2008

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

 

 

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 þ     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 þ

 

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 þ     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.

 

 

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

 

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, 2008, was approximately $38.6 billion.

 

As of January 31, 2009, 902,530,000 shares (excludes 87,041,000 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):

 

 

 

 

[This page intentionally left blank]

 

 

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 2009 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 innovation across a range of disciplines, including agriculture and industrial biotechnology, chemistry, biology, materials science and manufacturing. The company operates globally and offers a wide range of innovative products and services for markets including agriculture and food, building and construction, electronics and communications, general industrial, and transportation. Total worldwide employment at December 31, 2008, was approximately 60,000 people.

 

The company is strategically aligned into five market- and technology-focused growth segments consisting of Agriculture & Nutrition; Coatings & Color Technologies; Electronic & Communication Technologies; Performance Materials; and Safety & Protection. In addition to the five growth segments, the company’s reportable segments include Pharmaceuticals. The company includes embryonic businesses not included in the growth segments, such as applied biosciences and nonaligned businesses in Other.

 

Information describing the business of the company can be found on the indicated pages of this report:

 

 

The company has operations in approximately 90 countries worldwide and about 64 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 suppliers 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 many raw materials, including hydrocarbon feedstocks. Large volume purchases are generally procured under competitively priced supply contracts.

 

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, contract growers and the availability of preferred hybrids with desired traits.

 

The major commodities, raw materials and supplies for the company’s reportable segments in 2008 include the following:

 

  Agriculture & Nutrition:

benzene and carbamic acid related intermediates; copper; insect control products; natural gas; soybeans; soy flake; soy lecithin; sulfonamides; corn and soybean seeds

Part I

 

Item 1. Business, continued

 

  Coatings & Color Technologies:

chlorine; solvents; isocyanates; industrial gases; pigments; resins; titanium ore

 

  Electronic & Communication Technologies:

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

 

  Performance Materials:

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

 

  Safety & Protection:

alumina hydroxide; ammonia; benzene; high density polyethylene; isophthaloyl chloride; metaphenylenediamine; methyl methacrylate; natural gas; paraphenylenediamine; polyester fiber; propylene; sulfur; 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).

 

DuPont has contracts 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. CSC is contracted 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 2011.

 

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. As of December 31, 2008, some of the services associated with this contract are in place and are operating, including preparation of payroll in the U.S. and Puerto Rico. All services associated with this contract are scheduled to be operating in 2010. Convergys Corporation is contracted to provide services through 2018.

 

Backlog

In general the company does not manufacture its products against a backlog of orders and does not consider backlog to be a significant indicator of the level of future sales activity. 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.

 

Intellectual Property

The company believes that its intellectual property estate provides it with an important competitive advantage. It has an established 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 has a large portfolio of and is licensed under various patents. These definite-lived patents cover 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 17,000 worldwide patent applications. In 2008, the company was granted about 500 U.S. patents and about 1,500 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

Part I

 

Item 1. Business, continued

 

segment. For a discussion of the importance of patents to Pharmaceuticals, see the segment discussion on page 33 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. During 2007, Pioneer entered into a business agreement on corn herbicide tolerance and insect control trait technologies with Monsanto Company. Among other provisions, modifications were made to the existing corn license agreements; both parties agreed to exchange certain non-assert and other intellectual property rights; and both parties obtained rights to reference and access certain regulatory data and approvals in which the other has certain interests. See the Contractual Obligations table on page 38 for more information.

 

The company has approximately 1,800 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 actively pursues licensing opportunities for selected trademarks at the retail level.

 

Seasonality

Sales of the company’s products in Agriculture & Nutrition are affected by seasonal patterns. Agriculture & Nutrition’s sales and earnings 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 promoted through multiple marketing channels in North America. In the corn and soybean markets of the U.S. Corn Belt, products are sold through a specialized force of independent sales representatives. In other North American markets, 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 motor vehicle original equipment manufacturer (OEM) industry supply chain. The company has long-standing relationships with these customers and they are considered to be important to the segments’ operating results.

Part I

 

Item 1. Business, continued

 

Competition

As a science and technology based company, DuPont competes on a variety of factors such as product quality and performance or specifications, continuity of supply, price, 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, Korea and India. 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 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 applied research and the Stine-Haskell Research Center conducts agricultural product research and toxicological research to assure the safe manufacture, handling and use of products and raw materials.

 

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, also operates more than 20 additional research and development facilities at locations outside the U.S., with major facilities located in Sao Paulo, Brazil; Kingston, Canada; Shanghai, China; Meyrin, Switzerland; Seoul, Korea; Wuppertal, Germany; and Utsunomiya, Japan. A new research and development facility was opened in Hyderabad, India in 2008 to better serve the Asia Pacific 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. Recently, the company has broadened its sustainability commitments beyond environmental footprint reduction to include market-driven targets for research and development investment. The company is expanding 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 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 segments. 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 21 of this report.

Part I

 

Item 1. Business, continued

 

Facility Security

See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 43 for a discussion of facility security.

 

Environmental Matters

Information related to environmental matters is included in several areas of this report: (1) Environmental Proceedings on page 11, (2) Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 24-25, 40-43 and (3) Notes 1 and 19 to the Consolidated Financial Statements.

 

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.

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. 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 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. Additionally, the company enters into over-the-counter and exchange traded derivative commodity instruments to hedge its exposure to price fluctuations on certain raw material purchases. 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

Part I

 

Item 1A. Risk Factors, continued

 

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, patent infringement, antitrust claims, and claims for third party property damage or personal injury stemming from alleged environmental torts. 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.

 

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. 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 matter, 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.

Part I

 

Item 1A. Risk Factors, continued

 

Changes in government policies and laws 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, particularly in emerging markets. 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.

 

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.

 

Conditions in the global economy and global capital markets may adversely affect the company’s results of operations, financial condition, and cash flows.

The company’s business and operating results have been and will continue to be affected by the global recession, including the credit market crisis, declining consumer and business confidence, fluctuating commodity prices, volatile exchange rates, and other challenges currently affecting the global economy. The company’s customers may experience deterioration of their businesses, cash flow shortages, and difficulty obtaining financing. As a result, existing or potential customers may delay or cancel plans to purchase products and may not be able to fulfill their obligations in a timely fashion. Further, suppliers may be experiencing similar conditions, which could impact their ability to fulfill their obligations to the company. If the global recession continues for significant future periods or deteriorates significantly, the company’s results of operations, financial condition and cash flows could be materially adversely affected.

 

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, and create delays and inefficiencies in the supply chain. 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, and natural disasters. 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 endeavors 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

Part I

 

Item 1A. Risk Factors, continued

 

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.

Part I

 

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.

 

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 10, 19 and 24 to the Consolidated Financial Statements

 

The company has investments in property, plant and equipment related to global manufacturing operations. Collectively there are over 300 sites in total. The more significant sites are listed by their applicable segment(s) as set forth below:

 

Agriculture & Nutrition

 

Coatings & Color Technologies

 

Electronic & Communication Technologies

 

Performance Materials

Part I

 

 

 

Safety & Protection

 

The company’s plants and equipment are well maintained and in good operating condition. Sales as a percent of capacity were 78, 83, and 84 percent in 2008, 2007 and 2006, respectively. Properties are primarily 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.

Litigation

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 19 to the Consolidated Financial Statements under the heading PFOA.

 

Elastomers Antitrust Matters

Information related to this matter is included in Note 19 to the Consolidated Financial Statements under the heading Elastomers Antitrust Matters.

 

Environmental Proceedings

Belle Spent Acid Plant New Source Review Notice of Violation

On August 2, 2007, the U.S. Environmental Protection Agency (EPA) issued a Notice and Finding of Violation to DuPont and Lucite International (Lucite) regarding the spent acid regeneration unit at the Belle Plant in South Charleston, West Virginia. DuPont sold the unit to Imperial Chemical Industries, Plc (ICI) in 1993, who sold it to Lucite in 1999. DuPont has operated the unit since it was built in 1964, including after the sale to ICI, through the present. The Notice alleges 5 projects in the time period 1988 to 1996 should have triggered the New Source Review or New Source Performance Standard requirements of the Clean Air Act (CAA) and, therefore, required the unit be shut down or retrofitted to “best available” technology. Lucite, DuPont, EPA and U.S. Department of Justice (DOJ) have reached an agreement in principle that requires the unit be shut down by April 2010 and a penalty of $2 million. DuPont believes that Lucite should bear the costs of any shutdown and penalty. Lucite has notified the company that it will seek indemnity for such costs from DuPont.

 

TSCA Voluntary Audit

DuPont voluntarily undertook a self-audit concerning reporting of inhalation studies pursuant to Toxic Substances Control Act (TSCA) section 8(e). DuPont voluntarily reported the results of that audit to the EPA. The EPA has reviewed the information submitted under this self-audit and has indicated potential violations exist with respect to some of the submitted studies. Based upon communications with the EPA, the company believes the EPA will seek a penalty.

 

West Virginia Department of Environmental Protection

On July 31, 2008, the West Virginia Department of Environmental Protection (WVDEP) notified DuPont that it was seeking a penalty for alleged violations of the Solid Waste Management and Water Pollution Control Acts from 2004 to present at DuPont’s Washington Works site and two landfills in Wood County, West Virginia. The alleged violations include exceedances of discharge permit parameters, releases to the environment reported to the agency, and failing to comply with construction and operation permit requirements at one of the landfills. An agreement in

Part I

 

Item 3. Legal Proceedings, continued

 

 

principle has been reached to settle this matter for a penalty of $1.1 million and Supplemental Environmental Projects involving expenditures of $500,000.

None.

Part I

 

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

 

 

Executive Officers of the Registrant

The following is a list, as of February 12, 2009, 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.

 

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 and assumed leadership of Marketing & Sales along with Safety and Sustainability. She was appointed President on October 1, 2008 and became Chief Executive Officer on January 1, 2009.

 

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 director, North America and was appointed Vice President and General Manager-DuPont Crop Protection later that year. In January 2004, he was named Senior Vice President-DuPont Global Human Resources. In February 2008, Mr. Borel was named Group Vice President-DuPont with responsibility for production agriculture.

 

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 September 2000, 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.

 

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.

Part I

 

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

 

 

W. Donald Johnson joined DuPont in 1974 and has held a variety of technical and manufacturing assignments in fibers. In 1997 he was appointed Vice President and General Manager-DuPont Advanced Fiber Systems and DuPont Nylon and in 1999 he became the Group Vice President for Nylon Worldwide. From 2001 until 2006 when he was transferred to Japan, he had responsibilities for DuPont operations and engineering. He was named to Senior Vice President-DuPont Human Resources in February 2008.

 

Jeffrey L. Keefer joined DuPont in 1976 as a financial analyst in corporate finance. 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.

 

Thomas L. Sager joined DuPont in 1976 as an attorney in the labor and securities group. In 1998 he was named Chief Litigation Counsel and assumed oversight responsibility for all company litigation matters. He was named Vice President and Assistant General Counsel in 1999. In July 2008, he was appointed Senior Vice President and General Counsel.

