2003
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 COMMISSION FILE NUMBER 1-815
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E. I. DU PONT DE NEMOURS
AND COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0014090
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1007 MARKET STREET
WILMINGTON, DELAWARE 19898
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 302 774-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
(EACH CLASS IS REGISTERED ON THE NEW YORK STOCK EXCHANGE, INC.):
TITLE OF EACH CLASS
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Common Stock ($.30 par value)
Preferred Stock
(without par value-cumulative)
$4.50 Series
$3.50 Series
NO SECURITIES ARE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT.
---------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE ACT).
YES [X] NO [ ]
THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NONAFFILIATES OF THE
REGISTRANT (EXCLUDES OUTSTANDING SHARES BENEFICIALLY OWNED BY DIRECTORS AND
OFFICERS AND TREASURY SHARES) AS OF JUNE 30, 2003, WAS APPROXIMATELY $41.0
BILLION.
AS OF JANUARY 31, 2004, 997,838,775 SHARES (EXCLUDES 87,041,427 SHARES OF
TREASURY STOCK) OF THE COMPANY'S COMMON STOCK, $.30 PAR VALUE, WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
(SPECIFIC PAGES INCORPORATED ARE INDICATED UNDER THE APPLICABLE ITEM HEREIN):
INCORPORATED
BY REFERENCE
IN PART NO.
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The company's Proxy Statement in connection with the
Annual Meeting of Stockholders to be held on April 28, 2004 ....... III
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E. I. DU PONT DE NEMOURS AND COMPANY
FORM 10-K
TABLE OF CONTENTS
The terms "DuPont" or the "company" as used herein refer to E. I. du Pont de
Nemours and Company and its consolidated subsidiaries (which are wholly owned or
majority-owned), or to E. I. du Pont de Nemours and Company, as the context may
indicate.
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PAGE
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PART I
Forward-Looking Statements 3
Item 1. Business 4
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders
and Executive Officers of the Registrant 10
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PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 41
Item 8. Financial Statements and Supplementary Data 43
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure 43
Item 9A. Controls and Procedures 43
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PART III
Item 10. Directors and Executive Officers of the Registrant 43
Item 11. Executive Compensation 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 44
Item 13. Certain Relationships and Related Transactions 44
Item 14. Principal Accountant Fees and Services 44
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PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 45
SIGNATURES 47
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NOTE ON INCORPORATION BY REFERENCE
Information pertaining to certain Items in Part III of this report is
incorporated by reference to portions of the company's definitive 2004 Annual
Meeting Proxy Statement to be filed within 120 days after the end of the year
covered by this Annual Report on Form 10-K, pursuant to Regulation 14A (the
Proxy).
2
PART I
CAUTIONARY STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
FORWARD-LOOKING STATEMENTS
This report, including "Management's Discussion and Analysis" in Item 7,
contains forward-looking statements which may be identified by their use of
words like "plans," "expects," "will," "anticipates," "intends," "projects,"
"pending," "estimates" or other words of similar meaning. All statements that
address expectations or projections about the future, including statements about
the company's strategy for growth, product development, market position,
expenditures and financial results, are forward-looking statements.
Forward-looking statements are based on certain assumptions and expectations of
future events. The company cannot guarantee that these assumptions and
expectations are accurate or will be realized. In addition, the following are
some of the important factors that could cause the company's actual results to
differ materially from those projected in any such forward-looking statements:
o The company operates in approximately 75 countries worldwide and derives 55
percent of its revenues from sales outside the United States. Therefore,
governmental and quasi-governmental activities, including changes in the
laws or policies of any country in which the company operates, could affect
the company's business and profitability in that country. Also, the
company's business and profitability in a particular country could be
affected by political or economic repercussions on a domestic, country
specific or global level from acts of terrorism or war (whether or not
declared) and the response to such activities. In addition, economic
factors (including slowing economic growth, particularly in the U.S.,
Europe and Asia Pacific, inflation or fluctuations in interest and foreign
currency exchange rates) and competitive factors (such as greater price
competition or expiration of patent protection) could affect the company's
financial results.
o The company's growth objectives are largely dependent on its ability to
renew its pipeline of new products and services and to bring those products
and services to market. This ability may be adversely affected by
difficulties or delays in product development such as the inability to:
identify viable new products; successfully complete research and
development; obtain relevant regulatory approvals; obtain adequate
intellectual property protection; or gain market acceptance of the new
products and services.
o The company's ability to grow earnings will be affected by increases in the
cost of raw materials. The Performance Materials and Textiles & Interiors
segments are particularly affected by increases in the costs of oil,
natural gas and products derived from oil and natural gas. The company may
not be able to fully offset the effects of higher raw material costs
through price increases or productivity improvements.
o As part of its strategy for growth, the company has made and may continue
to make acquisitions and divestitures and form strategic alliances. The
successful separation of Textiles & Interiors is important to the company's
strategies to improve ongoing operations; however, there can be no
assurance that this or any other planned divestiture or acquisition will be
completed or beneficial to the company.
o To a significant degree, results in the company's Agriculture & Nutrition
segment reflect changes in agricultural conditions, including weather and
government programs. These results also reflect the seasonality of sales of
agricultural products; highest sales in the Northern Hemisphere occur in
the first half of the year. In addition, demand for products produced in
these segments may be affected by market acceptance of genetically enhanced
products.
o The company has undertaken and may continue to undertake productivity
initiatives, including organizational restructurings and Six Sigma
productivity improvement projects, to improve performance and generate cost
savings. There can be no assurance that these will be completed or
beneficial to the company. Also, there can be no assurance that any
estimated financial benefit from such activities will be realized.
o The company's facilities are subject to a broad array of environmental laws
and regulations. The costs of complying with complex environmental laws and
regulations, as well as internal voluntary programs, are significant and
will continue to be so for the foreseeable future. The company's accruals
for such costs and liabilities may not be adequate since the estimates on
which the accruals
3
PART I
are based depend on a number of factors including the nature of the
allegation, the complexity of the site, the nature of the remedy, the
outcome of discussions with regulatory agencies and other potentially
responsible parties (PRPs) at multiparty sites, and the number and
financial viability of other PRPs.
o The company's results of operations could be affected by significant
litigation adverse to the company, including product liability claims,
patent infringement claims and antitrust claims.
The foregoing list of important factors is not all inclusive, or necessarily in
order of importance.
ITEM 1. BUSINESS
The company's annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports are accessible on
the company's Web site at WWW.DUPONT.COM by clicking on the tab labeled
"Investor Center" and then on "SEC filings." These reports are made available,
without charge, as soon as is reasonably practicable after the company files or
furnishes them electronically with the Securities and Exchange Commission.
DuPont was founded in 1802 and was incorporated in Delaware in 1915. DuPont is a
world leader in science and technology in a range of disciplines, including
high-performance materials, synthetic fibers, electronics, specialty chemicals,
agriculture and biotechnology. The company operates globally, manufacturing a
wide range of products for distribution and sale to many different markets,
including the automotive, textile, construction, agricultural, medical,
packaging, electronics, and the nutrition and health markets. Total worldwide
employment at year-end 2003 was approximately 81,000 people.
In 2002, the company strategically realigned its businesses into five market-
and technology-focused growth platforms. The growth platforms are: Agriculture &
Nutrition; Coatings & Color Technologies; Electronic & Communication
Technologies; Performance Materials; and Safety & Protection. These growth
platforms are designed to address large, attractive market spaces that allow the
company to leverage its science and technology, products and brands, market
access, and global reach to bring innovative solutions to meet specific customer
needs. A sixth platform, Textiles & Interiors, was also formed to prepare it for
separation from the company. On November 17, 2003, the company and Koch
Industries, Inc. (Koch) announced that they had reached a definitive agreement
to sell substantially all of the net assets related to the Textiles & Interiors
segment to subsidiaries of Koch. These net assets and related businesses are
referred to as INVISTA. The sale is expected to close during the first half of
2004. The growth platforms, together with Textiles & Interiors and
Pharmaceuticals, comprise the company's seven reportable segments. The company's
nonaligned and embryonic businesses are grouped under Other.
The following information describing the business of the company can be found on
the indicated pages of this report:
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ITEM PAGE(S)
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Segment Reviews - Introduction 24
Agriculture & Nutrition 24
Coatings & Color Technologies 26
Electronic & Communication Technologies 27
Performance Materials 28
Pharmaceuticals 29
Safety & Protection 30
Textiles & Interiors 31
Other 32
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Total Segment Sales, Transfers, After-Tax Operating
Income, and Segment Net Assets
for 2003, 2002, and 2001 F-40
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GEOGRAPHIC INFORMATION:
Net Sales and Net Property for 2003, 2002, and 2001 F-39
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The company and its subsidiaries have operations in about 75 countries worldwide
and about 55 percent of consolidated net sales are made to customers outside the
United States. Subsidiaries and affiliates of DuPont conduct manufacturing, seed
production, or selling activities, and some are distributors of products
manufactured by the company.
SOURCES OF SUPPLY
The company utilizes numerous firms as well as internal sources to supply a wide
range of raw materials, energy, supplies, services and equipment. To ensure
availability, the company maintains multiple sources for fuels and most raw
materials, including hydrocarbon feedstocks. Large volume purchases are
generally procured under competitively priced supply contracts.
A substantial portion of the production and sales in the Performance Materials
and Textiles & Interiors segments is dependent upon the availability of
hydrocarbon feedstocks.
4
PART I
ITEM 1. BUSINESS-CONTINUED
Current hydrocarbon feedstock requirements are met by purchases from major
petrochemical companies. DuPont participates in a joint venture with Equistar
Chemicals, LP, which manufactures and supplies a significant portion of the
company's requirements for ethylene glycol, a hydrocarbon feedstock.
Within the Agriculture & Nutrition segment, the company's subsidiary, Pioneer,
which is in the hybrid seed industry, has seed production facilities located
throughout the world, in both the Northern and Southern Hemispheres. In the
production of its parent and commercial seed, Pioneer generally provides the
seed stock, detasseling and roguing labor, and certain other production inputs.
The balance of the labor, equipment, and inputs are supplied by independent
growers. Pioneer believes the availability of growers, parent seed stock, and
other inputs necessary to produce its commercial seed is adequate for planned
production levels. The principal risk in the production of seed is the
environment, with weather being the single largest variant. Pioneer lessens this
risk by distributing production across many locations around the world. Due to
its global presence, the company can engage in seed production year round.
