XLON:0OQN E I du Pont de Nemours & Company Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XLON:0OQN Fair Value Estimate
Premium
XLON:0OQN Consider Buying
Premium
XLON:0OQN Consider Selling
Premium
XLON:0OQN Fair Value Uncertainty
Premium
XLON:0OQN Economic Moat
Premium
XLON:0OQN Stewardship
Premium
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-815
 
E. I. du Pont de Nemours and Company
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
51-0014090
(State or other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
1007 Market Street, Wilmington, Delaware 19898
(Address of Principal Executive Offices)
 
(302) 774-1000
(Registrant’s Telephone Number)
 
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  x   No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.)  Yes  x   No  o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large Accelerated Filer x
 
Accelerated Filer o
 
 
 
Non-Accelerated Filer o
 
Smaller reporting company o
 
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes  o   No  x
 
The Registrant had 930,373,000 shares (excludes 87,041,000 shares of treasury stock) of common stock, $0.30 par value, outstanding at July 16, 2012.
 
 



E. I. DU PONT DE NEMOURS AND COMPANY

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. 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



 
 


2


PART I.  FINANCIAL INFORMATION
 
Item 1.
CONSOLIDATED FINANCIAL STATEMENTS
 
E. I. du Pont de Nemours and Company
Consolidated Income Statements (Unaudited)
(Dollars in millions, except per share)
 
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2012
2011
2012
2011
Net sales
$
11,006

$
10,264

$
22,236

$
20,298

Other income, net
277

229

303

254

Total
11,283

10,493

22,539

20,552

Cost of goods sold and other operating charges
7,815

7,191

15,342

14,022

Selling, general and administrative expenses
1,186

1,136

2,355

2,163

Research and development expense
528

462

1,033

861

Interest expense
117

115

231

215

Total
9,646

8,904

18,961

17,261

Income before income taxes
1,637

1,589

3,578

3,291

Provision for income taxes
449

360

890

618

Net income
1,188

1,229

2,688

2,673

Less: Net income attributable to noncontrolling interests
9

11

21

24

Net income attributable to DuPont
$
1,179

$
1,218

$
2,667

$
2,649

Basic earnings per share of common stock
$
1.26

$
1.31

$
2.85

$
2.85

Diluted earnings per share of common stock
$
1.25

$
1.29

$
2.82

$
2.80

Dividends per share of common stock
$
0.43

$
0.41

$
0.84

$
0.82

 
See Notes to the Consolidated Financial Statements beginning on page 7.



3


E. I. du Pont de Nemours and Company
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in millions, except per share)

 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2012
2011
2012
2011
Net income
$
1,188

$
1,229

$
2,688

$
2,673

Other comprehensive income (loss), before tax:
 
 
 
 
      Cumulative translation adjustment
(412
)
73

(242
)
117

      Net revaluation and clearance of cash flow hedges to earnings:
 
 
 
 
      Additions and revaluations of derivatives designated as cash flow hedges
38

(5
)
36

3

      Clearance of hedge results to earnings
(23
)
25

(55
)
52

      Net revaluation and clearance of cash flow hedges to earnings
15

20

(19
)
55

      Pension benefit plans:
 
 
 
 
      Net gain (loss)
4

(3
)
(19
)
(3
)
      Prior service cost

(2
)
22

(2
)
      Reclassifications to net income:
 
 
 
 
                Amortization of prior service cost
3

4

7

8

                Amortization of loss
220

153

439

306

      Pension benefit plans, net
227

152

449

309

      Other benefit plans:
 
 
 
 
      Reclassifications to net income:
 
 
 
 
                Amortization of prior service benefit
(30
)
(31
)
(60
)
(61
)
                Amortization of loss
22

15

44

30

      Other benefit plans, net
(8
)
(16
)
(16
)
(31
)
      Net unrealized gain (loss) on securities
1

(1
)
2


Other comprehensive income (loss), before tax
(177
)
228

174

450

      Income tax expense related to items of other comprehensive income
(76
)
(54
)
(140
)
(116
)
Other comprehensive income (loss), net of tax
(253
)
174

34

334

Comprehensive income
935

1,403

2,722

3,007

      Less: Comprehensive income attributable to noncontrolling interests
34

9

48

21

Comprehensive income attributable to DuPont
$
901

$
1,394

$
2,674

$
2,986


See Notes to the Consolidated Financial Statements beginning on page 7.


