1,320 $ 1,415 $ 1,444 $ 1,452
Research and development (R&D) expense(6) $ 1,264 $ 1,588 $ 1,776 $ 1,617 $ 1,308
Average number of shares (millions)
Basic 994 1,036 1,043 1,085 1,129
Diluted 999 1,041 1,051 1,098 1,145
Dividends per common share $ 1.40 $ 1.40 $ 1.40 $ 1.40 $ 1.365
At year-end
Employees (thousands)(7) 79 79 93 94 101
Closing stock price $ 42.40 $ 42.51 $ 48.31 $ 65.88 $ 53.06
Common stockholders of record (thousands) 116 127 132 140 145
- ------------------------------------------------------------------------------------------------------------------------------------
(1) See Management's Discussion and Analysis in Item 7 and the Consolidated
Financial Statements on pages F-1 through F-38, including the quarterly
financial data in Note 31, for information relating to significant items
affecting the results of operations and financial position.
(2) 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 9 to the
Consolidated Financial Statements, beginning on page F-15 of this report.
(3) Includes a cumulative effect of a change in accounting principle benefit of
$11 and $.01 per share, basic and diluted. See Note 9 to the Consolidated
Financial Statements, beginning on page F-15 of this report.
(4) Includes a charge from early extinguishment of debt of $201 and $.18 per
share (basic and diluted), net of taxes.
(5) Reflects pro forma effects relating to the adoption of SFAS No. 142 and the
resulting nonamortization of goodwill and indefinite-lived intangible
assets. See Note 14 to the Consolidated Financial Statements, beginning on
page F-17 of this report.
(6) Excludes purchased in-process research and development.
(7) Includes employees of discontinued Conoco operations prior to 1999.
13
Part II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ANALYSIS OF OPERATIONS
NET SALES
Consolidated net sales in 2002 were $24.0 billion, $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 due to portfolio changes. Net sales
during 2002 were lower due to the company's divestiture of DuPont
Pharmaceuticals and the Clysar(R) shrink film business as well as the
discontinuance of Benlate(R) fungicide. These reductions were partly offset by
the company's acquisition of Liqui-Box Corporation and ChemFirst, Inc. Segment
sales which include transfers and the company's pro rata share of equity
affiliate sales were $26.7 billion, down $1.0 billion or 3 percent. The
portfolio changes reduced segment sales by 4 percent. Excluding portfolio
changes, worldwide segment sales increased 1 percent, reflecting 4 percent
higher volume partly offset by 3 percent lower U.S. dollar selling prices.
Volume increases were most significant in the Textiles & Interiors, Performance
Materials and Coatings & Color Technologies segments. The Textiles & Interiors,
Electronic & Communication Technologies and Coatings & Color Technologies
segments had the most significant downward impact on the worldwide price
average. The effect of currency fluctuations on U.S. dollar sales for the year
was less than one percent. Prices in local currencies declined 3 percent.
Segment sales into the U.S. region declined 5 percent, but were flat after
adjusting for a 5 percent negative impact from portfolio changes. A volume
increase of 3 percent offset 3 percent lower selling prices. Higher U.S. volume
principally reflected improvement in the Textiles & Interiors and Performance
Materials segments. Segment sales into the European region decreased 3 percent
reflecting 4 percent lower level selling prices and a 3 percent negative impact
due to portfolio changes, partly offset by 1 percent higher volume and a 3
percent benefit from the weaker dollar. Segment sales into the Asia Pacific
region increased 3 percent reflecting a 9 percent volume increase partly offset
by a 1 percent negative impact due to portfolio changes. Asian region selling
prices in U.S. dollar terms were 5 percent lower.
Consolidated net sales in 2001 were $24.7 billion, $3.5 billion or 13 percent
below 2000, reflecting 9 percent lower volume, 2 percent lower U.S. dollar
selling prices and a 2 percent reduction due to portfolio changes. Segment sales
which include transfers and the company's pro rata share of equity affiliate
sales were $27.7 billion, down $4.0 billion or 13 percent. Of this decrease,
$850 million or 3 percent was attributable to portfolio changes, primarily the
sale of DuPont Pharmaceuticals and disposition of certain polyester businesses.
Excluding these portfolio changes, worldwide segment sales declined 10 percent,
reflecting 8 percent lower volume and 2 percent lower U.S. dollar selling
prices. Volume declines were most significant in the Textiles & Interiors,
Performance Materials, Coatings & Color Technologies and Electronic &
Communication Technologies segments. The Textiles & Interiors, Agriculture &
Nutrition, and Coatings & Color Technologies segments had the most significant
downward impact on the worldwide price average. The effect of currency
fluctuations, resulting in a stronger dollar during the year, reduced worldwide
sales by 2 percent. Local prices declined 1 percent.
