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E. I. du Pont de Nemours and Company (DuPont) - 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for E. I. du Pont de Nemours and Company for the period ended June 30, 2007. DuPont is a large accelerated filer engaged in the manufacture and sale of agricultural products, coatings, electronics, performance materials, pharmaceuticals, and safety products. The company operates globally, with sales outside the U.S. constituting more than half of its revenue.

Key Financial Metrics

Note: Net Debt is defined by management as total debt less cash and cash equivalents and marketable debt securities.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 6% year-over-year for both the quarter and the six-month period. Growth was driven by a 2% increase in local selling prices, a 3% favorable currency effect, and a 1% volume increase. International volume growth offset weakness in U.S. residential construction and auto markets.
• Profitability: Net income for the quarter was essentially flat ($972 million vs. $975 million prior year). While revenue grew, earnings were offset by higher raw material costs, increased spending on growth initiatives, and a higher effective tax rate (25.6% in Q2 2007 vs. 22.2% in Q2 2006).
• Segment Performance:
  • Agriculture & Nutrition: Sales up 7%; Pretax operating income (PTOI) flat due to higher fixed costs for seed research.
  • Coatings & Color Technologies: Sales up 5%; PTOI flat due to higher ingredient costs, though year-to-date PTOI improved significantly due to the absence of a $135 million restructuring charge taken in the prior year.
  • Performance Materials: Sales up 8%; PTOI up 19%, though year-to-date included a $52 million litigation charge related to elastomers antitrust matters.
  • Safety & Protection: Sales up 4%; PTOI up 3%, driven by Kevlar and Nomex sales.
• Liquidity: Cash and cash equivalents decreased from $1.8 billion at year-end 2006 to $987 million, primarily due to seasonal working capital needs in the Agriculture & Nutrition segment and stock repurchases.

Guidance, Outlook, and Risks

• Outlook: Management maintains a full-year 2007 earnings per share outlook of $3.09. This includes a $0.06 per share charge taken in Q1 related to litigation reserves. The company expects continued growth outside the U.S. and higher local selling prices to benefit the second half, offset by softness in U.S. housing, higher ingredient costs, and a higher effective tax rate.
• Stock Repurchases: The company has a $5 billion buyback plan authorized in 2005. As of June 30, 2007, $3.9 billion had been spent. A subsequent event on July 31, 2007, involved a structured repurchase agreement for $1.1 billion.
• Key Risks and Contingencies:
  • PFOA Litigation and Regulation: Significant ongoing exposure regarding Perfluorooctanoic Acid (PFOA). The company has established reserves for environmental actions, drinking water settlements (including a $108 million reserve established in 2004), and potential medical monitoring. The EPA has issued screening levels, and class actions regarding health effects are pending.
  • Benlate Litigation: Ongoing lawsuits regarding crop damage. The company has incurred approximately $2 billion in costs/expenses to date, with $11.5 million in reserves for specific settlements.
  • Antitrust Matters: Investigations into synthetic rubber markets (Elastomers). The company increased reserves by $65 million in 2007 for EU matters and has a $177 million reserve balance for U.S. matters.
  • Environmental Remediation: Total environmental liability accrual is $349 million, with potential liabilities ranging up to two to three times this amount under adverse circumstances.

Investor Verification Checklist

• PFOA Exposure: Verify the status of the independent science panel study regarding PFOA and human disease, as a finding of a "probable link" could trigger up to $235 million in medical monitoring costs.
• Antitrust Reserves: Monitor the final decision from EU antitrust authorities regarding the elastomers matter, as fines could exceed current reserves.
• Raw Material Costs: Assess the company's ability to pass on higher energy and raw material costs to customers, particularly in the U.S. market where demand is soft.
• Pharmaceutical Royalties: Track the decline in Cozaar/Hyzaar income, which is expected to step down significantly starting in 2010 as patents expire.
• Working Capital: Review the seasonal cash burn in the Agriculture & Nutrition segment and its impact on net debt levels.