2006

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

 

Mark One

 

 

For the fiscal year ended December 31, 2006

 

 

 

Commission file number 1-815

 

E. I. DU PONT DE NEMOURS
AND COMPANY

(Exact name of registrant as specified in its charter)

 

 

1007 Market Street
Wilmington, Delaware 19898
(Address of principal executive offices)

 

Registrant’s telephone number, including area code: 302 774-1000
Securities registered pursuant to Section 12(b) of the Act
(Each class is registered on the New York Stock Exchange, Inc.):

 

Title of Each Class

 

 

 

 

Common Stock ($.30 par value)
Preferred Stock
(without par value-cumulative)
$4.50 Series
$3.50 Series

No securities are registered pursuant to Section 12(g) of the Act.

 

 

 

 

Indicate by check mark whether the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act). Yes x  No o

 

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o   No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x  Accelerated filer o  Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o   No x

 

The aggregate market value of voting stock held by nonaffiliates of the registrant (excludes outstanding shares beneficially owned by directors and officers and treasury shares) as of June 30, 2006, was approximately $38.0 billion.

 

As of January 31, 2007, 924,125,197 shares (excludes 87,041,427 shares of treasury stock) of the company’s common stock, $.30 par value, were outstanding.

Documents Incorporated by Reference
(Specific pages incorporated are indicated under the applicable Item herein):

 

 

E. I. du Pont de Nemours and Company

 

Form 10-K

 

TABLE OF CONTENTS

 

The terms “DuPont” or the “company” as used herein refer to E. I. du Pont de Nemours and Company and its consolidated subsidiaries, or to E. I. du Pont de Nemours and Company, as the context may indicate.

 

 

Note on Incorporation by Reference

 

Information pertaining to certain Items in Part III of this report is incorporated by reference to portions of the company’s definitive 2007 Annual Meeting Proxy Statement to be filed within 120 days after the end of the year covered by this Annual Report on Form 10-K, pursuant to Regulation 14A (the Proxy).

 

DuPont was founded in 1802 and was incorporated in Delaware in 1915. DuPont is a world leader in science and technology in a range of disciplines, including biotechnology, electronics, materials science, safety and security and synthetic fibers. The company operates globally, manufacturing a wide range of products for distribution and sale to many different markets, including the transportation, safety and protection, construction, motor vehicle, agriculture, home furnishings, medical, electronics, communications, protective apparel and the nutrition and health markets. Total worldwide employment at December 31, 2006, was approximately 59,000 people.

 

The company is strategically aligned into five market- and technology-focused growth platforms consisting of Agriculture & Nutrition; Coatings & Color Technologies; Electronic & Communication Technologies; Performance Materials; and Safety & Protection. In addition to the five growth platforms, the company’s reportable segments include Pharmaceuticals. The company includes developmental businesses, such as bio-based materials and nonaligned businesses in Other.

 

In 2004, the company sold the majority of the net assets of the then Textiles & Interiors segment (INVISTA) to subsidiaries of Koch Industries, Inc. (Koch). Beginning in 2005, any activities related to the remaining assets of Textiles & Interiors are included in Other. In January 2006, the company completed the sale of its interest in an equity affiliate to its equity partner thereby completing the sale of all of the net assets of Textiles & Interiors. Information describing the business of the company can be found on the indicated pages of this report:

 

 

The company has operations in approximately 80 countries worldwide and about 60 percent of consolidated Net sales are made to customers outside the United States of America (U.S.). Subsidiaries and affiliates of DuPont conduct manufacturing, seed production, or selling activities and some are distributors of products manufactured by the company.

 

Sources of Supply

 

The company utilizes numerous firms as well as internal sources to supply a wide range of raw materials, energy, supplies, services and equipment. To ensure availability, the company maintains multiple sources for fuels and most raw materials, including hydrocarbon feedstocks. Large volume purchases are generally procured under competitively priced supply contracts.

 

A substantial portion of the production and sales in Performance Materials is dependent upon the availability of hydrocarbon and hydrocarbon derivative feedstocks. Current hydrocarbon feedstock requirements are met by

Part I

Item 1. Business, continued

 

purchases from major energy and petrochemical companies. In addition, the company obtains adipic acid and hexamethylenediamine from Koch under a long-term supply contract.

 

Within Agriculture & Nutrition, the company’s wholly-owned subsidiary, Pioneer Hi-Bred International, Inc. (Pioneer), operates in the seed industry and has seed production facilities located throughout the world. Seed production is performed directly by the company or contracted with independent growers and conditioners. The company’s ability to produce seeds primarily depends upon weather conditions, grower contract terms and the availability of preferred hybrids with desired traits.

 

The major commodities, raw materials and supplies for the company’s reportable segments in 2006 include the following:

 

Agriculture & Nutrition:

 

carbamic acid related intermediates; insect control products; natural gas; polyethylene; soybeans; soy flake; soy lecithin; sulfonamides

 

Coatings & Color Technologies:

 

butyl acetate; chlorine; HDI based poly aliphatic isocyanates; industrial gases; titanium ore; pigments

 

Electronic & Communication Technologies:

 

block co-polymers; chloroform; fluorspar; hydrofluoric acid; copper; hydroxylamine; oxydianiline; perchloroethylene; polyester film; precious metals; pyromellitic dianhydride

 

Performance Materials:

 

adipic acid; butanediol; dimethyl terephthalate (DMT); ethane; ethylene glycol; fiberglass; hexamethylenediamine (HMD); natural gas; purified terephthalic acid; methanol; butadiene

 

Safety & Protection:

 

alumina hydroxide; ammonia; benzene; high density polyethylene; isophthaloyl chloride; metaphenylenediamine; methyl methacrylate; natural gas; paraphenylenediamine; polyester fiber; propylene; terephthaloyl chloride; wood pulp

 

No commodities or raw materials are purchased for the Pharmaceutical segment. This segment’s revenues arise from licensing arrangements for Cozaar^® and Hyzaar^® antihypertensive drugs, which are manufactured and distributed by Merck & Co. (Merck).

 

Since 1997, DuPont has contracted with Computer Sciences Corporation (CSC) and Accenture LLP (Accenture) to provide certain services for the company. CSC operates a majority of the company’s global information systems and technology infrastructures and provides selected applications and software services. In December 2005, DuPont entered into a new contract with CSC to provide these services through December 2014. Accenture provides selected applications, software services and enterprise resource planning solutions designed to enhance the company’s manufacturing, marketing, distribution and customer service. Accenture is contracted to provide these services through December 2008.

 

In November 2005, DuPont contracted with Convergys Corporation to provide the company with global human resources transactional services including employee development, workforce planning, compensation management, benefits administration and payroll. The full scope of these services is scheduled to be operating by the end of 2008. Convergys Corporation is contracted to provide services through 2018.

Part I

Item 1. Business, continued

 

 

Backlog

 

The company does not consider backlog to be a significant indicator of the level of future sales activity. In general, the company does not manufacture its products against a backlog of orders. Production and inventory levels are based on the level of incoming orders as well as projections of future demand. Therefore, the company believes that backlog information is not material to understanding its overall business and should not be considered a reliable indicator of the company’s ability to achieve any particular level of revenue or financial performance.

 

Patents and Trademarks

 

The company believes that its patent and trademark estate provides it with an important competitive advantage. It has established a global network of attorneys, as well as branding, advertising and licensing professionals, to procure, maintain, protect, enhance and gain value from this estate.

 

The company owns and is licensed under various patents, which expire from time to time, covering many products, processes and product uses. These patents protect many aspects of the company’s significant research programs and the goods and services it sells. The actual protection afforded by these patents varies from country to country and depends upon the scope of coverage of each individual patent as well as the availability of legal remedies in each country. The company owns approximately 21,000 worldwide patents and approximately 15,000 worldwide patent applications. In 2006, the company was granted about 500 U.S. patents and about 1,900 international patents. The company’s rights under its patents and licenses, as well as the products made and sold under them, are important to the company as a whole, and to varying degrees, important to each reportable segment. For a discussion of the importance of patents to Pharmaceuticals, see the segment discussion on page 37 of this report.

 

The environment in which Pioneer and the rest of the companies within the seed industry compete is increasingly affected by new patents, patent positions, patent lawsuits and the status of various intellectual property rights. Ownership of and access to intellectual property rights, particularly those relating to biotechnology and germplasm, are important to Pioneer and its competitors. No single patent owned by Pioneer or its competitors is essential to Pioneer’s ability to compete. However, Pioneer will continue to address freedom to operate issues by enforcing its own intellectual property rights, challenging claims made by others and, where appropriate, obtaining licenses to important technologies on commercially reasonable terms.

 

The company has approximately 1,900 unique trademarks for its products and services and approximately 17,000 worldwide registrations and applications for these trademarks. Ownership rights in trademarks do not expire if the trademarks are continued in use and properly protected. The company has many trademarks that have significant recognition at the consumer retail level and/or business to business level. Significant trademarks at the consumer retail level include the DuPont Oval and DuPont^tm (the “DuPont Brand Trademarks”); Pioneer^® brand seeds; Teflon^® fluoropolymers, films, fabric protectors, fibers and dispersions; Corian^® surfaces; Kevlar^® high strength material; and Tyvek^® protective material. The company is actively pursuing licensing opportunities for selected trademarks at the retail level. For example, the DuPont Brand Trademarks have been licensed for hard surface flooring, automotive appearance products, air filtration, water filtration and lubricants. In addition, the Teflon^® trademark has been extended through licensing to personal care products, automotive care products, automotive wiper blades, eye glass lenses, home care products, lubricants, paint, paint accessories, cookware and small appliances.

 

As part of the sale of INVISTA to Koch in 2004, DuPont transferred certain patents and patent applications as well as certain trademarks and their related registrations and applications. In addition to this transfer, Koch and DuPont have entered into agreements regarding intellectual property rights, including patent and trademark licenses.

Part I

Item 1. Business, continued

 

 

Seasonality

 

Sales of the company’s products in Agriculture & Nutrition are affected by seasonal patterns. Agriculture & Nutrition’s performance is strongest in the first half of the year. The segment generally operates at a loss during the third and fourth quarters of the year. As a result of the seasonal nature of its seed business, Agriculture & Nutrition’s inventory is at its highest level at the end of the calendar year and is sold down in the first and second quarters. Trade receivables in Agriculture & Nutrition are at a low point at year-end and increase through the selling season to peak at the end of the second quarter.

 

In general, businesses in the remaining segments are not significantly affected by seasonal factors.

 

Marketing

 

With the exception of Pioneer^® brand seeds and Solae^® soy proteins, most products are marketed primarily through DuPont’s sales force, although in some regions, more emphasis is placed on sales through distributors. Pioneer^® brand products are aggressively promoted through multiple marketing channels in North America. In the high corn and soybean concentration markets of the U.S. Corn Belt, products are sold through a specialized force of independent sales representatives. In more diverse cropping areas, Pioneer^® products are marketed through distributors and crop input retailers. Pioneer^® products outside of North America are marketed through a network of subsidiaries, joint ventures and independent producer-distributors. Solae^® isolated and functional soy proteins are marketed using a combination of outside distributors, joint ventures and direct sales.

 

Major Customers

 

The company’s sales are not materially dependent on a single customer or small group of customers. However, collectively, Coatings & Color Technologies and Performance Materials have several large customers, primarily in the automotive original equipment manufacturer (OEM) industry. The company has long-standing relationships with these customers and they are considered to be important to the segments’ operating results.

 

Competition

 

The company competes on a variety of factors such as price, product quality and performance or specifications, continuity of supply, customer service and breadth of product line, depending on the characteristics of the particular market involved and the product or service provided.

 

Major competitors include diversified industrial companies principally based in the U.S., Western Europe, Japan, China and Korea. In the aggregate, these competitors offer a wide range of products from agricultural, commodity and specialty chemicals to plastics, fibers and advanced materials. The company also competes in certain markets with smaller, more specialized firms who offer a narrow range of products or converted products that functionally compete with the company’s offerings.

 

Agriculture & Nutrition sells advanced plant genetics through Pioneer, principally for the global production of corn and soybeans and thus directly competes with other seed and plant biotechnology companies. Agriculture & Nutrition also provides food safety equipment and soy-based food ingredients in competition with other major grain and food processors.

 

Research and Development

 

The company conducts research in the U.S. at over 30 sites in 14 states at either dedicated research facilities or manufacturing plants. The highest concentration of research is in the Wilmington, Delaware area at several large research centers. Among these, the Experimental Station laboratories engage in investigative and applied research, the Chestnut Run laboratories focus on applications research and the Stine-Haskell Research Center

Part I

Item 1. Business, continued

 

conducts agricultural product research and toxicological research to assure the safe manufacture, handling and use of products.

 

Other major research locations in the U.S. include Marshall Lab in Philadelphia, Pennsylvania and Mt. Clemens in Mt. Clemens, Michigan, both dedicated to coatings research; Pioneer research facilities in Johnston, Iowa; The Solae Company facilities in St. Louis, Missouri; polymer research facilities in Richmond, Virginia and Parkersburg, West Virginia; and electronic technology research facilities in Research Triangle Park, North Carolina, Towanda, Pennsylvania and Santa Barbara, California.