 

 

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 87,729 at January 31, 2009.

 

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.

 

The company’s quarterly high and low trading stock prices and dividends per common share for 2008 and 2007 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, 2008.

 

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. Recognizing that strong science capabilities are the driving force behind the company’s transformation over the past decade, management chose a new peer group for 2008 that includes more research intensive companies with a scientific focus versus commodity-based chemical companies. The peer group companies for the year ended December 31, 2008 are 3M Company; Abbott Laboratories; Air Products & Chemicals, Inc.; Baxter International Inc.; The Boeing Company; Caterpillar Inc.; Eastman Kodak Company; Emerson Electric Co.; Hewlett-Packard Company; Honeywell International Inc.; Ingersoll-Rand Company Limited; Johnson & Johnson; Johnson Controls, Inc.; Kimberly-Clark Corporation; Merck & Company, Inc.; Monsanto Company; Motorola Inc.; The Procter & Gamble Company; Rohm and Haas Company; and United Technologies Corporation. For comparison, the company’s old peer group companies were 3M Company, Alcoa Inc.; BASF Corporation; The Dow Chemical Company; Eastman Kodak Company; Ford Motor Company; General Electric Company; Hewlett-Packard 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, 2003 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 6.

 

Overview

Long-term Growth Strategies – DuPont strives to grow shareholder value over the long term by executing its three growth strategies – Putting Science to Work, Leveraging the Power of One DuPont and Going Where the Growth Is. DuPont science and innovation is focused on delivering solutions for some of the world’s toughest challenges such as the need for increased food production, renewable energy and raw materials, energy efficiency, and greater safety and protection. The initiatives employed to achieve the strategies are: #1 Grow in the areas of agriculture, biosciences, safety and protection and polymer science by delivering science-based solutions. #2 Expand the company’s position in emerging markets. #3 Extend cost and capital productivity gains. Over the long term, DuPont continues to see the potential for attractive earnings growth from these initiatives. In addition to its growth strategies, DuPont’s financial discipline principles are critical to delivering shareholder value over time. The principles are first to maintain a strong balance sheet and second to return excess cash to shareholders unless there is a compelling opportunity to invest for growth. The company’s strong balance sheet supports liquidity and a low cost of borrowing and is a direct result from the disciplined execution of these principles.

 

Global Economic Conditions – The year 2008 was challenging due to a global economic recession with demand weakness in North American and Western European motor vehicle and construction related markets and dramatic escalation of global raw material, energy and transportation costs. Despite these challenges, the company delivered 4 percent sales growth and strong performances from the Agriculture & Nutrition segment, Pharmaceuticals, and most businesses in emerging markets. Early in the fourth quarter 2008 a financial crisis spreading globally triggered unprecedented market volatility and depressed economic growth. The fourth quarter of 2008 was the clear pivot point in the economic environment with a steep decline in demand becoming pervasive across a broader range of end markets and geographies. Reflecting these conditions, the company’s full year sales volume dropped 5 percent versus the prior year.

 

Response to Challenging Global Market Conditions – In December 2008, DuPont announced plans to address rapidly deteriorating market conditions and strengthen the company’s future competitiveness. Plans are focused on generating cash by better aligning cost, working capital and property, plant and equipment expenditures to the revised demand signals of the fourth quarter. These plans include a restructuring program with an associated fourth quarter pre-tax charge of $535 million, with expected pre-tax savings of about $130 million for 2009, and about $250 million annual savings thereafter. The restructuring will reduce about 2,500 employee positions, primarily those associated with motor vehicle and construction related businesses in Western Europe and the U.S. In addition to the expected $130 million cost savings in 2009 from restructuring, the company detailed plans to deliver an additional $600 million cost reduction in 2009. These plans include fixed cost productivity improvements, as well as immediate cost reductions implemented across the company such as significantly reducing discretionary spending, temporarily idling over 100 sites, reducing about 4,000 contractors and continuing productivity projects for streamlining and leveraging opportunities across operations, supply chain and support functions. The company also outlined 2009 plans to achieve a $1 billion net working capital reduction, and a 10 to 20 percent reduction in capital spending.

 

Part II

 

 

 

Analysis of Operations

 

 

2008 versus 2007  Consolidated net sales for 2008 were $30.5 billion, up 4 percent. This reflects 10 percent sales growth through September 30, partly offset by a 17 percent year-over-year sales decline in the fourth quarter, precipitated by a significant decline in demand. Full year sales reflect a 7 percent increase in local selling prices and 3 percent favorable currency exchange, partly offset by 5 percent lower volume and a 1 percent reduction from portfolio changes. Worldwide sales volumes reflect a modest increase outside the U.S. driven by growth in emerging markets, more than offset by significantly lower volumes in the company’s major polymer, chemical, material, and electronic product lines sold in the U.S. and Western Europe.

 

The table below shows a regional breakdown of 2008 consolidated net sales based on location of customers and percentage variances from prior year:

 

 

2007 versus 2006  Consolidated net sales for 2007 were $29.4 billion, up 7 percent. This growth was principally the result of an 11 percent increase in sales outside of the U.S., reflecting in part the benefit of a weaker U.S. dollar (USD), which added 3 percent to worldwide sales. Worldwide volumes and local selling prices each increased 2 percent. Sales in the U.S. increased 1 percent reflecting 3 percent higher selling prices, partially offset by 2 percent lower volume. The decrease in U.S. sales volume was primarily due to lower demand for the company’s products related to construction and motor vehicle production markets. Sales in Canada and Latin America increased 15 percent, primarily due to a 10 percent volume increase reflecting a substantial increase in sales of seed and crop protection products in South America.

 

The table below shows a regional breakdown of 2007 consolidated net sales based on location of customers and percentage variances from prior year:

 

 

Part II

 

 

 

 

2008 versus 2007  Other income, net, increased $32 million versus 2007. The increase was attributable to an increase of $211 million in equity in earnings of affiliates, primarily due to the absence of the 2007 impairment charge described below, and a favorable $51 million litigation settlement in 2008. The increases are partially offset by additional net pre-tax exchange losses of $154 million and a decrease of $86 million in asset sales.

 

2007 versus 2006  Other income, net, decreased $286 million versus 2006. This reduction is primarily due to an impairment charge of $165 million to write down the company’s investment in a polyester films joint venture in the Performance Materials segment, a decrease of $81 million in net pre-tax exchange gains and a decrease in miscellaneous items of $231 million offset by higher Cozaar^®/Hyzaar^® income of $128 million (see page 33 for Pharmaceuticals segment information and Note 3 to the Consolidated Financial Statements).

 

The decrease in miscellaneous items resulted from the absence of 2006 benefits of $90 million for the reversal of accrued interest related to the favorable settlement of certain prior-year tax contingencies and $76 million of insurance recoveries from its insurance carriers as part of asbestos litigation matters. Of the $76 million, $61 million related to costs, including outside counsel fees and expenses and settlements paid over the past twenty years. 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 a material adverse effect on the company’s consolidated financial position or liquidity. These asbestos related insurance recoveries were reflected in cash provided by operating activities within the company’s Consolidated 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 was included in cost of goods sold and other operating charges in the Consolidated Income Statements. No amounts were received from insurance carriers for damages suffered by the company as a result of Hurricane Rita.

 

Additional information related to the company’s other income, net is included in Note 3 to the Consolidated Financial Statements.

 

 

2008 versus 2007  Cost of goods sold and other operating charges (COGS) for the year 2008 were $24.1 billion, versus $21.7 billion in 2007, an increase of 11 percent. COGS was 79 percent of net sales for 2008 versus 74 percent for the year 2007. The 5 percentage point increase principally reflects a $535 million charge for restructuring as discussed below, a $227 million charge for hurricane-related cleanup and repair, and significant increases in raw material, energy and freight costs.

 

In 2008, the company initiated a global restructuring program in response to the decline in the motor vehicle and construction markets, as well as the global economic recession. The program was established to reduce costs and improve profitability across the company’s businesses. The program includes the elimination of approximately 2,500 positions principally located in Western Europe and the U.S. primarily supporting the motor vehicle and construction markets.

 

A resulting charge of $535 million has been reflected in COGS. This charge includes costs of $287 million related to employee severance costs and $248 million attributable to asset shut-downs, asset impairments and other non-personnel charges. Additional details related to this program are contained in the individual segment reviews and in Note 5 to the Consolidated Financial Statements.

 

Part II

 

 

 

Essentially all employee terminations related to this program will begin during the first quarter of 2009. The program is estimated to be substantially complete in 2010. There were no cash payments related to this program in 2008.

 

Expected pre-tax cost savings of approximately $250 million per year are associated with the program when complete. Approximately $130 million of this savings is expected to be realized in 2009.

 

2007 versus 2006  COGS for the year 2007 were $21.7 billion, versus $20.6 billion in 2006, an increase of 5 percent. COGS was 74 percent of net sales for 2007 versus 75 percent for the year 2006. The 1 percentage point reduction principally reflects the absence of 2006 charges for restructuring, the effects of the company’s productivity initiatives and a current year benefit from the weaker U.S. dollar due to currency exchange rate changes which increased sales at a higher rate than the rate they increased COGS. Partly offsetting these factors were increases in raw material and finished product distribution costs, as well as the absence of a 2006 benefit of $128 million in insurance recoveries.

 

The 2006 restructuring programs included the elimination of approximately 3,200 positions and redeployment of about 650. 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. At December 31, 2008, the 2006 restructuring programs are essentially complete. Additional details related to these programs are contained in the segment reviews and in Note 5 to the Consolidated Financial Statements.

 

Payments from operating cash flows to terminated employees as a result of the 2006 plans totaled $47 million, $77 million, and $32 million during 2008, 2007 and 2006, respectively. Annual pre-tax cost savings of about $125 million per year are associated with the Coatings & Color Technologies program, approximately $53 million of which is reflected in COGS. Cumulative savings of approximately 100 percent, 80 percent and 35 percent was realized in 2008, 2007 and 2006, respectively.

 

 

Selling, general and administrative expenses (SG&A) as a percent of sales remained constant over the three year period. Higher SG&A is primarily due to increased global commissions, selling and marketing investments related to the company’s seed products and an unfavorable foreign currency impact.

 

 

Research and development expense (R&D) as a percent of sales remained constant over the three year period. Higher R&D in 2008 and 2007 relates to the accelerated biotechnology trait research and development in the Agriculture & Nutrition segment. The 2007 increase was partially offset by a decrease in R&D in the Coatings & Color Technologies segment as a result of consolidating research facilities as a part of its 2006 business transformation plan.

 

Part II

 

 

 

 

Interest expense decreased $54 million in 2008 compared to 2007. The decrease in interest expense is due to lower average interest rates, partially offset by higher average borrowings. Interest expense decreased $30 million in 2007 versus 2006. This decrease was primarily due to lower average borrowing levels and higher capitalized interest, partially offset by slightly higher average interest rates.

 

 

In 2008, the company recorded a tax provision of $381 million (see Note 6 to the Consolidated Financial Statements).