Segment sales into the U.S. region decreased 17 percent, including a 4 percent
impact from portfolio changes, 1 percent lower prices, and 12 percent lower
volume. Lower U.S. volume principally reflected declines in the Textiles &
Interiors, Performance Materials and Electronic & Communication Technologies
segments. European region segment sales decreased 6 percent reflecting 2 percent
lower U.S. dollar selling prices, 3 percent lower volume and a reduction of 1
percent due to portfolio changes. The net effect of currency fluctuations during
the year reduced European segment sales by 3 percent. Segment sales into the
Asia Pacific region decreased 8 percent reflecting a 2 percent volume decline
and 6 percent lower U.S. dollar selling prices.
A reconciliation of segment sales to consolidated net sales for 2002, 2001 and
2000 is included in Note 30 to the Consolidated Financial Statements.
14
Part II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
EARNINGS
Net loss for the year 2002 was $1,103 million compared with net income of $4,339
million in 2001 and $2,314 million in 2000. Income before the cumulative effect
of changes in accounting principles was $1,841 million in 2002 compared to
$4,328 million in 2001 and $2,314 million in 2000. In order to facilitate an
understanding and comparison of results of operations over the three-year
period, the following table of special items is presented.
- ---------------------------------------------------------------------------------------------------------------------------
Diluted
Pretax After-Tax Earnings
SPECIAL ITEMS Benefit Benefit (Loss)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE) (Charge) (Charge)* Per Share
- ---------------------------------------------------------------------------------------------------------------------------
2002
Employee separation costs and write-down of assets $(290) $(200) $(0.19)
Pioneer acquisition related costs 40 67 0.07
Litigation costs (130) (81) (0.08)
Gain on asset sales 109 90 0.09
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
- --------------------------------------------------------------------------------------------------------------------------
Total $(402) $(168) $(0.16)
- --------------------------------------------------------------------------------------------------------------------------
2001
Employee separation costs and write-down of assets $(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
- --------------------------------------------------------------------------------------------------------------------------
2000
Employee separation costs and write-down of assets $(101) $(63) $(0.07)
Pioneer acquisition related costs (626) (410) (0.39)
Litigation costs (145) (106) (0.10)
Gain on sale of equity securities 299 190 0.18
Write-down of WebMD investment (342) (215) (0.20)
Gain on asset sale 23 16 0.02
Gain related to joint venture formation 24 24 0.02
- --------------------------------------------------------------------------------------------------------------------------
Total $(868) $(564) $(0.54)
===========================================================================================================================
* The segment impact of these special items is included in Note 30 to the
Consolidated Financial Statements.
15
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. Net loss for 2002 includes a $2,944 million charge for the
cumulative effect of a change in accounting principle for impairment of
goodwill. Net income for 2001 includes an $11 million benefit from the adoption
of a new accounting standard governing derivative instruments and hedging
activities. 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 detailed in the table on page 15.
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 more than offset 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.
Net income for the year 2001 was $4,339 million compared with $2,314 million in
2000. Net income for 2001 includes an $11 million benefit from the adoption of a
new accounting standard governing derivative instruments and hedging activities.
Income before cumulative effect of changes in accounting principles was $4,328
million in 2001 versus $2,314 million in 2000. 2001 income before cumulative
effect of changes in accounting principles includes a net after-tax benefit of
$3,077 million for special items, and the year 2000 includes a net after-tax
charge of $564 million related to special items. Such special items for each
year are detailed in the table on page 15.
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 a significant decline in
operating income principally due to lower sales volumes and selling prices
resulting from a severe global economic downturn as well as from secular
weaknesses for nylon and polyester in the apparel and textile industries.
Earnings per share on a diluted basis were $4.16 in 2001 versus $2.19 in 2000.
INCOME TAXES
The determination of the provision for income taxes and the associated assets
and liabilities on the balance sheet requires management to make certain
estimates and assumptions. Management judgment is utilized to determine the
appropriate valuation allowance provided against deferred tax assets.
Furthermore, with tax returns being filed after the close of the financial
year-end, inevitably actual results will differ to some extent from the
estimates on which the financial statements are prepared. In addition,
assessments of uncertainties related to audit resolutions in multiple taxing
jurisdictions are also required.
2002, 2001, and 2000 income tax expense and effective income tax rates (EITR)
were as follows:
- --------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2002 2001 2000
- --------------------------------------------------------------------------------
Income tax expense $185 $2,467 $1,072
Effective income tax rate 8.7% 36.0% 31.1%
================================================================================
The 2002 EITR of 8.7 percent is significantly lower than the 2001 EITR of 36
percent. There are 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 special items discussed on page 15. 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. The primary special items which contributed to the
lower EITR are the sale of DuPont Pharmaceuticals, employee separation costs and
write-down of assets and agreement on certain prior year audit issues.
The 2001 EITR of 36 percent is higher than the 2000 EITR of 31.1 percent. This
increase is primarily due to the tax impact of the sale of DuPont
Pharmaceuticals.
16
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
RESEARCH AND DEVELOPMENT
The company has broad and deep science and technology capabilities and its
objective is to connect these capabilities to existing and new markets. The
company's goal is to achieve one-third of total company revenues from new
products introduced within the last five years by 2005.