 

DuPont, reflecting the company’s global interests, operates more than 30 additional research and development facilities at locations outside the U.S. in Belgium, Canada, China, France, Germany, Japan, Luxembourg, Mexico, The Netherlands, Spain and Switzerland. A new research and development facility was opened in Taiwan in 2006 to better serve the integrated circuit market.

 

The objectives of the company’s research and development programs are to create new technologies, processes and business opportunities in relevant fields, as well as to improve existing products and processes. Each segment of the company funds research and development activities that support its business mission. In 2006, the company broadened its sustainability commitments beyond environmental footprint reduction to include market-driven targets for research and development investment. The company will expand its offerings addressing safety, environment, energy and climate challenges in the global marketplace by developing and commercializing renewable, bio-based materials; advanced biofuels; energy-efficient technologies; enhanced safety and protection products; and alternative energy products and technologies. The goals are tied directly to business growth, specifically to the development of safer and environmentally improved new products that enhance the environmental profile of its traditional businesses for DuPont’s key global markets, including transportation, building and construction, agriculture and food and communications.

 

The corporate research laboratories are responsible for conducting research programs aligned with corporate strategy as provided by the growth platforms. All research and development activities are administered by senior research and development management to ensure consistency with the business and corporate strategy. The future of the company is not dependent upon the outcome of any single research program.

 

Additional information with respect to research and development, including the amount incurred during each of the last three fiscal years, is included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, on page 24 of this report.

 

Facility Security

 

DuPont recognizes that the security and safety of its operations are critical to its employees, neighbors and, indeed, to the future of the company. As such, DuPont has merged chemical site security into its safety core value where it serves as an integral part of its long standing safety culture. Physical security measures have been combined with process safety measures (including the use of inherently safer technology), administrative procedures and emergency response preparedness into an integrated security plan. The company has conducted vulnerability assessments at operating facilities in the U.S. and high priority sites worldwide and identified and implemented appropriate measures to protect these facilities from physical or cyber attacks. DuPont is partnering with carriers, including railroad, shipping and trucking companies, to secure chemicals in transit.

 

Environmental Matters

 

Information related to environmental matters is included in several areas of this report: (1) Environmental Proceedings on page 13, (2) Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 28 and 48-50 and (3) Notes 1 and 20 to the Consolidated Financial Statements.

Part I

Item 1. Business, continued

 

 

Available Information

 

The company is subject to the reporting requirements under the Securities Exchange Act of 1934. Consequently, the company is required to file reports and information with the Securities Exchange Commission (SEC), including reports on the following forms: annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

 

The public may read and copy any materials the company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

 

The company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are also accessible on the company’s website at http://www.dupont.com by clicking on the tab labeled “Investor Center” and then on “SEC filings.” These reports are made available, without charge, as soon as is reasonably practicable after the company files or furnishes them electronically with the Securities and Exchange Commission.

Part I

 

The company’s operations could be affected by various risks, many of which are beyond its control. Based on current information, the company believes that the following identifies the most significant risk factors that could affect its businesses. However, the risks and uncertainties the company faces are not limited to those discussed below. Additional risks and uncertainties not presently known to the company or that the company currently believes to be immaterial also could affect its businesses. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

 

Price increases for energy costs and raw materials could have a significant impact on the company’s ability to sustain and grow earnings.

 

The company’s manufacturing processes consume significant amounts of energy and raw materials, the costs of which are subject to worldwide supply and demand as well as other factors beyond the control of the company. Significant variations in the cost of energy, which primarily reflect market prices for oil and natural gas and raw materials affect the company’s operating results from period to period. When possible, the company purchases raw materials through negotiated long-term contracts to minimize the impact of price fluctuations. The company has taken actions to offset the effects of higher energy and raw material costs through selling price increases, productivity improvements and cost reduction programs. Success in offsetting higher raw material costs with price increases is largely influenced by competitive and economic conditions and could vary significantly depending on the market served. If the company is not able to fully offset the effects of higher energy and raw material costs, it could have a significant impact on the company’s financial results.

 

Failure to develop and market new products could impact the company’s competitive position and have an adverse effect on the company’s financial results.

 

The company’s operating results are largely dependent on its ability to renew its pipeline of new products and services and to bring those products and services to market. This ability could be adversely affected by difficulties or delays in product development such as the inability to identify viable new products, successfully complete research and development, obtain relevant regulatory approvals, obtain intellectual property protection, or gain market acceptance of new products and services. Because of the lengthy development process, technological challenges and intense competition, there can be no assurance that any of the products the company is currently developing, or could begin to develop in the future, will achieve substantial commercial success. Sales of the company’s new products could replace sales of some of its current products, offsetting the benefit of even a successful product introduction.

 

The company’s results of operations could be adversely affected by litigation and other commitments and contingencies.

 

The company faces risks arising from various unasserted and asserted litigation matters, including, but not limited to, product liability claims, patent infringement claims and antitrust claims. The company has noted a nationwide trend in purported class actions against chemical manufacturers generally seeking relief such as medical monitoring, property damages, off-site remediation and punitive damages arising from alleged environmental torts without claiming present personal injuries. Various factors or developments can lead to changes in current estimates of liabilities such as a final adverse judgment, significant settlement or changes in applicable law. A future adverse ruling or unfavorable development could result in future charges that could have a material adverse effect on the company. An adverse outcome in any one or more of these matters could be material to the company’s financial results.

Part I

Item 1A. Risk Factors, continued

 

 

In the ordinary course of business, the company may make certain commitments, including representations, warranties and indemnities relating to current and past operations, including those related to divested businesses and issue guarantees of third party obligations. If the company were required to make payments as a result, they could exceed the amounts accrued, thereby adversely affecting the company’s results of operations.

 

As a result of the company’s current and past operations, including operations related to divested businesses, the company could incur significant environmental liabilities.

 

The company is subject to various laws and regulations around the world governing the environment, including the discharge of pollutants and the management and disposal of hazardous substances. As a result of its operations, including its past operations and operations of divested businesses, the company could incur substantial costs, including cleanup costs, third-party property damage or personal injury claims. The costs of complying with complex environmental laws and regulations, as well as internal voluntary programs, are significant and will continue to be so for the foreseeable future. The ultimate costs under environmental laws and the timing of these costs are difficult to predict. The company’s accruals for such costs and liabilities may not be adequate because the estimates on which the accruals are based depend on a number of factors including the nature of the allegation, the complexity of the site, site geology, the nature and extent of contamination, the type of remedy, the outcome of discussions with regulatory agencies and other Potentially Responsible Parties (PRPs) at multi-party sites and the number and financial viability of other PRPs.

 

The company’s ability to generate sales from genetically enhanced products, particularly seeds and other agricultural products, could be adversely affected by market acceptance, government policies, rules or regulations and competition.

 

The company is using biotechnology to create and improve products, particularly in its Agriculture & Nutrition segment. Demand for these products could be affected by market acceptance of genetically modified products as well as governmental policies, laws and regulations that affect the development, manufacture and distribution of products, including the testing and planting of seeds containing biotechnology traits and the import of crops grown from those seeds.

 

The company competes with major global companies that have strong intellectual property estates supporting the use of biotechnology to enhance products, particularly in the agricultural products and production markets. Speed in discovering and protecting new technologies and bringing products based on them to market is a significant competitive advantage. Failure to predict and respond effectively to this competition could cause the company’s existing or candidate products to become less competitive, adversely affecting sales.

 

Changes in government policies and laws or worldwide economic conditions could adversely affect the company’s financial results.

 

Sales outside the U.S. constitute more than half of the company’s revenue. The company anticipates that international sales will continue to represent a substantial portion of its total sales and that continued growth and profitability will require further international expansion. The company’s financial results could be affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and non-U.S. governments, agencies and similar organizations. These conditions include but are not limited to changes in a country’s or region’s economic or political conditions, trade regulations affecting production, pricing and marketing of products, local labor conditions and regulations, reduced protection of intellectual property rights in some countries, changes in the regulatory or legal environment, restrictions on currency exchange activities, burdensome taxes and tariffs and other trade barriers. International risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities and war, could lead to reduced international sales and reduced profitability associated with such sales.

Part I

Item 1A. Risk Factors, continued

 

 

Economic factors, including inflation and fluctuations in currency exchange rates, interest rates and commodity prices could affect the company’s financial results.

 

The company is exposed to fluctuations in currency exchange rates, interest rates and commodity prices. Because the company has significant international operations, there are a large number of currency transactions that result from international sales, purchases, investments and borrowings. The company actively manages currency exposures that are associated with monetary asset positions, committed currency purchases and sales and other assets and liabilities created in the normal course of business. Failure to successfully manage these risks could have an adverse impact on the company’s financial position, results of operations and cash flows.

 

Business disruptions could seriously impact the company’s future revenue and financial condition and increase costs and expenses.

 

Business disruptions, including supply disruptions, increasing costs for energy, temporary plant and/or power outages and information technology system and network disruptions, could seriously harm the company’s operations as well as the operations of its customers and suppliers. Although it is impossible to predict the occurrences or consequences of any such events, they could result in reduced demand for the company’s products, make it difficult or impossible for the company to deliver products to its customers or to receive raw materials from suppliers, create delays and inefficiencies in the supply chain and result in the need to impose employee travel restrictions. The company actively manages the risks within its control that could cause business disruptions to mitigate any potential impact from business disruptions regardless of cause including acts of terrorism or war, natural disasters and severe weather events. Despite these efforts, the impact from business disruptions could significantly increase the cost of doing business or otherwise adversely impact the company’s financial performance.

 

Inability to protect and enforce the company’s intellectual property rights could adversely affect the company’s financial results.

 

Intellectual property rights are important to the company’s business. The company attempts to protect its intellectual property rights in jurisdictions in which its products are produced or used and in jurisdictions into which its products are imported. However, the company may be unable to obtain protection for its intellectual property in key jurisdictions. Additionally, the company has designed and implemented internal controls to restrict access to and distribution of its intellectual property, including confidential information and trade secrets. Despite these precautions, it is possible that unauthorized parties may access and use such property. When misappropriation is discovered, the company reports such situations to the appropriate governmental authorities for investigation and takes measures to mitigate any potential impact.

 

None.

 

The company’s corporate headquarters are located in Wilmington, Delaware. The company’s manufacturing, processing, marketing and research and development facilities, as well as regional purchasing offices and distribution centers are located throughout the world.

Part I

Item 2. Properties, continued

 

Information regarding research and development facilities is incorporated by reference to Item 1, Business-Research and Development. Additional information with respect to the company’s property, plant and equipment and leases is contained in Notes 11 and 26 to the Consolidated Financial Statements.

 

The company has investments in property, plant and equipment related to manufacturing operations in the U.S. and Puerto Rico at over 100 sites. Some of these sites and their applicable segment(s) are set forth below:

 

Delaware: Edgemoor⁽²⁾ and Newark⁽⁴⁾

Florida: Starke⁽²⁾

Georgia: Valdosta⁽¹⁾

Illinois: El Paso⁽¹⁾

Iowa: Fort Madison^(2,3) and Johnston⁽¹⁾

Louisiana: La Place^(4,5)

Michigan: Mt. Clemens⁽²⁾

Mississippi: DeLisle⁽²⁾ and Pascagoula⁽⁵⁾

New Jersey: Deepwater^(3,4,5) and Parlin⁽³⁾

New York: Buffalo^(3,5) and Niagara Falls⁽⁵⁾

North Carolina: Fayetteville^(3,4) and Research Triangle Park⁽³⁾

Ohio: Circleville^(3,4)

Pennsylvania: Towanda⁽³⁾

South Carolina: Charleston⁽⁴⁾ and Florence⁽⁴⁾

Tennessee: Chattanooga⁽⁴⁾, Memphis⁽⁵⁾, New Johnsonville⁽²⁾ and Old Hickory^(4,5)

Texas: Bayport⁽³⁾, Beaumont^(4,5), Corpus Christi⁽³⁾, LaPorte^(1,3,4), Orange⁽⁴⁾ and Victoria⁽⁴⁾

Virginia: Front Royal⁽²⁾, Hopewell⁽⁴⁾ and Richmond^(4,5)

West Virginia: Belle^(1,5) and Parkersburg^(3,4)

Puerto Rico: Manati^(1,3)

 

In addition, the company has investments in property, plant and equipment related to manufacturing operations outside the U.S. and Puerto Rico at over 100 sites. Some of these sites and their applicable segment(s) are set forth below:

 

 

 

The company’s plants and equipment are well maintained and in good operating condition. Sales as a percent of capacity were 84 percent in 2006, 82 percent in 2005, and 84 percent in 2004. Properties are primarily directly owned by the company; however, certain properties are leased. No title examination of the properties has been made for the purpose of this report and certain properties are shared with other tenants under long-term leases.

Part I

 

Litigation

 

Benlate^®

 

Information related to this matter is included in Note 20 to the Consolidated Financial Statements under the heading Benlate^®.

 

PFOA: Environmental and Litigation Proceedings

 

For purposes of this report, the term PFOA means collectively perfluorooctanoic acid and its salts, including the ammonium salt and does not distinguish between the two forms. Information related to this matter is included in Note 20 to the Consolidated Financial Statements under the heading PFOA.

 

Elastomers Antitrust Matters

 

Information related to this matter is included in Note 20 to the Consolidated Financial Statements under the heading Elastomers Antitrust Matters.