4


E. I. du Pont de Nemours and Company
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in millions, except per share) 
 
June 30,
2012
December 31,
2011
Assets
 

 

Current assets
 

 

Cash and cash equivalents
$
3,506

$
3,586

Marketable securities
50

433

Accounts and notes receivable, net
9,476

6,022

Inventories
6,011

7,195

Prepaid expenses
151

151

Deferred income taxes
932

671

Total current assets
20,126

18,058

Property, plant and equipment, net of accumulated depreciation
   (June 30, 2012 - $19,962; December 31, 2011 - $19,349)
13,342

13,412

Goodwill
5,348

5,413

Other intangible assets
5,228

5,413

Investment in affiliates
1,087

1,117

Deferred income taxes
3,822

4,067

Other assets
1,078

1,012

Total
$
50,031

$
48,492

Liabilities and Equity
 

 

Current liabilities
 

 

Accounts payable
$
3,695

$
4,816

Short-term borrowings and capital lease obligations
3,696

817

Income taxes
930

255

Other accrued liabilities
4,117

5,297

Total current liabilities
12,438

11,185

Long-term borrowings and capital lease obligations
11,254

11,736

Other liabilities
14,643

15,508

Deferred income taxes
1,051

1,001

Total liabilities
39,386

39,430

Commitments and contingent liabilities




Stockholders’ equity
 

 

Preferred stock
237

237

Common stock, $0.30 par value; 1,800,000,000 shares authorized;
   Issued at June 30, 2012 - 1,017,365,000; December 31, 2011 - 1,013,164,000
305

304

Additional paid-in capital
10,494

10,107

Reinvested earnings
14,975

13,422

Accumulated other comprehensive loss
(8,743
)
(8,750
)
Common stock held in treasury, at cost
   (87,041,000 shares at June 30, 2012 and December 31, 2011)
(6,727
)
(6,727
)
Total DuPont stockholders’ equity
10,541

8,593

Noncontrolling interests
104

469

Total equity
10,645

9,062

Total
$
50,031

$
48,492

 
See Notes to the Consolidated Financial Statements beginning on page 7.

5


E. I. du Pont de Nemours and Company
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in millions)
 
 
Six Months Ended
 
June 30,
 
2012
2011
Operating activities
 

 

Net income
$
2,688

$
2,673

Adjustments to reconcile net income to cash used for operating activities:
 

 

Depreciation
702

607

Amortization of intangible assets
198

137

Contributions to pension plans
(692
)
(198
)
Other noncash charges and credits - net
314

624

Change in operating assets and liabilities - net
(4,327
)
(4,487
)
Cash used for operating activities
(1,117
)
(644
)
 
 
 
Investing activities
 

 

Purchases of property, plant and equipment
(696
)
(741
)
Investments in affiliates
(14
)
(27
)
Payments for businesses - net of cash acquired

(6,264
)
Proceeds from sales of assets - net of cash sold
166

59

Net decrease in short-term financial instruments
388

2,404

Forward exchange contract settlements
80

(454
)
Other investing activities - net
(7
)
(13
)
Cash used for investing activities
(83
)
(5,036
)
 
 
 
Financing activities
 

 

Dividends paid to stockholders
(788
)
(767
)
Net increase in borrowings
2,406

3,823

Repurchase of common stock
(400
)
(272
)
Proceeds from exercise of stock options
406

768

Payments for noncontrolling interest
(447
)

Other financing activities - net
27

(22
)
Cash provided by financing activities
1,204

3,530

Effect of exchange rate changes on cash
(84
)
155

Decrease in cash and cash equivalents
$
(80
)
$
(1,995
)
Cash and cash equivalents at beginning of period
3,586

4,263

Cash and cash equivalents at end of period
$
3,506

$
2,268

 
See Notes to the Consolidated Financial Statements beginning on page 7.


6

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)


Note 1.  Summary of Significant Accounting Policies
Interim Financial Statements
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included.  Results for interim periods should not be considered indicative of results for a full year.  These interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in the company’s Annual Report on Form 10-K for the year ended December 31, 2011, collectively referred to as the “2011 Annual Report”.  The Consolidated Financial Statements include the accounts of the company and all of its subsidiaries in which a controlling interest is maintained, as well as variable interest entities for which DuPont is the primary beneficiary. 