 

In 2007, the company recorded a tax provision of $748 million which included a benefit of $108 million related to tax settlements offset by net tax expense in other operating results (see Note 6 to the Consolidated Financial Statements).

 

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 6 to the Consolidated Financial Statements).

 

The company’s current estimate of the 2009 effective income tax rate is about 26 percent, excluding tax effects of exchange gains and losses which can not be reasonably estimated at this time. See Note 6 for additional detail on items that significantly impact the company’s effective tax rates.

 

 

2008 versus 2007  Net income for 2008 decreased $981 million, or 33 percent versus 2007. The decrease in net income is attributable to a substantial decline in sales volume, primarily occurring during the fourth quarter 2008, and higher fixed costs including restructuring and hurricane-related charges recorded in the fourth quarter 2008.

 

2007 versus 2006  Net income for 2007 decreased 5 percent versus 2006, primarily due to the higher effective tax rate, as well as the decrease in other income. These decreases were partially offset by a 7 percent increase in net sales, the absence of the restructuring charges taken in 2006 and a favorable foreign currency exchange impact.

 

Corporate Outlook

For the year 2009, the company’s earnings outlook is a range of $2.00 to $2.50 per share, anticipating that the global economic recession will adversely affect the company’s results. Favorable global agriculture market and competitive conditions are expected to support continued sales and earnings growth for the Agriculture & Nutrition segment. However, lower demand for the company’s major polymer, chemical, material, and electronic product lines and the impact of currency are expected to limit the company’s overall revenue growth. The company plans to continue its appropriate level of support for businesses expected to have above-average growth rates and margins. In addition, cash-generating actions have been implemented including spending reductions and restructuring to better align capital expenditures and costs with anticipated continuing lower global demand. For 2009, the company has set targets for capital expenditures of about $1.6 billion, and fixed cost and working capital reductions of about $730 million and $1 billion respectively.

 

Part II

 

 

 

Accounting Standards Issued Not Yet Adopted

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 (revised 2007) “Business Combinations” (SFAS 141R) which replaces SFAS No. 141. SFAS 141R addresses the recognition and measurement of identifiable assets acquired, liabilities assumed, and non-controlling interests in business combinations. SFAS 141R also requires disclosure that enables users of the financial statements to better evaluate the nature and financial effect of business combinations. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS 141R will be adopted by the company on January 1, 2009. The company does not believe that at the time of adoption SFAS 141R will have a material impact on its Consolidated Financial Statements. This standard requires significantly different accounting treatment for business combinations than current requirements. Thus, accounting for potential future business combinations after adoption may produce a significantly different result and financial statement impact than under current standards.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of Accounting Research Bulletin No. 51” (SFAS 160) which changes the accounting and reporting for minority interests and for the deconsolidation of a subsidiary. It also clarifies that a third-party, non-controlling interest in a consolidated subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 also requires disclosure that clearly identifies and distinguishes between the interests of the parent and the interests of the non-controlling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. SFAS 160 will be adopted by the company on January 1, 2009. The company does not believe that at the time of adoption SFAS 160 will have a material impact on its Consolidated Financial Statements.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS 161). Effective for fiscal years and interim periods beginning after November 15, 2008, the new standard requires enhanced disclosures about derivative and hedging activities that are intended to better convey the purpose of derivative use and the risks managed. SFAS 161 will not affect the company’s financial position or results of operations. The new standard solely affects the disclosure of information.

 

In December 2008, FASB issued FASB Staff Position (FSP) FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” which is effective for fiscal years ending after December 15, 2009. The new standard expands disclosures for assets held by employer pension and other postretirement benefit plans. FSP FAS 132(R)-1 will not affect the company’s financial position or results of operations. The new standard solely affects the disclosure of information.

 

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 generally accepted accounting principles in the Unites States of America (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, long-term employee benefit obligations, income taxes, restructuring liabilities, 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.

 

Long-term Employee 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

 

Part II

 

 

 

pension and other long-term employee benefit plans. Management reviews these two key assumptions annually as of December 31st. 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 long-term employee 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.

 

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 market value. The market-related value of assets is calculated by averaging market returns over 36 months. Accordingly, there may 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:

 

 

Market-related value of plan assets decreased during 2008 due to recent adverse conditions in the global capital markets.

 

For plans other than the principal U.S. pension plan, pension expense is typically determined using the fair market value of assets. The fair market value of assets in all pension plans was $16.2 billion at December 31, 2008, and the related projected benefit obligations were $21.5 billion. In addition, obligations under the company’s unfunded other long-term employee benefit plans were $4.1 billion at December 31, 2008.

 

The following table highlights the potential impact on the company’s pre-tax earnings due to changes in certain key assumptions with respect to the company’s pension and other long-term employee benefit plans, based on assets and liabilities at December 31, 2008:

 

 

Additional information with respect to pension and other long-term employee benefits expenses, liabilities and assumptions is discussed under “Long-Term Employee Benefits” beginning on page 39.

 

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

 

Part II

 

 

 

complexity of the 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 multiparty sites and the number of and financial viability of other PRPs. The company has recorded a liability of $379 million on the Consolidated Balance Sheet as of December 31, 2008; 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 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 precise 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 and antitrust claims, and claims for third party property damage or personal injury stemming from alleged environmental torts. The company records accruals 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 accruals 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 accrual 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 19 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. It is reasonably possible that changes to the company’s global unrecognized tax benefits could be significant, however, due to the uncertainty regarding the timing of completion of audits and the possible outcomes, a current estimate of the range of increases or decreases that may occur within the next twelve months cannot be made.

 

Part II

 

 

 

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.

 

At December 31, 2008, the company had a deferred tax asset balance of $6,524 million, net of valuation allowance of $1,693 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 intangible assets and investments in affiliates is an integral part of the company’s normal ongoing review of operations. Testing for potential impairment of these 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. Based on the results of the company’s annual impairment test in 2008, no impairments exist at this time. However, due to the global recession, there has been a reduction in the fair values in excess of book value of net assets within goodwill and other indefinite-lived intangible assets. The company believes the current assumptions and estimates utilized are both reasonable and appropriate. Future changes in the environment and the economic outlook for the assets being evaluated could result in an increase or decrease of excess fair values of book value, or 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 sales include transfers. Segment pre-tax operating income (PTOI) is defined as operating income before income taxes, minority interests, exchange gains (losses), corporate expenses and net interest. A reconciliation of segment sales to consolidated net sales and segment PTOI to income before income taxes and minority interests for 2008, 2007 and 2006 is included in Note 25 to the Consolidated Financial Statements.

 

As described in Note 5 to the Consolidated Financial Statements, the company initiated a global restructuring program during 2008 to reduce costs and improve profitability across its businesses. The program charge reduced 2008 segment PTOI as follows: Agriculture & Nutrition – $18 million; Coatings & Color Technologies – $236 million; Electronic & Communication Technologies – $55 million; Performance Materials – $94 million; Safety & Protection – $101 million; and Other – $31 million.

 

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Agriculture & Nutrition leverages the company’s technology, customer relationships and industry knowledge to improve the quantity, quality and safety of the global food supply. Land available for worldwide 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 producing agriculture products to global production and distribution of soy-based food ingredients to food quality diagnostic testing equipment. 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.

 

Agriculture & Nutrition includes the company’s wholly owned subsidiary, Pioneer Hi-Bred International, Inc. (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 2008, Pioneer benefited from the global launch of approximately 30 new soybean varieties and 60 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. 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, the segment operates within the specialty food ingredients market, including soy proteins and lecithins through its majority-owned venture with Bunge Limited, The Solae Company.

 

2008 versus 2007  Sales of $8 billion were 16 percent higher reflecting 14 percent higher USD selling prices and 3 percent higher volume, partially offset by a 1 percent reduction from portfolio changes. The volume growth reflects higher corn seed sales in Europe and Brazil, record soybean seed sales in North America and Brazil due to market share gains and increased acreage shift from corn, and strong demand for corn and cereal herbicides and cereal fungicides in Europe. The higher USD selling prices reflect higher value product mix, pricing actions to offset the increases of raw materials costs and favorable currency impacts in Europe, Latin America and Canada.

 

PTOI for 2008 was $1.1 billion, up 22 percent versus $894 million in 2007, principally driven by increased sales and higher value product mix, partially offset by continued funding of strategic growth investments in research and development and sales and marketing.

 

2007 versus 2006  Sales of $6.8 billion were 14 percent higher reflecting 9 percent higher USD selling prices and a 5 percent increase in volume. Higher USD selling prices reflected a richer mix of corn and soybean seed, and crop protection herbicides and fungicides. Volume increases were driven by corn seed sales in North America, herbicides in Europe and fungicides in Latin America, partially offset by a decrease in the sale of soybean seed on lower planting acreage in North America.

¹  Registered Trademark of Dow AgroSciences LLC

 

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2007 PTOI was $894 million versus $604 million in 2006. 2006 PTOI included a $122 million restructuring charge. In addition, 2007 PTOI benefited from sales volume and price gains, partially offset by higher production costs across most of the segment and the growth investment in the seed business.

 

Outlook  In 2009, the segment anticipates continued growth through increased Pioneer corn value offerings, including stacked traits and seed treatments in the U.S. and Canada. Pioneer will continue to build on its North American product offerings with the addition of 26 new soybean varieties and 96 new Pioneer^® brand corn hybrids. Pioneer anticipates price increases from higher value product mix and continued market share gains in key soybean and corn markets including the U.S., Canada and Brazil. The segment’s introduction of new crop protection products is projected to drive volume gains, particularly in Europe and Latin America. Higher production and raw material costs and negative currency impacts will be moderating factors in the underlying results.

 

 

Coatings & Color Technologies is one of the world’s leading motor vehicle coatings suppliers and the world’s largest manufacturer of titanium dioxide products. Products offered include high performance liquid and powder coatings for motor vehicle original equipment manufacturers (OEMs), the motor vehicle aftermarket, 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 motor vehicle aftermarkets, 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 to an established, growing business, shipping product globally. In 2008, construction was completed and operations began at a $30 million titanium tetrachloride facility at its titanium dioxide plant in Tennessee.

 

The key markets in which Coatings & Color Technologies operates continued to grow for most of the year, with growth in the emerging regions, offset by significant decline in demand across the segment during the last four months of 2008 as the industry supply chains destocked worldwide in response to the global economic recession.

 

Global demand for titanium dioxide products was down in 2008 with global market volumes down 5 percent from 2007. Sales for refinish products increased in all regions, except the U.S. The OEM market realized growth in Latin America and Asia Pacific, however this was more than offset by significant declines in Europe, U.S., and Canada as a result of lower builds of automobiles and light trucks in 2008. Industrial coatings sales increased in most regions outside the U.S. and Canada, with larger increases in Asia Pacific and Latin America.

 

In December 2008, as part of the company’s restructuring plan, the segment recorded a charge of $236 million that included costs for employee separations and asset related charges and will cover the elimination of approximately 1,600 positions and the closure of certain manufacturing units. The plan is expected to be completed in 2010 and will result in cost savings of approximately $50 million in 2009, with an annual savings rate of approximately $140 million.