 

Environmental Proceedings

 

Acid Plants New Source Review Enforcement Action

 

In 2003, the U.S. Environmental Protection Agency (EPA) issued a “Notice of Violation and Finding of Violation” for the company’s Fort Hill sulfuric acid plant in North Bend, Ohio. The EPA conducted a review of capital projects at the plant over the past twenty years. Based on its review, the EPA believes that two of the projects triggered a requirement to meet the New Source Performance Standards for sulfuric acid plants and that the company should have sought a permit under the New Source Review requirements of the Clean Air Act (CAA). In July 2004, the EPA issued a Notice of Violation for the James River sulfuric acid plant with similar allegations. The company disagrees with the EPA’s findings because the EPA continues to change its interpretation of these rules and requirements without going through the required process to amend them. The courts are split on these interpretations. The company has a total of four sulfuric acid plants that use similar technology.

 

In October 2006, the EPA, several states and the company reached an agreement in principle to settle this matter under which the company will pay a total of $4,125,000 in civil penalties to the U.S. federal government and the states. Depending on which plants the company elects to retrofit, the company may incur capital expenditures in the range of about $35 million to $70 million. The agreement is subject to the parties’ negotiation of acceptable written terms and to various governmental approvals.

 

Sabine River Works, Orange, Texas

 

On November 19, 2004, the company received a Notice of Enforcement Action (NoE) from the Texas Commission on Environmental Quality (TCEQ) regarding its Sabine River Works facility located in Orange, Texas. The Notice contained 45 allegations relating to reportable and non-reportable emission events from 2002 through 2004 and sought an administrative penalty of $134,852. In addition to this NoE, the company had received 6 other NoEs raising allegations of air, water and monitoring violations dating back to 2001. The company has reached an agreement with the TCEQ combining all of these enforcement actions and settling the allegations for a total penalty of $176,575. As a condition of the agreement, the company did not agree to the allegations and the allegations remain in dispute. Under the agreement, $88,288 will be paid as a penalty to the TCEQ with the remaining balance being paid to a local Supplemental Environmental Project.

Part I

Item 3. Legal Proceedings, continued

 

 

Gibson City, Illinois

 

The EPA has alleged that The Solae Company violated the CAA’s New Source Review Regulations and certain Prevention of Significant Deterioration requirements at its plant in Gibson City, Illinois. The Solae Company, a majority-owned venture with Bunge Limited, was formed in 2003. The EPA has proposed a settlement of this matter that would include sites located in Indiana, Ohio, Oklahoma and Tennessee, some of which are wholly owned by DuPont, in addition to the Gibson City site. The EPA’s proposed settlement includes a penalty of $350,000 and Supplemental Environmental Projects involving expenditures of at least $500,000. The company and The Solae Company are negotiating with the EPA and U.S. Department of Justice (DOJ).

 

None.

 

Executive Officers of the Registrant

 

The following is a list, as of February 23, 2007, of the company’s executive officers:

 

 

The company’s executive officers are elected or appointed for the ensuing year or for an indefinite term and until their successors are elected or appointed.

 

Charles O. Holliday, Jr. joined DuPont in 1970, and has advanced through various manufacturing and supervisory assignments in product planning and marketing. He is a former president, executive vice president, president and chairman-DuPont Asia Pacific. Mr. Holliday became an executive officer in 1992 when he was appointed senior vice president. He became Chief Executive Officer on February 1, 1998, and Chairman of the Board of Directors on January 1, 1999.

 

James C. Borel joined DuPont in 1978, and held a variety of product and sales management positions for Agricultural Products. In 1993, he transferred to Tokyo, Japan with Agricultural Products as regional manager, North Asia and was appointed regional director, Asia Pacific in 1994. In 1997, he was appointed regional

Part I

Item 4. Submission of Matters to a Vote of Security Holders, continued

 

director, North America and was appointed vice president and general manager-DuPont Crop Protection later that year. In January 2004, he was named to his current position, Senior Vice President-DuPont Global Human Resources.

 

Thomas M. Connelly, Jr. joined DuPont in 1977 as a research engineer. Since then, Mr. Connelly has served in various research and plant technical leadership roles, as well as product management and business director roles. Mr. Connelly served as vice president and general manager-DuPont Fluoroproducts from 1999 until 2001, when he was named senior vice president and chief science and technology officer. In June 2006, Mr. Connelly was named Executive Vice President and Chief Innovation Officer and given the added responsibility for DuPont Electronic & Communication Technologies in October 2006.

 

Richard R. Goodmanson joined DuPont in 1999 as Executive Vice President and Chief Operating Officer. Prior to joining DuPont, Mr. Goodmanson was president and chief executive officer of America West Airlines from 1996 to 1999. He was senior vice president of operations for Frito-Lay Inc. from 1992 to 1996, and he was a principal at McKinsey & Company, Inc. from 1980 to 1992.

 

Jeffrey L. Keefer joined DuPont in 1976 as a financial analyst in the titanium dioxide business. In 1982, he accepted a field sales assignment and was appointed customer service manager in 1985. He advanced through various sales and management assignments and in February 1999 he was named vice president and general manager — DuPont Titanium Technologies. In January 2004, he was named group vice president — DuPont Performance Materials. In June 2006, he was named Executive Vice President — DuPont Finance and Chief Financial Officer.

 

Ellen J. Kullman joined DuPont in 1988 as marketing manager and progressed through various roles as global business director and was named vice president and general manager of White Pigment & Mineral Products in 1995. In 2000, Ms. Kullman was named group vice president and general manager of several businesses and new business development. She became group vice president-DuPont Safety & Protection in 2002. In June 2006, Ms. Kullman was named Executive Vice President DuPont Safety & Protection and DuPont Coatings & Color Technologies and assumed leadership of Marketing & Sales along with Safety and Sustainability.

 

Stacey J. Mobley joined DuPont’s legal department in 1972. He was named director of Federal Affairs in the company’s Washington, D.C. office in 1983, and was promoted to vice president-Federal Affairs in 1986. He returned to the company’s Wilmington, Delaware headquarters in March 1992 as vice president — Communications in External Affairs and was promoted to Senior Vice President in May 1992. He was named Chief Administrative Officer in May 1999 and General Counsel in November 1999.

 

Market for Registrant’s Common Equity and Related Stockholder Matters

 

The company’s common stock is listed on the New York Stock Exchange, Inc. (symbol DD) and certain non-U.S. exchanges. The number of record holders of common stock was 84,240 at December 31, 2006, and 83,821 at January 31, 2007.

 

Holders of the company’s common stock are entitled to receive dividends when they are declared by the Board of Directors. While it is not a guarantee of future conduct, the company has continuously paid a quarterly dividend since the fourth quarter 1904. Dividends on common stock and preferred stock are usually declared in January, April, July and October. When dividends on common stock are declared, they are usually paid mid March, June, September and December. Preferred dividends are paid on or about the 25th of January, April, July and October. The Stock Transfer Agent and Registrar is Computershare Trust Company, N.A. (formerly EquiServe Trust Company, N.A.).

 

The company’s quarterly high and low trading stock prices and dividends per common share for 2006 and 2005 are shown below.

 

 

Issuer Purchases of Equity Securities

 

There were no purchases of the company’s common stock during the three months ended December 31, 2006.

Part II

 

Stock Performance Graph

 

The following graph presents the cumulative five-year total return for the company’s common stock compared with the S&P 500 Stock Index and a self-constructed peer group of companies. The peer group companies are Alcoa Inc.; BASF Corporation; The Dow Chemical Company; Eastman Kodak Company; Ford Motor Company; General Electric Company; Hewlett-Packard Company; Minnesota Mining and Manufacturing Company; Monsanto Company; Motorola, Inc.; PPG Industries, Inc.; Rohm and Haas Company; and United Technologies Corporation.

 

Stock Performance Graph

 

 

 

The graph assumes that the value of DuPont Common Stock, the S&P 500 Stock Index and the peer group of companies was each $100 on December 31, 2001 and that all dividends were reinvested. The peer group is weighted by market capitalization.

Part II

 

 

Part II

 

CAUTIONARY STATEMENTS ABOUT FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements which may be identified by their use of words like “plans,” “expects,” “will,” “anticipates,” “intends,” “projects,” “estimates” or other words of similar meaning. All statements that address expectations or projections about the future, including statements about the company’s strategy for growth, product development, market position, expenditures and financial results are forward-looking statements.

 

Forward-looking statements are based on certain assumptions and expectations of future events. The company cannot guarantee that these assumptions and expectations are accurate or will be realized. For some of the important factors that could cause the company’s actual results to differ materially from those projected in any such forward-looking statements see the Risk Factors discussion set forth under Part I, Item 1A beginning on page 9.

 

Overview

 

DuPont continues to successfully employ its three growth strategies — Putting Science to Work, Leveraging the Power of One DuPont and Going Where the Growth Is — by leveraging resources through its five growth platforms: Agriculture & Nutrition, Coatings & Color Technologies, Electronic & Communication Technologies, Performance Materials and Safety & Protection. The company’s sixth reportable segment, Pharmaceuticals, continues to receive substantial income from two anti-hypertension (AIIA) drugs, Cozaar^® and Hyzaar^®, developed by DuPont and licensed to Merck.

 

By successfully executing its three growth strategies, DuPont expects to achieve over the long term, annual financial targets of 6 percent revenue growth, 10 percent earnings growth in earnings per share and 1 percentage point improvement in Return on Invested Capital (ROIC). In 2006, sales increased 3 percent, diluted earnings per share increased 63 percent and ROIC increased 7 percentage points.

 

Putting Science to Work — Science is the basis for the capabilities, offerings and competitive advantages of the company’s businesses. The company’s research and development programs are focused on creating new technologies, processes and business opportunities in relevant fields, as well as improving existing products and processes. Market-driven innovation, which relies on the voice of the customer and concrete market opportunities, is central to the company’s research efforts. In 2006 over 1,000 new products were commercialized, 1,800 new U.S. patent applications were filed and more than one third of 2006 sales were derived from products introduced in the last 5 years. The company is focused on prioritizing deployment of research resources to the most promising opportunities and is aggressively filing patent applications to protect the intellectual property created by that research. The company has identified the top 75 technology projects expected to generate commercial success and continues to prioritize programs for faster and larger payoffs.

 

Leveraging the Power of One DuPont — The company’s strategy is to increase productivity and leverage market access, capabilities and customers, with a single focus, thereby creating wider opportunities for its businesses. In late 2005, management committed to intensify cost and capital productivity efforts by adjusting capital and resources allocation among its businesses. By doing so, management expects to reduce fixed costs as a percentage of sales and increase ROIC. Target reductions of $1 billion in costs and $1 billion in working capital savings over a three year period starting in 2006, were set to partially offset cost increases from inflation and desired growth investments. Management exceeded its goal for fixed cost savings in 2006 by reducing fixed costs by approximately $170 million, or approximately 2 percentage points as a percentage of sales. In addition, the company continued to take actions to standardize and simplify its supply chains and support functions globally and improve its sales effectiveness.

Part II

 

 

Going Where the Growth Is — The company has achieved significant growth in emerging markets by increasing its direct presence and sales efforts including extending the company’s science, products, brands and market position into new applications and uses. The company has a strong presence in the fastest-growing emerging markets and continues to leverage resources and market position to realize new growth. Sales outside of North America, the United Kingdom, Germany, France, Italy and Japan have increased to 36 percent of total company sales in 2006 from 33 percent in 2004.

 

Analysis of Operations

 

During 2006, the company maintained a leading position in biotechnology, safety and protection and crop yield improvement and continued to execute its growth strategies, while overcoming record-high energy costs. Management estimates that year over year cost increases for raw materials in 2006 exceeded $800 million, principally reflecting higher market prices for oil, natural gas and hydrocarbon feedstock and overall tight supply in certain raw materials. The company took actions to increase pricing and improve productivity to offset these cost increases, particularly in the Agriculture & Nutrition and Coatings & Color Technologies platforms where the company initiated restructuring actions to streamline operations and further reduce fixed costs. The company’s operations have completely recovered from hurricane disruptions of 2005. The most significant damage was to the company’s DeLisle, Mississippi, titanium dioxide plant which remained shut down from August 2005 until production began a phased-in restart in January 2006. Normal operations resumed by the end of the second quarter 2006. In 2006, the company received $204 million in insurance recoveries related to losses suffered from Hurricane Katrina and asbestos settlements; $128 million is recorded in Cost of goods sold and other operating charges and $76 million is recorded in Other income, net.

 

The company adopted a dual approach to quantifying materiality and elected to refine the accounting related to the following existing cutoff practices. For certain of the company’s sales transactions, ownership title transfers when goods are received by the customers. Historically, the company recorded these sales when shipped and monitored the impact of this difference. Additionally, some accruals were historically recorded on a month-lag basis. The impacts of these sales and accrual cutoff practices were considered to be immaterial in every interim and annual period. During the fourth quarter of 2006, the company chose to change its practices to record these sales when received by customers and to record certain accruals without a lag. As a result, sales of $107 million were not recorded as of December 31, 2006 that historically would have been. If the company had applied this new practice throughout 2006, sales would have been $81 million higher than reported. Incremental accruals of $24 million were also recorded at December 31, 2006, that would not have been recorded under prior practices. The after-tax impact on the 2006 income statement of these changes was $39 million.