Note 2.  Other Income, Net 
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2012
2011
2012
2011
Cozaar®/Hyzaar® income
$
14

$
79

$
39

$
127

Royalty income
25

35

66

66

Interest income
37

32

60

60

Equity in earnings of affiliates, excluding exchange gains/losses
21

35

31

83

Gain on sale of equity method investment
122


122


Net gain on sales of other assets
5

33

10

39

Net exchange gains (losses) 1
28

4

(52
)
(139
)
Miscellaneous income and expenses, net 2
25

11

27

18

Total
$
277

$
229

$
303

$
254

 

1 
The company routinely uses foreign currency exchange contracts to offset its net exposures, by currency, related to the foreign currency-denominated monetary assets and liabilities. The objective of this program is to maintain an approximately balanced position in foreign currencies in order to minimize, on an after-tax basis, the effects of exchange rate changes on net monetary asset positions. The net pre-tax exchange gains and losses are recorded in other income, net and the related tax impact is recorded in provision for income taxes on the interim Consolidated Income Statements.
 
Miscellaneous income and expenses, net, generally includes interest items, insurance recoveries, litigation settlements and other items.

Note 3.  Provision for Income Taxes 
In the second quarter 2012, the company recorded a tax provision of $449, including $59 of tax expense primarily associated with the company’s policy of hedging the foreign currency-denominated monetary assets and liabilities of its operations.

Year-to-date 2012, the company recorded a tax provision of $890, including $23 of tax expense primarily associated with the company's policy of hedging the foreign currency denominated monetary assets and liabilities of its operations.

In the second quarter 2011, the company recorded a tax provision of $360, including $7 of tax benefit primarily associated with the company’s policy of hedging the foreign currency-denominated monetary assets and liabilities of its operations.

Year-to-date 2011, the company recorded a tax provision of $618, including $142 of tax benefit primarily associated with the company's policy of hedging the foreign currency denominated monetary assets and liabilities of its operations.

Each year the company files hundreds of tax returns in the various national, state and local income taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the taxing authorities. Positions challenged by the taxing authorities may be settled or appealed by the company. As a result, there is an uncertainty in income taxes recognized in the company’s financial statements in accordance with accounting for income taxes and accounting for uncertainty in income taxes. 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 possible outcomes, a current estimate of the range of increases or decreases that may occur within the next twelve months cannot be made.


7

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

Note 4.  Earnings Per Share of Common Stock 
Set forth below is a reconciliation of the numerator and denominator for basic and diluted earnings per share calculations for the periods indicated:
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2012
2011
2012
2011
Numerator:
 
 
 
 
Net income attributable to DuPont
$
1,179

$
1,218

$
2,667

$
2,649

Preferred dividends
(2
)
(2
)
(5
)
(5
)
Net income available to common stockholders
$
1,177

$
1,216

$
2,662

$
2,644

 
 
 
 
 
Denominator:
 
 
 
 
Weighted-average number of common shares outstanding - Basic
934,057,000

930,798,000

933,982,000

927,860,000

Dilutive effect of the company’s employee compensation plans
8,775,000

13,189,000

9,551,000

14,601,000

Weighted-average number of common shares outstanding - Diluted
942,832,000

943,987,000

943,533,000

942,461,000

 
The following average number of stock options were antidilutive, and therefore, were not included in the diluted earnings per share calculations: 
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2012
2011
2012
2011
Average number of stock options
12,750,000


11,737,000


 
The change in the average number of stock options that were antidilutive in the three and six months ended June 30, 2012 compared to the same periods last year was primarily due to changes in the company’s average stock price.

Note 5. Inventories 
 
June 30,
2012
December 31,
2011
Finished products
$
3,927

$
4,541

Semifinished products
1,746

2,293

Raw materials, stores and supplies
1,234

1,262

 
6,907

8,096

Adjustment of inventories to a last-in, first-out (LIFO) basis
(896
)
(901
)
Total
$
6,011

$
7,195

 

8

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

Note 6.  Goodwill and Other Intangible Assets 
There were no significant changes in goodwill for the six months ended June 30, 2012.

The gross carrying amounts and accumulated amortization of other intangible assets by major class are as follows: 
 
June 30, 2012
December 31, 2011
 
Gross
Accumulated
Amortization
Net
Gross
Accumulated
Amortization
Net
Intangible assets subject to amortization (Definite-lived):
 

 

 

 

 

 

Customer lists
$
1,802

$
(274
)
$
1,528

$
1,841

$
(220
)
$
1,621

Patents
510

(101
)
409

518

(77
)
441

Purchased and licensed technology
1,921

(976
)
945

1,854

(878
)
976

Trademarks
57

(27
)
30

57

(25
)
32

Other 1
327

(153
)
174

330

(151
)
179

 
4,617

(1,531
)
3,086

4,600

(1,351
)
3,249

 
 
 
 
 
 
 
Intangible assets not subject to amortization(Indefinite-lived):
 

 

 

 

 

 

In-process research and development
69


69

70


70

Microbial cell factories 2
306


306

306


306

Pioneer germplasm 3
975


975

975


975

Trademarks/tradenames
792


792

813


813

 
2,142


2,142

2,164


2,164

Total
$
6,759

$
(1,531
)
$
5,228

$
6,764

$
(1,351
)
$
5,413


 
Primarily consists of sales and grower networks, marketing and manufacturing alliances and noncompetition agreements.
 