Research and development expense was $1,264 million, $1,588 million and $1,776
million in 2002, 2001, and 2000, respectively. The decline in research and
development expense over the three-year period is primarily attributable to the
company's divestiture of DuPont Pharmaceuticals, its research intensive
pharmaceuticals subsidiary, on October 1, 2001. Excluding pharmaceuticals,
research and development expense in 2002 increased 8 percent over 2001.
2002 research and development expense represents approximately 5 percent of
sales. 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 2003. Because of its
broad array of products and customers, the company's future financial
performance is not materially dependent on the success or failure of any single
research or development project.
RESTRUCTURING ACTIVITIES
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. These programs are discussed below. Additional
details are contained in Note 5 to the Consolidated Financial Statements.
2002-COATINGS & COLOR TECHNOLOGIES
A restructuring program was instituted within Coatings & Color Technologies in
the fourth quarter of 2002. Under the program, costs to terminate approximately
775 employees involved in technical, manufacturing, marketing and administrative
activities reduced 2002 net income $69 million before taxes. About 175 employees
have been terminated as of December 31, 2002, and the remaining employees will
cease working by December 31, 2003. In addition, the company will 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 $80 million. About 70 percent of these cash outlays are
expected to be 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 being
realized in 2003 and essentially all the remaining savings expected to be
realized in 2004. The savings in 2003 will be essentially offset by accelerated
depreciation and dismantlement charges on the facilities that will be shut down.
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 of 2002. Under the program, the cost 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, reduced 2002 net
income $208 million before taxes. About 1,425 employees have been terminated as
of December 31, 2002, and the additional employee terminations will be completed
before July 2003.
In the aggregate, payments from operating cash flows to terminated employees and
to third parties for dismantlement and removal activities are expected to total
about $165 million. About 30 percent of the cash outlays were made in 2002, and
50 and 10 percent are expected to be paid in 2003 and 2004, respectively, with
the remainder expected to be paid starting in 2005. The company expects annual
pretax cost savings of about $120 million per year from this restructuring
program when completed. About 20 percent of these savings were realized in 2002
and essentially all the remaining savings are expected to be realized in 2003.
About 80 percent of these savings will result in reduced Cost of Goods Sold and
Other Operating Charges, with the remaining 20 percent expected to be 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 PROGRAMS
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 workforce 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 for contract
cancellations are expected to total about $380 million. About $150 million of
these cash outlays were made in 2001, about $182 million were made in 2002, and
most of the remaining payments will be made in 2003. The 2002 benefit to
earnings was approximately $400 million before taxes with about 60 percent of
these savings resulting in reduced Cost of Goods Sold and Other Operating
Charges, about 30 percent 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.
ACCOUNTING STANDARDS ISSUED NOT YET ADOPTED
In 2001, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The company will adopt SFAS No. 143
on January 1, 2003. The provisions of SFAS No. 143 require companies to record
an asset and related liability for the costs associated with the retirement of a
long-lived tangible asset if a legal liability to retire the asset exists. Based
on the company's evaluation to date, the adoption of SFAS No. 143 is expected to
result in a charge of approximately $.03 per share that will be reported as the
cumulative effect of a change in accounting principle.
In 2002, the FASB issued Interpretation (FIN) No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." The initial recognition and measurement provisions of
FIN No. 45 apply on a prospective basis to guarantees issued or modified after
December 31, 2002. As required, the company has adopted the disclosure
requirements of the interpretation as of December 31, 2002 (See Note 23). The
company will apply the initial recognition and measurement provisions on a
prospective basis effective January 1, 2003. The Interpretation 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 company is in the process of evaluating the recognition and measurement
provisions of the Interpretation and absent any unforeseen events, management
does not expect that the adoption of these provisions will have a significant
impact on the company's financial condition, liquidity or results of operations.
In 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of SFAS No. 123." The
company plans to begin expensing stock options granted to employees after
January 1, 2003, using the prospective method as set forth in the guidelines of
this statement as amended. Under historical grant levels and current valuation
assumptions, the resulting increase in noncash expense is expected to reduce the
company's earnings per share by approximately $.02 in 2003. This impact is
expected to grow to about $.06 per share by 2005 and then stabilize, as most
stock options vest over a three-year period.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Certain Variable
Interest Entities" (VIEs), which is an interpretation of Accounting Research
Bulletin (ARB) No. 51, "Consolidated Financial Statements." FIN No. 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. The company currently has relationships with three VIEs within the
financing structures of its synthetic lease programs. (See Off-Balance Sheet
Arrangements beginning on page 35). These entities serve as the owner/lessors
and debt holders of the assets in the programs. The assets and liabilities of
these entities are not consolidated within the company's Consolidated Financial
Statements. As of December 31, 2002, the fair values of the assets under these
programs were approximately $330 million and the fair values of the associated
liabilities and noncontrolling interests were approximately $331 million.