Production in the nutrition and health businesses is primarily dependent upon
the availability of soy flake, which is readily available from many sources.
The major commodities, raw materials, and supplies for the company's reportable
segments in 2003 include the following:
AGRICULTURE & NUTRITION:
acetaldoxime; carbamic acid related intermediates; polyethylene; soybeans;
soy flake; 5-choroindanone; soy lecithin
COATINGS & COLOR TECHNOLOGIES:
butyl acetate; chlorine; HDI based poly alaphatic isocyanates; industrial
gases (O2/N2); ore; petroleum coke; pigments
ELECTRONIC & COMMUNICATION TECHNOLOGIES:
chloroform; fluorspar; hydrofluoric acid; kraton; oxydianiline;
perchloroethylene; polyester; polyethylene; precious metals; pyromellitic
dianhydride
PERFORMANCE MATERIALS:
adipic acid; butanediol; ethane; ethylene glycol; fiberglass;
hexamethylenediamine; methacrylic acid; methanol; natural gas; paraxylene
SAFETY & PROTECTION:
ammonia; benzene; high density polyethylene; isophthaloyl chloride;
metaphenylenediamine; methyl methacrylate; natural gas;
paraphenylenediamine; polyester fiber; polypropylene; propylene;
terephthaloyl chloride; wood pulp
TEXTILES & INTERIORS:
acetylene; adipic acid; ammonia; butadiene; cyclohexane; natural gas;
paraxylene; terephthalic acid
In addition, during 2003, the company consumed substantial amounts of
electricity and natural gas for energy.
After the completion of the pending sale of INVISTA, a subsidiary of Koch will
be the sole provider of adipic acid and hexamethylenediamine for the quantities
anticipated to be required by the Performance Materials segment.
DuPont has contracted with Computer Sciences Corporation (CSC) and Accenture LLP
to provide certain services for the company. CSC operates a majority of the
company's global information systems and technology infrastructures and provides
selected applications and software services. Accenture LLP provides enterprise
resource planning solutions designed to enhance the company's manufacturing,
marketing, distribution and customer service.
PATENTS AND TRADEMARKS
The company believes that its patent and trademark estate provides it with an
important competitive advantage. It has established a global network of
attorneys, as well as branding, advertising, and licensing professionals, to
procure, maintain, protect, enhance, and gain value from this estate.
The company owns and is licensed under various patents, which expire from time
to time, covering many products, processes and product uses. These patents
protect many aspects of the company's significant research program and the goods
and services it sells. The actual protection afforded by these patents varies
from country to country and depends upon the scope of coverage of each
individual patent as well as the
5
PART I
ITEM 1. BUSINESS-CONTINUED
availability of legal remedies in each country. The company owns approximately
22,000 worldwide patents and approximately 15,000 worldwide patent applications.
In 2003, the company was granted almost 440 U.S. patents and about 1,950
international patents. The company's rights under its patents and licenses, as
well as the products made and sold under them, are important to the company as a
whole, and to varying degrees, important to each reportable segment.
For a discussion of the importance of patents to Pharmaceuticals, see the
segment discussion on page 29 of this report.
The environment in which Pioneer and the rest of the companies within the seed
industry compete is increasingly affected by new patents, patent positions,
patent lawsuits and the status of various intellectual property rights.
Ownership of and access to intellectual property rights, particularly those
relating to biotechnology, are important to the Pioneer business and its
competitors. No single patent owned by Pioneer or its competitors is essential
to Pioneer's ability to compete. However, Pioneer will continue to address
freedom to operate issues by enforcing its own intellectual property rights,
challenging claims made by others, and where appropriate, obtaining licenses to
important technologies on commercially reasonable terms.
The company has approximately 2,100 unique trademarks for its products and
services and approximately 22,000 worldwide registrations and applications for
these trademarks. Ownership rights in trademarks do not expire if the trademarks
are continued in use and properly protected. The company has many trademarks
that have significant recognition at the consumer retail level and/or business
to business level. Significant trademarks at the consumer retail level include
the DuPont Oval and DuPontTM (the "DuPont Brand Trademarks"); Pioneer(R) brand
seeds, Teflon(R) fluoropolymers, films, fabric protectors, fibers, and
dispersions; Corian(R) solid surfaces; Kevlar(R) high strength material, and
Tyvek(R) protective material. The company is actively pursuing licensing
opportunities for selected trademarks at the retail level. For example, the
DuPont Brand Trademarks have been licensed for hard surface flooring, automotive
appearance products, air and water filtration, and lubricants. In addition, the
Teflon(R) trademark has been extended through brand licensing to personal care
products, automotive car care products, automotive wiper blades, eye glass
lenses, and home care products.
Certain patents and patent applications, as well as certain trademarks,
(including Lycra(R) brand premium stretch fibers, Stainmaster(R) carpets,
Cordura(R) nylon, Coolmax(R) fibers and Tactel(R) nylon), and the related
registrations and applications are included in the pending sale of INVISTA.
Consequently, the company expects its patent estate to decrease by about 4,200
patents and 2,600 patent applications; and its trademark estate to decrease by
about 3,700 registrations and 470 applications. In addition, the company and
Koch have entered into agreements regarding intellectual property rights,
including patent and trademark licenses.
SEASONALITY
Sales of the company's products in Agriculture & Nutrition, and to a certain
extent, Coatings & Color Technologies and Textiles & Interiors, are affected by
seasonal patterns. Agriculture & Nutrition's performance is strongest in the
first half of the year. Pioneer generally operates at a loss during the third
and fourth quarters of the year, and due to the seasonal nature of the seed
business, Pioneer's inventory is at its highest level at the end of the calendar
year and is sold down in the first and second quarters. Trade receivables in
Agriculture & Nutrition are at a low point at year-end and increase through the
selling season to peak at the end of the second quarter. Coatings & Color
Technologies' sales reflect seasonal patterns related to motor vehicle builds
and after-market refinishing. Textiles & Interiors' flooring businesses are
somewhat affected by the seasonality of the construction industry, which
experiences its highest level of activity during the summer months.
In general, businesses in the remaining segments are not significantly affected
by seasonal factors.
MARKETING
In 2003, the company formed a majority-owned venture, The Solae Company, with
Bunge Limited, comprised of the company's protein technologies business and
Bunge's North American, European and Brazilian ingredients operations. With the
exception of Pioneer and The Solae Company, most products are marketed primarily
through DuPont's sales force, although in some regions, more emphasis is placed
on sales through distributors. In North America, the majority of Pioneer(R)
brand seed is marketed through independent sales representatives. In areas
outside the traditional corn belt, seed products are often marketed through
dealers and distributors who handle
6
PART I
ITEM 1. BUSINESS-CONTINUED
other agricultural supplies. Pioneer products are marketed outside North America
through a network of subsidiaries, joint ventures, and independent
producer-distributors. Solae(R) isolated and functional soy proteins are
marketed using a combination of independent sales representatives, outside
distributors and joint ventures.
MAJOR CUSTOMERS
The company's sales are not materially dependent on a single customer or small
group of customers. Textiles & Interiors and Coatings & Color Technologies,
however, have several large customers in their respective industries that are
important to these segments' operating results.
COMPETITION
The company's businesses compete on a variety of factors such as price, product
quality and performance or specifications, continuity of supply, customer
service and breadth of product line, depending on the characteristics of the
particular market involved and the product or service provided.
Major competitors include chemical companies principally based in the United
States, Western Europe, Japan, China and Korea. In the aggregate, competitors
offer a comparable range of products from agricultural, commodity and specialty
chemicals to plastics and fibers products. The company also competes in certain
product markets with smaller, more specialized firms, as well as those with
partially or fully integrated petrochemical operations.
Agriculture & Nutrition sells hybrid seeds through Pioneer, principally for the
global production of corn and soybeans, and thus directly competes with other
hybrid seed suppliers. Agriculture & Nutrition also provides food safety
equipment and soy-based food ingredients in competition with other major grain
and food processors.
RESEARCH AND DEVELOPMENT
The company conducts research in the United States at over 40 sites in 19 states
at either dedicated research facilities or manufacturing plants. The highest
concentration of research is in the Wilmington, Delaware area at several large
research centers. Among these, the Experimental Station laboratories engage in
investigative and applied research, the Chestnut Run laboratories focus on
applications research, and the Stine-Haskell Research Center conducts
agricultural product research and toxicological research to assure the safe
manufacture, handling and use of products.
Within Agriculture & Nutrition, Pioneer, which has its largest center in
Johnston, Iowa, carries out research to develop hybrids of corn, canola, sorghum
and sunflower, and varieties of soybean, alfalfa, wheat and canola forage
additives for worldwide markets. Hybrids and varieties are developed at primary
research locations, including those in Iowa and Brazil, and tested at many other
locations. Also included in Agriculture & Nutrition is The Solae Company, which
has its largest research center in St. Louis, Missouri. Health benefit studies
are advanced in cooperation with several universities across the globe, and
product and application development is managed in technical centers located in
Denmark, Brazil, England and Russia.
DuPont, reflecting the company's global interests, operates a number of
additional research and development facilities at locations outside the United
States in countries such as Belgium, Canada, France, Germany, Japan, Luxembourg,
Mexico, the Netherlands, Spain, and Switzerland. Plans to establish a new
research and development facility in China by early 2005 were announced in late
2003.
The objectives of the company's research and development programs are to create
new technologies, processes and business opportunities in relevant fields, as
well as to improve existing products and processes. Each segment of the company
funds research and development activities that support its business mission. The
future of the company is not dependent upon the outcome of any specific research
program.
The corporate research laboratories are responsible for conducting research
programs aligned with corporate strategy as provided by the growth platforms.
All research and development activities are administered by senior research and
development management to ensure consistency with the business and corporate
strategy.
Additional information with respect to research and development, including the
amount spent during each of the last three fiscal years, is included in Item 7,
Management's Discussion and Analysis on page 16 of this report.
7
PART I
ITEM 1. BUSINESS-CONTINUED
ENVIRONMENTAL MATTERS
Information related to environmental matters is included in several areas of
this report: (1) Environmental Proceedings on pages 8-10, (2) Management's
Discussion and Analysis on pages 22 and 39-41, and (3) Notes 1 and 24 to the
Consolidated Financial Statements.
