E. I duPont de Nemours & Co. Inc.Michelle E. Ruffini

ACG2021-Financial AccountingSpring 2004 0 Section - 080

Executive Summary

Dupont continues to remain a leader in the chemical industry.

•It leads in many areas including

–Safety and Protection

–Agriculture

–Coatings and color technologies in the automotive industry

Executive Summary

• It’s recent years of expanding its business into the semiconductor industry is beginning to pay off.

• With the planned sell of the Textiles and Interiors department which has been a high energy cost and lower yield, the company is moving ahead into the future of biochemistry.

Executive Summary

• Its financial health is positive with good growth potential.

• The chemical industry for 2003 will be flat but the continuing growth in housing starts and automotive sells should be positive.

• Dupont is now over 200 years old.

Annual Report Link Instructions

• The Annual Report is a pdf file. To get to the page following this link

– http://www.corporate-ir.net/ireye/ir_site.zhtml?ticker=DD&script=11902&item_id='index.htm‘

– Then look to the right of the screen and select Annual Report. That will automatically begin a download of the pdf file.

Part A. Introduction• Chad Holliday – Chairman & Chief

Executive Office• Home Office Address, phone number,

& web site – 1007 Market Street– Wilmington, DE 19898– Phone: 302-774-1000– Website: www.dupont.com

• Ending date of latest fiscal year – 12/31/02

Part A. IntroductionPrincipal products or services

• Biotechnology• Production

Agriculture;Food Processing

Part A. IntroductionPrincipal products or services

• Dupont Coatings & Color Technologies

• Automotive; Collision Repair, Paper, Industrial Coatings; Digital Printing; Architectural Coatings;Plastics

Part A. IntroductionPrincipal products or services

• Dupont Electronic & Communication Technologies

• Semiconductors; Printed Circuit Boards and Components; Communications; Display and Imaging

Part A. IntroductionPrincipal products or services

• Dupont Performance Materials

• Automotive; Electrical and Electronics; Packaging; Construction

Part A. IntroductionPrincipal products or services

– Dupont Safety & Protection• Construction; Personal Protection – Industrial and

First Responders; Medical; Process Industries; Safety and Operations Services

Part A. IntroductionPrincipal products or services

• Dupont Textiles & Interiors

• Apparel; Carpet; Interior and Industrial Uses; and Nylon, Polyester and Elastane Intermediates; and related Specialties

Part A. IntroductionMain geographic area of activity

• International Company– Operates in 75

countries– ½ revenue from

sales comes from outside US

Part A. Audit Report

• Auditors - PricewaterhouseCoopers LLP – Two Commerce Square, Suite 1700– 2001 Market Street– Philadelphia, Pennsylvania 19103

Part A. Audit Report

• PricewaterhouseCoopers LLP reported Dupont’s Form 10-K the following:– “In our opinion, the consolidated financial statements

listed in the accompanying index present fairly, in all material respects, the financial position of E. I. du Pont de Nemours and company and its subsidiaries at December 21, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ending December 31, 2002 in conformity with accounting principles generally accepted in the United Sates of America.”

Part A. Audit Report

• My opinion of the report from Pricewaterhousecoopers, LLP– This statement does not tell you anything about

the company’s health present or past. It does not give any insights to problems in the accounting practices or future issues negative or positive.

Part A. Stock Market Information

• Most recent price of the company’s stock – Opened 2/19/04 at 45.40

• Dividend per share - $1.40

• Date: 2/19/04

• Your opinion about the company stock as an investment? BUY/SELL/HOLD - HOLD

Part A. Stock Information

• Average Number of shares(millions) –diluted– 2002 999– 2001 1,041

• Shares outstanding – year-end(millions)– 2002 994– 2001 1,002

Part A. Stock Market Prices

• Market Price – year–end close

• 2002 $42.40• 2001 $42.51

– High-low range• 2002 $49.80

- $35.02• 2001

$49.88-$32.64

Part B. Industry Situation and Company Plans

• Chemical Industry OutlookIn 2003 the outlook for the industry was to remain flat.

Source: Chemical Manufacturers Association & Standard and Poor’s

– Note: This powerpoint presentation was done in February of 2004. The annual report for Dupont is not due till March 2004. It was difficult to trace back to 2003 outlooks since that year is now completed.

Part B. Industry Situation and Company Plans

• Dupont plans to sell the textile division.– The reason for this is due to the

higher cost of energy and raw materials to produce the products in this division.