Residual value guarantees
18
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
under these programs were $277 million at December 31, 2002. The company is in
the process of reviewing the provisions of FIN No. 46. In response to this
Interpretation, the company has identified several options, including: (1)
consolidating the VIEs into the company's Consolidated Financial Statements, (2)
purchasing selected assets from the VIEs, or (3) finding alternative financing
sources. None of these options are expected to have a material impact on the
company's consolidated financial position, liquidity, or results of operations.
CRITICAL ACCOUNTING ESTIMATES
A summary of the company's significant accounting policies is included in Note 1
to the Consolidated Financial Statements. Management believes that the
application of these policies on a consistent basis enables the company to
provide the users of the financial statements with useful and reliable
information about the company's operating results and financial condition.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities and the reported amounts of revenue and expenses.
Judgments and assessments of uncertainties are required in applying the
company's accounting policies in many areas. For example, key assumptions are
particularly important when determining the company's projected liabilities for
pension and other postretirement employee benefits. Information with respect to
pension and other postretirement employee expenses and liabilities, together
with the impact of changes in key assumptions is discussed under Long-Term
Employee Benefits beginning on page 38.
Other areas in which significant uncertainties exist include, but are not
limited to, projected costs to be incurred in connection with environmental and
tax matters and the resolution of litigation. A discussion of environmental
matters, including information as to the uncertainties involved in developing
reasonable estimates of future site remediation costs is included under
Environmental Matters beginning on page 39. Information on some of the key
estimates and assumptions on which the company's annual provision for income
taxes is based may be found under Income Taxes on page 16. There is also
significant uncertainty with respect to estimating legal liabilities. Factors
which are considered include the nature of the specific claim, the company's
experience with similar types of claims, the jurisdiction in which the matter is
filed and the current status of the matter.
Actual results will inevitably differ to some extent from the estimates on which
the company's Consolidated Financial Statements are prepared at any given point
in time. Despite these inherent limitations, management believes that the
company's Management's Discussion and Analysis and audited Consolidated
Financial Statements provide a meaningful and fair perspective on the company.
CORPORATE OUTLOOK
The company expects 2003 earnings per share to reflect increased sales volumes,
barring the occurrence of significant world events or economic disruption. In
addition, the company expects to benefit from continued efforts to control
costs.
Sales volumes in 2003 will reflect, in part, the worldwide GDP growth, which the
company expects to be about 2 percent for 2003. Sales for the company's products
most closely track the worldwide manufacturing sector, which has been lagging
the overall recovery of the economy from the last recession. In the United
States, housing and motor vehicle production are both important markets to the
company; in 2003, housing sales are expected to continue at their record levels
of 2002 and motor vehicle production is expected to be slightly below its record
levels of 2002. The U.S. production agriculture economic environment, which is
also important to the company, is expected to be slightly more favorable in
2003. However, given the U.S. manufacturing sector's very low capacity
utilization, the company's ability to raise prices in the face of higher energy
and raw material costs may be limited.
In addition to the macroeconomic environment, there are several important
factors that influence the company's outlook for the year 2003:
1) The combined impact of pension and other postretirement expenses is
expected to negatively impact 2003 earnings per share by $0.34 to
$0.39, versus prior year.
2) The company expects its effective income tax rate in 2003 to be more
in line with historical rates, significantly higher than the 2002 rate
of 8.7 percent.
19
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
3) Two newly adopted accounting standards will adversely impact 2003
earnings per share by about $0.05 - SFAS No. 143 for asset retirement
obligations and SFAS No. 123, as amended, for stock options.
Prospects for longer term growth will continue to be influenced by the following
factors: 1) growth in global economies, particularly those in North America,
Europe and Asia Pacific regions; 2) improving market conditions including demand
from the U.S. manufacturing sector and production agriculture; 3) successful
commercialization of new products arising from research and development; 4)
stronger worldwide demand and strong pricing for commodity chemicals and polymer
products; 5) recovery of the depressed electronics and high-technology markets;
and 6) the successful separation of the Textiles & Interiors segment.
SEGMENT REVIEWS
SEGMENT SALES DISCUSSED BELOW INCLUDE TRANSFERS AND PRO RATA EQUITY AFFILIATE
SALES. SEGMENT AFTER-TAX OPERATING INCOME (ATOI) DOES NOT INCLUDE CORPORATE
EXPENSES, INTEREST, EXCHANGE GAINS (LOSSES) AND CORPORATE MINORITY INTERESTS.
IN 2002 THE COMPANY ANNOUNCED THE REALIGNMENT OF ITS BUSINESSES INTO FIVE
MARKET- AND TECHNOLOGY-FOCUSED GROWTH PLATFORMS AND THE CREATION OF A DUPONT
TEXTILES & INTERIORS SUBSIDIARY. THE DISCLOSURES CONTAINED IN THIS REPORT
REFLECT THIS NEW ORGANIZATIONAL STRUCTURE. PRIOR YEARS' DATA HAVE BEEN
RECLASSIFIED TO REFLECT THE 2002 ORGANIZATIONAL STRUCTURE.
