CTA-PB

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2006, for E. I. du Pont de Nemours and Company (DuPont). The company operates as a large accelerated filer and is engaged in the production of agricultural, chemical, and industrial products. The reporting period reflects the execution of growth strategies, sustained pricing momentum, and the completion of the separation of the Textiles & Interiors business.

Key Financial Metrics

Margins: Cost of goods sold (COGS) was 70% of net sales for the quarter and 71% for the six-month period, an increase from 69% in the prior year periods, primarily due to higher raw material costs.

Material Changes Versus Prior Period

• Net Sales: Consolidated net sales decreased 1% to $7.4 billion for the quarter and 1% to $14.8 billion for the six months compared to the prior year. This decline is principally due to the absence of $213 million in sales from elastomers businesses transferred to The Dow Chemical Company in 2005. Excluding this portfolio change, sales increased due to higher prices and volume growth in Asia Pacific and Latin America.
• Net Income: Net income decreased 4% to $975 million for the quarter and 10% to $1,792 million for the six months. The decrease reflects higher energy and raw material costs and lower operating results in the Agriculture & Nutrition segment, partially offset by higher selling prices and licensing income.
• Other Income: Other income, net decreased significantly ($215 million for the quarter) primarily due to lower foreign currency exchange gains ($34 million in 2006 vs. $176 million in 2005) and the absence of one-time gains from asset sales in the prior year.
• Restructuring: A $135 million restructuring charge was recorded in the first quarter of 2006 within the Coatings & Color Technologies segment for a transformation plan involving 1,700 positions. No new restructuring charges were recorded in the second quarter.

Guidance, Outlook, and Risks

• Outlook: Management forecasts 2006 earnings per share of approximately $2.83. This outlook assumes continued pricing strength, new product introductions, and fixed cost control will offset higher energy and ingredient costs.
• Segment Performance:
  • Agriculture & Nutrition: Sales and income declined due to lower crop protection demand and adverse weather.
  • Coatings & Color Technologies: Sales increased 2% with strong demand for TiO2; income improved due to fixed cost reductions despite the Q1 restructuring charge.
  • Safety & Protection: Sales and income increased driven by higher selling prices and volume growth in aramid fibers.
• Risks and Contingencies:
  • PFOA Litigation: Significant ongoing litigation regarding perfluorooctanoic acid (PFOA) in drinking water and consumer products. Reserves of $27 million exist for the West Virginia settlement, with potential additional costs of up to $235 million if a science panel finds a probable link to disease (currently deemed remote by management).
  • Benlate Litigation: Ongoing lawsuits regarding crop damage; no reserves established as management believes the appeal of a recent adverse judgment will be resolved in its favor.
  • Antitrust: Ongoing investigations and settlements related to synthetic rubber markets; $144 million in reserves remain.
  • Environmental: $342 million liability recorded for environmental remediation, with potential liability ranging up to two to three times the accrued amount under adverse circumstances.
• Capital Allocation: The company completed an accelerated share repurchase agreement in July 2006, settling for $180 million. The Board has authorized a $5 billion buyback plan, with approximately $1.8 billion remaining to be executed over the next 12 months.

Investor Verification Checklist

• Verify the impact of the $135 million restructuring charge in Coatings & Color Technologies on future operating margins and the timeline for realizing the projected $135 million in annualized savings.
• Monitor the PFOA independent science panel findings; a conclusion of a probable link to disease could trigger an additional $235 million in medical monitoring costs.
• Assess the sustainability of pricing power in the Agriculture & Nutrition segment given the reported volume declines and competitive pressures.
• Review the cash flow from operations ($68 million for six months), which was significantly lower than the prior year, to ensure liquidity remains sufficient for working capital needs and dividend payments.
• Confirm the status of the accelerated share repurchase settlement and the execution of the remaining $1.8 billion of the authorized buyback plan.