– Brands include

• Stainmaster carpet

• Dupont Lycra

• Dupont Teflon

• Nylon (Dupont’s invention)

Part B. Industry Situation and Company Plans

• According to information from Argus Company Report dated 2/20/04– We expect Dupont to utilize the proceeds from

the Textile divisions sale (to Koch) to buy shares of the company stock, and this could give earnings a boost. We also expect some repayment of debt.

– Dupont has said that it would contribute $200 million of this sale to U.S. pension plans.

Part C. Income Statement

•Is the format most like a single-step or multistep format?

– The Income Statement follows the multistep format.

Part C. Income Statement(dollars in millions except per share)

2002 2001Net Sales $24,006 $24,726

Other income 516 644

Total 24,552 25,370

Cost of goods sold and other operating charges

16,296 16,727

Selling, general and administrative expenses 2,699 2,925

Depreciation 1,297 1,320

Amortization of goodwill and other intangible assets

218 434

Research and development expense 1,264 1,588

Interest expense 359 590

Employee separation costs and write-down of assets

290 1,078

Gain on sale of Dupont Pharmaceuticals (25) (6,136)

Total 22,398 18,526

Part C. Income Statement(dollars in millions except per share)

2002 2001Income from continuing operations before income taxes and minority interests

2,124 6,844

Provision for income taxes 185 2,467

Minority interests in earnings of consolidated subsidiaries

98 49

Income from continuing operations 1,841 4,328

Income before extraordinary item and cumulative effect of change sin accounting principles

1,841 4,328

Cumulative effect of changes in accounting principles, net of taxes

(2,944) 11

Net income (loss) $(1,103) $4339

Part C. Income Statement(dollars in millions except per share)

2002 2001

Diluted earnings (loss) per share of common stock

Continuing operations before extraordinary item and cumulative effect of changes in accounting principles

$.84 $4,15

Before extraordinary item and cumulative effect of changes in accounting principles

1.84 4.15

Cumulative effect of changes in accounting principles

(2.95) .01

Net income (loss) $(1.11) $ 4.16

Part C. Income StatementComments

• These items showed a decrease from 2001 to 2002– Net Sales and other income– Cost of Goods Sold and other operating charges– Selling, general and administrative expenses– Amortization of goodwill and other intangible assets– Interest expense– Research and Development expense– Employee separation costs and write-down of assets– Gain on sale of Dupont Pharmaceuticals– Income from continuing operations before income taxes and minority interest– Provision for income taxes– Total Income from continuing operations– Income before extraordinary item and cumulative effect of changes in accounting

principles.

• I believe the reason for these changes is primarily due to the sale of the pharmaceutical business in 2001.

Part C. Income StatementComments

• These items showed a increase from 2001 to 2002– Minority interests in earnings of consolidated subsidiaries

• I believe the reason for this change is also due to the sale of the pharmaceutical business in 2001.

Part C. Balance Sheet Current Assets

Assets 2002 2001Current Assets

Cash & cash equivalents $3,678 $5,763

Marketable debt securities 465 85

Accounts and notes receivable 3,884 3,903

Inventories 4,409 4,215

Prepaid expenses 175 217

Income taxes 848 618

Total Current Assets 13,459 14,801

Part C. Balance SheetOther Assets

2002 2001Property, plant and equipment $33,732 $33,778

Less: accumulated depreciation 20,446 20,491

Net Property, plant & equipment 13,286 13,287

Goodwill 1,167 3,746

Other intangible assets 3,109 3,151

Investment in affiliates 2,047 2,045

Other assets 1,553 3,289

Total $34,621 $40,319

Part C. Balance SheetCurrent Liabilities

2002 2001Accounts Payable $2,727 $2,219

Short-term borrowings and capital lease obligations

1,185 1,464

Income Taxes 47 1,295

Other accrued liabilities 3,3137 3,089

Total current liabilities $7,096 $8,067

Part C. Balance Sheet Other Liabilities

2002 2001Long-term borrowings & capital lease obligations

$5,647 $5,350

Other liabilities 8,770 7,336

Deferred income taxes 1,622 2,690

Total Liabilities $23,135 $23,443

Minority interest 2,423 2,424

Stockholders’ equity 9,063 14,452

Total $34,621 $40,319

Part C. Balance SheetSummary

2002 2001

Assets $34,621 $40,319

Liabilities $34,621 $40,319

Part C. Balance Sheet Comments

• These items showed a decrease from 2001 to 2002– Assets

• Total Current Assets

• Goodwill

• Other assets

– Liabilities and Stockholders Equity• Total Current Liabilities

• Deferred income taxes

• Stockholder’s equity

• I believe the changes to these items is due to the sale of the pharamaceutial business.