- --------------------------------------------------------------------------------
AGRICULTURE & NUTRITION
- --------------------------------------------------------------------------------
Agriculture & Nutrition's mission is to leverage biotechnology and food value
chain knowledge to increase the quality, quantity and safety of the global food
supply. The segment comprises a broad portfolio of products, services and strong
global brands such as Pioneer(R) brand seed products and DuPont(TM) Solae(TM)
soy protein. It also has well-established brands of insecticides, fungicides and
high-value, low-use-rate herbicides. Research and development efforts focus on
increasing grower productivity, improving safe handling and environmental impact
of pest control products, and using technology to enhance the value of grains
used in feed and food.
During 2002, the commercial seed industry for major crops remained fairly stable
in terms of area planted. Value growth continues to be achieved by improving
crop yields and by incorporating genetic traits that confer insect protection
and herbicide tolerance. In 2002, the crop protection industry continued a
gradual decline from its peak in 1996. This decline has been driven by low
commodity prices, generic competition and a technology shift to genetic insect
control and herbicide tolerance traits. The markets for soy protein and
microbial testing continued to grow significantly as consumers increase their
demand for safe and healthy food.
Agriculture & Nutrition participates in the production agriculture market
through its subsidiary, Pioneer, the world's largest commercial seed producer,
and its crop protection product offerings. The segment also provides soy-based
food ingredients, diagnostic testing equipment and services, and liquid food
packaging systems through its subsidiaries, DuPont Protein Technologies (DPT),
Qualicon, and Liqui-Box, respectively.
Pioneer's principal products are hybrid seed corn, soybean seed, and other crop
seed lines sold to customers in key markets throughout the world. Pioneer is
also focused on developing products used to produce grain for human food and
industrial uses, as well as developing grain identity preservation systems with
entities throughout the crop value chain. Pioneer sales increased over 5 percent
during 2002. In the North American market, Pioneer(R) brand soybean varieties
gained market share, while corn seed market share declined slightly.
Internationally, strong product performance and higher sales of corn with insect
protection traits led to corn market share gains in Latin America. Corn market
share grew slightly in Europe. During 2002, Pioneer(R) brand corn hybrids
outperformed competitive hybrids in North America by an average yield of 6.8
bushels per acre based on 184,000 side-by-side comparisons. Farmers growing
Pioneer(R) brand corn hybrids won 23 of 27 categories in the 2002 National Corn
Growers Association Corn Yield Contest, including a six-time winner who produced
a record breaking 442 bushels per acre.
Agriculture & Nutrition serves the global production agriculture industry with
crop protection products for the grain and specialty crop sectors as well as
forestry and vegetation management. The crop protection product offerings
include herbicide, fungicide, and insecticide products and services. During
2002, sales of crop protection products declined 1 percent in an industry that
declined over 2 percent. Agriculture & Nutrition continues to increase its focus
on crop protection products serving
20
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
specialty markets such as fruits, vegetables, and selected plantation crops by
offering growers, shippers, and processors broad solutions to improve their
businesses.
DPT is a world leader in the research, manufacturing and marketing of isolated
soy protein and soy fiber ingredients. Qualicon provides diagnostic products to
help food and health care industry customers control the microbial environment
in their manufacturing processes and facilities. Qualicon products include
BAX(R), an automated instrument that uses a genetics-based system that provides
accurate and rapid detection of harmful microorganisms, and the RiboPrinter(R)
microbial characterization system, the world's only automated instrument for
fingerprinting the DNA of bacteria. During 2002, DPT and Qualicon sales
experienced double-digit growth.
On May 31, 2002, the company completed the acquisition of Liqui-Box Corporation
for $272 million. The acquired business generates annual sales of approximately
$150 million with operations in North America, Europe and Asia. This business
was combined with DuPont Canada's Enhanced Packaging Systems business and
operates as Liqui-Box. The new entity offers complete turnkey systems for the
aseptic and refrigerated liquid packaging of beverages, dairy products and
pumpable foods in retail and institutional applications globally.
2002 DEVELOPMENTS
Key growth initiatives in Agriculture & Nutrition included:
o Solae(TM) brand soy protein continued to increase its presence in consumer
markets. A number of major global food companies have introduced, or are
planning to introduce, food and beverage products containing Solae(TM). 8th
Continent(TM) soymilk, which is a product of a joint venture between DuPont
and General Mills, achieved the No. 2 position for soymilk in its first
full year of sales.
o Pioneer received key Japanese regulatory approvals for the Herculex(R)(1) I
insect protection trait, which was developed in a research collaboration
between Pioneer and Dow AgroSciences. Combined with previous U.S.
approvals, Pioneer plans to offer new corn hybrids in North America with
the Herculex(R) I trait at introductory levels in 2003. The trait will give
corn growers protection against more pests than other in-plant insect
protection products.