 

2008 versus 2007  Sales of $6.6 billion were flat when compared to 2007, reflecting 8 percent higher USD selling prices, offset by an 8 percent volume decline. The higher USD selling prices primarily reflect favorable currency impacts in Europe and Latin America and pricing actions to offset the increases of raw materials costs. The decrease in volume was primarily due to lower sales of products sold to OEMs in North America and Europe and lower demand for titanium dioxide, partially offset by strong sales in emerging markets.

 

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2008 PTOI was $326 million as compared to $840 million in 2007. Year-over-year decline in PTOI reflects the restructuring charge described above, as well as the impact of higher raw material costs and lower volumes, partially offset by higher prices and strong sales in emerging markets.

 

2007 versus 2006  Sales of $6.6 billion were up 5 percent, reflecting about 4 percent higher USD selling prices for the segment, as well as a 1 percent increase in volume. USD selling prices were higher across a majority of the segment’s products. The increase in volume was primarily attributable to the sales of titanium dioxide, particularly in Europe and Asia Pacific. This increase was partially offset by declines in volume for products sold to OEM producers, primarily in North America and Europe. Volumes for sales of refinish products were relatively flat as compared to 2006.

 

PTOI in 2007 of $840 million increased from $817 million in 2006. The PTOI improvement was primarily the result of higher revenue driven by higher USD selling prices and benefits realized from the 2006 restructuring program, partially offset by higher raw material and transportation costs. PTOI in 2006 included a net charge of $132 million for restructuring and $30 million primarily for accelerated depreciation related to the transformation plan that was initiated in the first quarter 2006 (see Note 5 to the Consolidated Financial Statements). These charges were partially offset by $142 million in insurance proceeds, primarily related to the hurricane damages incurred in 2005.

 

Outlook  Sales in 2009 are expected to decrease, reflecting continued weakness due to the global recession. Industry demand for titanium dioxide is expected to be lower in 2009, with continued weakness in North American and European construction and motor vehicle markets. Conditions in the global coatings industry will continue to provide a challenging operating environment in 2009. Modest declines are expected for refinish markets in mature economies while modest growth is expected in emerging markets. Profitability of coatings sold to OEM producers is highly dependent upon volume at specific plants the company services. Global motor vehicle industry builds in 2009 are expected to be down from 2008 with all regions showing declines. Lower raw material cost, fixed cost benefits from the company’s 2008 restructuring program and productivity initiatives are expected to partially offset the impact of lower volumes.

 

 

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

 

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 increased functionality and lower costs for electronic and communication devices.

 

Electronic & Communication Technologies is the market leader in flexographic printing and black pigmented ink serving the packaging and commercial printing industries. Its offerings include DuPont^tm Cyrel^® and Cyrel^® FAST flexographic printing systems. DuPont is the world’s leading supplier of solvent-free thermal flexographic platemaking technologies, with a broad array of patented products and equipment.

 

The segment also includes a portfolio of industrial and specialty fluorochemicals and fluoropolymers that are sold into the refrigeration, insulation, aerosol propellants, fire extinguishants, telecommunications, aerospace, automotive, electronics, chemical processing and housewares industries.

 

Electronic & Communication Technologies leverages DuPont’s strong materials and technology base to target growth opportunities in electronics, fluoropolymers, fluorochemicals, packaging graphics, ink-jet and photovoltaic

 

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materials. In semiconductor fabrication, packaging and interconnects, the segment is extending and broadening its portfolio of materials to address critical needs in the industry, e.g., chemical mechanical planarization and cleaners for semiconductor manufacture; flex circuitry, advanced dielectric films and embedded passives enabling miniaturization. In the 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 alternative backlighting materials and display films, while continuing to invest in developing materials technologies for organic light-emitting diode (OLED). In fluoropolymers and fluorochemicals, the segment continues to pursue product renewal innovations such as next generation refrigerants. In the fast growing photovoltaics market, the segment continues to be a leading supplier of conductors and fluoropolymer films for crystalline silicon cell and module manufacturers and is adding new products to serve the emerging thin film photovoltaic module market. In packaging graphics, products such as Cyrel^®FAST have rapidly grown, solidifying the segment’s market leadership position. DuPont is also expanding its leadership position in black pigmented inks, and investing in color pigmented inks for network printing applications.

 

2008 versus 2007  Sales of $4 billion were up 5 percent, reflecting 7 percent higher USD selling prices, 3 percent volume decline and a 1 percent increase from portfolio changes. The higher USD selling prices mainly reflect pricing actions to offset the increases of raw materials costs and favorable currency impacts in Europe and Asia Pacific. The lower volumes reflect decreased demand for products across the segment key markets, mostly towards the end of 2008, partially offset by increased demand for photovoltaic products and higher sales in emerging markets.

 

PTOI was $436 million as compared to $594 million in 2007. This decline was mainly driven by higher raw materials cost, lower sales volumes and the impact of the $55 million charge for the 2008 restructuring program. 2007 PTOI also includes a benefit of $53 million related to a gain on a land sale and inventory valuation adjustments.

 

2007 versus 2006  Sales of $3.8 billion were up 6 percent versus 2006, reflecting 5 percent volume growth and 1 percent higher USD selling prices. The volume growth was primarily due to increased demand for fluoroproducts and packaging graphics. Sales growth was strongest outside the U.S.

 

PTOI in 2007 was $594 million, an increase of 3 percent compared to 2006. This increase reflects 5 percent sales volume growth, as well as the benefit of $53 million related to a gain on a land sale and inventory valuation adjustments. These increases were partially offset by higher ingredient and transportation costs as well as increased fixed cost from growth initiatives.

 

Outlook  For 2009, sales for electronic materials, fluoroproducts, and packaging graphics products will be impacted by the global recession. Continued growth in the photovoltaics market, cost control initiatives and benefits from the 2008 restructuring program will partially offset the effect of lower volumes. This segment manufactures products that could be affected by uncertainties associated with PFOA matters. See the discussion on page 43 under the subheading PFOA.

 

 

Performance Materials provides productive, higher performance polymers, elastomers, films, parts, and systems and solutions which improve the uniqueness, functionality and profitability of its customers’ offerings. Performance Materials delivers a broad range of polymer-based high performance materials in its product portfolio, including thermoplastic and thermoset engineering polymers and elastomers which are used by customers to fabricate components for mechanical, chemical and electrical systems, as well as specialized resins and films used in packaging and industrial applications, 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, Vespel^® parts and shapes, Tynex^® filaments, Surlyn^® resins, Vamac^® ethylene acrylic elastomer,

 

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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, oil, photovoltaics, aerospace, chemical processing and consumer durable goods.

 

The segment’s core competencies include global market knowledge and access in key growth industries, local technical support in all major regions to help customers solve their problems, world class polymer science, material science and applications development, scientists working to solve customer problems, world class manufacturing which provides high quality reliable products, and a broad, tested, product portfolio which successfully substitutes traditional materials with solutions which offer performance, total systems cost reductions, sustainability, durability, aesthetics and weight reduction advantages. Other areas of focus include new applications and processing materials into innovative parts and systems. A recent example of this core innovation capability is the introduction of Hytrel^® resins based on renewable resources which have the performance attributes of high performance engineering resins but are based on plant feedstock.

 

2008 versus 2007  Sales of $6.4 billion were 3 percent lower, driven by a 13 percent decrease in volume and a 1 percent reduction from portfolio changes, which more than offset 11 percent higher USD selling prices. Sales volume declines were more pronounced beginning late in the third quarter, with continued and accelerated deterioration through the fourth quarter, and occurred in all major regions and end-use market segments. The decline reflects a broad industry movement to reduce inventory and improve cash positions to manage through what is projected to be a protracted period of weak global economic demand. Volumes were also negatively impacted by extended operating unit shutdowns related to the time taken to implement facility repairs stemming from damages associated with Hurricanes Gustav and Ike. Operating units outages associated with the hurricanes were of varying lengths depending on the level of damage incurred and the ability to obtain utilities and ingredients to enable a restart.

 

2008 PTOI was $128 million compared to $626 million in 2007. 2008 PTOI includes charges related to hurricane damages of $216 million. In addition, as part of the company’s restructuring program, the segment recorded a charge of $94 million to cover employee termination costs and other assets related charges. The decline in PTOI was also influenced by charges associated with low capacity utilization of production units to reduce inventories due to the decreased demand. The decrease in PTOI in 2008 was partially offset by the absence of a $165 million impairment charge in 2007 to write down the company’s investment in a polyester films joint venture.

 

2007 versus 2006  Sales of $6.6 billion were 7 percent higher than 2006 reflecting 8 percent higher USD selling prices, partly offset by 1 percent lower volume. Sales volume declines reflect the impact of ingredients shortages, temporary operating unit shutdowns and softness in North America, principally in the automotive markets, partly offset by volume improvements in Latin America, Europe and Asia Pacific.

 

2007 PTOI increased 12 percent to $626 million. 2007 PTOI included an impairment charge of $165 million to write down the company’s investment in a polyester films joint venture. The impairment resulted from several factors, including adverse changes in market conditions and the rapid rise in oil-related raw material costs, which have had a negative impact on the profitability on the venture’s operations in North America and Europe. Improvement in 2007 PTOI was driven by improved pricing, which reflected both the offset of the ingredient cost increases seen during the year and improved product sales mix, and positive currency benefits, offset in part by the weaker volume. The segment is involved in the elastomers antitrust matters and recorded a net $20 million charge in 2007 related to these matters (see Note 19 to the Consolidated Financial Statements).

 

Outlook  Global motor vehicle industry builds in 2009 are expected to decline. Most of the markets served by the segment are expected to remain soft in 2009. The 2009 outlook also assumes a softening from a weak petrochemical cycle. Revenue is also expected to decline in part due to lower production capacity and negative currency impacts, partially offset by higher local currency average selling prices. PTOI is expected to decline, as benefits from lower average ingredient prices, improved fixed cost performance, benefits from the company’s 2008

 

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restructuring program and customer-driven innovations for products and processes are projected to be offset by soft global demand.

 

 

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^®, Nomex^® and Corian^®, Safety & Protection has built a unique presence in the marketplace since its inception in 2002.

 

The segment’s businesses serve customers in diverse markets that include construction, transportation, communications, industrial chemicals, oil and gas, electric utilities, automotive, manufacturing, defense, homeland security and safety consulting.

 

In addition to serving its existing customer base, Safety & Protection is investing in the future by expanding into emerging markets. Over the past two years the segment has achieved strong double-digit growth in Greater China, India, Eastern Europe and Latin America. Safety & Protection is focusing its efforts globally on four major value propositions where it has a distinct competitive advantage: protecting lives, safe and durable buildings, protecting critical processes and protecting the environment.