 

 

2006 versus 2005  Consolidated net sales for 2006 were $27.4 billion, up 3 percent. The increase reflects 2 percent higher local selling prices and 2 percent higher net volume partially offset by a 1 percent reduction in worldwide sales attributable to the transfer of certain elastomers assets in 2005. Local selling prices increased across all regions. During 2006, significant volume increases in key growth regions, particularly Asia Pacific and Latin America, along with modest growth in Europe, more than offset lower U.S. volume. Volume declines in the U.S. are largely attributable to lower demand in motor vehicle and residential housing related markets. These declines more than offset the recovery in the U.S. of titanium dioxide, industrial chemical and packaging polymer sales lost in 2005 due to hurricane business interruption.

Part II

 

 

The table below shows a regional breakdown of 2006 Consolidated net sales based on location of customers and percentage variances from prior year:

 

 

 

2005 versus 2004  Consolidated net sales for 2005 were $26.6 billion, down 3 percent. The 2004 sale of INVISTA resulted in a $2.1 billion or 8 percent reduction in Net sales. This reduction was partly offset by a 6 percent increase in sales resulting from 5 percent higher local selling prices and 1 percent favorable currency effect. In 2005, growth in key markets, particularly those in Asia Pacific and Latin America, helped offset the reduction in U.S. volumes. Volume declines in the U.S. and Europe were related to lower demand in motor vehicle and production agriculture markets and the impact of the 2005 hurricanes.

 

The table below shows a regional breakdown of 2005 consolidated net sales based on location of customers and percentage variances from prior year:

 

 

 

 

2006 versus 2005  Other income decreased $291 million versus 2005. This reduction is primarily due to a $407 million decrease in net pretax exchange gains (see page 54 for a discussion of the company’s program to manage currency risk and Note 3 to the Consolidated Financial Statements). The company records royalty income related to its licenses for Cozaar^®/Hyzaar^® in Other income. Licensing income related to these products was $815 million and $747 million in 2006 and 2005, respectively.

Part II

 

 

In 2006, the company recorded $76 million of insurance recoveries in Other income from its insurance carriers. Of this amount, $61 million related to costs, including outside counsel fees and expenses and settlements paid over the past twenty years as part of asbestos litigation matters. During this twenty year period, DuPont has been served with thousands of lawsuits alleging injury from exposure to asbestos on DuPont premises. Most of these claims have been disposed of through trial, dismissal or settlement. Management believes it is remote that the outcome of remaining or future asbestos litigation matters will have material adverse effect on the company’s consolidated financial position or liquidity. These asbestos related insurance recoveries are reflected in Cash provided by operating activities within the company’s Statements of Cash Flows. The remaining $15 million is part of a total recovery of $143 million relating to insurance recoveries associated with damages to the company’s facilities suffered as a result of Hurricane Katrina in 2005. The majority of the Hurricane Katrina recovery is included in Cost of goods sold and other operating charges in the Consolidated Income Statement; additional recoveries are not expected to be material. No amounts are expected to be received from insurance carriers for damages suffered by the company as a result of Hurricane Rita.

 

2005 versus 2004  Other income increased $1,197 million versus 2004. The increase is primarily due to net pretax exchange gains in 2005 of $423 million compared to losses in 2004 of $391 million (see page 54 for a discussion of the company’s program to manage currency risk and Note 3 to the Consolidated Financial Statements). Royalty income related to the licenses for Cozaar^®/Hyzaar^® was $747 million and $675 million in 2005 and 2004, respectively. Equity in the earnings of affiliates increased $147 million over 2004, primarily due to the absence of a $150 million elastomers antitrust litigation charge in the DuPont Dow Elastomers LLC (DDE) joint venture recorded in 2004 (discussed in detail in Note 20 to the Consolidated Financial Statements).

 

 

2006 versus 2005  Cost of goods sold and other operating charges (COGS) for the year 2006 were $20.4 billion, versus $19.7 billion in 2005, up 4 percent. COGS was 75 percent of sales versus 74 percent in the prior year. The 1 percentage point increase in COGS as a percent of sales principally reflects higher raw material costs not entirely covered by selling price increases and higher costs for restructuring plans discussed below.

 

In 2006, the company recorded a benefit to COGS for $128 million for insurance recoveries related to the property damage suffered as a result of Hurricane Katrina in 2005. In 2005, the company recorded a charge of $160 million related to the clean-up and restoration of manufacturing operations, as well as the write-off of inventory and plant assets that were destroyed by two major hurricanes in the U.S. Hurricane charges reduced segment earnings as follows: Coatings & Color Technologies — $116 million; Performance Materials — $17 million; and Safety & Protection — $27 million.

 

In 2006, restructuring plans were introduced within the Coatings & Color Technologies and the Agriculture & Nutrition segments. These programs include the elimination of approximately 3,200 positions and redeployment of about 400 employees in excess positions to the extent possible. The company recorded a net charge of $326 million in 2006 related to employee separation costs and asset impairment charges. This included $184 million to provide severance benefits for approximately 2,800 employees involved in manufacturing, marketing and sales, administrative and technical activities. The company also recorded a benefit of $6 million in 2006 resulting from changes in estimates for prior years’ restructuring programs. Additional details related to these programs are contained in the individual segment reviews and in Note 5 to the Consolidated Financial Statements.

Part II

 

 

Payments from operating cash flows to terminated employees as a result of the 2006 plans total about $28 million during the current year. The remainder will be substantially paid during 2007. Annual pretax cost savings of about $135 million per year are associated with the Coatings & Color Technologies program. Approximately 35 percent was realized in 2006. An additional 50 percent is expected in 2007, with the remainder expected to be realized in 2008. A substantial portion of the Agriculture & Nutrition program involves reinvestment in research and development activities so cost savings are largely neutral under this plan.

 

In 2005, the company evaluated capital investment requirements at its Louisville, Kentucky facility and the declining demand for the neoprene products produced at the facility. As a result, the company has made plans to consolidate neoprene production at its upgraded facility in LaPlace, Louisiana, which is now expected to be completed by the end of 2007. A charge of $34 million was recorded in 2005 reflecting severance and related costs for approximately 275 employees, principally at the Louisville site. Additionally, a benefit of $13 million was recorded in 2005 to reflect changes in estimates related to employee separations that were implemented in earlier years.

 

2005 versus 2004  COGS for the year 2005 was $19.7 billion, a decrease of $1,144 million from the prior year. 2005 COGS includes a $160 million hurricane charge, a $34 million charge and a $13 million benefit related to employee separations discussed above. 2004 COGS included a $108 million litigation charge related to PFOA and a charge of $118 million related to elastomers antitrust litigation (see Note 20 to the Consolidated Financial Statements). COGS also included employee separation costs and asset impairment charges in 2004 of $411 million as described below. As a percent of sales, COGS was 74 percent in 2005 versus 76 percent in 2004. The improvement principally reflects the changes in employee separation costs and the sale of INVISTA, which had higher COGS in relation to sales than the rest of the company, partly offset by raw material costs that escalated at a higher rate than the increases in selling prices. A modestly favorable effect of currency translation offset a small decrease in sales volumes.

 

COGS in 2004 includes a net charge of $411 million in 2004 related to employee separation costs and asset impairment charges as a result of actions taken in that year to ensure the company’s global competitiveness as a more focused, science-based company. This included $302 million to provide severance benefits for approximately 2,700 employees involved in manufacturing, marketing and sales, administrative and technical activities. Essentially all of these employees were separated as of December 31, 2005. These staff reductions affected essentially all segments. The company also recorded a benefit of $12 million in 2004 resulting from changes in estimates for prior years’ restructuring programs. In addition, the company recorded impairment charges of $121 million in 2004 which included: $27 million to reflect an other than temporary decline in the value of an investment security; $23 million related to the shutdown of U.S. manufacturing assets; $42 million related to the write down of certain European manufacturing assets; and $29 million to write off abandoned technology.

 

Payments from operating cash flows to terminated employees as a result of the 2004 plan total about $300 million. Approximately 44 percent of these cash outlays were made in 2004, 45 percent were made in 2005 and the remainder in 2006 and thereafter. Annual pretax cost savings of about $225 million per year are associated with the 2004 restructuring plan. About 40 percent was realized in 2004 and essentially all the remaining savings in payroll costs were realized in 2005. Over 50 percent of the savings associated with the staff reductions are reflected in Selling, general and administrative expenses, approximately 30 percent in COGS and other operating charges and the balance in Research and development expense.

Part II

 

 

 

Selling, general and administrative (SG&A) expenses increased $1 million and remained constant as a percent of sales in 2006 as compared to 2005. In 2005, SG&A expenses increased $82 million. The 1 percentage point increase as a percent of sales primarily reflects the absence of INVISTA in 2005, which had lower selling expenses as a percent of sales compared to the rest of the company.

 

 

Research and development expense as a percent of sales remained constant over the three-year period. Expenditures in 2006 were consistent with spending by segment in 2005 and reflect concentration in expansion of seed traits, breeding advancement and product development within Agriculture & Nutrition, as well as activities to support the growth platforms. Spending in 2005 reflects increases across most segments, offset by the absence of spending in Textiles & Interiors after April 30, 2004. The company continues to support a strong commitment to research and development as a source of sustainable growth and expects research and development funding to increase modestly in 2007.

 

 

Interest expense decreased $58 million in 2006 compared to 2005 primarily due to lower average borrowing level partially offset by higher average rates. An increase in the average interest rates from 3.46 percent to 4.60 percent and a 3 percent higher average borrowing level resulted in the increase in interest expense for 2005 as compared to 2004.

 

 

On April 30, 2004, the company sold a majority of the net assets of Textiles & Interiors, referred to as INVISTA, to Koch. In January 2006, the company sold its interest in a Textiles & Interiors equity affiliate to its equity partner for proceeds of $14 million thereby completing the sale of all of the net assets of Textiles & Interiors.

 

During 2005, the company sold its investments in three affiliated companies to Koch and its investment in a fourth affiliated company to its equity partner. The divestiture activities resulted in a net benefit of $62 million and the transfer of the company’s interest in the affiliates to Koch resulted in a gain of $35 million. The sale of two of these affiliates had been delayed until the company received approval from its equity partners. Although the transfer of these affiliates completed the sale to Koch, the company will have significant continuing involvement with INVISTA as a result of long-term purchase and supply contracts and a long-term contract manufacturing agreement in which INVISTA will manufacture and supply certain products for the company. In addition, the company indemnified Koch against certain liabilities, primarily related to taxes, legal matters, environmental matters and representations and warranties (see Note 20 to the Consolidated

Part II

 

Financial Statements). The company’s total indemnification obligation for the majority of the representations and warranties can not exceed approximately $1.4 billion. The company also recorded a gain of $29 million in 2005 related to the sale of the company’s investment in another equity affiliate and $2 million of other charges associated with the separation. Net cash proceeds from these transactions totaled $135 million. See Note 6 to the Consolidated Financial Statements for information regarding the charges that were recorded in 2004.

 

 

In 2006, the company recorded a tax provision of $196 million which included a benefit of $272 million related to tax settlements and a $186 million benefit for reversal of tax valuation allowances related to the net deferred tax assets of certain foreign subsidiaries due to the sustained improved business performance in these subsidiaries. These tax benefits were offset by net tax expense in other operating results (see note 7 to the Company’s Consolidated Financial Statements).

 

In 2005, the company recorded a tax provision of $1,470 million which included $483 million of tax expense on exchange gains associated with the company’s policy of hedging the foreign currency denominated monetary assets and liabilities of its operations and $292 million of tax expense related to the repatriation of $9.1 billion under The American Jobs Creation Act of 2004 (AJCA). AJCA created a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations provided that repatriated cash from such accumulated earnings is reinvested in the U.S. pursuant to a domestic reinvestment plan.

 

In 2004, the company recorded significant tax benefits which principally included $360 million on exchange losses in connection with the company’s foreign currency hedging program, $320 million related to the separation of Textiles & Interiors, $160 million primarily related to agreement on certain prior year audit issues previously reserved and $137 million resulting from recording deferred tax assets in two European subsidiaries for tax basis investment losses recognized on local tax returns. These tax benefits were partly offset by net tax expense on other operating results.

 

The company’s current estimate of the 2007 effective income tax rate is about 27 percent, excluding tax effects of exchange gains and losses which cannot be reasonably estimated at this time. See Note 7 to the Consolidated Financial Statements for additional detail on items that significantly impact the company’s effective tax rates. In the past three years, these items have generally included a lower effective tax rate on international operations, tax settlements and valuation allowance releases.

 

 

Minority interests in losses of consolidated subsidiaries in 2006 reflects losses incurred by Solae, primarily as a result of restructuring charges, and the absence of minority interests in DDE. Minority interests in earnings of consolidated subsidiaries in 2005 reflects earnings in the first half of 2005 for DDE and the absence of minority interests in subsidiaries transferred to Koch. Minority interests in losses of consolidated subsidiaries in 2004 reflect the consolidation of DDE as a Variable Interest Entity (VIE) in April 2004.