o The segment's newest insecticides, DuPont(TM) Steward(R) and DuPont(TM)
Avaunt(TM), grew at double-digit rates, principally in Asia-Pacific and
North America. DuPont(TM) Steadfast(TM) herbicide also experienced
substantial revenue growth, aided by a unique bulk delivery system.
o Steps were taken to increase the segment's presence in China by (1) signing
an agreement between DPT and Luohe Shineway Industry Group Company, Ltd. to
establish a joint venture to produce high quality soy protein to meet the
growing demand for healthy food in China, and (2) forming a joint venture
between Pioneer and Denghai Seed Group, one of China's largest seed
companies, to develop and distribute high-yielding corn hybrids for the
summer corn market, which represents about one third of the total corn
market in China.
o A corn herbicide marketing and supply agreement was executed with Syngenta
to provide customers with expanded choices and greater value. Syngenta will
promote DuPont(TM) Accent(R) and DuPont(TM) Steadfast(TM) herbicides, while
DuPont will promote Syngenta's Calisto(TM)(2) herbicide.
o The U.S. Department of Agriculture's Food Safety and Inspection Service
announced adoption of the BAX(R) instrument to screen meat and poultry
samples for Listeria monocytogenes. The system is emerging as a critical
tool to address global health problems related to food borne disease,
antibiotic resistance and pharmaceutical quality assurance.
Other significant developments included:
o A broad-reaching business agreement was finalized between DuPont, Pioneer
and Monsanto Company, which provides Pioneer access to several key traits.
As part of the agreement, Pioneer obtained royalty-bearing access to
Monsanto's newest Roundup Ready(R)(3) corn technology, continued access to
Roundup Ready(R) soybean and canola technology, and freedom to operate for
second generation European corn borer and corn rootworm traits through a
royalty-bearing license. As part of the agreement, the com-
- ----------
(1) Herculex(R)is a registered trademark of Dow AgroSciences LLC
(2) Calisto(TM)is a trademark of Syngenta
(3) Roundup Ready(R)is a registered trademark used under license from the
Monsanto Company
21
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
panies have resolved all issues related to certain previously contested
germplasm. Pioneer plans to offer new corn hybrids in North America with
the Roundup Ready(R) gene at introductory levels in 2003.
o An impairment charge of $2,866 million was recorded as a cumulative effect
of a change in accounting principle to write off goodwill associated with
the company's acquisition of Pioneer. The primary factors that resulted in
the impairment were the difficult economic environment in the agriculture
sector, slower than expected development of and access to biotechnology
traits, and a slower than expected rate of acceptance by the public,
especially in Europe, of new agricultural products based on biotechnology.
The effect of these factors is reflected in reported results and
deterioration from these levels is not expected.
In January 2003, DuPont and Bunge Limited announced that they intend to form an
alliance to significantly grow their agriculture and nutrition businesses. The
alliance will include (1) a majority-owned venture, Solae(TM) LLC, for the
global production and distribution of specialty food ingredients, beginning with
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 to farmers. DuPont will
contribute its DPT food ingredients business for a majority interest in
Solae(TM) LLC. Initially, global revenues of the venture are expected to exceed
$800 million annually. Solae(TM) LLC, will participate in the rapidly growing
market for healthy and better tasting food proteins. It will combine
complementary capabilities and assets and will provide a broad offering of soy
ingredient products to better fit customer needs, including textured vegetable
proteins, soy concentrates and isolates, and specialty lecithins.
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 acquisition of
Liqui-box. ATOI was $443 million excluding a charge of $2,866 million
attributable to the cumulative effect of a change in accounting principle as
discussed above. 2002 also 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 pending sale of a manufacturing site in Europe, and a
$29 million charge to write off inventories of discontinued herbicide products.
2002 ATOI also reflects the benefit of higher Pioneer, DPT and Qualicon sales
and lower overall segment costs, the latter principally a $108 million benefit
(versus prior year) from the absence of 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 separation
costs, a write-down of assets, legal settlements, and purchase accounting
adjustments related to the sale of Pioneer inventory.
2001 VERSUS 2000 Sales of $4.3 billion were 4 percent lower, reflecting 3
percent lower prices and 1 percent lower volume. ATOI was $21 million compared
with a loss of $179 million. ATOI in 2001 improved in the seed, food ingredients
and safety businesses but was more than offset by lower earnings in the crop
protection business due to lower sales and margins. 2001 included net charges of
$225 million for employee separation costs, a write-down of assets, legal
settlements, and purchase accounting adjustments related to the sale of Pioneer
inventory. ATOI in 2000 was reduced by a charge to write down investment in
WebMD to fair market value and purchase accounting charges, principally related
to sale of Pioneer inventory.
OUTLOOK The production agriculture economic environment is expected to be
slightly more favorable in 2003 due to improved commodity grain prices and the
new five-year U.S. Farm Bill. Longer term, the new farm bill provides slightly
more support for grains (corn) and less for oilseeds (soybeans) and is not
expected to have any significant impact on farmer income or cash flow, as
production in the United States should continue at relatively stable, high
levels.