Microbial cell factories, derived from natural microbes, are used to sustainably produce enzymes, peptides and chemicals using natural metabolic processes. The company recognized the microbial cell factories as an intangible asset upon the acquisition of Danisco. This intangible asset is expected to contribute to cash flows beyond the foreseeable future and there are no legal, regulatory, contractual, or other factors which limit its useful life.
 
Pioneer germplasm is the pool of genetic source material and body of knowledge gained from the development and delivery stage of plant breeding. The company recognized germplasm as an intangible asset upon the acquisition of Pioneer. This intangible asset is expected to contribute to cash flows beyond the foreseeable future and there are no legal, regulatory, contractual, or other factors which limit its useful life.       

The aggregate pre-tax amortization expense for definite-lived intangible assets was $92 and $198 for the three and six months ended June 30, 2012, respectively, and $70 and $137 for the three and six months ended June 30, 2011, respectively. The estimated aggregate pre-tax amortization expense for the remainder of 2012 and each of the next five years is approximately $140, $332, $348, $351, $308 and $180.

Note 7.  Commitments and Contingent Liabilities 
Guarantees 
Indemnifications
In connection with acquisitions and divestitures, the company has indemnified respective parties against certain liabilities that may arise in connection with these transactions and business activities prior to the 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. 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. The carrying amounts recorded for all indemnifications as of June 30, 2012 and December 31, 2011 were $241 and $105, respectively. The increase in the carrying amount at June 30, 2012 primarily relates to the settlement of the 2008 lawsuit filed by subsidiaries of Koch Industries, Inc. (INVISTA) alleging that certain representations and warranties in the Purchase and Sale Agreement concerning the sale of the majority of the net assets of Textiles and Interiors were breached.

9

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)


Obligations for Equity Affiliates & Others 
The company has directly guaranteed various debt obligations under agreements with third parties related to equity affiliates, customers and suppliers. At June 30, 2012 and December 31, 2011, the company had directly guaranteed $485 and $563, respectively, of such obligations. These amounts represent 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.

The company assesses the payment/performance risk by assigning default rates based on the duration of the guarantees. These default rates are assigned based on the external credit rating of the counterparty or through internal credit analysis and historical default history for counterparties that do not have published credit ratings. For counterparties without an external rating or available credit history, a cumulative average default rate is used.

In certain cases, the company has recourse to assets held as collateral, as well as personal guarantees from customers and suppliers. Assuming liquidation, these assets are estimated to cover approximately 48 percent of the $287 of guaranteed obligations of customers and suppliers. Set forth below are the company's guaranteed obligations at June 30, 2012:
 
Short-Term
Long-Term
Total
Obligations for customers and suppliers1:
 

 

 

Bank borrowings (terms up to 5 years)
$
167

$
120

$
287

Obligations for equity affiliates2:
 

 

 

Bank borrowings (terms up to 1 year)
198


198

Total
$
365

$
120

$
485

 
1 
Existing guarantees for customers and suppliers arose as part of contractual agreements.
2   
Existing guarantees for equity affiliates arose for liquidity needs in normal operations.

Imprelis® 
The company has received claims and been served with multiple lawsuits alleging that the use of Imprelis® herbicide caused damage to certain trees. The lawsuits seeking class action status have been consolidated in federal court in Philadelphia, Pennsylvania. In addition, about 60 individual actions have been filed in state court in various jurisdictions. DuPont is seeking to remove these cases to federal court.

In August 2011, the company suspended sales of Imprelis® and in September began a process to fairly resolve claims associated with the use of Imprelis®. The deadline for property owners to file claims was February 1, 2012, although DuPont continues to receive claims at a declining rate which it expects to consider as part of the claims resolution process. However, the company believes that the number of unasserted claims is limited due to the fact that sales were suspended in August 2011 and the product was last applied during the 2011 spring application season.