ITEM 2. PROPERTIES
DuPont's corporate headquarters are located in Wilmington, Delaware. In
addition, the company owns and operates manufacturing, processing, marketing and
research and development facilities, as well as, regional purchasing offices and
distribution centers.
Information regarding research and development facilities is incorporated by
reference to Item 1, Business - Research and Development. Additional information
with respect to the company's property, plant and equipment, and leases is
contained in Notes 14 and 24 to the company's Consolidated Financial Statements.
The company's investment in property, plant and equipment in the United States
and Puerto Rico related to operations is located at over 100 major sites, some
of which are as follows:
TEXAS DELAWARE VIRGINIA
- ---------------------------------------------------------
Bayport Edge Moor Front Royal
Beaumont Newark Hopewell
Corpus Christi Seaford* Richmond
LaPorte Wilmington Waynesboro*
Orange
Victoria
WEST VIRGINIA TENNESSEE NORTH CAROLINA
- ---------------------------------------------------------
Belle Chattanooga Fayetteville
Parkersburg Memphis Kinston*
New Johnsonville Research
Old Hickory Triangle Park
NEW JERSEY SOUTH CAROLINA NEW YORK
- ---------------------------------------------------------
Deepwater Camden* Buffalo
Parlin Charleston Niagara Falls
Florence
MICHIGAN IOWA PUERTO RICO
- ---------------------------------------------------------
Mt. Clemens Fort Madison Manati
Troy Johnston
* Included in the pending sale of INVISTA.
Property, plant and equipment outside the United States and Puerto Rico is also
located at over 100 major sites, principally in the United Kingdom, Canada,
Germany, the Netherlands, Taiwan, Spain, Singapore, Luxembourg, France, Mexico,
Brazil, Belgium, China, Argentina, Japan and Korea.
The company's plants and equipment are well maintained and in good operating
condition. Sales as a percent of capacity were 80 percent in 2003, 81 percent in
2002 and 78 percent in 2001. Properties are primarily directly owned by the
company; however, certain properties are leased. Although no title examination
of the properties has been made for the purpose of this report, the company
knows of no material defects in title to any of these properties.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION
BENLATE(R)
Information related to this matter is included in Note 24 to the company's
Consolidated Financial Statements under the heading Benlate(R).
PFOA: U.S. ENVIRONMENTAL PROTECTION AGENCY AND CLASS ACTION
Information related to this matter is included in Note 24 to the company's
Consolidated Financial Statements under the heading PFOA.
DUPONT DOW ELASTOMERS LLC
Information related to this matter is included in Note 24 to the company's
Consolidated Financial Statements under the heading DuPont Dow Elastomers LLC.
ENVIRONMENTAL PROCEEDINGS
GRAND CAL/INDIANA HARBOR SYSTEM
The Indiana Departments of Natural Resources and Environmental Management and
the United States Department of Interior are in the process of conducting a
natural resource damage assessment of the Grand Calumet River and the Indiana
Harbor Canal System under the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA), and the Oil Pollution Act. The
company's plant in East Chicago, Indiana, which discharges industrial wastewater
into these waterways, was identified as one of 17 potentially responsible
parties (PRPs) for the cost of the assessment and any determined natural
8
PART I
ITEM 3. LEGAL PROCEEDINGS-CONTINUED
resource damages. The trustees have indicated that their preferred remedy is to
dredge the entire Grand Cal/Indiana Harbor system. DuPont has joined with eight
other PRPs to contest the remedy. A settlement offer has been tendered to the
trustees and negotiations are ongoing.
PFOA: WEST VIRGINIA AND OHIO DEPARTMENTS OF ENVIRONMENTAL PROTECTION
DuPont uses perfluorooctanoic acid and its salts (PFOA) as a processing aid to
manufacture fluoropolymer resins and dispersions at its Washington Works plant
in Wood County, West Virginia. Currently, DuPont recovers or destroys over 85
percent of the PFOA that potentially could be emitted or discharged during the
manufacturing process at the Washington Works plant. By the end of 2004, the
company expects that more than 90 percent will be recovered or destroyed.
In November 2001, the West Virginia Department of Environmental Protection
(WVDEP) and DuPont signed a multimedia Consent Order (the WV Order) that
requires environmental sampling and analyses and the development of screening
levels for PFOA that is used or managed by the Washington Works plant. As a
result of this process, WVDEP issued its Final Ammonium Perfluorooctanoate
Assessment of Toxicity Team Report in August 2002. In the report, the WVDEP
established a screening level of 150 micrograms of PFOA per liter screening
level for drinking water and a soil screening level of 240 parts per million.
None of the local sources for drinking water has tested at or above the
screening level. The report established a screening level of 1 microgram per
cubic meter for air. DuPont recently submitted to the WVDEP its initial air
dispersion modeling results for the period September 2002 through August 2003
which demonstrated that the air screening level was not exceeded during the time
period.
Unless DuPont violates its terms, the WV Order does not call for sanctions.
DuPont has completed all major activities currently required by the WV Order and
has spent approximately $3.5 million through December 31, 2003, in connection
with these activities. DuPont expects to continue to monitor public drinking
water supplies in and around the Washington Works plant on a quarterly and/or
annual basis. The scope and extent of this monitoring has yet to be determined.
In addition, the company may perform other environmental monitoring as suggested
by results received from studies performed under the WV Order.
Environmental sampling of the PFOA levels in the groundwater and drinking water
has been conducted across the Ohio River pursuant to a Memorandum of
Understanding among DuPont, the Ohio Environmental Protection Agency, the WVDEP,
and the Division of Health and Human Resources (the MOU). Under the MOU, these
results were shared with the Ohio EPA. Also, DuPont is funding investigations of
ground and drinking water in that state comparable to the studies in West
Virginia, pursuant to the MOU. In addition, DuPont signed a Safe Drinking Water
Consent (SDWC) Order with EPA Region III (which includes West Virginia) and
Region V (which includes Ohio) in March 2002 to assure provision of alternative
drinking water if supplies are found to exceed screening levels established
under the WV Order. Since the PFOA concentrations in drinking water tested to
date are significantly below the screening level, it is unlikely that DuPont
will be required to provide alternative drinking water under the SDWC Order.
NEW JOHNSONVILLE, TENNESSEE
The U.S. Environmental Protection Agency (EPA) conducted a multi-media audit of
DuPont's titanium dioxide plant in New Johnsonville, Tennessee in the summer of
2001. In December 2002, the EPA alleged certain potential violations by DuPont
and its contractor under Section 608 of the Clean Air Act (CAA) regarding
refrigerant emissions.
The EPA requested substantial information and documents regarding the repair,
charging and maintenance of the refrigerant machines at the New Johnsonville
plant from DuPont's contractor responsible for the repair and maintenance of
certain refrigeration machines at the plant. A substantial number of documents
were provided to the EPA. In addition, DuPont and its contractor have had
numerous discussions with the EPA since January 2003 to obtain more specificity
regarding the alleged violations and to respond to the EPA's various inquiries.
DuPont and its contractor continue to discuss the matter with the EPA in an
effort to reach a clear understanding of the facts associated with the EPA's
alleged CAA regulatory violations. The EPA and the Department of Justice have
presented DuPont and its contractor with a proposed settlement approach. DuPont
is considering its options and anticipates resolution of this matter in 2004.
9
PART I
ITEM 3. LEGAL PROCEEDINGS-CONTINUED
FORT HILL NEW SOURCE REVIEW ENFORCEMENT ACTION
In 2003, the EPA issued a "Notice of Violation and Finding of Violation" for the
DuPont Fort Hill sulfuric acid plant in North Bend, Ohio. The EPA conducted a
review of capital projects at the plant over the past twenty years. Based on its
review, the EPA believes that two of the projects triggered a requirement to
meet the New Source Performance Standards for sulfuric acid plants and that
DuPont should have sought a permit under the New Source Review requirements of
the Clean Air Act. DuPont vigorously disagrees with the EPA's findings because
the EPA continues to change its interpretation of these rules and requirements
without going through the required process to amend them. The courts are split
on these interpretations. The company has three other sulfuric acid plants that
use similar technology.
The EPA has invited the company to begin settlement negotiations, but insists
that all four sulfuric acid plants be included. Since there can be no assurance
that the company will prevail if it litigates this matter, DuPont has accepted
the EPA's invitation. If the negotiations are successful, it is reasonably
likely that the resulting settlement would include capital expenditures as well
as penalties. However, the company cannot reasonably estimate the amount of such
costs at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list, as of March 1, 2004, of the company's executive
officers.
- -------------------------------------------------------------
Executive
Officer
Age Since
- -------------------------------------------------------------
CHAIRMAN OF THE BOARD OF DIRECTORS AND
CHIEF EXECUTIVE OFFICER:
Charles O. Holliday, Jr.* 55 1992
- -------------------------------------------------------------
OTHER EXECUTIVE OFFICERS:
James C. Borel,
Senior Vice President-
Global Human Resources 48 2003
Thomas M. Connelly, Jr.,
Senior Vice President and Chief
Science and Technology Officer 51 2000
Richard R. Goodmanson,
Executive Vice President and Chief
Operating Officer 56 1999
John C. Hodgson,
Executive Vice President and Chief
Marketing & Sales Officer 60 2002
W. Donald Johnson,
Group Vice President-
Global Operations 56 2003
Stacey J. Mobley,
Senior Vice President and Chief
Administrative Officer and
General Counsel 58 1992
Gary M. Pfeiffer,
Senior Vice President and Chief
Financial Officer 54 1997
- -------------------------------------------------------------
* Member of the Board of Directors.
The company's executive officers are elected or appointed for the ensuing year
or for an indefinite term, and until their successors are elected or appointed.
Charles O. Holliday, Jr. joined DuPont in 1970, and has advanced through various
manufacturing and supervisory assignments in product planning and marketing. He
is a former president, executive vice president, president and chairman - DuPont
Asia Pacific. Mr. Holliday became an executive officer in 1992 when he was
appointed senior vice president. He became Chief Executive Officer on February
1, 1998, and Chairman of the Board of Directors on January 1, 1999.