Pioneer is well positioned for 2003 in global markets with industry leading
product performance and ample supplies of quality products. In the key U.S.
market, corn acres are expected to be up slightly in 2003 over the prior year,
improving Pioneer's prospects for increased sales of its most profitable
products. In the North American market, Pioneer expects to introduce
approximately 43 new corn hybrids and 23 new soybean varieties.
Agriculture & Nutrition expects to reduce costs and improve productivity of crop
protection products while facing significant competitive challenges and change
during 2003, due to continuing industry consolidation and the influence of
insect protected and herbicide tolerant crops.
22
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
DPT anticipates strong growth as major food companies continue to develop new
mainstream products utilizing Solae(TM) soy proteins, as 8th Continent(TM)
soymilk is launched in additional markets, and after the venture with Bunge
begins to generate new opportunities. Qualicon also plans to aggressively grow
its food safety business in 2003 with expanded testing capability and global
utilization of BAX(R) instruments.
Liqui-Box plans to grow its liquid packaging systems business through geographic
expansion and by expanding its technology platforms.
- --------------------------------------------------------------------------------
COATINGS & COLOR TECHNOLOGIES
- --------------------------------------------------------------------------------
The mission of Coatings & Color Technologies is to develop and market coatings,
ingredients, systems and technologies that address industrial and consumer
needs. The segment is the world's leading automotive coatings supplier and the
world's largest manufacturer of titanium dioxide white pigments which serve
customers in the coatings, plastic and paper industries.
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, appliances, outdoor furniture, and
bicycles. The company markets its Refinish products using the DuPont(TM)
Standox(R), DuPont(TM) Spies Hecker(R), DuPont(TM) and DuPont(TM) 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.
Coatings & Color Technologies also offers specialty products for digital
printing, including the DuPont(TM) Artistri(TM) Ink line for textiles, and
products for adhesive bonding and electrical insulation. In addition, various
grades of DuPont(TM) Ti-Pure(R) titanium dioxide (TiO2) in both slurry and
powder form serve the coatings, plastic and paper industries.
North American light vehicle builds were up 6 percent in 2002 versus 2001, while
2002 European builds were down about 5 percent. Refinish markets rebounded in
2002 versus 2001 and the company gained share in North America and Europe.
Industrial and powder coatings demand remained depressed in 2002 with particular
softness in Europe.
Industry demand for titanium dioxide pigment grew about 7 percent in 2002.
Growth was particularly high, in excess of 10 percent, in both Asia Pacific and
Europe, while other regions grew at a more modest rate of 2-3 percent. Industry
pricing reached cyclical lows early in 2002 but improved through the remainder
of the year.
2002 DEVELOPMENTS
Key growth initiatives in Coatings & Color Technologies included:
o DuPont(TM) Automotive Systems SupraShield(TM) brand, a new premium
automotive clearcoat finish that resists scratches without sacrificing
other important appearance attributes, was introduced. This product is
based on a polymer engineering breakthrough which has resulted in a class
of "SuperSolids" coatings that reduce solvents and increase the solids
content of coatings. This ultra-low emissions coatings technology was
introduced at the Daimler Chrysler assembly plant in Newark, Delaware.
o The segment increased to 50 percent its share of the refinish coatings
requirements at AutoNation, Inc., America's largest retailer of both new
and used vehicles.
o The company was awarded a contract to supply one-third of the interior
coatings demand for the West-East Natural Gas Pipeline project in China.
This is the largest pipeline in China.
o Coatings & Color Technologies announced a partnership with Ichinose Toshin
Kogyo Co., LTD, combining the Artistri(TM) technology for textile printing
with the ICHINOSE 2020 printer. This system will provide new opportunities
and enhance operations of companies in the printed apparel industry
reducing the design-to-production cycle time.
o New TiO2 products were introduced to both the laminate paper and
engineering plastics industries, which together represent approximately
$100 million of new market opportunity.
In the fourth quarter of 2002, Coatings & Color Technologies announced a
rationalization program to enhance its position as a leader in the highly
competitive global coatings industry and to align its businesses with
accelerating structural changes in the industry. This program will result in
workforce reductions of
23
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
about 775 employees principally in Europe and the United States. In addition
Coatings & Color Technologies will shut down operating facilities during 2003
due to transferring production to more cost effective facilities.
2002 VERSUS 2001 Sales of $5.0 billion were 2 percent higher driven by increased
sales of automotive finishes. Volumes improved 5 percent while selling prices
declined 3 percent. ATOI was $483 million compared with $452 million. 2002
includes a $42 million net charge for employee separation costs. 2001 includes a
similar net charge totaling $46 million. The segment ATOI improvement reflects
higher earnings in coatings partly offset by lower earnings in TiO2 products,
the latter resulting principally from lower prices.
