CTA-PB

Business Context and Reporting Period

Company: E. I. du Pont de Nemours and Company (DuPont)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: DuPont operates across multiple segments including Agriculture & Nutrition, Coatings & Color Technologies, Electronic & Communication Technologies, Performance Materials, Pharmaceuticals, and Safety & Protection. The company reported strong growth driven by the Agriculture & Nutrition platform and pharmaceutical royalties, despite headwinds in U.S. automotive and residential construction markets.

Key Financial Metrics

Margins: Total segment pre-tax operating income as a percent of sales increased to 20% in Q1 2007. Cost of goods sold as a percent of net sales improved to 71% from 72% in the prior year.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 6% year-over-year, driven by a 2% increase in local selling prices, a 2% favorable currency impact, and a 2% volume increase.
• Profitability: Net income rose 16% to $945 million. This was fueled by higher seed sales in the Agriculture & Nutrition segment and increased royalty income from Cozaar/Hyzaar pharmaceuticals.
• Segment Performance:
  • Agriculture & Nutrition: Sales up 13% and pre-tax operating income up 9% due to higher corn acreage and seed sales.
  • Coatings & Color Technologies: Pre-tax operating income surged to $194 million from $21 million, primarily due to the absence of a $135 million restructuring charge recorded in Q1 2006.
  • Performance Materials: Included a $52 million litigation charge related to elastomers antitrust matters.
• Cash Flow: Cash used for operating activities improved by $141 million to $(240) million, largely due to higher earnings, though seasonal working capital needs remained significant.
• Debt: Net debt increased by $1.0 billion to $6.6 billion, primarily attributable to seasonal working capital requirements in the Agriculture & Nutrition segment.

Guidance, Outlook, and Risks

• Full-Year 2007 Outlook: Management expects full-year earnings per share of $3.09. This guidance includes the $0.06 per share charge taken in Q1 for litigation reserves. The outlook assumes modest volume gains, with growth outside the U.S. and strong agricultural markets offsetting lower demand in U.S. housing and automotive sectors. Energy and ingredient costs are expected to be roughly equal to 2006 levels.
• Pharmaceutical Royalties: Management expects royalty income from Cozaar/Hyzaar to begin a significant step-down in 2010 as U.S. exclusivity expires, continuing to decline to zero after 2013.
• Key Risks and Contingencies:
  • PFOA Litigation and Regulation: Significant ongoing exposure regarding perfluorooctanoic acid (PFOA). Reserves of approximately $108 million were established for a class action settlement regarding drinking water, with potential additional costs for medical monitoring if a science panel finds a link to disease. The company is also subject to EPA and DOJ investigations.
  • Antitrust Matters: Increased reserves by $65 million for EU antitrust allegations regarding synthetic rubber markets. A settlement in principle was reached with Canadian authorities for approximately $3.5 million.
  • Benlate Litigation: Ongoing lawsuits regarding crop damage and birth defects. Reserves of $15 million were established for settlements in principle.
  • Environmental Liabilities: Total environmental liability reserve is $349 million, with potential liabilities ranging up to two to three times this amount under adverse circumstances.
• Stock Repurchases: The company entered into a structured stock repurchase agreement on May 1, 2007, for $300 million. Under the 2005 plan, $1.4 billion remains to be purchased by the end of 2007.

Investor Verification Checklist

• Pharmaceutical Revenue Sustainability: Verify the timeline and magnitude of the expected decline in Cozaar/Hyzaar royalty income post-2010.
• PFOA Exposure: Monitor the findings of the independent science panel regarding PFOA and human disease, which could trigger up to $235 million in medical monitoring costs.
• Antitrust Reserves: Track the final decision and fine amount from EU antitrust authorities regarding the elastomers market.
• Working Capital Seasonality: Assess the impact of seasonal cash outflows in the Agriculture & Nutrition segment on liquidity and net debt levels.
• Benlate Settlements: Confirm the finalization of the $8.5 million settlement for reopener cases and the $9 million settlement for birth defect claims.