Part II

 

 

 

2006 versus 2005  Net income for 2006 increased 53 percent versus 2005, reflecting higher selling prices, higher sales volumes, lower fixed costs and an increase in other income, partly offset by higher raw material costs. Selling prices increased year over year in each quarter of 2006 and were higher for each region for the full year. Net income also includes benefits from tax settlements, reversals of tax valuation allowances and insurance recoveries. These benefits were partly offset by charges for restructuring and asset impairments. 2005 results include significant hurricane related charges as well as tax expenses associated with the repatriation of cash under AJCA. Earnings per share were $3.38 in 2006 versus $2.07 in 2005, a 63 percent increase. This increase includes a 10 percentage point benefit from lower shares outstanding resulting from shares purchased by the company under its accelerated share repurchase program.

 

2005 versus 2004  Net income for 2005 increased 16 percent over 2004. 2005 Net income reflects higher selling prices which essentially offset record increases in raw material costs and higher fixed costs. In addition, 2005 results include significant hurricane related charges as well as tax expenses associated with the repatriation of cash under the AJCA. In contrast, 2004 results were adversely affected by even greater charges resulting from a corporate restructuring program, losses on the separation of Textiles & Interiors and charges for certain elastomers antitrust matters and litigation related to PFOA. Earnings per share were $2.07 in 2005 versus $1.77 in 2004, a 17 percent increase. This includes a 2 percentage point benefit in 2006 from lower shares outstanding resulting from the accelerated share repurchase program.

 

Corporate Outlook

 

Overall, economic conditions are expected to be less favorable in 2007 than in 2006, with growth expected to slow in every region of the world. Gross Domestic Product (GDP) growth in developed countries is forecast to slow to below-trend rates, while growth in the developing world will be near trend with about 5 percent growth in South America to 9 percent in China. Global industrial production, which is considered a reliable indicator of demand for the company’s products and services, is forecast to expand about 3 percent in 2007 versus about 4.5 percent in 2006 and will exhibit a regional trend similar to GDP. Sales volume is expected to be up across the growth platforms, with the largest increases in Electronic & Communication Technologies, Safety & Protection and Agriculture & Nutrition. The 2007 average value of the U.S. dollar is forecast to be slightly weaker than the 2006 average. This should have a beneficial impact on sales and income from operations outside of the U.S. and increase demand for the company’s exported products. Raw material costs are expected to remain relatively consistent with 2006. While prices for both oil and natural gas moderated somewhat during the second half of 2006, futures markets indicate increases in both during 2007 averaging somewhat higher than 2006 prices. Fixed costs as a percent of sales are expected to be lower than in 2006, reflecting the company’s continued strong productivity efforts. Other income is forecast to be lower in 2007 reflecting reduced income from Pharmaceuticals and lower licensing income in Agriculture & Nutrition. Based on these expectations, management estimates that earnings per share will be about $3.15 in 2007, with Net sales of about $29 billion.

 

Accounting Standards Issued Not Yet Adopted

 

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109 (SFAS 109), “Accounting for Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 will be adopted by the company on January 1, 2007. Prior to the adoption of FIN 48, the company used a

Part II

 

different measurement attribute to account for uncertainty in income taxes. While the company is still evaluating the impact of adoption of FIN 48 on its consolidated financial statements, it believes that adoption of FIN 48 will decrease the liabilities accrued for uncertainty in income taxes at December 31, 2006, by $100 million to $125 million with a corresponding increase in reinvested earnings at January 1, 2007.

 

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (SFAS 157), “Fair Value Measurements,” which addresses how companies should measure fair value when required for recognition or disclosure purposes under generally accepted accounting principles in the U.S. (GAAP). The standard’s provisions will be applied to existing accounting measurements and related disclosures, that are based on fair value. SFAS 157 does not require any new fair value measurements. The standard applies a common definition of fair value to be used throughout GAAP, with emphasis on fair value as a “market-based” measurement versus an entity-specific measurement and establishes a hierarchy of fair value measurement methods. The disclosure requirements are expanded to include the extent to which companies use fair value measurements, the methods and assumptions used to measure fair value and the effect of fair value measurements on earnings. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The new standard’s provisions applicable to the company will be applied prospectively and the company is currently evaluating the impact of adoption on its consolidated financial statements.

 

Critical Accounting Estimates

 

The company’s significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements. Management believes that the application of these policies on a consistent basis enables the company to provide the users of the financial statements with useful and reliable information about the company’s operating results and financial condition.

 

The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts, including, but not limited to, receivable and inventory valuations, impairment of tangible and intangible assets, pension and other postretirement benefit obligations, income taxes, restructuring reserves, environmental matters and litigation. Management’s estimates are based on historical experience, facts and circumstances available at the time and various other assumptions that are believed to be reasonable. The company reviews these matters and reflects changes in estimates as appropriate. Management believes that the following represents some of the more critical judgment areas in the application of the company’s accounting policies which could have a material effect on the company’s financial position, liquidity or results of operations.

 

Pension and Other Postretirement Benefits

 

Accounting for employee benefit plans involves numerous assumptions and estimates. Discount rate and expected return on plan assets are two critical assumptions in measuring the cost and benefit obligation of the company’s pension and other postretirement benefit plans. Management reviews these two key assumptions at least annually. These and other assumptions are updated periodically to reflect the actual experience and expectations on a plan specific basis as appropriate. As permitted by GAAP, actual results that differ from the assumptions are accumulated on a plan by plan basis and to the extent that such differences exceed 10 percent of the greater of the plan obligations or the applicable plan assets, the excess is amortized over the average remaining working life of current employees.

 

About 80 percent of the company’s benefit obligation for pensions and essentially all of the company’s other postretirement benefit obligations are attributable to the benefit plans in the U.S. The company utilizes published long-term high quality bond indices to determine the discount rate at the balance sheet date. Where commonly available, the company considers indices of various durations to reflect the timing of future benefit payments.

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Within the U.S., the company establishes strategic asset allocation percentage targets and appropriate benchmarks for significant asset classes with the aim of achieving a prudent balance between return and risk. Strategic asset allocations in other countries are selected in accordance with the laws and practices of those countries. Where appropriate, asset-liability studies are also taken into consideration. The long-term expected return on plan assets in the U.S. is based upon historical real returns (net of inflation) for the asset classes covered by the investment policy and projections of inflation over the long-term period during which benefits are payable to plan participants.

 

In determining annual expense for the principal U.S. pension plan, the company uses a market-related value of assets rather than their fair value. Accordingly, there tends to be a lag in recognition of changes in market valuation. As a result, changes in the fair market value of assets are not immediately reflected in the company’s calculation of net pension cost. The following table shows the market-related value and fair market value of plan assets for the principal U.S. pension plan.

 

 

For other plans, pension expense is typically determined using the fair value of assets. The fair value of assets in all pension plans was $22 billion at December 31, 2006, and the related projected benefit obligations were $23 billion. In addition, obligations under the company’s unfunded other postretirement benefit plans were $4 billion at December 31, 2006.

 

The following table highlights the potential impact on the company’s pretax earnings due to changes in certain key assumptions with respect to the company’s pension and other postretirement benefit plans, based on assets and liabilities at December 31, 2006:

 

 

Additional information with respect to pension and other postretirement employee expenses, liabilities and assumptions is discussed under “Long-Term Employee Benefits” beginning on page 47.

 

Environmental Matters

 

DuPont accrues for remediation activities when it is probable that a liability has been incurred and a reasonable estimate of the liability can be made. The company’s estimates are based on a number of factors, including the complexity of the geology, the nature and extent of contamination, the type of remedy, the outcome of discussions with regulatory agencies and other PRPs at multiparty sites and the number of and financial viability of other PRPs. The company has recorded a liability of $349 million on the Consolidated Balance Sheet as of December 31, 2006; these accrued liabilities exclude claims against third parties and are not discounted.

 

Considerable uncertainty exists with respect to environmental remediation costs and, under adverse changes in circumstances, the potential liability may range up to two to three times the amount accrued. Much of this liability results from the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, often referred to as the Superfund), the Resource Conservation and Recovery Act (RCRA) and similar state laws. These laws require the company to undertake certain investigative and remedial activities at sites where

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the company conducts or once conducted operations or at sites where company-generated waste was disposed. The accrual also includes a number of sites identified by the company for which it is probable that environmental remediation will be required, but which are not currently the subject of CERCLA, RCRA or state enforcement activities. Federal and state authorities may seek fines and penalties for violation of the various laws and governmental regulations and could, among other things, impose liability on the company for cleaning up the damage resulting from company-generated waste disposal. Over the next two decades, the company could incur significant costs under both CERCLA and RCRA.

 

Remediation activities vary substantially in duration and cost from site to site. These activities and their associated costs, depend on the mix of unique site characteristics, evolving remediation technologies, diverse regulatory agencies and enforcement policies, as well as the presence or absence of PRPs. Therefore, it is difficult to develop accurate estimates of future site remediation costs.

 

Legal Contingencies

 

The company’s results of operations could be affected by significant litigation adverse to the company, including product liability claims, patent infringement claims and antitrust claims. The company records reserves for legal matters when the information available indicates that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Management makes adjustments to these reserves to reflect the impact and status of negotiations, settlements, rulings, advice of counsel and other information and events that may pertain to a particular matter. Predicting the outcome of claims and lawsuits and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from estimates. In making determinations of likely outcomes of litigation matters, management considers many factors. These factors include, but are not limited to, the nature of specific claims including unasserted claims, the company’s experience with similar types of claims, the jurisdiction in which the matter is filed, input from outside legal counsel, the likelihood of resolving the matter through alternative dispute resolution mechanisms and the matter’s current status. Considerable judgment is required in determining whether to establish a litigation reserve when an adverse judgment is rendered against the company in a court proceeding. In such situations, the company will not recognize a loss if, based upon a thorough review of all relevant facts and information, management believes that it is probable that the pending judgment will be successfully overturned on appeal. A detailed discussion of significant litigation matters is contained in Note 20 to the Consolidated Financial Statements.

 

Income Taxes

 

The breadth of the company’s operations and the global complexity of tax regulations require assessments of uncertainties and judgments in estimating the ultimate taxes the company will pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal, state and international tax audits. The resolution of these uncertainties may result in adjustments to the company’s tax assets and tax liabilities.

 

Deferred income taxes result from differences between the financial and tax basis of the company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Significant judgment is required in evaluating the need for and magnitude of appropriate valuation allowances against deferred tax assets. The realization of these assets is dependent on generating future taxable income, as well as successful implementation of various tax planning strategies. For example, changes in facts and circumstances that alter the probability that the company will realize deferred tax assets could result in recording a valuation allowance, thereby reducing the deferred tax asset and generating a deferred tax expense in the relevant period. In some situations these changes could be material.

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At December 31, 2006, the company had a net deferred tax asset balance of $1,778 million, net of valuation allowance of $1,259 million. Realization of these assets is expected to occur over an extended period of time. As a result, changes in tax laws, assumptions with respect to future taxable income and tax planning strategies could result in adjustments to these assets.

 

Valuation of Assets

 

Assessment of the potential impairment of property, plant and equipment, goodwill, other purchased intangible assets and investments in affiliates is an integral part of the company’s normal ongoing review of operations. Testing for potential impairment of long-lived assets is significantly dependent on numerous assumptions and reflects management’s best estimates at a particular point in time. The dynamic economic environments in which the company’s businesses operate and key economic and business assumptions with respect to projected selling prices, market growth and inflation rates, can significantly affect the outcome of impairment tests. Estimates based on these assumptions may differ significantly from actual results. Changes in factors and assumptions used in assessing potential impairments can have a significant impact on the existence and magnitude of impairments, as well as the time in which such impairments are recognized. Future changes in the environment and the economic outlook for the assets being evaluated could also result in additional impairment charges. Information with respect to the company’s significant accounting policies on long-lived assets is included in Note 1 to the Consolidated Financial Statements.

 

Segment Reviews

 

Segment sales include transfers and a pro rata share of equity affiliates’ sales. Segment pretax operating income (PTOI) is defined as operating income before income taxes, minority interests, exchange gains (losses), corporate expenses, interest and the cumulative effect of changes in accounting principles. A reconciliation of segment sales to consolidated Net sales and segment PTOI to Income before income taxes and minority interests for 2006, 2005 and 2004 is included in Note 27 to the Consolidated Financial Statements.

 

AGRICULTURE & NUTRITION

 

 

Agriculture & Nutrition leverages the company’s technology, customer relationships and industry knowledge to improve the quantity, quality and safety of the global food supply. Global land area that can be used in agricultural production is increasingly limited. Therefore, increases in production will need to be achieved principally through improving crop yields and productivity rather than through increases in planted acreage. Agriculture & Nutrition delivers a broad portfolio of products and services that are specifically targeted to achieve gains in crop yields and productivity, including Pioneer^® brand seed products and well-established brands of insecticides, fungicides and herbicides. The segment operates across the food value chain from inputs for production agriculture to global production and distribution of soy-based food ingredients, food quality diagnostic testing equipment and services and liquid food packaging systems. Research and development focuses on leveraging technology to increase grower productivity and enhance the value of grains and soy through improved seed traits, superior germplasm and the effective use of insecticides, herbicides and fungicides.