2001 VERSUS 2000 Sales of $4.9 billion were 10 percent lower resulting from a 7
percent volume decline and 3 percent lower prices. ATOI was $452 million versus
$724 million. Lower ATOI principally resulted from lower titanium dioxide prices
and volumes and lower coatings volumes.
OUTLOOK The global coatings businesses will operate in a challenging environment
in 2003 as competitive conditions are expected to remain intense. All areas of
the value chain--suppliers, distributors, and customers--are expected to
continue to experience consolidation. Most manufacturers are continuing to focus
on environmentally friendly products that provide systems solutions. North
American OEM inventory levels are above normal and it is expected that 2003
North American builds will be about 2 percent below 2002 levels. European
automotive builds are expected to increase 1 percent in 2003 versus 2002.
The segment expects improved coatings revenues and earnings in 2003 based on
growth in Asia, new non-automotive applications, and continued growth in OEM and
refinished coatings. In 2003 earnings from titanium dioxide offerings are also
expected to improve based on continued strengthening of global economies and
improved pricing. Continued revenue growth is expected based on moderate, but
continued growth, in demand and improved industry capacity utilization and
pricing. With moderate economic growth, the upward price momentum that began in
mid-2002 should continue through 2003. In addition, new product offerings are
expected to drive revenue growth at a somewhat higher rate than the industry.
- --------------------------------------------------------------------------------
ELECTRONIC & COMMUNICATION TECHNOLOGIES
- --------------------------------------------------------------------------------
Electronic & Communication Technologies focuses on the high growth global
electronics and communication industries. The mission of the segment is to
establish the company as the recognized market leader for electronic materials
and components and the key technology innovation partner for all major
electronics and communication companies. To achieve this mission, the segment
will leverage a strong materials and technology base to provide innovative
solutions that advance the speed and reduce the size and cost of electronic and
communication devices and systems.
Electronic & Communication Technologies provides a wide range of advanced
materials for the electronics industry; flexible printing and color proofing
systems for the packaging and commercial printing industries; and a wide range
of fluoropolymer and fluorochemical products for electronics, communications,
and industrial markets. The segment is also pursuing development activities in
the flat panel display and fuel cell markets.
The primary markets served by Electronic & Communication Technologies began a
weak recovery during the first half of 2002, followed by essentially no growth
during the second half of the year.
Major product lines for the global electronics industry include: DuPont(TM)
Kapton(R) polyimide film, DuPont(TM) Pyralux(R) flexible laminates, DuPont(TM)
Riston(R) dry film photoresists, DuPont(TM) Green Tape(TM) low temperature
co-fired ceramics, DuPont(TM) Fodel(R) photoimageable composites and DuPont(TM)
Mazin(R) colloidal silica-based slurries. Market segments served include
integrated circuit fabrication materials, integrated circuit 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.
Electronic & Communication Technologies, the leader in flexography printing and
color proofing, markets to 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), DuPont(TM) Cromalin(R), and DuPont(TM) Dylux(R).
In addition, Electronic & Communication Technologies is the largest global
manufacturer of industrial and specialty fluoro-
24
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
chemicals 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, DuPont(TM) Formacel(R) foam
expansion agents, DuPont(TM) Dymel(R) propellants, DuPont(TM) Vertrel(R)
solvents, DuPont(TM) Zyron(R) electronic gases, DuPont(TM) FE(TM) fire
extinguishants, DuPont(TM) Teflon(R) and DuPont(TM) Tefzel(R) fluoropolymer
resins, DuPont(TM) Autograph(R) and Teflon(R) non-stick finishes, and DuPont(TM)
Teflon(R) and DuPont(TM) Tedlar(R) fluoropolymer films.
One of the segment's important developmental activities is focused on the global
flat panel display market. Based on its core competencies in polymer science and
optical components, the business is building capabilities to meet the
performance and cost demands of target markets. It is investing in technology
and strategic alliances to build a broad base of intellectual property and
manufacturing expertise.
The segment is also building on the market leading position of DuPont(TM)
Nafion(R) membrane to target growth opportunities in proton exchange membrane
(PEM) fuel cells. Applications targeted for this technology include personal
transportation and portable power devices.
2002 DEVELOPMENTS
Key growth initiatives in Electronic & Communication Technologies included:
o ChemFirst, Inc. was acquired in November 2002, and brought two integrated
circuit fabrication materials businesses, EKC Technology and ChemFirst
Electronic Materials. These new businesses complement the company's role as
a leading global supplier of ceramic and organic packaging and circuit
materials to the electronics industry. EKC Technology is a leading maker of
advanced semiconductor photoresist removers and has significant technology
in chemical mechanical planarization materials. ChemFirst Electronic
Materials (renamed DuPont Electronic Polymers) manufactures polymers for
248 nanometer photoresists. The addition of these businesses makes the
company a leading supplier of integrated circuit fabrication materials.
o The segment strengthened its position in integrated circuit packaging by
purchasing a minority interest in Merrimac Industries. Merrimac is an
industry leader with expertise in design, simulation, prototyping and
manufacture of multi-layer, high-frequency electronic