Business Context and Reporting Period
Company: E. I. du Pont de Nemours and Company (DuPont)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2006
Business Overview: DuPont is a global science and technology leader operating in five growth platforms: Agriculture & Nutrition, Coatings & Color Technologies, Electronic & Communication Technologies, Performance Materials, and Safety & Protection. The company also reports a Pharmaceuticals segment derived from licensing agreements for Cozaar and Hyzaar. Total worldwide employment was approximately 59,000.
Key Financial Metrics
| Metric (in millions, except per share) | 2006 | 2005 |
|---|---|---|
| Net Sales | $27,421 | $26,639 |
| Net Income | $3,148 | $2,056 |
| Diluted Earnings Per Share | $3.38 | $2.07 |
| Cash Provided by Operating Activities | $3,736 | $2,542 |
| Total Assets | $31,777 | $33,291 |
| Total Debt | $7,530 | $8,180 |
| Net Debt | $5,637 | $6,329 |
| Working Capital | $4,930 | $4,986 |
| Cost of Goods Sold (as % of Sales) | 75% | 74% |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 3% to $27.4 billion, driven by 2% higher local selling prices and 2% higher net volume. Growth was led by Asia Pacific and Latin America, offsetting volume declines in the U.S. automotive and housing markets.
- Profitability Surge: Net income rose 53% to $3.1 billion, and diluted EPS increased 63% to $3.38. This was driven by higher selling prices, volume growth, lower fixed costs, and significant tax benefits (settlements and valuation allowance reversals).
- Cost Pressures: Raw material costs increased by over $800 million year-over-year due to higher oil and natural gas prices. The company offset these through price increases and productivity gains.
- Restructuring: The company recorded a net charge of $326 million in 2006 for restructuring plans in Agriculture & Nutrition and Coatings & Color Technologies, involving approximately 3,200 positions.
- Insurance Recoveries: Received $204 million in insurance recoveries related to Hurricane Katrina (2005) and asbestos settlements.
Guidance, Outlook, and Risks
- 2007 Outlook: Management forecasts net sales of approximately $29 billion and earnings per share of about $3.15. Economic conditions are expected to be less favorable than 2006, with slower global GDP growth.
- Strategic Targets: Long-term targets include 6% revenue growth, 10% earnings per share growth, and a 1 percentage point improvement in Return on Invested Capital (ROIC).
- Key Risks:
- Commodity Prices: Continued volatility in energy and raw material costs could impact margins if not fully passed through to customers.
- Environmental & Litigation: Significant exposure to PFOA (perfluorooctanoic acid) regulatory actions and litigation, as well as Benlate fungicide claims. Potential environmental liabilities could range up to two to three times the accrued amount ($349 million).
- Pharmaceuticals: Earnings from Cozaar/Hyzaar are expected to decline significantly after U.S. patents expire in 2010.
- Accounting Changes: Adoption of SFAS 158 in 2006 reduced total assets and stockholders' equity by $2.2 billion and $1.6 billion, respectively, to reflect the funded status of pension plans.
Investor Verification Checklist
- PFOA Exposure: Verify the status of the EPA's PFOA Stewardship Program and potential regulatory bans that could impact $1 billion in revenues.
- Restructuring Execution: Monitor the realization of the targeted $135 million annual cost savings from the 2006 restructuring plans.
- Pension Obligations: Review the funded status of the principal U.S. pension plan and the impact of the Pension Protection Act of 2006 on future contributions.
- Share Repurchases: Track the completion of the remaining $1.7 billion of the $5 billion share buyback program authorized in 2005.
- Raw Material Hedging: Assess the effectiveness of hedging strategies in mitigating the impact of rising energy and feedstock costs on margins.