CTA-PB

Business Context and Reporting Period

Company: E. I. du Pont de Nemours and Company (DuPont)
Filing Type: Form 8-K (Current Report)
Reporting Period: Third Quarter ended September 30, 2006
Filing Date: October 24, 2006

DuPont reported consolidated financial results for the third quarter of 2006, highlighting a return to profitability driven by higher sales volumes, increased local selling prices, and reduced fixed costs. The results are compared against the third quarter of 2005, which was significantly impacted by hurricane-related charges and a one-time tax charge.

Key Financial Metrics

Capital Allocation: The company repurchased $100 million of stock in Q3 2006, bringing total repurchases under its $5 billion program to $3.3 billion.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 7% year-over-year, driven by a 3% increase in local prices, a 3% increase in volume, and a 1% positive currency effect. Asia Pacific volume grew 11%.
• Profitability: The company moved from a net loss of $82 million in Q3 2005 to a net income of $485 million in Q3 2006. The prior year loss was largely due to a $320 million tax charge (American Jobs Creation Act) and $95 million in after-tax hurricane charges.
• Cost Management: Raw material costs were $180 million higher than the prior year but were fully offset by selling price increases. Fixed costs decreased by $50 million year-over-year.
• Segment Performance:
  • Coatings & Color Technologies: PTOI surged to $276 million (vs. $26 million) due to higher titanium dioxide sales and insurance recoveries offsetting prior-year hurricane charges.
  • Performance Materials: PTOI more than doubled to $172 million (vs. $68 million) driven by higher prices and volume in engineering polymers.
  • Agriculture & Nutrition: Reported a loss of $158 million, an increase in seasonal losses compared to the prior year due to lower sales and higher costs.

Guidance, Outlook, and Risks

Full-Year 2006 Outlook:

• Reported EPS: Expected to be approximately $2.86 per share.
• Adjusted EPS: Reaffirmed at approximately $2.85 per share (excluding significant items), representing a 22% increase over the prior year.

Management Commentary: CEO Charles O. Holliday stated the company is on track for a strong second half, citing continued pricing momentum and cost control. The company expects to meet its long-term goal of 10% annual growth in EPS.

Risks and Contingencies:

• Significant Items: Results include a $50 million benefit from initial insurance recoveries for prior-year hurricane damage. Conversely, Q3 2005 included significant hurricane charges and tax liabilities.
• Forward-Looking Risks: Management noted risks including changes in laws/regulations, economic conditions, inflation, interest rates, foreign currency exchange rates, competitive pressures, and severe weather events causing business interruptions.

Investor Verification Checklist

• Non-GAAP Reconciliation: Verify the reconciliation of Adjusted EPS ($0.49) to Reported EPS ($0.52) and the specific components of "significant items" (insurance recoveries vs. prior-year charges).
• Segment Volatility: Review the Agriculture & Nutrition segment's continued losses and the specific drivers (seasonality, soy protein sales) to assess long-term viability.
• Share Repurchase Progress: Confirm the remaining $1.7 billion of the $5 billion buyback program and the timeline for completion (end of 2007).
• Fixed Cost Trends: Validate the sustainability of the 4.2 percentage point improvement in fixed costs as a percent of sales.
• Insurance Recoveries: Assess the certainty of the $50 million insurance recovery benefit included in current results versus the timing of future recoveries.