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Agriculture & Nutrition includes the company’s wholly owned subsidiary, Pioneer, which is also the world’s leading seed brand and a world leader in improving crop yields with hybrid and varietal seeds that improve grower yields and provide insect protection and herbicide tolerance. The principal products of Pioneer are hybrid seed corn and soybean seed. In 2006, farmers in North America continued to demonstrate a preference for corn hybrids containing biotechnology traits and Pioneer had limited supplies of these products. As a result, corn market share in North America declined slightly. In soybeans, Pioneer increased market share in key segments supported by strong product performance. Pioneer benefited from the global launch of 22 new soybean varieties and 90 new Pioneer^® brand corn hybrids that include new combinations of corn borer, corn rootworm and weed management traits highlighted by the expansion of the Herculex^®1 family of traits.

 

Agriculture & Nutrition also serves the global production agriculture industry with crop protection products in the grain and specialty crop sectors, forestry and vegetation management. Principal crop protection products are herbicides, fungicides, insect control products and plant growth regulators. Sales of crop protection products declined modestly in 2006, with largest declines in herbicides in North America and Europe and Indoxacarb insecticide in Asia Pacific, but were partially offset by higher sales in Latin America. The segment continued to expand its presence in fruit and vegetable specialty markets and continues to expand product offerings in the professional pest control market.

 

Additionally, Agriculture & Nutrition operates within the specialty food ingredients market, including soy proteins and lecithins through its majority-owned venture with Bunge Limited, The Solae Company. Sales from these products increased in 2006, primarily due to slightly increased volume and increased prices of soy proteins and lecithins.

 

In 2006, the segment launched a restructuring plan to increase investment in plant genetics, biotechnology and other growth opportunities while consolidating manufacturing assets, technology centers and marketing strategies in its nutrition and crop protection businesses. The segment recorded a charge of $194 million in the fourth quarter for employee separations and asset impairments associated with this investment and streamlining plan. The plan includes the closure of manufacturing units and the elimination of approximately 1,500 positions. Operating costs savings of approximately $100 million per year will be reinvested into the seed business to increase the speed to market of seed products with next-generation biotech traits (see Note 5 to the Consolidated Financial Statements).

 

2006 versus 2005  Sales of $6.3 billion were 1 percent lower than last year reflecting slightly lower USD selling prices and volumes. Lower selling prices reflect declines in the crop protection market partially offset by prices for a richer mix in corn and soybean seed. Volume declines were driven by lower corn seed sales in North America, specialty products in India and herbicide sales in North America and Europe, partially offset by increases in the sale of soybeans. 2006 includes some earlier than anticipated seed sales for the 2007 planting season in Europe. The segment continues to invest resources in R&D and introduced approximately 210 new products and product applications during 2006.

 

2006 PTOI was $507 million versus $862 million, down 41 percent. The decline in 2006 PTOI reflects the charge of $194 million described above. In addition, 2006 PTOI reflects the sales decline and higher production costs across most of the segment, slightly offset by income of $73 million related to technology transfers, licensing agreements and asset sales.

 

2005 versus 2004  Sales of $6.4 billion increased 2 percent reflecting 4 percent higher USD selling prices and 2 percent lower volumes. Higher selling prices reflect a richer mix in corn and soybean seed. Volume declines were driven by lower corn seed sales in North America and specialty food ingredients partially offset by increases in the sale of soybeans, insecticides in Latin America and herbicides for cereals in Europe. During the year approximately 160 new products and product applications were introduced.

1  Registered Trademark of Dow AgroSciences LLC

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2005 PTOI was $862 million versus $769 million in 2004, up 12 percent. The improvement in 2005 PTOI reflects higher USD selling prices partially offset by lower volumes and higher raw material costs. 2004 results also included restructuring charges of $34 million. In addition, during 2005 the segment continued to increase research spending and drive productivity improvements while managing overall fixed costs to a level consistent with 2004.

 

Outlook  In 2007, the segment anticipates modest earnings growth through increased Pioneer corn value offerings, including stacked traits and seed treatments in the U.S. and Canada and corn volumes in key international markets. Pioneer also expects continued market share gains in key soybean markets including the U.S., Canada and Brazil. The segment’s introduction of new crop protection products is projected to drive volume gains. Segment margins will be challenged by higher production and raw material costs and continued investments in research, which will drive long-term profitability.

 

Technology will continue to play an important role for Agriculture & Nutrition. Pioneer will build on their global product offerings with the addition of 21 new soybean varieties and 90 new Pioneer^® brand corn hybrids.

 

COATINGS & COLOR TECHNOLOGIES

 

 

Coatings & Color Technologies is one of the world’s leading automotive coatings suppliers and the world’s largest manufacturer of titanium dioxide white pigments. Products offered include high performance liquid and powder coatings for automotive OEMs, the automotive aftermarket (known as refinish) and general industrial applications, such as coatings for heavy equipment, pipes and appliances and electrical insulation. The company markets its refinish products using the DuPont^tm, Standox^®, Spies Hecker^® and Nason^® brand names. Standox^® and Spies Hecker^® are focused on the high-end refinish markets, while Nason^® is primarily focused on economy coating applications. The segment’s broad line of DuPont^tm Ti-Pure^® titanium dioxide products, in both slurry and powder form, serve the coatings, plastic and paper industries.

 

The segment’s titanium tetrachloride business has moved from a startup business to an established, growing venture, shipping product globally. In October, the business publicly announced a $30 million investment in additional titanium tetrachloride facilities at its titanium dioxide plant in Tennessee. When completed in mid-summer 2008, these facilities will supply up to 100 million pounds of high purity titanium tetrachloride annually to Allegheny Titanium’s new titanium metal plant in Utah. The business also launched and began commercial production in 2006 of its own titanium metal powder growth initiative.

 

The key markets in which Coatings & Color Technologies operates continued to grow in 2006, with more significant growth in the Latin America and Asia Pacific regions. A key driver of the segment’s sales growth in 2006 was the completion of clean-up and repair of damage from Hurricane Katrina at its DeLisle, Mississippi titanium dioxide plant. The facility began a phased in restart in January 2006, returning to full operation by the end of the second quarter. During 2006, the segment was able to return the DeLisle plant back to full operations and regain market share lost during the hurricane related outage in 2005. Global demand for titanium dioxide white pigment was strong in 2006 with global market volumes up about 5 percent from 2005.

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Sales for refinish products grew in all regions, most notably in the U.S., Europe and Latin America. While the OEM market realized growth in Latin America and Asia Pacific, it was more than offset by declines in the U.S., Canada and Europe. This reflects the flat or lower 2006 North American and European builds of automobiles and light trucks. Powder coatings sales grew in all regions, more significantly in Asia Pacific, U.S. and Europe, while demand in Latin America showed improvement. Worldwide sales in electrical insulation and metal coatings markets continued to improve.

 

2006 versus 2005  Sales of $6.3 billion were up 4 percent, reflecting about 2 percent higher USD selling prices for the segment. An additional 2 percent increase from volume was primarily realized in the pigments business, reflecting strong global demand as well as the first quarter startup of the DeLisle plant following Hurricane Katrina. Higher selling prices reflect concerted efforts within the segment to increase prices for the majority of its products as part of its efforts to offset the impact of higher raw material costs and the impact of lower global OEM automotive volumes. During the year approximately 390 new products and product applications were introduced.

 

PTOI in 2006 of $795 million increased from $528 million in the prior year. Lower fixed costs in both years and higher volumes in pigments contributed to the improved 2006 earnings. PTOI in 2006 includes a net charge of $132 million for restructuring and $30 million primarily for accelerated depreciation related to the transformation plan that was initiated in first quarter 2006 (see Note 5 to the Consolidated Financial Statements). 2006 PTOI also includes $142 million in insurance proceeds, primarily related to the hurricane damages suffered in 2005. 2005 PTOI included charges of $116 million related to the clean-up and restoration of manufacturing operations, as well as the write-off of inventory and plant assets that were destroyed by hurricanes.

 

2005 versus 2004  Sales of $6.1 billion were up 3 percent, reflecting 6 percent higher USD selling prices, partly offset by 3 percent lower volumes. Higher selling prices reflect concerted efforts within the segment to increase prices for the majority of its products as part of its efforts to offset the impact of higher raw material costs. Sales volumes were lower due to the DeLisle plant outage and the impact of lower global OEM automotive volumes. During the year approximately 360 new products and product applications were introduced.

 

PTOI in 2005 of $528 million decreased from $698 million in the prior year. Higher raw material costs and lower sales volumes negatively affected 2005 earnings. PTOI in 2005 includes a $116 million hurricane charge while 2004 included charges of $96 million for employee separation costs and an automotive refinish litigation settlement.

 

Outlook  The segment expects sales in 2007 to increase slightly, while taking actions to reduce costs and improve profitability. Industry demand for titanium dioxide is expected to moderate in 2007, in line with more moderate global economic growth of about 2 percent. Competitive conditions in the global coatings industry will continue to provide a challenging operating environment in 2007. Modest growth is expected for refinish markets in mature economies while strong growth is expected to continue in emerging markets. Profitability of coatings sold to automotive OEM producers is highly dependent upon volume at specific plants the company services. North American and European 2007 automotive builds are expected to be essentially flat with 2006 levels, with moderate growth in Asia Pacific.

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ELECTRONIC & COMMUNICATION TECHNOLOGIES

 

 

Electronic & Communication Technologies provides a broad range of advanced materials for the electronics industry, flexographic printing and color communication systems and a wide range of fluoropolymer and fluorochemical products. The segment also continues to pursue development activities related to displays and fuel cells.

 

In the electronics industry, DuPont is a leading supplier of electronic and advanced display materials. The company offers a broad portfolio of ceramic, flexible and rigid organic circuit materials; materials for semiconductor fabrication and packaging; and a wide range of products for advanced displays. The segment’s products enable electronic devices to be more portable with higher functionality. Major product lines include DuPont Kapton^® polyimide film, Pyralux^® flexible laminates, Fodel^® photoimageable thick-film pastes, Riston^® dry film photoresists, PlasmaSolve^® post-etch residue removers, Solamet conductor compositions for photovoltaic cells and MicroPlanar^® slurries for chemical mechanical planarization.

 

Electronic & Communication Technologies is the market leader in flexographic printing and color communication serving the packaging and commercial printing industries. Its offerings include DuPont^tm Cyrel^® and Cyrel^®FAST^tm flexographic printing systems, as well as color communication systems, including DuPont^tm WaterProof^®, Cromalin^® and Dylux^®. Cyrel^®FAST^tm is the only solvent-free thermal flexographic platemaking technology commercially available. This technology is helping to offset the continuing decline in the proofing technology market.

 

The segment also includes a portfolio of industrial and specialty fluorochemicals and fluoropolymers which are sold into the refrigeration, insulation, aerosol packaging, telecommunications, aerospace, automotive, electronics, chemical processing and housewares industries. As the largest global manufacturer of fluoroproducts, the company’s offerings include DuPont^tm Suva^® and ISCEON refrigerants, Teflon^® and Tefzel^® fluoropolymer resins, Autograph^® and Teflon^® non-stick finishes and Teflon^® and Tedlar^® fluoropolymer films.

 

Electronic & Communication Technologies leverages DuPont’s strong materials and technology base to target growth opportunities in electronics, fluoropolymers, fluorochemicals, packaging graphics and ink-jet materials. In semiconductor fabrication, packaging and interconnect, the segment is extending and broadening its portfolio of materials to address critical needs in the industry, e.g., chemical mechanical planarization for semiconductor manufacture, flex circuitry and embedded passives enabling miniaturization. In the rapidly growing market for flat panel displays, the segment continues to be a leading materials supplier for plasma displays. In addition, the segment is developing new innovative technologies for liquid crystal displays, such as thermal color filters and display films, while continuing to invest in developing materials technologies for organic light-emitting diode (OLED) displays and field emission displays. In fluoropolymers and fluorochemicals, the segment continues to pursue product renewal innovations such as next generation refrigerants, while broadening the scope of applications into high growth areas such as communications cabling and photovoltaics. In packaging graphics, products such as Cyrel^®FAST^tm have rapidly grown, solidifying the segment’s market leadership position. Also, DuPont is maintaining its leadership position in

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inks for ink-jet printing while continuing to pursue exciting new opportunities within Artistri^tm digital textile printing offerings.

 

2006 versus 2005  Sales of $3.8 billion increased about 4 percent over 2005, reflecting 2 percent higher USD prices coupled with a 2 percent improvement in volume. Price improvements reflect higher metals prices primarily for Micro Circuit Materials. Higher volumes reflect increased demand for fluoroproducts and electronic materials. Sales growth was strongest outside the U.S. During the year, approximately 190 new products & product applications were introduced.

 

PTOI in 2006 was $589 million versus $571 million in 2005. Earnings growth in 2006 resulted from improved volume, modest pricing improvement and continued productivity gains. 2005 included a gain of $48 million on the sale of the company’s remaining interest in DuPont Photomasks, Inc.

 

2005 versus 2004  Sales of $3.7 billion increased about 7 percent, on 6 percent higher USD prices and a 1 percent improvement in volume. Price improvements reflect higher prices, primarily for fluorochemicals. Higher volumes reflect increased demand primarily for fluoroproducts and electronic materials partly offset by the divestiture of the remaining interest in DuPont Photomasks, Inc. Sales growth was strongest outside the U.S. During the year, approximately 220 new products and product applications were introduced.