10
PART I
ITEM 4. EXECUTIVE OFFICERS OF THE REGISTRANT--CONTINUED
James C. Borel joined DuPont in 1978, and held a variety of product and sales
management positions for Agricultural Products. In 1993, he transferred to
Tokyo, Japan with Agricultural Products as regional manager, North Asia, and was
appointed regional director, Asia Pacific in 1994. In 1997, he was appointed
regional director, North America and was appointed president of DuPont Crop
Protection and vice president and general manager - DuPont later that year. In
January 2004, he was named to his current position, Senior Vice President -
DuPont Global Human Resources.
Thomas M. Connelly, Jr. joined DuPont in 1977 as a research engineer. Since
then, Mr. Connelly has served in various research and plant technical leadership
roles, as well as product management and business director roles. Mr. Connelly
served as vice president and general manager - DuPont Fluoroproducts from 1999
until September 1, 2000, when he was named to his current position.
Richard R. Goodmanson joined DuPont in 1999 as Executive Vice President and
Chief Operating Officer. Prior to joining DuPont, Mr. Goodmanson was president
and chief executive officer of America West Airlines from 1996 to 1999. He was
senior vice president of operations for Frito-Lay Inc. from 1992-1996, and he
was a principal at McKinsey & Company, Inc. from 1980 to 1992.
John C. Hodgson joined DuPont in 1966. Since then, Mr. Hodgson has held various
sales and product management positions and has served in several business
director roles. In 1996, he was named vice president and general manager of
Photopolymer & Electronic Materials. Prior to his promotion to Executive Vice
President, with responsibility for the company's five newly formed growth
platforms, Mr. Hodgson served as group vice president and general manager -
DuPont iTechnologies from February 2000 until he was named to his current
position in February 2002. In addition, he was named Chief Marketing & Sales
Officer in 2003.
W. Donald Johnson joined DuPont in 1974, and has advanced through a variety of
technical, manufacturing, corporate strategy and business assignments, including
global business director for Kevlar(R). In 1999, he became group vice president,
Nylon Worldwide, and later group vice president - DuPont Operations & Services
in 2001. In January 2004, he was named to his current position, Group Vice
President - Global Operations.
Stacey J. Mobley joined DuPont's legal department in 1972. He was named director
of Federal Affairs in the company's Washington, D.C. office in 1983, and was
promoted to vice president - Federal Affairs in 1986. He returned to the
company's Wilmington, Delaware headquarters in March 1992 as vice president -
Communications in External Affairs, and was promoted to Senior Vice President in
May 1992. He was named Chief Administrative Officer in May 1999, and General
Counsel in November 1999.
Gary M. Pfeiffer joined DuPont in 1974, and has held a succession of tax and
financial and business analysis positions. Mr. Pfeiffer has also served in
several director roles and prior to his promotion to Senior Vice President and
Chief Financial Officer, Mr. Pfeiffer served as vice president and general
manager, DuPont Nylon - North America from 1994 until October 1997.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The company's common stock is listed on the New York Stock Exchange, Inc.
(symbol DD) and certain non-U.S. exchanges. The number of record holders of
common stock was 111,067 at December 31, 2003, and 110,676 at January 31, 2004.
Holders of the company's common stock are entitled to receive dividends when
they are declared by the Board of Directors. While it is not a guarantee of
future conduct, the company has continuously paid a quarterly dividend since the
fourth quarter 1904. Dividends on common stock and preferred stock are usually
declared in January, April, July and October. When dividends on common stock are
declared, they are usually paid on or about the 12th of March, June, September
and December. Preferred dividends are paid on or about the 25th of January,
April, July and October. The Stock Transfer Agent and Registrar is EquiServe
Trust Company N.A.
The company's quarterly high and low trading stock prices and dividends for 2003
and 2002 are shown.
- --------------------------------------------------------------------------------
QUARTERLY HIGH/LOW
MARKET PRICES OF Market Prices Per Share
COMMON STOCK ________________________________ Dividend
High Low Declared
- --------------------------------------------------------------------------------
2003
First Quarter $45.00 $34.71 $0.35
Second Quarter 44.88 38.56 0.35
Third Quarter 45.55 39.55 0.35
Fourth Quarter 46.00 38.60 0.35
- --------------------------------------------------------------------------------
2002
First Quarter $49.80 $39.79 $0.35
Second Quarter 48.40 41.75 0.35
Third Quarter 45.75 35.02 0.35
Fourth Quarter 45.30 36.00 0.35
- --------------------------------------------------------------------------------
12
PART II
ITEM 6. SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE) 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS(1)
Net sales $ 26,996 $ 24,006 $ 24,726 $28,268 $26,918
Income from continuing operations before
income taxes and minority interests $ 143 $ 2,124 $ 6,844 $ 3,447 $ 1,690
Provision for (benefit from) income taxes $ (930) $ 185 $ 2,467 $ 1,072 $ 1,410
Income from continuing operations before cumulative
effect of changes in accounting principles $ 1,002 $ 1,841 $ 4,328 $ 2,314 $ 219
Income from discontinued operations $ -- $ -- $ -- $ -- $ 7,471(2)
Net income (loss) $ 973(3) $ (1,103)(4) $ 4,339(5) $ 2,314 $ 7,690
Adjusted net income (loss)(6) $ 973(3) $ (1,103)(4) $ 4,505(5) $ 2,482 $ 7,793
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share of common stock
Income from continuing operations before cumulative
effect of changes in accounting principles $ 1.00 $ 1.84 $ 4.17 $ 2.21 $ 0.19
Income from discontinued operations $ -- $ -- $ -- $ -- $ 6.89
Net income (loss) $ 0.97(3) $ (1.12)(4) $ 4.18(5) $ 2.21 $ 7.08
Adjusted net income (loss)(6) $ 0.97(3) $ (1.12)(4) $ 4.34(5) $ 2.37 $ 7.18
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share of common stock
Income from continuing operations before cumulative
effect of changes in accounting principles $ 0.99 $ 1.84 $ 4.15 $ 2.19 $ 0.19
Income from discontinued operations $ -- $ -- $ -- $ -- $ 6.80
Net income (loss) $ 0.96(3) $ (1.11)(4) $ 4.16(5) $ 2.19 $ 6.99
Adjusted net income (loss)(6) $ 0.96(3) $ (1.11)(4) $ 4.32(5) $ 2.35 $ 7.09
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR-END(1)
Working capital $ 5,419 $ 6,363 $ 6,734 $ 2,401 $ 1,425
Total assets $ 37,039 $ 34,621 $ 40,319 $ 39,426 $ 40,777
Borrowings and capital lease obligations
Short-term $ 6,017(7) $ 1,185 $ 1,464 $ 3,247 $ 4,941
Long-term $ 4,462(7) $ 5,647 $ 5,350 $ 6,658 $ 6,625
Stockholders' equity $ 9,781 $ 9,063 $ 14,452 $ 13,299 $ 12,875
- ------------------------------------------------------------------------------------------------------------------------------------
GENERAL
For the year
Capital expenditures $ 1,784 $ 1,416 $ 1,634 $ 2,022 $ 6,988
Depreciation $ 1,355 $ 1,297 $ 1,320 $ 1,415 $ 1,444
Research and development (R&D) expense(8) $ 1,349 $ 1,264 $ 1,588 $ 1,776 $ 1,617
Average number of shares (millions)
Basic 997 994 1,036 1,043 1,085
Diluted 1,000 999 1,041 1,051 1,098
Dividends per common share $ 1.40 $ 1.40 $ 1.40 $ 1.40 $ 1.40
At year-end
Employees (thousands) 81 79 79 93 94
Closing stock price $ 45.89 $ 42.40 $ 42.51 $ 48.31 $ 65.88
Common stockholders of record (thousands) 111 116 127 132 140
- ------------------------------------------------------------------------------------------------------------------------------------
(1) See Management's Discussion and Analysis in Item 7 and the Consolidated
Financial Statements on pages F-1 through F-43, including the quarterly
financial data in Note 32, for information relating to significant items
affecting the results of operations and financial position.
(2) Relates to the Conoco divestiture.
(3) Includes a cumulative effect of a change in accounting principle charge of
$29 and $0.03 basic and diluted per share. See Note 10 to the Consolidated
Financial Statements.
(4) Includes a cumulative effect of a change in accounting principle charge of
$2,944 and $2.96 (basic) and $2.95 (diluted) per share. See Note 10 to the
Consolidated Financial Statements.
(5) Includes a cumulative effect of a change in accounting principle benefit of
$11 and $0.01 per share, basic and diluted. See Note 10 to the Consolidated
Financial Statements.
(6) Reflects pro forma effects relating to the adoption of Statement of
Financial Accounting Standards (SFAS) No. 142 and the resulting
nonamortization of goodwill and indefinite-lived intangible assets.
See Note 15 to the Consolidated Financial Statements.
(7) Includes borrowings and capital lease obligations classified as liabilities
held for sale within the Consolidated Balance Sheet.
(8) Excludes purchased in-process research and development.
13
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In early 2002, the company was reorganized into five growth platforms to extend
the global reach and competitiveness of its businesses and to bring greater
focus to attain financial targets of 6 percent revenue growth, 10 percent
earnings growth, and 1 percentage point improvement in return on investor's
capital (ROIC) per year. The company experienced 12 percent revenue growth in
2003 driven by volume increases in the five growth platforms which averaged 5
percent in 2003. Strategies are in place, including developing a more direct and
powerful connection to customers and strengthening the company's presence in
emerging high-growth markets, to deliver strong revenue growth again in 2004. A
sixth platform, the company's mature Textiles & Interiors segment, was formed to
prepare for its separation from the company. The company's seventh platform is
its Pharmaceuticals segment.
On November 17, 2003, the company and Koch Industries, Inc. (Koch) announced
that they had reached a definitive agreement to sell substantially all of the
net assets of the Textiles & Interiors segment to subsidiaries of Koch. These
net assets and related businesses are now referred to as INVISTA. The company
expects the sale to close during the first half of 2004. The successful
separation of INVISTA is an important milestone for achieving a profitable
growth strategy, and for reducing the company's exposure to the volatility of
oil and natural gas prices, which have had a significant negative impact on the
company's earnings in 2003.