 

DuPont^tm Kevlar^® and Nomex^® hold strong positions in life protection markets due to continued demand for body armor and personal protective gear for the military, law enforcement personnel, firefighters and other first responders, as well as for workers in the oil and gas industry and in emerging regions. 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. Additionally, the surfaces protection businesses continue to offer new products that meet demand for sustainable solutions.

 

Safety & Protection continues to strengthen the building envelope and building interiors with offerings that improve comfort, energy efficiency, air quality and protection from the elements. In 2008, new products introductions from the Corian^® and Tyvek^® product families solidified the segment’s market position globally, while enhancing the presence on commercial construction and remodeling markets.

 

In the consulting services market, Safety & Protection continued to help organizations worldwide reduce workplace injuries and fatalities while improving operating costs, productivity and quality. DuPont is a leader in the safety consulting field, selling training products, as well as consulting services. Additionally, Safety & Protection is dedicated to clean air, clean fuel, and clean water with offerings that help reduce sulfur and other emissions, formulate cleaner fuels, or dispose of liquid waste. Its goal is to help maintain business continuity and environmental compliance for companies in the refining and petrochemical industries, as well as for government entities.

 

In 2007, DuPont announced a $500 million investment at its Cooper River site near Charleston, South Carolina and $50 million at its Spruance site in Richmond, Virginia, to significantly expand production of DuPont^tm Kevlar^® brand fiber for industrial and military uses as well as investments in related polymer production. The company also announced a multi-product, multi-region expansion plan to increase worldwide capacity of DuPont^tm Nomex^®. The company expects to invest more than $100 million in the three-part expansion plan for Nomex^®. The second phase was completed in 2008.

 

2008 versus 2007  Sales of $5.7 billion were 2 percent higher than last year, due to 9 percent higher USD selling prices, offset by a 5 percent decline in volume and a 2 percent reduction from a divested business. Decreased volume primarily reflects lower sales to the U.S. residential and construction markets and the automotive industry, which accelerated and spread to other key markets during the fourth quarter. The higher USD selling prices primarily

 

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reflect pricing actions to offset the increases of raw materials costs and positive currency impact in Europe and Latin America.

 

2008 PTOI was $829 million compared to $1,199 million in 2007. The decreased earnings were primarily due to higher production costs and the impact of lower volumes related to the global recession. In addition, 2008 PTOI includes a charge of $101 million to cover employee separation costs and other asset related charges as part of the company restructuring program.

 

2007 versus 2006  Sales of $5.6 billion were 3 percent higher than 2006, due to higher USD selling prices across all businesses within the segment. Sales volumes remained relatively flat as higher sales of Kevlar^® and Nomex^® were offset by decreased sales of products for U.S. residential construction markets.

 

PTOI in 2007 was $1,199 million, an increase of 11 percent over the prior year. The increased earnings were primarily due to higher sales of Kevlar^® and Nomex^®. 2006 PTOI included 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.

 

Outlook  For 2009, sales will be affected by the impact of the global recession. Demand for Kevlar^® and Nomex^® is expected to increase moderately with public sector sales growth offset by continued weakening in the motor vehicle and personal protection markets. The building envelope market segments are expected to decline due to global market weakness and continued volume declines in the U.S. and European residential construction markets. Earnings in 2009 will include benefits from the restructuring actions announced in 2008.

 

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 below. Merck is responsible for manufacturing, marketing and selling Cozaar^® and Hyzaar^®.

 

Pharmaceuticals’ Cozaar^®/Hyzaar^® income is the sum of two parts derived from a royalty on worldwide contract net sales linked to the exclusivity term in a particular country, and a share of the profits from North American sales and certain markets in Europe, regardless of exclusivity term. Patents and exclusivity have already started to expire and the U.S. exclusivity for Cozaar^® ends in April 2010. The worldwide agreement terminates when the following conditions are met: (i) the Canadian exclusivity ends in 2013, and (ii) North American sales fall below a certain level. Therefore, absent any major changes in the markets, the company expects its income to take its first significant step-down in 2010, and from that year on, continue to step-down each year to zero when the contract ends, which is expected to be after 2013. The company cannot predict the magnitude of the earnings step-down in each year. In general, management expects a traditional sales, earnings and cash decline for a drug going off patent in the pharmaceutical industry.

 

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 and cash until the U.S. patents expire in 2010. Significant declines are expected thereafter as outlined above.

 

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The company includes embryonic businesses not included in the growth segments, such as applied biosciences and nonaligned businesses in Other. The potential viability of each embryonic business depends on a number of factors including successful product development, market acceptance and production ramp up capabilities. Using these factors and others, management periodically assesses the potential and fit of these businesses and may make investment adjustments based on such assessments. Applied biosciences is focused on the development of biotechnology solutions using biology, chemistry, materials science and engineering in an integrated fashion to serve our customers. Specific global growth projects across the company are consolidated within applied biosciences to capitalize on the market opportunities and technology needs in this high-growth industry, including biomaterial and biospeciality products and technologies and advanced biofuels.

 

Applied biosciences will provide advantaged products for agricultural energy crops, feedstock processing and advanced biofuels through two businesses: one to commercialize non-food, cellulosic ethanol and the second to commercialize biobutanol. To accelerate commercialization, DuPont has formed a joint venture with Danisco, DuPont Danisco Cellulosic Ethanol LLC, for the cellulosic ethanol technology. For biobutanol, a partnership was created in 2006 with BP p.l.c.

 

DuPont partnered with Tate & Lyle PLC to produce 1,3-propanediol (Bio-PDO^tm) using a proprietary fermentation and purification process based on corn sugar. Bio-PDO^tm is the key building block for DuPont^tm Sorona^® polymer and DuPont^tm Cerenol^tm polyols, two new families of renewably sourced products. Under the Zemea^® propanediol and Susterra^® propanediol brands, it is also being marketed for use as an ingredient in nearly a dozen direct applications ranging from industrial to personal care uses. 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 include activities and costs associated with Benlate^® fungicide and other discontinued businesses and, since January 2005, activities related to the remaining assets of the former Textiles & Interiors segment. In 2004, the company sold a majority of the net assets of Textiles and Interiors to subsidiaries of Koch Industries, Inc. (INVISTA). In 2005, the company completed the transfer of three equity affiliates to INVISTA 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.

 

In the aggregate, sales in Other for 2008, 2007 and 2006 represent less than 1 percent of total segment sales.

 

PTOI in 2008 was a loss of $181 million compared to a loss of $224 million in 2007. The improvement for the year was mainly due to a benefit of $51 million from a litigation settlement in 2008 and the absence of a $69 million charge recorded in 2007 for litigation related to a discontinued business.

 

PTOI in 2007 was a loss of $224 million compared to a loss of $173 million in 2006. The 29 percent increase in the pre-tax loss was primarily due to higher inventory, freight and business development costs. PTOI in 2007 included litigation charges for former businesses of $69 million. PTOI in 2006 included a charge of $27 million to write down certain specialty resins manufacturing assets to estimated fair value.

 

Liquidity & Capital Resources

Despite the global economic recession and adverse conditions in the global capital markets, management believes the company’s ability to generate cash from operations, coupled with cost reduction initiatives and access to capital markets, will be adequate to meet anticipated cash requirements to fund working capital, capital spending, dividend payments, debt maturities and other cash needs. The company’s liquidity needs can be met through a variety of sources, including: cash provided by operating activities, cash and cash equivalents, marketable securities, commercial paper, syndicated credit lines, bilateral credit lines, equity and long-term debt markets and asset sales. The company’s current strong financial position, liquidity and credit ratings have not been materially impacted by the current credit environment. In addition, cash generating actions have been implemented including spending reductions and restructuring to better align capital expenditures and costs with anticipated continuing lower global demand. However, there can be no assurance that the cost or availability of future borrowings will not be impacted by

 

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the ongoing credit market instability. The company will continue to monitor the financial markets in order to respond to changing conditions.

 

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 securities balances of $3.7 billion as of December 31, 2008, provide primary liquidity to support all short-term obligations. The company has access to approximately $2.7 billion in credit lines with several major financial institutions, as additional support to meet short term liquidity needs. These credit lines are primarily multi-year facilities. The $1.6 billion decrease from the $4.3 billion in credit lines at December 31, 2007 is primarily due to the expiration of credit lines obtained to support the company’s cash repatriation program under the American Jobs Creation Act of 2004 (AJCA).

 

The company continually reviews its debt portfolio and occasionally may rebalance it to ensure adequate liquidity and an optimum maturity debt schedule.

 

The company’s long term and short term credit ratings are as follows:

 

 

Moody’s Investors Service and Standard & Poor’s recently affirmed the company’s A2/A long term and P-1/A-1 short term ratings, respectively. Additionally, they revised their outlooks to negative from stable. The company does not expect these actions to impact liquidity or cost of debt.

 

 

The company’s cash provided by operating activities was $3.1 billion in 2008, a $1.2 billion decrease from the $4.3 billion generated in 2007. The decrease is primarily due to lower earnings and the impact of the stronger dollar on working capital items, which was hedged by forward exchange contracts in investing activities.

 

The company’s cash provided by operating activities was $4.3 billion in 2007, a $554 million increase from the $3.7 billion generated in 2006. The increase is primarily due to higher earnings after adjusting for noncash items. Net income for 2006 included noncash tax benefits totaling $615 million (see Note 6 to the Consolidated Financial Statements).

 

 

In 2008, cash used for investing activities totaled $1.6 billion compared to $1.8 billion used in 2007. The $140 million decrease was mainly due to higher proceeds from forward exchange contract settlements, partially offset by increased capital expenditures, lower proceeds from asset sales and higher expenditures for businesses acquired.

 

In 2007, cash used for investing activities totaled $1.8 billion compared to $1.3 billion used in 2006. The $405 million increase was mainly due to the settlement of forward exchange contracts and a slight increase in capital spending, partially offset by higher proceeds from sales of assets. Due to the impact of a weakening USD, 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 payment of $285 million in 2007 versus the receipt of $45 million in 2006. The forward exchange contract settlements were largely offset by the revaluation of the items being hedged, which are reflected in the appropriate categories in the Consolidated Statements of Cash Flows.

 

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Purchases of property, plant and equipment totaled $2.0 billion, $1.6 billion and $1.5 billion in 2008, 2007 and 2006, respectively. This incremental spending is primarily based on the company’s previously announced investments in Kevlar^® and Nomex^®. The company expects 2009 purchases of plant, property and equipment to be $1.6 billion.

 

 

The $3.9 billion increase in cash provided by financing activities in 2008 compared to 2007 was primarily due to the increase in the net proceeds from borrowings and the absence of the purchase of common stock, which were partly offset by the decrease in the proceeds from the exercise of stock options. During the fourth quarter of 2008, interest rate swaps were terminated with a combined notional amount of $1.25 billion for cash proceeds of $226 million, which are classified within financing cash flows in the Consolidated Statements of Cash Flows. This gain will be amortized to earnings as a reduction to interest expense over the remaining life of the debt, through 2018.

 

The $746 million increase in cash used for financing activities in 2007 compared to 2006 was primarily due to the company’s share repurchase activity, partially offset by the increase in proceeds from stock options exercised.