Part C. Balance Sheet Comments

• These items showed a increase from 2001 to 2002– Assets

• Marketable debt securities

• Inventories - slightly

• Income Taxes

– Liabilities and Stockholders Equity• Accounts payable

• Short-term borrowings and capital lease obligations – slightly

• Other liabilities

• I believe the changes to these items is due to the sale of the pharamaceutial business.

Part C. Statement of Cash Flows•Are cash flows from operations more or less than net income for the past two years?

–Cash flow in 2002 was $360 million. This increased from 2001

•Is the company growing through investing activities, i.e., buying property, plant and equipment and other long lived assets?

–Yes, please read the next slides

•What is the company’s primary source of financing, i.e., long-term loans, stock sales?

–Sales and some long-term debt

•Overall, has cash increased or decreased over the past two years?–Cash flow increased in 2002.

Part C. Statement of Cash FlowsNew Investments and Joint Ventures

• January– Dupont began a collaborative effort with the United Sates Conference of Mayors to

survey the homeland security needs of civic leaders in more than 1,000 cities across the country.

• February– The first aircraft baggage container, using Dupont Kevlar fiber as an integral

component, passed the FAA’s blast resistant container test. The container is made by Telair International.

– Dupont completed its previously announced $25. Billion share repurchase program by repurchasing $470 million worth of Dupont stock in January and February.

– Dupont introduced “Super Solids” ultra-low emissions coating technology at the DaimlerCrysler assembly plant in Newark, Delaware, The new technology reduces volatile organic emissions of the final protective clear coat by 25% and offers a significant improvement in scratch and mar resistance.

Part C. Statement of Cash FlowsNew Investments and Joint Ventures

• March 2002– Purchased an equity interest in Merrimac Industries, Inc. Dupont and

Merrimac agreed to work together to better understand the dynamics of the markets for high-frequency electronic components and modules

– Announced a five-year effort with the Massachusetts Institute of Technology (MIT) to develop lightweight molecular materials to equip US soldiers uniforms and gear that will help heal them, shield them and protect them against chemical and biological warfare

– Established a joint venture with Asahi Kasei Corporation for the production and marketing of acetal(also known as POM) copolymer resins in China.

Part C. Statement of Cash FlowsNew Investments and Joint Ventures

• April– USDA Food Safety and Inspection Service adopted the Dupont BAX

system, a genetics-based screening method, to detect Listeria monocytogenes in the nation’s meat and poultry supply.

• May– Dupont Canada, Inc. acquired Liqui-Box Corporation, a leading

manufacturer of packaging systems for pumpable food products for institutional applications. The acquisition complements Dupont’s Enhance flexible packaging systems for retail operations.

Part C. Statement of Cash FlowsNew Investments and Joint Ventures

• August– Dupont and RiTdisplay Corporation launched a mass-production line for

next generation displays. The high-volume manufacturing plant will produce polymer-based OLED (organic light-emitting diode)flat-panel display modules for Dupont.

– Dupont and China Nuclear Honghua Specialty Gases Company formed a joint venture for the manufacture and sale of nitrogen trifluoride(NF3), a key chamber cleaning and etch gas used in semiconductor manufacturing and flat panel displays.

Part C. Statement of Cash FlowsNew Investments and Joint Ventures

• September– Dupont acquired the Atofina fluortelomer surface protection and specialty

surfactants business assets. With the acquistion, Dupont becomes the largest integrated producer of fluorotelomer-based specialty products for surface protection applications in North America and Europe.

• October– As part of a federally-sponsored research and development initiative,

Dupont, Sarnoff and Bell Labs agreed to develop new organic-tin film transistor technology on plastic substrates.

– Dupont became the first major agricultural seed producer in the U.S. to be accredited by the National Seed Health System. This accreditation authorizes Pioneer to conduct plant health inspections and test sin compliance with international phytosanitary regulations, which will speed product development and the shipment of seed.

Part C. Statement of Cash FlowsNew Investments and Joint Ventures

• October– Dupont announced that it is part of a science-based consortium that will

receive $19 million in matching funds from the U.S. Department of Energy for research leading to an innovative “bio-refinery” – capable of producing ethanol fuel and value-added chemicals from renewable resources such as corn.