In 2003, strong demand continued in housing, construction and motor vehicle
related markets which, along with production agriculture, are the most important
demand drivers for the company's products. Higher sales volumes resulted from
the economic improvement in these key markets and increased market share;
however, broad improvement in U.S. manufacturing did not materialize until late
in the year. At the same time, 2003 prices for oil and natural gas rose
substantially after hitting post-recession lows in early 2002, and remained at
significantly higher levels throughout the year. Higher hydrocarbon prices are
the single largest component of the company's raw material cost increases, and
concurrently reduced gross margins since only a small portion of raw material
cost increases were recovered through higher selling prices. Reflecting
historically high oil and natural gas prices, higher raw material costs reduced
2003 after-tax earnings by about $650 million versus 2002. A significant portion
of this impact occurred in two segments, Textiles & Interiors and Performance
Materials which, together, consume approximately 70 percent of the company's oil
and natural gas related raw materials. Earnings were also adversely affected by
a $696 million after-tax charge primarily related to the separation of INVISTA.
In addition, the company experienced increases in non-cash pension, other
postretirement benefits, and stock option costs which reduced after-tax earnings
by about $400 million versus 2002.
Therefore, despite a 12 percent increase in 2003 sales, income before the
cumulative effect of changes in accounting principles declined 46 percent to $1
billion. To restore profitability, the company announced plans to improve 2005
pretax earnings by $900 million through variable margin improvements, fixed cost
reductions, and organizational actions. Approximately $450 million of the
improvements are expected to be realized in 2004. Cost improvements targeted in
2004 will essentially offset residual costs from the separation of INVISTA and
other expected fixed cost increases, thus allowing the full measure of the
company's expected 2004 volume and price improvement to benefit operating
earnings.
In addition, the company will continue to maintain a very strong liquidity
profile. Cash balances of over $3 billion and bank credit lines of $4.1 billion
as of December 31, 2003, provide primary liquidity to support all short-term
obligations. Secondary liquidity, sufficient to meet upcoming debt maturities,
comes from excellent access to capital markets, strong cash flow generation and
the ability to sell assets.
ANALYSIS OF OPERATIONS
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
NET SALES $26,996 $24,006 $24,726
- ------------------------------------------------------------
2003 VS 2002 Consolidated net sales in 2003 increased $3 billion or 12 percent,
reflecting 5 percent higher volume, 4 percent higher U.S. dollar selling prices,
and 3 percent resulting from acquisitions, principally the formation of The
Solae Company and the purchase of the remaining interest in Griffin LLC in 2003,
as well as the purchase of ChemFirst, Inc. and Liqui-Box corporation which
occurred during 2002.
14
PART II
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
The table below shows a regional breakdown of 2003 consolidated Net sales and
percentage variances from 2002:
- -------------------------------------------------------------------------------------------------------------------------
Percent Change Due to:
2003 Percent -------------------------------------------
NET Change Local Currency
(DOLLARS IN BILLIONS) SALES vs. 2002 Price Effect Volume Other*
- -------------------------------------------------------------------------------------------------------------------------
Worldwide $27.0 12 (1) 5 5 3
- -------------------------------------------------------------------------------------------------------------------------
United States 12.1 6 0 0 2 4
- -------------------------------------------------------------------------------------------------------------------------
Europe 7.5 18 (2) 16 2 2
- -------------------------------------------------------------------------------------------------------------------------
Asia Pacific 4.5 17 (1) 3 15 0
- -------------------------------------------------------------------------------------------------------------------------
Canada, Mexico, South America 2.9 19 2 2 5 10
- -------------------------------------------------------------------------------------------------------------------------
* Includes impacts from the sale of the Clysar(R) business, acquisitions of
Liqui-Box and ChemFirst, Inc., purchases of the remaining interests in
Griffin LLC and Renpar S.A., and the formation of The Solae Company.
Higher worldwide U.S. dollar selling prices primarily reflect the beneficial
currency impact of the weaker dollar, which increased worldwide sales by 5
percent. Volume growth was largely attributable to double-digit growth in the
Asia Pacific region, reflecting increased sales of electronics-related materials
and polymers, agricultural products, and engineering polymers.
2002 VS 2001 Consolidated Net sales in 2002 were down $0.7 billion or 3 percent
below 2001, reflecting 4 percent higher volume, 3 percent lower U.S. dollar
selling prices and a 4 percent reduction principally due to the company's
divestiture of DuPont Pharmaceuticals on October 1, 2001.
The table below shows a regional breakdown of 2002 consolidated Net sales and
percentage variances from 2001:
- -------------------------------------------------------------------------------------------------------------------------
Percent Change Due to:
2002 Percent -------------------------------------------
Net Change Local Currency
(DOLLARS IN BILLIONS) Sales vs. 2001 Price Effect Volume Other*
- -------------------------------------------------------------------------------------------------------------------------
Worldwide $24.0 (3) (4) 1 4 (4)
- -------------------------------------------------------------------------------------------------------------------------
United States 11.4 (6) (3) 0 3 (6)
- -------------------------------------------------------------------------------------------------------------------------
Europe 6.3 (2) (4) 3 2 (3)
- -------------------------------------------------------------------------------------------------------------------------
Asia Pacific 3.8 6 (4) (1) 12 (1)
- -------------------------------------------------------------------------------------------------------------------------
Canada, Mexico, South America 2.5 (4) (5) (2) 7 (4)
- -------------------------------------------------------------------------------------------------------------------------
* Includes impacts from the sale of DuPont Pharmaceuticals and the Clysar(R)
business, discontinued Benlate(R) fungicide and ammonia sales, and the
acquisition of Liqui-Box and ChemFirst, Inc.
Volume growth of 4 percent was attributable to higher sales volumes across all
regions, led by a double-digit increase in Asia Pacific where there was strong
demand for materials and polymers for electronic applications, engineering
polymers, titanium dioxide, and coatings. Worldwide sales volume growth reflects
demand across most product lines, particularly those in the Textiles &
Interiors, Performance Materials, and Coatings & Color Technologies segments.
Four percent lower local currency prices reflects competitive pricing pressures,
principally in the Textiles & Interiors, Electronic & Communication
Technologies, and Coatings & Color Technologies segments.
15
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
OTHER INCOME $734 $516 $644
- ------------------------------------------------------------
2003 VS. 2002 Other income increased $218 million in 2003. This improvement is
primarily attributable to $160 million in lower exchange losses (see Note 2 to
the Consolidated Financial Statements), and a $104 million increase in income
associated with Cozaar(R)/Hyzaar(R) antihyperintensive drugs (including a $23
million benefit from favorable arbitration). Other income also benefited from a
$16 million favorable settlement related to the Unifi manufacturing alliance.
These increases were partly offset by lower earnings in equity affiliates and
lower interest income.
2002 VS. 2001 Other income decreased $128 million in 2002, primarily due to a
$265 million increase in exchange losses which is discussed in detail at Note 2
to the Consolidated Financial Statements. These losses were primarily offset by
an increase of $148 million in Cozaar(R)/Hyzaar(R) income.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
COST OF GOODS SOLD AND
OTHER OPERATING CHARGES $19,476 $16,296 $16,727
As a percent of Net sales 72% 68% 68%
- ------------------------------------------------------------
2003 VS. 2002 Cost of goods sold and other operating charges increased $3.2
billion. As a percent of Net sales, Cost of goods sold and other operating
charges was up 4 percent. This increase relative to sales reflects a $1.0
billion increase in raw material costs, principally those related to oil and
natural gas, as well as a $400 million increase in pension and stock option
expenses. 2003 also included net charges of $78 million related to Benlate(R)
litigation.
2002 VS. 2001 Cost of goods sold and other operating charges decreased $431
million in 2002. As a percent of Net sales, Cost of goods sold and other
operating charges was 68 percent in both years. 2002 includes charges of $80
million to increase the company's reserve for Benlate(R) litigation, $47 million
in product exit costs to write off inventory associated with discontinued
specialty herbicide products, and $50 million to establish a reserve related to
vitamins litigation associated with a previously divested joint venture. These
charges were partly offset by a credit of $40 million attributable to the
revisions in Pioneer acquisition costs related to accrued postemployment costs
for certain Pioneer employees. 2001 includes charges of $56 million related to
the settlement of YieldGard(R) insect resistant corn litigation with Monsanto
and $133 million in Pioneer acquisition-related charges primarily associated
with the sale of acquired Pioneer inventory, which in accordance with purchase
accounting rules, was recorded at estimated fair value at the acquisition date.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES $2,995 $2,699 $2,925
As a percent of Net sales 11% 11% 12%
- ------------------------------------------------------------
2003 VS. 2002 Selling, general and administrative (SG&A) expense in 2003
increased $296 million over 2002. This increase reflects higher non-cash pension
expenses, currency translation and the net impact of portfolio changes.
2002 VS. 2001 SG&A declined $226 million in 2002 primarily due to the company's
divestiture of DuPont Pharmaceuticals in October 2001.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
RESEARCH AND DEVELOPMENT
EXPENSE $1,349 $1,264 $1,588
As a percent of Net sales 5% 5% 6%
- ------------------------------------------------------------
2003 VS. 2002 The increase in Research and development expense in 2003 is
primarily attributable to higher non-cash pension expenses.
2002 VS. 2001 The decline in Research and development expense in 2002 is
primarily attributable to the company's divestiture of DuPont Pharmaceuticals,
its research intensive pharmaceuticals subsidiary, on October 1, 2001.
The company has broad and deep science and technology capabilities, and its
objective is to connect these capabilities to existing and new markets. Through
2003, the company is on track to meet its goal of achieving one-third of total
company revenues from new products introduced within the last five years by
2005.
The company continues to support a strong commitment to research and development
as a source of sustainable growth, and expects research and development funding
to remain at about the same level in 2004. Because of its broad array of
products and customers, the company's future financial performance
16
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
is not materially dependent on the success or failure of any single research or
development project.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
INTEREST EXPENSE $347 $359 $590
- ------------------------------------------------------------
2003 VS. 2002 Interest expense was relatively flat year over year as a result of
lower average interest rates offset by higher debt levels.
2002 VS. 2001 Interest expense in 2002 decreased $231 million over 2001. This
reflects a decrease of $252 million due to lower average debt levels and lower
interest rates, partially offset by a charge of $21 million recorded in 2002 for
the early extinguishment of outstanding debentures.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
RESTRUCTURING AND ASSET
IMPAIRMENT CHARGES $(17) $290 $1,078
- ------------------------------------------------------------
The company did not institute any significant restructuring programs in 2003. A
benefit of $17 million was recorded to reflect changes in estimates related to
prior year restructuring programs.