 

Total debt at December 31, 2008 was $9.7 billion, a $2.4 billion increase from December 31, 2007. The proceeds from the increased borrowings were invested in cash equivalents and used for general corporate purposes.

 

Total debt at December 31, 2007 was $7.3 billion, a $205 million decrease from December 31, 2006. This decrease was primarily due to the repayment of borrowings related to the 2005 AJCA cash repatriation program, partially offset by the issuance of $750 million in 5 year notes in December 2007.

 

Dividends paid to common and preferred shareholders were $1.5 billion in 2008, and $1.4 billion in 2007 and 2006. Dividends per share of common stock were $1.64, $1.52 and $1.48 in 2008, 2007 and 2006, respectively. The common dividend declared in the first quarter 2009 was the company’s 418th 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 2008, 2007 and 2006, there were no purchases of stock under this program. As of December 31, 2008, the company has purchased 20.5 million shares at a total cost of $962 million. Management has not established a timeline for the buyback of the remaining shares of stock under this plan.

 

In October 2005, the Board of Directors authorized a $5 billion share buyback plan. In October 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. Additionally, in 2006, the company made open market purchases of its shares for $100 million. In 2007, the company purchased 34.7 million shares for $1.7 billion, thereby, completing this program. See Note 20 to the Consolidated Financial Statements for a reconciliation of shares activity.

 

Cash, Cash Equivalents and Marketable Securities

Cash and cash equivalents and marketable securities totaled $3.7 billion at December 31, 2008, $1.4 billion at December 31, 2007 and $1.9 billion at December 31, 2006. The $2.3 billion increase from 2007 to 2008 is primarily due to net increase in borrowings. The $457 million decrease from 2006 to 2007 is primarily due to the company’s share repurchase activity, as well as cash used to meet other business requirements.

 

Off-Balance Sheet Arrangements

Certain Guarantee Contracts

Indemnifications

In connection with acquisitions and divestitures, 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

 

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completion of the transaction. The term of these indemnifications, which typically pertain to environmental, tax and product liabilities, is 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 unlimited. The carrying amounts recorded for all indemnifications as of December 31, 2008 and 2007 were $110 million and $101 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 2004 sale of the majority of the net assets of Textiles and Interiors, the company indemnified INVISTA against certain liabilities primarily related to taxes, legal and environmental matters and other representations and warranties under the Purchase and Sale Agreement. The estimated fair value of the indemnity obligations under the Purchase and Sale Agreement is $70 million and is included in the indemnifications balance of $110 million at December 31, 2008. Under the Purchase and Sale Agreement, the company’s total indemnification obligation for the majority of the representations and warranties cannot exceed $1.4 billion. The other indemnities are not subject to this limit. In March 2008, INVISTA filed suit in the Southern District of New York alleging that certain representations and warranties in the Purchase and Sale Agreement were breached and, therefore, that DuPont is obligated to indemnify it. DuPont disagrees with the extent and value of INVISTA’s claims. DuPont has not changed its estimate of its total indemnification obligation under the Purchase and Sale Agreement as a result of the lawsuit.

 

Obligations for Equity Affiliates and Others

The company has directly guaranteed various debt obligations under agreements with third parties related to equity affiliates, customers, suppliers and other affiliated and unaffiliated companies. At December 31, 2008, the company had directly guaranteed $605 million of such obligations, plus $121 million relating to guarantees of obligations for divested subsidiaries. This represents the maximum potential amount of future (undiscounted) payments that the company could be required to make under the guarantees. The company would be required to perform on these guarantees in the event of default by the guaranteed party. At December 31, 2008 and 2007, a liability of $121 million and $135 million, respectively, was recorded for these obligations, representing the amount of payment/performance risk which the company deems probable. This liability is principally related to obligations of the company’s polyester films joint venture which are guaranteed by the company.

 

Existing guarantees for customers, suppliers and other unaffiliated companies arose as part of contractual agreements. Existing guarantees for equity affiliates and other affiliated companies arose for liquidity needs in normal operations. In certain cases, the company has recourse to assets held as collateral as well as personal guarantees from customers and suppliers.

 

The company has guaranteed certain obligations and liabilities of its divested subsidiaries including Conoco and Consolidation Coal Sales Company. Conoco and Consolidation Coal Sales Company have indemnified the company for any liabilities the company may incur pursuant to these guarantees. No material loss is anticipated by reason of such agreements and guarantees. At December 31, 2008, the company had no significant liabilities recorded for these obligations.

 

Additional information with respect to the company’s guarantees is included in Note 19 to the Consolidated Financial Statements. Historically, the company has not had to make significant payments to satisfy guarantee obligations; however, the company believes it has the financial resources to satisfy these guarantees.

 

Master Operating Leases

At December 31, 2008, the company has one master operating lease program relating to miscellaneous short-lived equipment with an unamortized value of approximately $106 million. Lease payments for these assets totaled $55 million in 2008, $59 million in 2007 and $58 million in 2006, and were reported as operating expenses in the Consolidated Income Statements. The leases under this program are considered operating leases and accordingly

 

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the related assets and liabilities are not recorded on the Consolidated Balance Sheets. Furthermore, the lease payments associated with this program vary based on one month USD LIBOR. In November 2008, the lessor notified the company that the program will terminate by November 2009. Prior to that time, the company may either purchase the assets for their unamortized value or arrange for the sale of the assets and remit the proceeds to the lessor. If the assets are sold and the proceeds are less than the unamortized value, the company must pay to the lessor the difference between the proceeds and the unamortized value, up to the residual value guarantee, which totaled $92 million at December 31, 2008.

 

Contractual Obligations

Information related to the company’s significant contractual obligations is summarized in the following table:

 

 

 

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The company expects to meet its contractual obligations through its normal sources of liquidity and believes it has the financial resources to satisfy these contractual obligations should unforeseen circumstances arise.

 

Long-Term Employee Benefits

The company has various obligations to its employees and retirees. The company maintains retirement-related programs in many countries that have a long-term impact on the company’s earnings and cash flows. These plans are typically defined benefit pension plans, as well as medical, dental and life insurance benefits for pensioners and survivors and disability and life insurance protection for employees. Approximately 80 percent of the company’s worldwide benefit obligation for pensions and essentially all of the company’s worldwide other long-term employee benefit obligations are attributable to the U.S. benefit plans. Pension coverage for employees of the company’s non-U.S. consolidated subsidiaries is provided, to the extent deemed appropriate, through separate plans. The company regularly explores alternative solutions to meet its global pension obligations in the most cost effective manner possible as demographics, life expectancy and country-specific pension funding rules change. Where permitted by applicable law, the company reserves the right to change, modify or discontinue its plans that provide pension, medical, dental, life insurance and disability benefits.

 

Benefits under defined benefit pension plans are based primarily on years of service and employees’ pay near retirement. Pension benefits are paid primarily from trust funds established to comply with applicable laws and regulations. Unless required by law, the company does not make contributions that are in excess of tax deductible limits. The actuarial assumptions and procedures utilized are reviewed periodically by the plans’ actuaries to provide reasonable assurance that there will be adequate funds for the payment of benefits. No contributions are required to be made to the principal U.S. pension plan in 2009 and no contributions are currently anticipated. Contributions beyond 2009 are not determinable since the amount of any contribution is heavily dependent on the future economic environment, investment returns on pension trust assets, and pending regulation. U.S. pension benefits that exceed federal limitations are covered by separate unfunded plans and these benefits are paid to pensioners and survivors from operating cash flows.

 

Funding for each pension plan is governed by the rules of the sovereign country in which it operates. Thus, there is not necessarily a direct correlation between pension funding and pension expense. In general, however, improvements in plans funded status tends to moderate subsequent funding needs. The company contributed $252 million in 2008 and anticipates that it will make approximately $300 million in contributions in 2009 to pension plans other than the principal U.S. pension plan.

 

The Pension Protection Act of 2006 (the “Act”) was signed into law in the U.S. in August 2006. The Act introduces new funding requirements for single-employer defined benefit pension plans, provides guidelines for measuring pension plan assets and pension obligations for funding purposes, introduces benefit limitations for certain underfunded plans and raises tax deduction limits for contributions to retirement plans. The new funding requirements are generally effective for plan years beginning after December 31, 2007. The implementation of the provisions of this Act did not have a material impact on the company’s required contributions.

 

In August 2006, the company announced major changes to the pension and defined contribution benefits that cover the majority of its U.S. employees. Effective January 1, 2007, for such employees hired on that date or thereafter, and effective January 1, 2008, for such active employees on the rolls as of December 31, 2006, the company contributes 100 percent of the first 6 percent of the employee’s contribution election. Additionally, for such employees, the company contributes 3 percent of each eligible employee’s compensation regardless of the employee’s contribution election. The definition of eligible compensation has also been expanded to be similar to the definition of eligible compensation used in determining pension benefits. Such full service employees on the rolls as of December 31, 2006 will also accrue additional benefits in the pension plan, but the annual rate of pension accrual is about one-third of the previous rate. In addition, company-paid postretirement survivor benefits for such employees do not continue to grow after December 31, 2007. Such employees hired in the U.S. after December 31, 2006 do not participate in the pension and post-retirement medical, dental and life insurance plans.

 

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As a result of the amendment to the principal U.S. pension plan, the company was required to re-measure its pension expense for the remainder of 2006, reflecting plan assets and benefit obligations as of the re-measurement date. As a result of better than expected return on plan assets and a higher discount rate of 6 percent as of the re-measurement date, pre-tax pension expense decreased by $72 million for 2006. For 2007, the plan amendment resulted in a reduction in pension expense of about $40 million. For 2008, the plan amendment resulted in a reduction of about $40 million in combined pension and defined contribution plans expense. Additional information related to these changes in the plans noted above is included in Note 21 to the Consolidated Financial Statements.

 

On December 31, 2006, the company adopted SFAS 158 and recorded a $1,555 million after-tax charge to stockholder’s equity primarily due to reclassifying unrecognized actuarial losses and prior service costs related to the pension plans.

 

Medical, dental, life insurance and disability plans are unfunded and the cost of the approved claims is paid from operating cash flows. Pre-tax cash requirements to cover actual net claims costs and related administrative expenses were $326 million, $315 million and $335 million for 2008, 2007 and 2006, respectively. This amount is expected to be about $330 million in 2009. Changes in cash requirements reflect the net impact of higher per capita health care costs, demographic changes and changes in participant premiums, co-pays and deductibles.

 

The company’s income can be significantly affected by pension and defined contribution benefits as well as retiree medical, dental and life insurance benefits. The following table summarizes the extent to which the company’s income over each of the last 3 years was affected by pre-tax charges and credits related to long-term employee benefits.

 

 

 

The above (benefits)/charges for pension and other long-term employee benefits are determined as of the beginning of each year. The decrease in pension expense in 2008 primarily reflects favorable returns on pension assets during 2007. The decrease in pension expense in 2007 reflects favorable returns on pension assets during 2006, plan amendments and changes in demographics and discount rates. The increase in 2007 other long-term employee benefit charges principally reflects changes in demographics, discount rates and higher than expected health care costs.