• November– Dupont acquired ChemFirst, Inc., which include two semiconductor

fabrication materials businesses and a chemical intermediates business. With the acquisition, Dupont becomes a leading supplier of integrated circuit fabrication materials – complementing its role as a leading global supplier of ceramic and organic (rigid and flexible) packaging and circuit materials to the electronics industry.

Part C. Statement of Cash FlowsNew Investments and Joint Ventures

• December– The U.S. Federal Trade Commission granted approval for a new generic

fiber subclass in recognition of the unique qualities of T-400, under the generic name elasterell-p, the latest innovation to be marketed under the Dupont Lycra brand

– Dupont established a commercial seed business in China by forming a joint venture with one of China’s largest seed companies, Denghai Seed group. The joint venture will produce top-performing corn seed for Chinese farmers.

– Dupont and Universal Display Corporation agreed to jointly develop a new generation of soluble OLED materials and technology. The joint development agreement establishes an important intellectual property collaboration aimed at combing the best elements of both small molecule OLED and solution processible OLED research.

Cash Flow and Balance Sheet Statements from CEO

• In a recent conference call, CEO Chad Holliday said, “our first call on cash is to maintain a strong balance sheet,’ and ‘we plan to reduce debt to maintain our rating,’

Part D. Accounting Policies

•List the topics of the notes to the financial statements.

–The change required by the Federal Government was noted.

Part E. Financial AnalysisLiquidity Ratios

2002 2001

Working Capital 6,363 6,734

Current Ratio 1.9 1.8

Receivable turnover

Average days’ sales uncollected

Inventory turnover

Average days’ inventory on hand

Part E. Financial AnalysisLiquidity Ratios - Comments

• Dupont remains strong in its liquidity ratios.– Inventory turnover changed slightly from 2001

to 2002.– The future sale of the Textile division will assist

Dupont in lowering costs for energy and raw materials.

Part E. Financial AnalysisProfitability Ratios

2002 2001

Profit Margin 21 36

Asset Turnover

Return on Assets 2.70%

Return on Equity 17.4% 9.4%

Part E. Financial AnalysisProfitability Ratios- Comments

• Profitability remains high. Dupont remains the leader in the chemical industry. Its diversification helps it to solidify its bottom line and financial statements.

Part E. Financial AnalysisSolvency Ratio

2002 2001

Debt to equity 37.3% 28.8%

Part E. Financial AnalysisSolvency Ratio - Comments

– Dupont remains solvent and can meet the future production demands and costs.

Part E. Financial AnalysisMarket Strength Ratios

For the past two years, calculate and comment on:• Price/earnings per share

– 2002 was 21

– 2001 was 36• Dropped due to sell of Pharmaceutical and new Acquisitions

• Dividend yield– 2002 was 3.3%

– 2001 was 3.3%• Remained the same from previous year.

Corporation Outlook for 2003

• Dupont expects 2003 earnings per share to reflect increased sales volumes, barring the occurrence of significant world events or economic disruption.

• 2003 sales volumes will reflect he worldwide GDP that the company expects to be about 2%.

Corporation Outlook for 2003

• 2003 housing sales affect the sale of textile products and are expected to continue at their record levels of 2002.

• 2003 motor vehicle production that affects the paints and other products that Dupont produces for the automotive industry, are expected to be slightly below its record levels of 2002.

Corporation Outlook for 2003

Other factors that influence the company’s outlook for 2003 • The combined impact of pension and other post-

retirement expenses is expected to be negative in regards to 2003 earnings per share by $0.34 to $0.39 versus the prior year.

• The company expects its effective income tax rate in 2003 to be more in line with historical rates, significantly higher than the 2002 rate of 8.7 percent.

• Two newly adopted accounting standards will adversely impact 2003 earnings per share by about $0.05 – SFAS No. 143 for asset retirement obligations and SFAS No.123, as amended, for stock options.

Prospects for Long-term Growth Influencing Factors

1. Growth in global economies, particularly those in North America, Europe and Asia Pacific regions

2. Improving market conditions including demand from the U.S.manufacturing sector and production agriculture

3. Successful commercialization of new products arising from research and development

Prospects for Long-term Growth Influencing Factors

4. Stronger worldwide demand and strong pricing for commodity chemical sand polymer products

5. Recovery of the depressed electronics and high-technology markets; and

6. The successful separation of the Textiles & Interiors segment.