 

PTOI in 2005 was $571 million, which included a gain of $48 million on the sale of the company’s remaining interest in DuPont Photomasks, Inc. versus $212 million in the prior year. 2004 included net charges of $108 million for PFOA matters (see Note 20 to the Consolidated Financial Statements) and $67 million for employee separation costs and asset impairment charges. Earnings growth in 2005 also resulted from improved pricing, modest demand improvement and continued productivity gains.

 

Outlook  For 2007, the segment expects moderate sales growth with gains in fluoropolymers, packaging graphics and the impact of higher precious metals prices in electronic materials. PTOI will reflect moderate growth for 2007 versus 2006 as sales growth is offset by higher investments in growth markets and technologies. This segment manufactures products that could be affected by uncertainties associated with PFOA matters. See the discussion on pages 51-53 under the subheading PFOA.

 

 

PERFORMANCE MATERIALS

 

 

Performance Materials provides customers with more productive, higher performance polymer materials, systems and solutions to improve the uniqueness, functionality and profitability of their product offerings. Performance Materials delivers a broad polymer-based materials product portfolio, including engineering polymers that are primarily used by customers to fabricate components for mechanical and electrical systems, as well as specialized resins and films used in various packaging and industrial applications. These applications include food packaging, sealants and adhesives, sporting goods and interlayers for laminated safety glass. Key brands include DuPont^tm Zytel^® nylon resins, Delrin^® acetal resins, Hytrel^® polyester thermoplastic elastomer resins, Tynex^® filaments, Surlyn^® resins, SentryGlas^® Plus and Butacite^® laminate interlayers, Mylar^® and Melinex^® polyester films, Kalrez^® perfluoroelastomer and Viton^® fluoroelastomers.

 

The key markets served by the segment include the automotive OEM and associated after-market industries, as well as electrical, electronics, packaging, construction and consumer durable goods.

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The segment’s core competency is applied materials science, focusing on substituting traditional materials with new materials that offer advantages such as performance, durability, aesthetics and weight reduction. New applications and processing materials into innovative parts and systems are also areas of focus. A recent example of this core innovation capability is SentryGlas^® Expressions^tm, which links DuPont^tm polymer materials with ink jet technologies to develop specialty decorative interlayers for architectural applications.

 

On June 30, 2005, DuPont completed a transaction with Dow related to DuPont Dow Elastomers LLC (DDE), a 50/50 joint venture. Dow acquired from DDE certain assets related to the Engage^®, Nordel^® and Tyrin^® businesses. Upon the completion of this transaction, the remaining elastomers business became a wholly owned subsidiary of DuPont and was renamed DuPont Performance Elastomers, LLC. In response to a long-term declining demand for the polychloroprene products and the anticipated capital investment requirements at the Louisville, Kentucky facility, the company now plans to consolidate production at its upgraded LaPlace, Louisiana, facility by the end of 2007 at which time neoprene production will cease at the Louisville site. In 2005, the company recorded a restructuring charge of $34 million, reflecting severance and related costs for approximately 275 employees. Annual cost reductions related to ceasing neoprene production at Louisville and consolidating production at LaPlace are expected to offset reduced revenue related to declining demand. Cash payouts of $25 million are largely expected to be paid in 2008.

 

2006 versus 2005  Sales of $6.9 billion were 2 percent higher than 2005 reflecting 3 percent higher USD selling prices, partly offset by 1 percent lower volume. Sales volume reflects the year over year impact of the businesses transferred to Dow at June 30, 2005. Excluding from 2005 the sales related to assets transferred to Dow ($386 million), sales volumes were up reflecting stronger business environment in Asia and Europe and the recovery from the segment’s business interruption due to the 2005 hurricanes. During 2006, the segment introduced approximately 160 new products and product applications.

 

PTOI in 2006 was $627 million compared to $523 million in 2005. PTOI in 2006 includes a $27 million impairment charge and reflects increased selling prices and aggressive cost controls that reduced fixed costs. 2005 PTOI of $523 million included a $17 million hurricane charge, $47 million in operating income related to certain DDE assets sold, a $25 million gain on sale of these DDE assets and a charge of $34 million related to the planned consolidation of the company’s neoprene operations at its LaPlace, Louisiana facility.

 

2005 versus 2004  Sales of $6.8 billion were 2 percent higher than 2004, reflecting 8 percent higher USD selling prices, partly offset by 6 percent lower sales volumes. Sales volumes declined due to the business interruption caused by the hurricanes, the aforementioned change in the elastomers business and exiting the DMT business, pricing actions to improve mix and margins and lower demand from markets tied to motor vehicle production in the U.S. and Europe.

 

Excluding sales from the businesses transferred to Dow of $386 million and $536 million from the years 2005 and 2004, respectively, segment sales were up 4 percent, reflecting 8 percent higher USD selling prices and 4 percent lower volume. During 2005, approximately 180 new products and product applications were introduced.

 

PTOI was $523 million compared to $295 million in 2004. 2005 PTOI includes $47 million in operating income related to certain elastomers assets sold and a $25 million gain on the sale of these assets. 2005 PTOI also reflects a charge of $17 million related to hurricane damage and a $34 million charge related to the aforementioned plans for the Louisville and LaPlace sites. In 2005, higher selling prices partly offset substantial increases in raw materials costs and the impact of the Hurricanes on supply and production. 2004 PTOI includes $268 million in elastomers antitrust litigation charges (see Note 20 to the Consolidated Financial Statements) and $67 million in employee separation activities and asset impairment charges.

 

Outlook  North American and European 2007 automotive builds are expected to be essentially flat as compared to 2006 levels, with moderate growth in Asia Pacific. However, the half year pattern is expected to be the reverse of 2006 with higher production in the second half of 2007. Global packaging market growth is

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expected to remain at current levels. The residential construction market in North America is expected to be softer than 2006 and it is anticipated that the electrical and electronics markets will continue to improve. Performance Materials expects to realize continued revenue growth in 2007. PTOI is expected to increase, benefiting from higher revenue, price increases, improved fixed cost performance and customer-driven innovations for products and processes. The level of earnings improvements in 2007 will depend on offsetting the continued high intermediate feedstock costs with price increases and further productivity gains.

 

PHARMACEUTICALS

 

 

On October 1, 2001, DuPont Pharmaceuticals was sold to the Bristol-Myers Squibb Company. DuPont retained its interest in Cozaar^® (losartan potassium) and Hyzaar^® (losartan potassium with hydrochlorothiazide). These drugs were discovered by DuPont and developed in collaboration with Merck and are used in the treatment of hypertension. The U.S. patents covering the compounds, pharmaceutical formulation and use for the treatment of hypertension, including approval for pediatric use, will expire in 2010. DuPont has exclusively licensed worldwide marketing and manufacturing rights for Cozaar^® and Hyzaar^® to Merck. Pharmaceuticals receives royalties and net proceeds as outlined in these licenses and related agreements. Merck is responsible for manufacturing, marketing and selling Cozaar^® and Hyzaar^®.

 

In September 2002, the U.S. Food & Drug Administration (FDA) approved Cozaar^® to reduce the rate of progression of nephropathy (kidney disease) in Type 2 diabetic patients with hypertension and nephropathy (hereafter referred to as the RENAAL study). Through 2005, approvals based on the RENAAL study have been granted in 60 countries, with further approvals pending.

 

The Losartan Intervention For Endpoint reduction in hypertension study (LIFE) results were reported and published in March 2002 at the annual meeting of the American College of Cardiology. The study found that use of Cozaar^® significantly reduced the combined risk of cardiovascular death, heart attack and stroke in patients with hypertension and left ventricular hypertrophy (LVH) compared to the beta-blocker atenolol. In March 2003, the FDA approved Cozaar^® as the first and only hypertensive medicine to reduce the risk of stroke in patients with hypertension and LVH. In total, 64 countries have granted regulatory licenses to Cozaar^® based on the LIFE study. In 2005, the FDA approved Hyzaar^® to reduce the risk of stroke based on the LIFE study.

 

The FDA granted a new indication for Hyzaar^® in 2004 for use in patients with severe hypertension. This fixed dose combination is not indicated for initial therapy of hypertension, except when the hypertension is severe enough that the value of achieving prompt blood pressure control exceeds the risk of initiating combination therapy in these patients. In November 2006, Canada granted a new indication for Hyzaar^® use in severe hypertension. The indication is identical to that in the U.S.

 

In October 2005, Hyzaar^® 100-12.5 mg tablets were introduced offering a new treatment alternative for doctors with patients whose blood pressure is not adequately controlled by Cozaar^® 100 mg alone. A total of 13 countries have granted approval and more are pending.

 

Preminent^®, trademark for losartan 50mg and hydrochlorothiazide 12.5mg in Japan, received marketing authorization in October of 2006. Preminent^® is the first AIIA combination product to be commercialized in Japan.

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Outlook  DuPont and Merck continue to support Cozaar^® and Hyzaar^® with clinical studies designed to identify additional therapeutic benefits for patients with hypertension and co-morbid conditions. The company expects the ongoing Cozaar^®/Hyzaar^® collaboration to continue to be an important contributor to earnings until the U.S. patents expire in 2010. Thereafter, earnings are expected to decline significantly.

 

SAFETY & PROTECTION

 

 

Safety & Protection satisfies the growing global needs of businesses, governments and consumers for solutions that make life safer, healthier and more secure. By uniting market-driven science with the strength of highly regarded brands such as Kevlar^®, Tyvek^® and Nomex^®, Safety & Protection has built a unique presence in the marketplace since its inception in 2002.

 

The segment serves a large number of customers in markets that range from construction, transportation, communications, industrial chemicals, oil and gas, automotive, power and manufacturing to defense, homeland security and safety consulting. In addition to serving its existing customer base, the segment is investing in the future by going where the growth is. Its growth initiatives respond to critical needs, making people safer at home and at work; assisting the government, military and law enforcement; and preserving and protecting the environment. These initiatives include building innovations, personal protection, cleaning and disinfection solutions, government solutions, environmental solutions and safety consulting services.

 

In 2006, disease preparedness and emergency response continued to be high priorities. The introduction of the DuPont^tm Personal Biosecurity Kit, DuPont^tm Workplace Biosecurity Kit and DuPont^tm Biosecurity Kit for the Farm reflects an integrated systems approach to help prevent the spread of disease in humans and animals in the event of an avian flu pandemic. This multi-level methodology incorporates special protective apparel, clean and disinfect chemicals and safety management solutions.

 

Products, including Kevlar^® and Nomex^®, provide weight savings, strength and durability as well as help meet stringent safety standards. Kevlar^®, Nomex^® and Tyvek^® continue to hold strong positions in the personal and life protection markets due to the strong demand for military and law enforcement body armor and for personal protective gear in the oil and gas industry and in emerging regions. These include solutions for emergency response, military, law enforcement and firefighting apparel, given the ongoing concerns about homeland security. Global demand for products that prevent disease and improve productivity in the food, health care and industrial markets continue to create growth opportunities for the segment’s clean and disinfect offerings.

 

Refinery Solutions business has made steady progress toward its goal of becoming the leading global provider of fully integrated environmental solutions, including air and water, for refineries and associated industries.

 

Through Building Innovations, Safety & Protection continued to strengthen and enhance the building envelope and building interiors. New product launches are a key business driver; in 2006, Building Innovations launched DuPont^tm Tyvek^® weatherization systems. This product improves comfort, emergency efficiency, air quality and protection from the elements. The business is also positioning itself to take advantage of substantial growth opportunities in China, India and Eastern Europe and focusing more on commercial construction and remodeling markets to make up for the slowdown in U.S. residential construction.

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DuPont Safety Resources continued to help organizations worldwide reduce workplace injuries and fatalities while gaining sustainable improvement in operating costs, productivity and quality. DuPont is a leader in this consulting field, selling materials and consulting. It operates within a range of business models, including sharing of client gains due to lower injury/workman’s compensation claims.

 

Initiated by DuPont in 2005, the World Safety Declaration, the first-ever agreement by industry to improve workplace safety globally, continues to attract attention around the world. In 2006, 11 Chinese companies and organizations made a public, global commitment to safety by signing the declaration, bringing the total number of charter signers to 45.

 

2006 versus 2005  Sales of $5.6 billion were up 7 percent due to 5 percent higher USD prices and 2 percent higher volumes. All businesses in the platform grew sales year over year with the strongest growth in chemical solutions and aramids. Segment sales experienced slower U.S. growth as a result of shifts in demand for construction, but were offset by higher sales growth in other regions, especially emerging regions. During 2006, approximately 170 new products and product applications were introduced.

 

PTOI in 2006 was $1,080 million, up 10 percent from $982 million in the prior year. The increase in PTOI reflects pricing gains and tight fixed cost control. 2006 PTOI includes a $47 million asset impairment charge related to an industrial chemical asset held for sale, partially offset by a $33 million benefit from insurance proceeds. 2005 PTOI includes a charge of $27 million related to hurricane costs and a $31 million gain from the sale of a non-core asset.

 

2005 versus 2004  Sales of $5.2 billion were up 11 percent, due to 6 percent higher USD selling prices and 5 percent higher volumes. The segment’s aramids fibers and safety consulting offerings primarily drove revenue growth. Segment sales were negatively affected during the last four months of the year by the Hurricanes, particularly in the aniline and acrylonitrile product lines. The Latin America and Asia Pacific regions experienced higher-than-average sales growth in 2005. During the year, approximately 200 new products and product applications were introduced.