 

The company’s key assumptions used in calculating its pension and other long-term employee benefits are the expected return on plan assets, the rate of compensation increases and the discount rate (see Note 21 to the Consolidated Financial Statements). For 2009, lower pension assets and higher health care cost are expected to result in an increase in long-term employee benefits expense of about $565 million.

 

Environmental Matters

DuPont operates global manufacturing, product handling and distribution facilities that are subject to a broad array of environmental laws and regulations. Company policy requires that all operations fully meet or exceed legal and regulatory requirements. In addition, DuPont implements voluntary programs to reduce air emissions, eliminate the generation of hazardous waste, decrease the volume of waste water discharges, increase the efficiency of energy use and reduce the generation of persistent, bioaccumulative and toxic materials. Management has noted a global upward trend in the amount and complexity of proposed chemicals regulation. The costs to comply with complex environmental laws and regulations, as well as internal voluntary programs and goals, are significant and will continue for the foreseeable future. While these costs may increase in the future, they are not expected to have a material impact on the company’s financial position, liquidity or results of operations.

 

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Pre-tax environmental expenses charged to current operations totaled $628 million in 2008 compared with $576 million in 2007 and $521 million in 2006. These expenses include the remediation accruals discussed below; operating, maintenance and depreciation costs for solid waste, air and water pollution control facilities and the costs of environmental research activities. The company expects expenses related to environmental research activities to become proportionally greater as the company increases its participation in businesses for which environmental assessments are required during product development. About 75 percent of total annual environmental expenses resulted from operations in the U.S.

 

In 2008, DuPont spent approximately $104 million on environmental capital projects either required by law or necessary to meet the company’s internal environmental goals. The company currently estimates expenditures for environmental-related capital projects to be approximately $98 million in 2009. In the U.S., significant capital expenditures are expected to be required over the next decade for treatment, storage and disposal facilities for solid and hazardous waste and for compliance with the Clean Air Act (CAA). Until all CAA regulatory requirements are established and known, considerable uncertainty will remain regarding future estimates for capital expenditures. Total CAA capital costs over the next two years are currently estimated to range from $40 million to $70 million.

 

Registration

The goal of the U.S. Toxic Substances Control Act (TSCA) is to prevent unreasonable risks of injury to health or the environment associated with the manufacture, processing, distribution in commerce, use, or disposal of chemical substances. Under TSCA, the EPA has established reporting, record-keeping, testing and control-related requirements for new and existing chemicals. In 1998, the EPA challenged the U.S. chemical industry to voluntarily conduct screening level health and environmental effects testing on nearly 3,000 High Production Volume (HPV) chemicals or to make equivalent information publicly available. An HPV chemical is a chemical listed on the 1990 Inventory Update Rule with annual U.S. cumulative production and imports of one million pounds or more. The company expects to complete its commitments regarding the HPV chemicals it volunteered to sponsor within the next two years. Approximately 500 chemicals in commerce have attained HPV status since 1990. The Extended HPV (EHPV) program is an expansion of the voluntary HPV program aimed at fulfilling the same goals on these 500 chemicals. DuPont committed to conduct testing on ten of these EHPV chemicals in 2008 and testing is underway and expected to be completed in the next two years.

 

In December 2006, the European Union adopted a new regulatory framework concerning the Registration, Evaluation and Authorization of Chemicals. This regulatory framework known as REACH entered into force on June 1, 2007. One of its main objectives is the protection of human health and the environment. REACH requires manufacturers and importers to gather information on the properties of their substances that meet certain volume or toxicological criteria and register the information in a central database to be maintained by a Chemical Agency in Finland. The Regulation also contains a mechanism for the progressive substitution of the most dangerous chemicals when suitable alternatives have been identified. DuPont met the deadline of December 1, 2008 for the pre-registration of those chemicals manufactured in, or imported into the European Economic Area in quantities of 1 metric ton or more that were not otherwise exempted. Complete registrations containing extensive data on the characteristics of the chemical will be required in three phases, depending on production usage or tonnage imported per year, and the toxicological criteria of the chemical. The first registrations are required in 2010; subsequent registrations are due in 2013 and 2018. The toxicological criteria considered for registration determinations are carcinogenicity, mutagenicity, reproductive toxicity (category 1 and 2), and aquatic toxicity. By June 1, 2013, the Commission will review whether substances with endocrine disruptive properties should be authorized if safer alternatives exist. By June 1, 2019, the Commission will determine whether to extend the duty to warn from substances of very high concern to those that could be dangerous or unpleasant. Management does not expect that the costs to comply with REACH will be material to its operations and consolidated financial position.

 

Climate Change

DuPont believes that climate change is an important global issue that will present numerous risks and opportunities to business and society at large. Since the early 1990s when DuPont began taking action to reduce greenhouse gas emissions, the company has achieved major global reductions in emissions. Voluntary emissions reductions implemented by DuPont and other companies are valuable but alone will not be sufficient to effectively address

 

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a problem of this scale. The Kyoto Protocol to the United Nations Framework Convention on Climate Change entered into force in February 2005 and, while not ratified by the U.S., has spurred policy action by many other countries and regions around the world including the European Union. Considerable international attention is now focused on development of a post-2012 international policy framework to guide international action to address climate change when the Kyoto Protocol expires in 2012. Proposed and existing legislative efforts to control or limit greenhouse gas emissions could affect the company’s energy source and supply choices as well as increase the cost of energy and raw materials derived from fossil fuels. However, the successful negotiation and implementation of sensible national, regional, and international climate change policies could provide the business community with greater certainty for the regulatory future, help guide investment decisions, and drive growth in demand for low-carbon and energy-efficient products, technologies, and services.

 

The company actively manages the potential risks that climate change could present, including those associated with the company’s physical assets, as well as regulatory and economic issues. DuPont looks for opportunities to make its overall portfolio less energy intensive, and energy use is one factor that is weighed when investments or divestitures are considered. DuPont is committed to continuing to bring to market more products and services to meet new and expanded demands of a low-carbon economy.

 

Remediation Expenditures

The RCRA extensively regulates and requires permits for the treatment, storage and disposal of hazardous waste. RCRA requires that permitted facilities undertake an assessment of environmental contamination at the facility. If conditions warrant, companies may be required to remediate contamination caused by prior operations. In contrast to CERCLA, the costs of the RCRA corrective action program are typically borne solely by the company. The company anticipates that significant ongoing expenditures for RCRA remediation activities may be required over the next two decades. Annual expenditures for the near term, however, are not expected to vary significantly from the range of such expenditures experienced in the past few years. Longer term, expenditures are subject to considerable uncertainty and may fluctuate significantly. The company’s expenditures associated with RCRA and similar remediation activities were approximately $51 million, $47 million and $44 million in 2008, 2007 and 2006, respectively.

 

From time to time, the company receives requests for information or notices of potential liability from the EPA and state environmental agencies alleging that the company is a PRP under CERCLA or similar state statutes. CERCLA is often referred to as the Superfund and requires companies to undertake certain investigative and research activities at sites where it conducts or once conducted operations or where company generated waste has been disposed. The company has also, on occasion, been engaged in cost recovery litigation initiated by those agencies or by private parties. These requests, notices and lawsuits assert potential liability for remediation costs at various sites that typically are not company owned, but allegedly contain wastes attributable to the company’s past operations.

 

As of December 31, 2008, the company had been notified of potential liability under CERCLA or state laws at 394 sites around the U.S., with active remediation under way at 151 of these sites. In addition, the company has resolved its liability at 160 sites, either by completing remedial actions with other PRPs or by participating in “de minimis buyouts” with other PRPs whose waste, like the company’s, represented only a small fraction of the total waste present at a site. The company received notice of potential liability at five new sites during 2008 compared with six similar notices in 2007 and 2006. The company’s expenditures associated with CERCLA and similar state remediation activities were approximately $17 million, $20 million and $19 million in 2008, 2007 and 2006, respectively.

 

For nearly all Superfund sites, the company’s potential liability will be significantly less than the total site remediation costs because the percentage of waste attributable to the company versus that attributable to all other PRPs is relatively low. Other PRPs at sites, where the company is a party, typically have the financial strength to meet their obligations and, where they do not, or where PRPs cannot be located, the company’s own share of liability has not materially increased. There are relatively few sites where the company is a major participant and the cost to the company of remediation at those sites and at all CERCLA sites in the aggregate, is not expected to have a material impact on the financial position, liquidity or results of operations of the company.

 

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Total expenditures for previously accrued remediation activities under CERCLA, RCRA and similar state laws were $81 million, $68 million and $64 million in 2008, 2007 and 2006, respectively.

 

Remediation Accruals

At December 31, 2008, the Consolidated Balance Sheets included an accrued liability of $379 million compared to $357 million at December 31, 2007. Considerable uncertainty exists with respect to environmental remediation costs and, under adverse changes in circumstances, potential liability may range up to two to three times the amount accrued as of December 31, 2008. Of the $379 million accrued liability, approximately 8 percent was reserved for non-U.S. facilities. Approximately 69 percent of the reserve balance was attributable to RCRA and similar remediation liabilities, while about 23 percent was attributable to CERCLA liabilities. Remediation accruals of $103 million, $76 million and $71 million were added to the reserve in 2008, 2007 and 2006, respectively.

 

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, the company 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.

 

In April 2007, the Department of Homeland Security (DHS) issued an interim final rule (Rule) that establishes risk-based performance standards for the security of U.S. chemical facilities. Covered chemical facilities are required to prepare Security Vulnerability Assessments that identify facility security vulnerabilities and to develop and implement Site Security Plans that include measures satisfying the identified risk-based performance standards. The Rule contains associated provisions addressing inspections and audits, recordkeeping, and the protection of information that constitutes Chemical-terrorism Vulnerability Information. DHS can seek compliance through the issuance of Orders, including Orders Assessing Civil Penalty and Orders for the Cessation of Operations.

 

In November of 2007, DHS finalized the list of chemicals regulated by the Rule and required facilities that have those chemicals in specified quantities to register with DHS. DuPont’s U.S. facilities have submitted this information and in June of 2008 DHS notified those facilities that were determined to be covered by the Rule’s security requirements. DuPont facilities that were notified by DHS conducted and submitted security vulnerability assessments to DHS. Once DHS has reviewed and approved those assessments, it will work with the company to establish security expectations specific to each facility. DuPont has already devoted substantial effort and resources in assessing security vulnerabilities and taking steps to reinforce security at its chemical manufacturing facilities. Until each facility develops and receives DHS approval for its site security plan, specific requirements can not be determined and considerable uncertainty exists regarding estimates for future capital expenditures. However, based on guidance issued by DHS regarding its risk-based performance standards, it is expected that new security measures will need to be implemented at the regulated facilities and that capital costs to implement such measures over the next three years will be about $50 million.