EXISTING PROGRAMS
Restructuring programs instituted in 2002 and 2001 further aligned resources
consistent with the specific missions of the segments, thereby improving
competitiveness, accelerating progress toward sustainable growth and addressing
weakening economic conditions. The company recorded net charges of $290 million
and $1.1 billion in 2002 and 2001, respectively. Significant components of these
programs are discussed below; additional details are contained in Note 4 to the
Consolidated Financial Statements.
2002 COATINGS & COLOR TECHNOLOGIES
A restructuring program was instituted within Coatings & Color Technologies in
the fourth quarter 2002 to terminate approximately 775 employees involved in
technical, manufacturing, marketing and administrative activities. Essentially
all employees had been terminated as of December 31, 2003, thereby completing
this portion of the program. In addition, the company shut down operating
facilities during 2003 due to transferring production to more cost effective
facilities.
In the aggregate, payments from operating cash flows to terminated employees and
to third parties, principally for dismantlement and removal activities, are
expected to total about $75 million. Over 50 percent of these cash outlays were
made in 2003, and most of the remaining payments will be made in 2004. As a
result of these activities, the company expects annual pretax cost savings of
about $55 million per year when completed with about 60 percent realized in
2003, and essentially all the remaining savings expected to be realized in 2004.
About 70 percent of these savings will result in reduced Cost of goods sold and
other operating charges, with the remaining 30 percent expected to be divided
about evenly between Selling, general and administrative expenses and Research
and development expense.
2002 TEXTILES & INTERIORS
A restructuring program was instituted within Textiles & Interiors in the second
quarter 2002 to terminate approximately 2,000 employees involved in technical,
manufacturing, marketing and administrative activities, and to shut down
operating facilities, principally due to transferring production to more cost
effective facilities. Essentially all employees had been terminated as of
December 31, 2003, thereby completing this portion of the program.
In the aggregate, payments from operating cash flows to terminated employees and
third parties for dismantlement and removal activities are expected to total
about $160 million. About 30 percent of the cash outlays were made in 2002, 40
percent in 2003, 20 percent are expected to be paid in 2004, and the remainder
is expected to be paid in 2005. The company realized annual pretax cost savings
of about $120 million per year from this restructuring program. About 20 percent
of these savings were realized in 2002, and essentially all the remaining
savings were realized in 2003. About 80 percent of these savings resulted in
reduced Cost of goods sold and other operating charges, with the remaining 20
percent divided evenly between Selling, general and administrative expenses and
Research and development expense.
17
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
2001 RESTRUCTURING INITIATIVES
Restructuring programs instituted in 2001 impacted essentially all segments.
Under the programs, the company terminated approximately 5,500 employees
involved in technical, manufacturing, marketing and administrative activities,
reduced the contractor work force by about 1,300, and shut down operating
facilities principally due to transferring production to more cost competitive
facilities.
In the aggregate, payments from operating cash flows to terminated employees and
to third parties for dismantlement and removal activities and to terminate
contracts are expected to total about $375 million. About $150 million of these
cash outlays were made in 2001, $182 million in 2002, $21 million in 2003, and
most of the remaining payments will be made in 2004. The 2003 benefit to
earnings was approximately $440 million before taxes with about 60 percent of
these savings resulting in reduced Cost of goods sold and other operating
charges, about 30 percent resulting in reduced Selling, general and
administrative expenses and the balance resulting in reduced Research and
development expense. Facility shutdown and contract cancellations resulting in
lower depreciation and lease expense contributed about $35 million of the total
cost savings.
FUTURE COST REDUCTION INITIATIVES
The company announced in December 2003 that it would take aggressive actions to
ensure its global competitiveness as a more focused, science-based company
following the separation of INVISTA. Included are variable margin improvements,
fixed cost reductions, and organizational actions that are expected to achieve a
$900 million pretax cost improvement in 2005. The company expects its actions to
yield a $450 million cost improvement in 2004, and the full $900 million in
2005. Cost improvements targeted in 2004 will essentially offset residual costs
from the separation of INVISTA and other expected fixed cost increases, thus
allowing the full measure of the company's expected 2004 volume and price
improvement to benefit operating earnings. A portion of the fixed cost savings
will come from work force reductions.
The company is in the process of developing plans to meet the
objectives announced in December and expects to publicly disclose information on
the number of position eliminations and any restructuring charges during the
first half of 2004.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
SEPARATION CHARGES--
TEXTILES & INTERIORS $1,620 -- --
- ------------------------------------------------------------
The company recorded a charge of $1.6 billion for asset impairments and other
charges primarily related to the expected sale of INVISTA. In addition, upon
reclassification to assets held for sale, the company ceased depreciation and
amortization of these assets. This is expected to improve the company's
quarterly 2004 earnings by approximately $.07 per share until separation.
Additional charges and credits related to the expected sale of INVISTA may be
recorded, some of which might be material to the company's Consolidated
Financial Statements.
The company expects to have significant continuing involvement due to ongoing
purchases and sales between INVISTA and the company, as well as other ongoing
obligations. This continuing involvement precludes the company from reporting
INVISTA results as discontinued operations in its Consolidated Financial
Statements.
Upon closing of the pending sale of INVISTA, the company will indemnify Koch
against certain liabilities primarily related to taxes, legal matters,
environmental matters, and representations and warranties. The company is
currently in the process of determining the fair value of these indemnities and
will record the fair value of these indemnities upon closing of the transaction.
Under the definitive agreement, the company's total indemnification obligation
for the majority of the representations and warranties cannot exceed
approximately $1.4 billion. The remaining indemnities are not limited to this
maximum payment amount. The company does not believe that the fair value of
these indemnities will have a material impact on the future liquidity of the
company. See Note 5 to the Consolidated Financial Statements for additional
information.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
GOODWILL IMPAIRMENT--
TEXTILES & INTERIORS $295 -- --
- ------------------------------------------------------------
In connection with the pending sale of INVISTA, the company was required to test
the related goodwill for recoverability. This test indicated that the carrying
value of goodwill exceeded fair value, and accordingly, the company recorded an
impairment
18
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
charge of $295 million to write off all of the associated goodwill. This
write-off was based on an estimate of fair value as determined by the negotiated
sales price of the INVISTA net assets.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
NONOPERATING GAIN $62 -- --
- ------------------------------------------------------------
The company recognized a $62 million gain associated with the formation of a
majority-owned venture, The Solae Company, with Bunge Limited. See Note 8 to the
Consolidated Financial Statements for additional information.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
PROVISION FOR (BENEFIT FROM)
INCOME TAXES $(930) $185 $2,467
Effective income tax rate (EITR) (650.3)% 8.7% 36.0%
- ------------------------------------------------------------
2003 VS. 2002 The 2003 EITR is significantly lower than the 2002 EITR of 8.7
percent. The change in EITR for 2003 is primarily affected by the recording of
deferred tax assets in two European subsidiaries for their tax basis investment
losses recognized on local tax returns. In addition, the impact of
jurisdictional mix and other tax benefits was magnified by the low level of
pretax earnings for the year.
The company's currentestimate of the 2004 EITR is about 25 percent, excluding
any tax effects on exchange gains/losses or special items, neither of which can
be reasonably estimated at this time.
2002 VS. 2001 The 2002 EITR of 8.7 percent is significantly lower than the 2001
EITR of 36 percent. There were four key factors driving the reduction in the
rate: (1) a greater portion of foreign earnings being generated in jurisdictions
with lower tax rates, (2) an increased utilization of foreign tax credits, (3)
tax benefits associated with losses on foreign exchange contracts, and (4) the
tax impact of the 2002 special items discussed on page 20. About 30 percent of
the decrease in the EITR relates to the first two items discussed above, another
30 percent relates to the tax benefit on foreign exchange contracts and the
balance relates to the tax impact of special items. Significant items which
contributed to the lower EITR are the sale of DuPont Pharmaceuticals,
restructuring and asset impairment charges, and agreement on certain prior year
audit issues.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES $(29) $(2,944) $11
- ------------------------------------------------------------
On January 1, 2003, the company adopted Statement of Financial Accounting
Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations," which
requires companies to record an asset and related liability for the costs
associated with the retirement of a long-lived tangible asset if a legal
liability to retire the asset exists. The adoption of this standard resulted in
a cumulative effect of a change in accounting principle after-tax charge to
income of $29 million.
The company's adoption of SFAS No. 142, "Goodwill and Other Intangible Assets,"
resulted in a cumulative effect after-tax charge to income of $2,944 million,
effective January 1, 2002. This charge was attributable to goodwill impairments
of $2,866 million in the Agriculture & Nutrition segment and $78 million in the
Textiles & Interiors segment.
On January 1, 2001, the company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended. The adoption of SFAS No. 133
resulted in a cumulative effect of a change in accounting principle after-tax
benefit of $11 million.
See Note 10 to the Consolidated Financial Statements for additional information
on the adoption of these accounting standards.
- ------------------------------------------------------------
(DOLLARS IN MILLIONS) 2003 2002 2001
- ------------------------------------------------------------
NET INCOME (LOSS) $973 $(1,103) $4,339
- ------------------------------------------------------------
Net income for the year 2003 was $973 million versus a net loss of $1,103
million in 2002. Income before the cumulative effect of changes in accounting
principles was $1,002 million in 2003 versus $1,841 million in 2002, a decrease
of $839 million or 46 percent. In 2003, special items totaled a net after-tax
charge of $667 million, representing an increase in special item net charges of
$499 million versus 2002, principally the result of 2003 charges taken in
connection with the separation of INVISTA. See table below which aids in
understanding these items and comparing results of operations over the
three-year period presented.
In addition to the impact of increased special items, the reduction in 2003
income before cumulative effect of changes in
19
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
accounting principles versus 2002 reflects a $650 million after-tax increase in
raw material costs and a $400 million after-tax increase in pension, other
postretirement benefits, and stock option expenses. The remaining operating
variances totaled a benefit of about $700 million, principally the result of
higher sales volumes, other income, and more favorable currency translation and
income tax rates.
Earnings per share on a diluted basis were $0.96 per share in 2003 versus a loss
of $1.11 in 2002.