 

PTOI in 2005 was $982 million, up 17 percent from $837 million in the prior year. 2005 includes a charge of $27 million related to hurricane costs and a $31 million gain from the sale of a non-core asset. This net benefit, along with strong earnings growth from aramid fibers and safety consulting helped increase the segment’s PTOI. Pricing momentum continued within the segment during 2005, but was offset by higher raw material and transportation costs. 2004 includes charges of $70 million for employee separation activities and the impairment of certain European manufacturing assets.

 

Outlook  Safety & Protection will continue to drive growth in its product lines globally with the strength of its brands. U.S. and global demand for aramids is expected to remain strong. Continued U.S. and local level homeland security funding is expected during 2007 and will support growth in personal protective systems. The personal protection, medical packaging and medical fabrics market segments are expected to grow during the year. Volume growth in U.S. residential markets will continue to be lower than 2006, but mitigated by continued healthy growth in commercial, remodel markets and non-U.S. residential. Overall, Safety & Protection expects continued revenue growth and moderate earnings growth in 2007 based on continued market penetration, the introduction of new products and technologies and continued investment in its growth initiatives.

Part II

 

TEXTILES & INTERIORS

 

 

On April 30, 2004, the company sold the majority of the net assets of Textiles & Interiors (INVISTA) to subsidiaries of Koch, Inc. (Koch) for $3,844 million, except for the transfer of certain equity affiliates, pending the approval of equity partners. Beginning in 2005, financial transactions related to the remaining assets of Textiles & Interiors are reported in Other.

 

OTHER

 

The company combines the results of its developmental and nonaligned businesses under Other. Developmental businesses include bio-based materials and other growth initiatives. DuPont bio-based materials is focused on the development of biotechnology solutions using biology, chemistry, materials science and engineering in an integrated fashion to serve our customers. Specific growth projects across the company globally are consolidated within bio-based materials to capitalize on the market opportunities and technology needs in this high-growth industry, including crop-based products and technologies, the biorefinery initiative with the U.S. Department of Energy and metabolic engineering capability to manufacture biofuels.

 

DuPont partnered with Tate & Lyle PLC to produce 1,3-propanediol (Bio-PDO^tm), the key building block for DuPont^tm Sorona^® polymer, using a proprietary fermentation and purification process based on corn sugar. This bio-based method uses 40 percent less energy and reduces greenhouse gas emissions by 20 percent versus petroleum-based propanediol. The first commercial-scale plant to manufacture Bio-PDO^tm began production in November 2006, marking the beginning of commercial availability of the company’s bio-based pipeline.

 

Nonaligned businesses includes activities and costs associated with Benlate^® fungicide and other discontinued businesses and, since January 2005, activities related to the remaining assets of Textiles & Interiors. In 2005, the company completed the transfer of three equity affiliates to Koch and sold its interest in another equity affiliate. In January 2006, the company completed the sale of its interest in an equity affiliate to its equity partner for proceeds of $14 million thereby completing the sale of all the net assets of Textiles & Interiors. Additional details regarding Textiles & Interiors are contained in Note 6 to the Consolidated Financial Statements. In the aggregate, sales in Other for 2006, 2005 and 2004 represent less than 1 percent of total segment sales.

 

PTOI in 2006 was a loss of $134 million compared to a loss of $78 million in 2005. The losses in 2006 are reflective of the concentration of activities in bio-based materials. PTOI in 2005 included a net gain of $62 million related to the disposition of equity affiliates, primarily associated with the Textiles & Interiors separation.

 

PTOI in 2005 was a loss of $78 million compared to a loss of $242 million in 2004. The improvement in 2005 reflects the gain relating to the disposition of four equity affiliates. The 2004 loss includes $94 million for employee separation activities, a $29 million charge to write off abandoned technology and a $20 million benefit from insurance proceeds related to Benlate^® litigation.

Part II

 

 

Liquidity & Capital Resources

 

The company’s liquidity needs can be met through a variety of independent sources, including: Cash provided by operating activities, Cash and cash equivalents, Marketable debt securities, commercial paper, syndicated credit lines, bilateral credit lines, equity and long-term debt markets and asset sales. The company’s relatively low long-term borrowing level, strong financial position and credit ratings provide excellent access to these markets.

 

Management considers its strong liquidity, financial position and flexibility to be a competitive advantage. This advantage is based on strong business operating cash flows over an economic cycle and a commitment to cash discipline regarding working capital, capital expenditures and acquisitions. Pursuant to its cash discipline policy, the company seeks first, to maintain a strong balance sheet and second, to return excess cash to shareholders unless the opportunity to invest for growth is compelling. Cash and cash equivalents and Marketable debt securities balances of $1.9 billion as of December 31, 2006, provide primary liquidity to support all short-term obligations. Secondary liquidity, sufficient to meet upcoming debt maturities, comes from excellent access to capital markets and strong cash flow generation. Management believes that the company’s ability to generate cash and access the capital markets will be adequate to meet anticipated future cash requirements to fund working capital, capital spending, dividend payments and other cash needs for the foreseeable future. In the unlikely event that the company would not be able to meet its short-term liquidity needs, the company has access to approximately $3.5 billion in “same day” credit lines with several major financial institutions. These credit lines are primarily multi-year facilities.

 

In October 2005, Standard & Poor’s (S&P), Moody’s Investors Service (Moody’s) and Fitch Ratings (Fitch) downgraded the company’s long-term debt credit rating following the company’s announced $5 billion share buyback program. Management expected the revision and it had minimal impact on the company’s borrowing costs and ability to access capital markets. The credit rating agencies left the company’s short-term credit ratings at or near the highest rating levels. The company’s long-term (LT) and short-term (ST) rating history at year end over the last three years follows:

 

 

 

The company’s Cash provided by operating activities was $3.7 billion in 2006, a $1.2 billion increase from the $2.5 billion generated in 2005. The increase is primarily due to higher net income in 2006 and a reduction in contributions made to pension plans, partially offset by the timing of tax payments. Working capital productivity measures of days sales outstanding and inventory days supply were essentially flat in 2006 versus 2005, while days payable outstanding slightly decreased.

 

The company’s Cash provided by operating activities was $2.5 billion in 2005, a $689 million decrease from the $3.2 billion generated in 2004. The year-over-year decrease principally reflects higher contributions to pension plans, primarily a $1 billion contribution to the principal U.S. pension plan. Changes in accounts receivable and inventories were modest. Working capital productivity measures of days sales outstanding, inventory days supply and days payable outstanding in 2005 were essentially flat versus 2004.

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In 2006, Cash used for investing activities totaled $1.3 billion compared to the $602 million used in 2005. The increase reflects higher purchases of property, plant and equipment and lower proceeds from the sale of assets. In addition, the settlement of forward exchange contracts issued to hedge the company’s net exposure, by currency, related to monetary assets and liabilities resulted in the receipt of $45 million in 2006 versus the receipt of $653 million in 2005. These settlements were largely offset by revaluation of the items being hedged, which are reflected in the appropriate categories in the Consolidated Statement of Cash Flows. Purchases of plant, property and equipment in 2006 totaled $1.5 billion.

 

In 2005, cash was used for investing activities totaling $602 million compared to investing activities that provided cash of $1.9 billion in 2004. The primary difference was related to proceeds from the sale of assets, which were $312 million in 2005 compared to $3.9 billion in 2004, the latter related principally to the sale of INVISTA (see Notes 6 and 24 to the Consolidated Financial Statements). In addition, in 2005, the settlement of forward exchange contracts issued to hedge the company’s net exposure, by currency, related to monetary assets and liabilities resulted in the receipt of $653 million versus cash payments of $509 million in 2004. The cash inflow in 2005 was primarily related to the stronger USD while the payments in 2004 were primarily attributable to the weaker USD. These settlements were largely offset by revaluations of the items being hedged, which are reflected in the appropriate categories in the Consolidated Statements of Cash Flows. Purchases of plant, property and equipment in 2005 totaled $1.3 billion, including $70 million to replace plant assets destroyed by the hurricanes.

 

The company expects 2007 purchases of plant, property and equipment to be modestly higher than 2006 levels.

 

 

Changes in cash flows related to financing activities are principally related to the company’s borrowings and share repurchase activity. Total debt at December 31, 2006 was $7.5 billion, a $650 million decrease from December 31, 2005. This decrease was primarily due to the repayment of borrowings related to the 2005 AJCA cash repatriation program partially offset by the issuance of $1 billion in 10 and 30 year notes in December 2006.

 

Total debt at December 31, 2005, was $8.2 billion, an increase of $1.7 billion from December 31, 2004, primarily due to new foreign borrowings to support the AJCA cash repatriation program, the $1 billion contribution to the principal U.S. pension plan and other cash needs, partially offset by domestic debt pay downs from the cash repatriated under the AJCA program.

 

Dividends paid to common and preferred shareholders were $1.4 billion in 2006, 2005 and 2004. Dividends per share of common stock were $1.48 in 2006, $1.46 in 2005 and $1.40 in 2004. The common dividend declared in the first quarter 2007 was the company’s 410th consecutive dividend since the company’s first dividend in the fourth quarter 1904.

 

The company’s Board of Directors authorized a $2 billion share buyback plan in June 2001. During 2005, the company purchased and retired 9.9 million shares at a total cost of $505 million. During 2006, there were no purchases of stock under this program. As of December 31, 2006 and 2005, the company has purchased

Part II

 

20.5 million shares at a total cost of $962 million. Management has not established a timeline for the buyback of the remaining stock under this plan.

 

In October 2005, the Board of Directors authorized a $5 billion share buyback plan. On October 27, 2005, the company repurchased 75.7 million shares of its common stock under an accelerated share repurchase agreement and paid $3.0 billion for the repurchase. Upon the conclusion of the agreement in 2006, the company paid $180 million in cash to Goldman, Sachs & Co. to settle the agreement. In addition, the company made open market purchases of its shares for $100 million bringing purchases to date under the $5 billion share buyback plan to about $3.3 billion. The company anticipates completing the remaining $1.7 billion of the program, consistent with its financial discipline principles, by the end of 2007. See Note 21 to the Consolidated Financial Statements for a reconciliation of shares activity and “Certain Derivative Instruments” under “Off Balance Sheet Arrangements” for more information.

 

Cash, Cash Equivalents and Marketable Debt Securities

 

Cash and cash equivalents and Marketable debt securities totaled $1.9 billion at December 31, 2006 and 2005, and $3.5 billion at December 31, 2004, respectively. The $1.6 billion decrease in cash from 2004 to 2005 was due mainly to the $3 billion share buyback and debt pay down partially offset by new borrowings to fund the repatriation of $9.1 billion under AJCA and positive net cash flow in several regions.

 

Debt

 

Total debt at December 31, 2006 and 2005 was $7.5 billion and $8.2 billion, respectively. The company defines net debt as total debt less Cash and cash equivalents and Marketable debt securities. Management believes that net debt is meaningful because it provides the investor with a more holistic view of the company’s liquidity and debt position since the company’s cash balance is available to meet operating and capital needs, as well as to provide liquidity around the world. Net debt also allows the investor to more easily compare cash flow between periods without adjusting for changes in cash and debt. At December 31, 2006, net debt was $5.6 billion compared to $6.3 billion and $2.9 billion at year-end 2005 and 2004, respectively. The $692 million decrease in net debt from 2005 to 2006 reflects the company’s positive cash flow during 2006. The $3.4 billion increase in net debt from 2004 to 2005 was primarily due to the $3.5 billion share repurchase program in 2005.

 

The following table reconciles total debt to net debt:

 

Part II

 

The following table summarizes changes in net debt throughout 2006, 2005 and 2004:

 

 

Off-Balance Sheet Arrangements

 

Certain Guarantee Contracts

 

Indemnifications

 

The company has indemnified respective parties against certain liabilities that may arise in connection with acquisitions and divestitures and related business activities prior to the completion of the transactions. The terms of these indemnifications, which typically pertain to environmental, tax and product liabilities, are generally indefinite. In addition, the company indemnifies its duly elected or appointed directors and officers to the fullest extent permitted by Delaware law, against liabilities incurred as a result of their activities for the company, such as adverse judgments relating to litigation matters. If the indemnified party were to incur a liability or have a liability increase as a result of a successful claim, pursuant to the terms of the indemnification, the company would be required to reimburse the indemnified party. The maximum amount of potential future payments is generally indeterminable. The carrying amounts recorded for all indemnifications as of December 31, 2006 and 2005 is $105 million and $103 million, respectively. Although it is reasonably possible that future payments may exceed amounts accrued, due to the nature of indemnified items, it is not possible to make a reasonable estimate of the maximum potential loss or range of loss. No assets are held as collateral and no specific recourse provisions exist.

 

In connection with the sale of INVISTA, the company indemnified Koch against certain liabilities primarily related to taxes, legal and environmental matters and other representations and warranties. The estimated fair value of these obligations of $70 million is included in the indemnifications balance of $105 million at December 31, 2006. The fair value was based on management’s best estimate of the value expected to be required to issue the indemnifications in a stand-alone, arm’s length transaction with an unrelated party and, where appropriate, by the utilization of probability-weighted discounted net cash flow models. The company does not believe that these indemnities will have a material impact on the future liquidity of the company (see Note 6 to the Consolidated Financial Statements).

Part II

 

 

Obligations for Equity Affiliates and Others