DuPont 2006 Annual Report Download - page 48

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued
As a result of the amendment to the principal U.S. pension plan, the company was required to remeasure its
pension expense for the remainder of 2006, reflecting plan assets and benefit obligations as of the
remeasurement date. Better than expected return on plan assets and a higher discount rate of 6 percent
decreased pretax pension expense for 2006 by $72 million. For 2007, the plan amendment is expected to result
in a reduction in pension expense of about $40 million. Additional information related to these changes in the
plans noted above is included in Note 22 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 losses related to the pension plans. Additional
information related to the company’s adoption of SFAS 158 is included in Note 2 to the company’s
Consolidated Financial Statements.
Medical, dental and life insurance plans are unfunded and the cost of the approved claims is paid from
operating cash flows. Pretax cash requirements to cover actual net claims costs and related administrative
expenses were $322 million, $395 million and $435 million for 2006, 2005 and 2004, respectively. This
amount is expected to be about $340 million in 2007. Changes in cash requirements during this period reflect
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 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 pretax charges and credits related to long-term employee benefits.
(Dollars in millions) 2006 2005 2004
Pension charges $191 $432 $ 997
Other postretirement benefit charges (credits) 138 218 (241)
Net charge $329 $650 $ 756
These expenses are determined as of the beginning of each year. The decrease in pension expense in 2006
reflects favorable returns on pension assets, plan amendments and changes in discount rates. The decrease in
2006 other postretirement benefit charges principally reflects the favorable medical trends in 2005 and
refinements in estimates to reflect the anticipated commencement of the Medicare prescription drug program.
The decrease in 2005 pension expense as compared to 2004 is primarily attributable to the absence of
$446 million net settlement and curtailment charges recorded in 2004 in connection with the sale of INVISTA.
In addition, the lower expense in 2005 reflects favorable returns on pension assets, higher contributions to
pension plans and changes in discount rates. The increase in 2005 other postretirement benefit expenses
principally reflects the absence of $436 million curtailment gains recognized in 2004 in connection with the
sale of INVISTA.
The company’s key assumptions used in calculating its long-term employee benefits are the expected return on
plan assets, the rate of compensation increases and the discount rate (see Note 22 to the Consolidated
Financial Statements). For 2007, the higher than expected returns on pension assets, the impact of the U.S. plan
amendment and changes in demographic and discount rates in 2006 are expected to result in a reduction in
pension and other postretirement benefit pretax expenses of about $200 million.
Environmental Matters
DuPont operates global manufacturing facilities, 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,
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Part II