- --------------------------------------------------------------------------------------------------------------------------
Diluted
Pretax After-Tax Earnings
SPECIAL ITEMS Benefit Benefit (Loss)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE) (Charge) (Charge)(1) Per Share
- --------------------------------------------------------------------------------------------------------------------------
2003
INVISTA related items(2) $(1,915) $ (696) $(0.69)
Benlate(R)litigation (78) (50) (0.05)
Corporate minority interest redemption (28) (17) (0.02)
Textiles & Interiors-Unifi settlement 16 10 0.01
Restructuring and asset impairment charges 17 12 0.01
Pharmaceuticals-favorable arbitration ruling 23 15 0.01
Gain on Canadian currency contract 30 18 0.02
Agriculture & Nutrition-The Solae Company nonoperating gain 62 41 0.04
- --------------------------------------------------------------------------------------------------------------------------
Total $(1,873) $ (667) $(0.67)
- --------------------------------------------------------------------------------------------------------------------------
2002
Restructuring and asset impairment charges $ (290) $ (200) $(0.19)
Litigation costs (130) (81) (0.08)
Exchange loss (Argentina mandatory conversion) (63) (63) (0.06)
Product exit costs (47) (29) (0.03)
Loss on early extinguishment of debt (21) (17) (0.02)
Tax items--net -- 65 0.06
Pioneer acquisition-related costs 40 67 0.07
Gain on asset sales 109 90 0.09
- --------------------------------------------------------------------------------------------------------------------------
Total $ (402) $ (168) $(0.16)
- --------------------------------------------------------------------------------------------------------------------------
2001
Restructuring and asset impairment charges $(1,078) $ (705) $(0.69)
Pioneer acquisition-related costs (133) (83) (0.08)
Litigation costs (56) (35) (0.04)
Gain on sale of equity securities 52 34 0.03
Gain on sale of DuPont Pharmaceuticals 6,136 3,866 3.74
- --------------------------------------------------------------------------------------------------------------------------
Total $ 4,921 $3,077 $ 2.96
- --------------------------------------------------------------------------------------------------------------------------
1 The segment impact of these special items is included in Note 31 to the
Consolidated Financial Statements.
2 Includes deferred tax benefits of $669, $0.67 per share.
20
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
Net loss for the year 2002 was $1,103 million compared with Net income of $4,339
million in 2001. Income before cumulative effect of changes in accounting
principles was $1,841 million in 2002 versus $4,328 million in 2001. 2002 Income
before cumulative effect of a change in accounting principle includes special
items totaling $168 million in net after-tax charges. 2001 includes a net
after-tax benefit of $3,077 million for special items including a $3,866 million
after-tax gain recorded on the sale of DuPont Pharmaceuticals. Special items for
each year are listed above.
In addition to the financial impact of differences in the amount of special
items in both years, the year-to-year change in income before the cumulative
effect of changes in accounting principles reflects an increase in income of
approximately $750 million resulting from higher sales volume, reductions in raw
material costs, lower fixed costs, absence of goodwill amortization, reduced
interest expense and lower income taxes. These benefits were partly offset by
the impact of lower selling prices.
Earnings per share on a diluted basis were a loss of $1.11 in 2002 versus
earnings of $4.16 in 2001.
ACCOUNTING STANDARDS ISSUED NOT YET ADOPTED
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities"
(VIEs), which is an interpretation of Accounting Research Bulletin (ARB) No. 51,
"Consolidated Financial Statements." FIN 46 addresses the application of ARB No.
51 to VIEs, and generally would require that assets, liabilities, and results of
the activity of a VIE be consolidated into the financial statements of the
enterprise that is considered the primary beneficiary. This interpretation
applies immediately to VIEs created after January 31, 2003, and to VIEs in which
a company obtains an interest after that date. The company has not created or
obtained an interest in any VIEs in 2003. In addition, the interpretation
becomes applicable on December 31, 2003, for special-purpose entities (SPEs)
created prior to February 1, 2003. As of December 31, 2003, the company had no
SPEs for which it was considered the primary beneficiary. For non-SPEs in which
a company holds a variable interest that it acquired before February 1, 2003,
the FASB has postponed the date on which the interpretation will become
applicable to March 31, 2004.
The company has identified two non-consolidated entities as VIEs where DuPont is
considered the primary beneficiary. One entity provides manufacturing services
for the company and the other entity is a real estate rental operation. The
company guarantees all debt obligations of these entities, which totaled $136
million at December 31, 2003. These amounts are included within obligations for
equity affiliates and others in Note 24 to the Consolidated Financial
Statements. In accordance with the provisions of FIN 46, the company will
consolidate these VIEs as of March 31, 2004. The company does not expect the
consolidation of these VIEs to have a material effect on the consolidated
results of operations or financial position.
On December 8, 2003, President Bush signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the Act) into law. As permitted under
FASB Staff Position (FSP) FAS 106-1, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003", the company did not reflect the effects of this Act in its Consolidated
Financial Statements and accompanying Notes. In January 2004, the company
amended its U.S. medical plan to be secondary to Medicare for prescription drug
coverage beginning in 2006 for eligible retirees and survivors. As a result of
this plan amendment, FAS 106-1 will not apply to the company. See further
discussion of plan amendment under Long-Term Employee Benefits beginning on page
37 and Note 28 to the Consolidated Financial Statements.
In December 2003, the Staff of the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition", which
supersedes SAB No. 101. The primary purpose of SAB No. 104 is to rescind
accounting guidance contained in SAB No. 101 and the SEC's "Revenue Recognition
in Financial Statements Frequently Asked Questions and Answers" (the FAQ)
related to multiple element revenue arrangements. The company does not expect
the issuance of SAB No. 104 to impact its current revenue recognition policies.
CRITICAL ACCOUNTING ESTIMATES
The company's significant accounting policies are more fully described in Note 1
to the Consolidated Financial Statements. Management believes that the
application of these policies on a consistent basis enables the company to
provide the users of the financial statements with useful and reliable
information about the company's operating results and financial condition.
21
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts, including, but not limited to, receivable and
inventory valuations, impairment of tangible and intangible assets,
postretirement employee benefit obligations, income taxes, restructuring
reserves and litigation. Management's estimates are based on historical
experience, facts and circumstances available at the time, and various other
assumptions that are believed to be reasonable under the circumstances. The
company reviews these matters and reflects changes in estimates as appropriate.
Management believes that the following represent some of the more critical
judgment areas in the application of the company's accounting policies which
could have a material effect on the company's financial position, liquidity or
results of operations.
PENSION AND OTHER POSTRETIREMENT BENEFITS
In connection with the company's postretirement plans, the fair value of assets
in all pension plans was $18 billion at December 31, 2003, and the related
benefit obligations were $21 billion. In addition, obligations under the
company's unfunded other postretirement benefit plans were $5 billion at
December 31, 2003. Expected return on plan assets and discount rate assumptions
are particularly important when determining the company's benefit obligations
and net periodic benefit costs associated with postretirement benefits. The
following table highlights the potential impact on the company's pretax earnings
due to changes in these assumptions with respect to the company's pension and
other postretirement benefit plans, based on assets and liabilities at December
31, 2003:
- ---------------------------------------------------------------------
1/2 Percentage 1/2 Percentage
(DOLLARS IN MILLIONS) Point Increase Point Decrease
- ---------------------------------------------------------------------
Discount rate $60 $(60)
Expected rate of
return on plan pension assets 75 (75)
- ---------------------------------------------------------------------
Additional information with respect to pension and other postretirement employee
expenses and liabilities is discussed under Long-Term Employee Benefits
beginning on page 37.
ENVIRONMENTAL MATTERS
DuPont accrues for remediation activities when it is probable that a liability
has been incurred and a reasonable estimate of the liability can be made. The
company's estimates are based on a number of factors, including the complexity
of the site, the nature of the remedy, the outcome of discussions with
regulatory agencies and other potentially responsible parties (PRPs) at
multiparty sites, and the number of and financial viability of other PRPs. The
company has recorded a liability of $380 million on the Consolidated Balance
Sheet as of December 31, 2003; these accrued liabilities exclude claims against
third parties and are not discounted.
Considerable uncertainty exists with respect to environmental remediation costs
and, under adverse changes in circumstances, the potential liability may range
up to two to three times the amount accrued. Much of this liability results from
the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA, often referred to as the Superfund), the Resource Conservation and
Recovery Act (RCRA) and similar state laws. These laws require the company to
undertake certain investigative and remedial activities at sites where the
company conducts or once conducted operations or at sites where
company-generated waste was disposed. The accrual also includes a number of
sites identified by the company for which it is probable that environmental
remediation will be required, but which are not currently the subject of CERCLA,
RCRA or state enforcement activities. Federal and state authorities may seek
fines and penalties for violation of the various laws and governmental
regulations, and could, among other things, impose liability on the company for
cleaning up the damage resulting from company-generated waste disposal. Over the
next two decades the company may incur significant costs under both CERCLA and
RCRA.
Remediation activities vary substantially in duration and cost from site to
site. These activities, and their associated costs, depend on the mix of unique
site characteristics, evolving remediation technologies, diverse regulatory
agencies and enforcement policies, as well as the presence or absence of PRPs.
Therefore, it is difficult to develop accurate estimates of future site
remediation costs. A detailed discussion of environmental matters is contained
in Management's Discussion and Analysis, beginning on page 39.
LEGAL CONTINGENCIES
The company's results of operations could be affected by significant litigation
adverse to the company, including product liability claims, patent infringement
claims and antitrust claims. The company records reserves for legal matters when
the informa-
22
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
tion available indicates that it is probable that a liability has been incurred
and the amount of the loss can be reasonably estimated. Predicting the outcome
of claims and litigation, and estimating related costs and exposure involves
substantial uncertainties that could cause actual costs to vary materially from
estimates. In making determinations of likely outcomes of litigation matters,
management considers many factors. These factors include, but are not limited
to, the nature of specific claims including unasserted claims, the company's
experience with similar types of claims, the jurisdiction in which the matter is
filed, input from outside legal counsel and the current status of the matter.
Considerable judgment is required in determining whether to establish a
litigation reserve when an adverse judgment is rendered against the company in a
court proceeding. In such situations, the company will not recognize a loss if,
based upon a thorough review of all relevant facts and information, management
believes that it is probable that the pending judgment will be successfully
overturned on appeal. A detailed discussion of significant litigation matters is
contained in Note 24 to the Consolidated Financial Statements.