 

PFOA

DuPont manufactures fluoropolymer resins and dispersions as well as fluorotelomers, marketing many of them under the Teflon^®, Capstone ^tm and Zonyl^® brands. The fluoropolymer resins and dispersions businesses are part of the Electronic & Communication Technologies segment; the fluorotelomers business is part of the Safety & Protection segment.

 

Fluoropolymer resins and dispersions are high-performance materials with many end uses including architectural fabrics, telecommunications and electronic wiring insulation, automotive fuel systems, computer chip processing

 

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equipment, weather-resistant/breathable apparel and non-stick cookware. Fluorotelomers are used to make soil, stain and grease repellants for paper, apparel, upholstery and carpets as well as firefighting foams and coatings.

 

A form of PFOA (collectively, perfluorooctanoic acid and its salts, including the ammonium salt) is used as a processing agent to manufacture fluoropolymer resins and dispersions. For over 50 years, DuPont purchased its PFOA needs from a third party, but beginning in the fall of 2002, it began producing PFOA to support the manufacture of fluoropolymer resins and dispersions. PFOA is not used in the manufacture of fluorotelomers; however, it is an unintended by-product present at trace levels in some fluorotelomer-based products.

 

DuPont Performance Elastomers, LLC (DPE) uses PFOA in the manufacture of raw materials to manufacture Kalrez^® perfluoroelastomer parts. PFOA is also used in the manufacture of some fluoroelastomers marketed by DPE under the Viton^® trademark. The wholly owned subsidiary is a part of the Performance Materials segment.

 

PFOA is bio-persistent and has been detected at very low levels in the blood of the general population. As a result, the EPA initiated a process to enhance its understanding of the sources of PFOA in the environment and the pathways through which human exposure to PFOA is occurring. In 2005, the EPA issued a draft risk assessment on PFOA stating that cancer data for PFOA may be best described as “suggestive evidence of carcinogenicity, but not sufficient to assess human carcinogenic potential” under the EPA’s Guidelines for Carcinogen Risk Assessment. At the EPA’s request, the Science Advisory Board (SAB) reviewed and commented on the scientific soundness of this assessment. In its May 2006 report, the SAB set forth the view, based on laboratory studies in rats, that the human carcinogenic potential of PFOA is more consistent with the Guideline’s descriptor of “likely to be carcinogenic.” However, the report stated that additional data should be considered before the EPA finalizes its risk assessment of PFOA. The EPA has acknowledged that it will consider additional data, including new research and testing, and has indicated that another SAB review will be sought after the EPA makes its risk assessment. DuPont disputes the cancer classification recommended in the SAB report. Although the EPA has stated that there remains considerable scientific uncertainty regarding potential risks associated with PFOA, it also stated that it does not believe that there is any reason for consumers to stop using any products because of concerns about PFOA.

 

DuPont respects the EPA’s position raising questions about exposure routes and the potential toxicity of PFOA and DuPont and other companies have outlined plans to continue research, emission reduction and product stewardship activities to help address the EPA’s questions. In January 2006, DuPont pledged its commitment to the EPA’s 2010/15 PFOA Stewardship Program. The EPA program asks participants (1) to commit to achieve, no later than 2010, a 95 percent reduction in both facility emissions and product content levels of PFOA, PFOA precursors and related higher homologue chemicals and (2) to commit to working toward the elimination of PFOA, PFOA precursors and related higher homologue chemicals from emissions and products by no later than 2015. In October 2008, (for the year 2007), DuPont reported to the EPA that it had achieved a 98 percent reduction of PFOA emissions in U.S. manufacturing facilities. The company achieved about a 97 percent reduction in global manufacturing emissions, exceeding the EPA’s 2010 objective. DuPont will work individually and with others in the industry to inform EPA’s regulatory counterparts in the European Union, Canada, China and Japan about these activities and PFOA in general, including emissions reductions from DuPont’s facilities, reformulation of the company’s fluoropolymer dispersions and new manufacturing processes for fluorotelomers products.

 

In February 2007, DuPont announced its planned commitment to no longer make, use or buy PFOA by 2015 or sooner if possible. DuPont has developed PFOA replacement technology and successfully used this technology in its global manufacturing facilities to produce test materials for all major fluoropolymer product lines. DuPont has begun to supply fluoropolymer products made without PFOA to customers for testing in their processes, and is working to obtain the appropriate regulatory approvals for this technology.

 

In the meantime, DuPont introduced Echelon^tm technology which reduces PFOA content by 99 percent in aqueous fluoropolymer dispersion products. DuPont has now converted customers representing over 95 percent of the sales volume for these products to the newly formulated Echelon^tm technology. In the first quarter 2008, DuPont introduced its next generation fluorotelomer products. The products are marketed as DuPont^tm Capstone^tm products for use in home furnishings, fire fighting foam, fluorosurfactants, and leather goods. Additional products will be introduced for paper packaging, textiles, and other end use markets pending appropriate regulatory approvals.

 

Part II

 

 

 

In November 2006, DuPont entered into an Order on Consent under the Safe Drinking Water Act (SDWA) with the EPA establishing a precautionary interim screening level for PFOA of 0.5 part per billion (ppb) in drinking water sources in the area around the Washington Works site located in Parkersburg, West Virginia. In January 2009 the EPA issued a Provisional Health Advisory for PFOA of 0.4 ppb in drinking water.

 

In February 2007, the New Jersey Department of Environmental Protection (NJDEP) identified a preliminary drinking-water guidance level for PFOA of 0.04 ppb as part of the first phase of an ongoing process to establish a state drinking-water standard. While the NJDEP will continue sampling and evaluation of data from all sources, it has not recommended a change in consumption patterns.

 

Occupational exposure to PFOA has been associated with small increases in some lipids (e.g. cholesterol). These associations were also observed in a recent community study. It is not known whether these are causal associations. Based on health and toxicological studies, DuPont believes the weight of evidence indicates that PFOA exposure does not pose a health risk to the general public. To date, there are no human health effects known to be caused by PFOA, although study of the chemical continues.

 

There have not been any regulatory or government actions that would prohibit the production or use of PFOA. However, there can be no assurance that the EPA, any other regulatory entity or government body will not choose to regulate or prohibit the production or use of PFOA in the future. Products currently manufactured by the company representing approximately $1 billion of 2008 revenues could be affected by any such regulation or prohibition. DuPont has established reserves in connection with certain PFOA environmental and litigation matters (see Note 19 to the Consolidated Financial Statements).

 

Part II

 

Financial Instruments

Derivatives and Other Hedging Instruments

In the ordinary course of business, the company enters into contractual arrangements (derivatives) to hedge its exposure to foreign currency, interest rate and commodity price risks under established procedures and controls. Derivative instruments utilized include forwards, options, futures and swaps. The counterparties to these contractual arrangements are major financial institutions and major commodity exchanges.

 

The company hedges certain foreign currency denominated revenues, monetary assets and liabilities, certain business-specific foreign currency exposures and certain energy and agricultural feedstock purchases.

 

Concentration of Credit Risk

Financial instruments that potentially subject the company to significant concentrations of credit risk consist principally of cash, investments, accounts receivable and derivatives.

 

As part of the company’s risk management processes, it continuously evaluates the relative credit standing of all of the financial institutions that service DuPont and monitors actual exposures versus established limits. The company has not sustained credit losses from instruments held at financial institutions.

 

The company maintains cash and cash equivalents, marketable securities, derivatives and certain other financial instruments with various financial institutions. These financial institutions are generally highly rated and geographically dispersed and the company has a policy to limit the dollar amount of credit exposure with any one institution.

 

The company’s sales are not materially dependent on a single customer or small group of customers. As of December 31, 2008, no one individual customer balance represented more than 5 percent of the company’s total outstanding receivables balance. Credit risk associated with its receivables balance is representative of the geographic, industry and customer diversity associated with the company’s global businesses.

 

The company also maintains strong credit controls in evaluating and granting customer credit. As a result, it may require that customers provide some type of financial guarantee in certain circumstances. Length of terms for customer credit varies by industry and region.

 

Foreign Currency Risk

The company’s objective in managing exposure to foreign currency fluctuations is to reduce earnings and cash flow volatility associated with foreign currency rate changes. Accordingly, the company enters into various contracts that change in value as foreign exchange rates change to protect the U.S. Dollar value of its existing foreign currency-denominated assets, liabilities, commitments, and cash flows.

 

The company uses foreign currency exchange contracts to offset its net exposures, by currency, related to the foreign currency-denominated monetary assets and liabilities of its operations. The primary business objective of this hedging program is to maintain an approximately balanced position in foreign currencies so that exchange gains and losses resulting from exchange rate changes, net of related tax effects, are minimized. The company also uses foreign currency exchange contracts to offset a portion of the company’s exposure to certain foreign currency-denominated revenues so that gains and losses on these contracts offset changes in the U.S. Dollar value of the related foreign currency-denominated revenues. The objective of the hedge program is to reduce earnings and cash flow volatility related to changes in foreign currency exchange rates.

 

The following table summarizes the impacts of this program on the company’s results of operations for the years ended December 31, 2008, 2007 and 2006, and includes the company’s pro rata share of its equity affiliates’ exchange gains and losses and corresponding gains and losses on foreign currency exchange contracts.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk continued

 

From time to time, the company will enter into foreign currency exchange contracts to establish with certainty the USD amount of future firm commitments denominated in a foreign currency. Decisions regarding whether or not to hedge a given commitment are made on a case-by-case basis, taking into consideration the amount and duration of the exposure, market volatility and economic trends. Foreign currency exchange contracts are also used, from time to time, to manage near-term foreign currency cash requirements.

 

Interest Rate Risk

The company uses interest rate swaps to manage the interest rate mix of the total debt portfolio and related overall cost of borrowing.

 

Interest rate swaps involve the exchange of fixed or floating rate interest payments to effectively convert fixed rate debt into floating rate debt based on USD LIBOR. Interest rate swaps allow the company to maintain a target range of floating rate debt.

 

Commodity Price Risk

The company enters into over-the-counter and exchange-traded derivative commodity instruments to hedge its exposure to price fluctuations on certain raw material purchases.

 

A portion of certain energy feedstock purchases are hedged to reduce price volatility using fixed price swaps and options.

 

The company contracts with independent growers to produce finished seed inventory. Under these contracts, growers are compensated with bushel equivalents that are marketed to the company for the market price of grain during the contract period. Derivative instruments having a high correlation to the underlying commodity are used to hedge the commodity price risk involved in compensating growers.

 

The company utilizes derivatives to manage the price volatility of soybean meal. These derivative instruments have a high correlation to the underlying commodity exposure and are deemed effective in offsetting soybean meal feedstock price risk.

 

Additional details on these and other financial instruments are set forth in Note 23 to the Consolidated Financial Statements.

 

Sensitivity Analysis

The following table illustrates the fair values of outstanding derivative contracts at December 31, 2008 and 2007, and the effect on fair values of a hypothetical adverse change in the market prices or rates that existed at December 31, 2008 and 2007. The sensitivity for interest rate swaps is based on a one percent change in the market interest rate. Foreign currency, agricultural and energy derivative sensitivities are based on a 10 percent change in market rates.