CTA-PB

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2005, for E. I. du Pont de Nemours and Company (DuPont). The company operates globally across several segments including Agriculture & Nutrition, Coatings & Color Technologies, Electronic & Communication Technologies, Performance Materials, and Safety & Protection. The reporting period reflects the completion of the separation of the Textiles & Interiors business and the consolidation of the DuPont Dow Elastomers joint venture.

Key Financial Metrics

Margins: Cost of goods sold as a percent of net sales improved to 69% in 2005 from 72% in 2004. Selling, general, and administrative expenses remained approximately 11% of net sales.

Material Changes vs. Prior Period

• Profitability Surge: Net income for Q2 2005 more than doubled compared to Q2 2004. This increase is primarily attributed to the absence of significant charges incurred in the prior year, including $319 million in employee separation and asset impairment charges and $29 million in PFOA litigation charges.
• Portfolio Changes: Net sales were essentially flat year-over-year due to the absence of $550 million in Textiles & Interiors sales from the prior year, which was offset by a 6% increase in local currency selling prices and a 2% currency benefit.
• Other Income: Other income increased significantly to $611 million in Q2 2005 from $205 million in Q2 2004, driven by foreign currency exchange gains (weakening euro) and gains on asset sales (DuPont Photomasks and elastomers assets).
• Debt Levels: Total debt increased by approximately $3 billion from year-end 2004, primarily due to seasonal working capital builds in the Agriculture & Nutrition segment and increased commercial paper usage.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Earnings Guidance: DuPont expects full-year 2005 reported earnings per share of $2.75 to $2.80. This includes $0.11 per share in significant items recorded in the second quarter (gains on asset sales and tax audit settlements offset by restructuring charges).
• Cost Pressures: Energy and ingredient costs are expected to be at least $1 billion higher than 2004 levels, approximately double the original assumption. Oil and natural gas prices remain a key variable.
• Volume Trends: Volume is down in the motor vehicle market segment due to declining OEM builds. In agriculture, corn seed volume was below expectations due to lower acreage in Europe and supply constraints on stacked-trait seeds in North America.
• Repatriation: The company is evaluating the repatriation of $8 to $10 billion in foreign earnings under the American Jobs Creation Act, with a preliminary tax cost estimate of 3% to 4%. A decision is expected in the third quarter.

Risks and Contingencies

• PFOA Litigation: Significant ongoing litigation regarding perfluorooctanoic acid (PFOA). A settlement was reached for a class of 80,000 residents in West Virginia, with a reserve of $108 million established. Additional class actions have been filed in Florida and other states alleging harm from Teflon products. Management states a range of potential losses cannot be reasonably estimated.
• Benlate Litigation: Ongoing lawsuits regarding crop damage and personal injury claims related to the fungicide Benlate. As of June 30, 2005, 75 cases were pending. Costs incurred to date are approximately $1,900 million.
• Elastomers Antitrust: Investigations in the U.S., EU, and Canada regarding synthetic rubber markets. DuPont has established a reserve of $268 million (net of $18 million reimbursement from Dow) for anticipated losses. A plea agreement with the DOJ included an $84 fine.
• Environmental Remediation: A liability of $348 million is recorded for environmental matters. Management notes that under adverse circumstances, potential liability could range up to two to three times the accrued amount.

Investor Verification Checklist

• Significant Items Impact: Verify the sustainability of earnings by excluding the $111 million net benefit from asset sales and tax settlements included in Q2 2005 results.
• Energy Cost Exposure: Monitor the impact of rising oil and natural gas prices on margins, as costs are projected to be $1 billion higher than 2004 levels.
• PFOA Liability Cap: Review the status of the independent panel study on PFOA health effects; a finding of a probable link could trigger a medical monitoring program capped at $235 million and open the door to personal injury claims.
• Repatriation Decision: Track the third-quarter decision on repatriating foreign earnings, which could impact cash flow and debt reduction strategies.
• Working Capital Seasonality: Confirm the normalization of accounts receivable in the Agriculture & Nutrition segment in the second half of the year to assess cash flow stability.