INCOME TAXES
The breadth of the company's operations and the global complexity of tax
regulations require assessments of uncertainties and judgments in estimating the
ultimate taxes the company will pay. The final taxes paid are dependent upon
many factors, including negotiations with taxing authorities in various
jurisdictions, outcomes of tax litigation and resolution of disputes arising
from federal, state, and international tax audits. The resolution of these
uncertainties may result in adjustments to the company's tax assets and tax
liabilities.
Significant judgment is required in evaluating the need for and magnitude of
appropriate valuation allowances against deferred tax assets. The realization of
these assets is dependent on generating future taxable income, as well as
successful implementation of various tax planning strategies. For example,
changes in facts and circumstances that alter the probability that the company
will realize deferred tax assets would result in recording a valuation
allowance, thereby reducing the net deferred tax asset. In some situations these
changes could be material.
In 2003, DuPont recorded $669 million in deferred tax assets associated with two
European subsidiaries for their tax basis investment losses recognized on local
tax returns. Realization of these assets is expected to occur over an extended
period of time. As a result, changes in tax laws, assumptions with respect to
future taxable income and tax planning strategies could result in adjustments to
these assets.
CORPORATE OUTLOOK
The company's overall outlook for 2004 is positive. DuPont expects cyclical
recovery in major industrial economies, in addition to continuing growth in
emerging economies. This is expected to support global real GDP growth of 3.6
percent in 2004, which would be the largest full-year increase since 2000. The
company also expects that in contrast to recent years the manufacturing sectors
of the developed industrial economies will grow at rates stronger than their
regional GDP.
The major risks and uncertainties associated with this outlook are sustained
increases in oil and natural gas prices or a faltering U.S. economic expansion.
However, with the strength of the recovery and its current momentum, DuPont
believes that the economic conditions in 2004 will be positive for its
businesses.
Specific key assumptions and actions that support the company's outlook for 2004
include the following:
o In December 2003, DuPont announced a program to reduce fixed costs and
improve variable margins. The company expects its actions to yield a $450
million pretax cost improvement in 2004, and the full $900 million in 2005.
Cost improvements targeted in 2004 will essentially offset residual costs
from the separation of INVISTA and other expected fixed cost increases.
o With oil and U.S. natural gas prices remaining high, the company does not
expect any relief from hydrocarbon costs in 2004 and anticipates that
prices for raw materials will remain at or slightly above 2003 levels.
o The company's current estimate of the 2004 effective income tax rate is
about 25 percent, excluding any tax effects on exchange gains/losses or
special items, neither of which can be reasonably estimated at this time.
Accordingly, the company's outlook for 2004 is between $2.00 and $2.20 earnings
per share. This does not include estimates for any 2004 special items, including
those anticipated for restructuring and the INVISTA separation, as such items
cannot be reasonably estimated at this time.
23
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
SEGMENT REVIEWS
Segment sales include transfers and pro rata share of equity affiliate sales.
Segment after-tax operating income (ATOI) does not include corporate expenses,
interest, exchange gains (losses), corporate minority interests or the
cumulative effects of changes in accounting principles. A reconciliation of
segment sales to consolidated Net sales and segment ATOI to Income before
cumulative effect of changes in accounting principles for 2003, 2002 and 2001 is
included in Note 31 to the Consolidated Financial Statements.
AGRICULTURE & NUTRITION
- --------------------------------------------------------------------------
Segment
Sales ATOI
(DOLLARS IN BILLIONS) (DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------
2003 $5.5 $540
2002 4.5 443
2001 4.3 21
- --------------------------------------------------------------------------
Agriculture & Nutrition leverages DuPont technology, customer relationships and
industry knowledge to improve the quantity, quality and safety of the global
food supply. Global land area that can be used in agricultural production is
becoming increasingly limited. Therefore, increases in production will need to
be achieved principally through improving crop yields and productivity rather
than through increases in planted acreage. Agriculture & Nutrition delivers a
broad portfolio of products and services that are specifically targeted to
achieve gains in crop yields and productivity, including Pioneer(R) brand seed
products and well-established brands of insecticides, fungicides and herbicides.
The segment also provides global production and distribution of soy-based food
ingredients, food quality diagnostic testing equipment and services, and liquid
food packaging systems. Research and development in this segment focuses on
leveraging technology to increase grower productivity and enhance the value of
grains and soy used in feed and food through improved seed traits and the
effective use of insecticides, herbicides and fungicides.
Agriculture & Nutrition includes the company's wholly owned subsidiary, Pioneer
Hi-Bred International, Inc., which is the world's largest seed producer and the
world leader in improving crop yields with hybrid and varietal seeds that
improve grower yields and provide insect protection and herbicide tolerance. The
principal products at Pioneer are hybrid seed corn and soybean seed. During
2003, Pioneer(R) brand corn hybrids outperformed competitive hybrids in North
America by an average yield of 6.1 bushels per acre based on side-by-side
comparisons. While the commercial seed industry for major crops remained stable
in 2003, Pioneer increased market share in the European and South American seed
corn markets, with over 10 percent growth in sales in 2003.
Agriculture & Nutrition also serves the global agriculture industry with crop
protection products for the grain and specialty crop sectors as well as forestry
and vegetation management. Demand for DuPont crop protection products in 2003
increased after several years of decline, reflecting higher commodity prices and
farm income. Sales of crop protection products increased about 12 percent,
reflecting market share growth in insecticide sales for use on cotton crops in
Asia pacific; an expanded presence in the fruit and vegetable specialty market
sectors; and product registrations that support the use of existing products in
new markets. In November 2003, the company acquired Griffin Corporation's 50
percent ownership interest in Griffin LLC for $13 million, net of $18 million
cash acquired, thereby becoming the sole owner. This acquisition strengthened
the segment's product, sales, marketing and manufacturing resources and
expertise to better serve crop protection customers.
Agriculture & Nutrition's sales of soy protein experienced strong growth in
2003, largely due to the formation in early 2003 of an alliance between DuPont
and Bunge Limited. This alliance resulted in (1) a majority-owned venture, The
Solae Company, that focuses on the global production and distribution of
specialty food ingredients, including soy proteins and lecithins; (2) a
biotechnology agreement to jointly develop and commercialize soybeans with
improved quality traits; and (3) an alliance to develop a broader offering of
services and products for farmers. DuPont contributed its soy food ingredients
business to the venture for a 72 percent majority ownership interest in The
Solae Company, and Bunge contributed businesses with a fair value of $520
million for a 28 percent interest in the venture.
Through its wholly owned subsidiary, Qualicon Inc., Agriculture & Nutrition also
provides diagnostic products, including the world's leading automated instrument
for fingerprinting the DNA of bacteria to help food and health care industry
customers monitor the microbial environment in their manufacturing
24
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
processes and facilities. In addition, the segment offers systems for the
aseptic and refrigerated liquid packaging of beverages, dairy products and
pumpable foods in retail and institutional applications. Sales of these products
and systems experienced growth of almost 50 percent in 2003.
2003 VERSUS 2002 Sales of $5.5 billion were 21 percent higher as both U.S.
dollar (USD) selling prices and volumes increased 6 percent. The 21 percent
increase also includes 9 percent due to additional sales resulting from the
formation of The Solae Company and the acquisition of the remaining interest of
Griffin LLC. Higher USD selling prices resulted principally due to currency
translation, reflecting the weaker dollar. Volume growth principally reflects
increased corn seed sales in markets outside of North America, higher sales of
herbicides in North America, a significant increase in insecticide sales in Asia
Pacific, and higher worldwide sales of soy-based products.
2003 ATOI was $540 million, including an after-tax gain of $41 million
attributable to the formation of The Solae Company. This compares to ATOI of
$443 million in 2002, which included a benefit of $67 million related to
revisions in post-employment costs for Pioneer, a $25 million charge to reflect
an expected loss on the sale of a manufacturing facility in Europe, and a $29
million charge to write off inventories of discontinued herbicide products. The
improvement in 2003 ATOI also reflects the benefits of higher volumes and
favorable currency exchange rates, which were partly offset by higher non-cash
pension expense and raw material costs.
2002 VERSUS 2001 Sales of $4.5 billion were 5 percent higher, reflecting 3
percent higher volume and a 2 percent increase due to the May 2002 acquisition
of Liqui-Box, a provider of systems for aseptic and refrigerated liquid
packaging. ATOI was $443 million, which includes a benefit of $67 million
related to revisions in post-employment costs for Pioneer, a $25 million charge
to reflect an expected loss on the sale of a manufacturing facility in Europe,
and a $29 million charge to write off inventories of discontinued herbicide
products. 2002 ATOI also reflects the benefit of higher Pioneer(R), soy, and
diagnostic product sales and lower overall segment costs, primarily due to a
$108 million benefit (versus prior year) from discontinuing amortization of
goodwill and indefinite-lived intangible assets as required by new accounting
standards. 2001 ATOI of $21 million included net charges of $225 million for
employee termination costs, a write-down of assets, legal settlements, and
purchase accounting adjustments related to the sale of Pioneer inventory.
OUTLOOK The production agriculture economic environment outlook is positive for
2004 with higher commodity grain prices reflecting increased consumption and
minimal reserve supplies. North American production agriculture is expected to
remain stable in terms of farm income and cash flow, as production in the U.S.
and Canada is expected to continue at historically high levels.
An unprecedented number of new products were launched in 2003 which are expected
to benefit the 2004 planting season. The launch includes 18 new soybean
varieties and 74 new Pioneer(R) brand corn hybrids, 46 of which contain the
Roundup Ready(R) gene*. Sales of corn hybrids containing the Roundup Ready(R)
gene* were at introductory levels in 2003, with full launch planned for 2004. As
part of a complete product line offering, Pioneer also anticipates growth in
treated corn seed sales, which doubled in 2003 from 2002 levels and are expected
to nearly double again in 2004.
Agriculture & Nutrition expects to increase profitability of crop protection
products through growth in specialty markets and improved asset utilization in
2004. Significant competitive challenges are anticipated to continue as a result
of industry consolidation and the influence of insect and herbicide tolerant
crops.
The segment also anticipates strong growth in soy protein sales, as major food
companies continue to develop new mainstream products utilizing Solae(R) soy
proteins, as 8th Continent(TM) light soymilk is fully launched, and as the
venture with Bunge begins to generate new opportuni