DuPont 2006 Annual Report Download - page 29

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
the company conducts or once conducted operations or at sites where company-generated waste was disposed.
The accrual also includes a number of sites identified by the company for which it is probable that
environmental remediation will be required, but which are not currently the subject of CERCLA, RCRA or
state enforcement activities. Federal and state authorities may seek fines and penalties for violation of the
various laws and governmental regulations and could, among other things, impose liability on the company for
cleaning up the damage resulting from company-generated waste disposal. Over the next two decades, the
company could incur significant costs under both CERCLA and RCRA.
Remediation activities vary substantially in duration and cost from site to site. These activities and their
associated costs, depend on the mix of unique site characteristics, evolving remediation technologies, diverse
regulatory agencies and enforcement policies, as well as the presence or absence of PRPs. Therefore, it is
difficult to develop accurate estimates of future site remediation costs.
Legal Contingencies
The company’s results of operations could be affected by significant litigation adverse to the company,
including product liability claims, patent infringement claims and antitrust claims. The company records
reserves for legal matters when the information available indicates that it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated. Management makes adjustments to these
reserves to reflect the impact and status of negotiations, settlements, rulings, advice of counsel and other
information and events that may pertain to a particular matter. Predicting the outcome of claims and lawsuits
and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to
vary materially from estimates. In making determinations of likely outcomes of litigation matters, management
considers many factors. These factors include, but are not limited to, the nature of specific claims including
unasserted claims, the company’s experience with similar types of claims, the jurisdiction in which the matter
is filed, input from outside legal counsel, the likelihood of resolving the matter through alternative dispute
resolution mechanisms and the matter’s current status. Considerable judgment is required in determining
whether to establish a litigation reserve when an adverse judgment is rendered against the company in a court
proceeding. In such situations, the company will not recognize a loss if, based upon a thorough review of all
relevant facts and information, management believes that it is probable that the pending judgment will be
successfully overturned on appeal. A detailed discussion of significant litigation matters is contained in
Note 20 to the Consolidated Financial Statements.
Income Taxes
The breadth of the company’s operations and the global complexity of tax regulations require assessments of
uncertainties and judgments in estimating the ultimate taxes the company will pay. The final taxes paid are
dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes
of tax litigation and resolution of disputes arising from federal, state and international tax audits. The
resolution of these uncertainties may result in adjustments to the company’s tax assets and tax liabilities.
Deferred income taxes result from differences between the financial and tax basis of the company’s assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation
allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not
be realized. Significant judgment is required in evaluating the need for and magnitude of appropriate valuation
allowances against deferred tax assets. The realization of these assets is dependent on generating future taxable
income, as well as successful implementation of various tax planning strategies. For example, changes in facts
and circumstances that alter the probability that the company will realize deferred tax assets could result in
recording a valuation allowance, thereby reducing the deferred tax asset and generating a deferred tax expense
in the relevant period. In some situations these changes could be material.
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Part II