The company has established review processes to verify and evaluate damage claims. There are several variables that impact the evaluation process including the number of trees on a property, the species of tree with reported damage, the height of the tree, the extent of damage and the possibility for trees to naturally recover over time. Upon receiving claims, DuPont verifies their accuracy and validity which often requires physical review of the property.

At June 30, 2012, DuPont had recorded charges of $490 related to the Imprelis® matter, which included charges of $265 and $315 recorded during the second quarter and year-to-date 2012, respectively. It is reasonably possible that additional charges could result related to this matter. While there is a high degree of uncertainty, total charges could range as high as $575. DuPont has submitted and will continue to submit requests for payment to its insurance carriers for costs associated with this matter in excess of $100.

Litigation
The company is subject to various legal proceedings arising out of the normal course of its business including product liability, intellectual property, commercial, environmental and antitrust lawsuits. It is not possible to predict the outcome of these various proceedings. Except as otherwise noted, management does not anticipate their resolution will have a materially adverse effect on the company's consolidated financial position or liquidity.  However, the ultimate liabilities could be significant to results of operations in the period recognized.  
 

10

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

PFOA 
DuPont uses PFOA (collectively, perfluorooctanoic acids and its salts, including the ammonium salt), as a processing aid to manufacture fluoropolymer resins and dispersions at various sites around the world including its Washington Works plant in West Virginia.  At June 30, 2012, DuPont has accruals of $16 related to the PFOA matters discussed below.

The accrual includes charges related to DuPont's obligations under agreements with the U.S. Environmental Protection Agency and voluntary commitments to the New Jersey Department of Environmental Protection.  These obligations include surveying, sampling and testing drinking water in and around certain company sites and offering treatment or an alternative supply of drinking water if tests indicate the presence of PFOA in drinking water at or greater than the national Provisional Health Advisory.

Drinking Water Actions
In August 2001, a class action, captioned Leach v DuPont, was filed in West Virginia state court alleging that residents living near the Washington Works facility had suffered, or may suffer, deleterious health effects from exposure to PFOA in drinking water.

DuPont and attorneys for the class reached a settlement in 2004 that binds about 80,000 residents. In 2005, DuPont paid the plaintiffs’ attorneys’ fees and expenses of $23 and made a payment of $70, which class counsel designated to fund a community health project.  The company is also funding a series of health studies by an independent science panel of experts (the “C8 Science Panel”) in the communities exposed to PFOA to evaluate available scientific evidence on whether any probable link exists, as defined in the settlement agreement, between exposure to PFOA and human disease.  The company expects the C8 Science Panel to complete these health studies through October 2012 at a total estimated cost of $33

In December 2011, the C8 Science Panel concluded that there is a probable link, as defined in the settlement agreement, between exposure to PFOA and pregnancy-induced hypertension, which includes preeclampsia. In April 2012, the C8 Science Panel announced its probable link determinations regarding cancer and adult onset diabetes. The C8 Science Panel found a probable link between exposure to PFOA and two categories of cancer (kidney and testicular). A panel of medical experts will determine an appropriate medical monitoring protocol, if any, as a result of these findings. If a medical monitoring protocol for any of these diseases is defined, DuPont is required to fund a medical monitoring program to pay for such medical testing. Plaintiffs may pursue personal injury claims against DuPont only for those human diseases for which the C8 Science Panel determines a probable link exists once the C8 Science Panel completes its work. In January 2012, the company put $1 in an escrow account as required by the settlement agreement. The company will reassess its liability based on the medical monitoring panel's determination since costs are not reasonably estimable until a medical monitoring protocol, if any, is identified. The company will continue to reassess its liability based on the C8 Science Panel's future probable link findings, if any, and associated medical monitoring protocols, if any. Under the settlement agreement, the company's total obligation to pay for medical monitoring cannot exceed $235. In addition, the company must continue to provide water treatment designed to reduce the level of PFOA in water to six area water districts, including the Little Hocking Water Association (LHWA), and private well users.

An Ohio action brought by the LHWA is currently in discovery. In addition to general claims of PFOA contamination of drinking water, the action claims “imminent and substantial endangerment to health and or the environment” under the Resource Conservation and Recovery Act (RCRA). DuPont denies these claims and is defending itself vigorously.
 
While DuPont believes that it is reasonably possible that it could incur losses related to PFOA matters in addition to those matters discussed above for which it has established accruals, a range of such losses, if any, cannot be reasonably estimated at this time.

Environmental 
The company is also subject to contingencies pursuant to environmental laws and regulations that in the future may require the company to take further action to correct the effects on the environment of prior disposal practices or releases of chemical or petroleum substances by the company or other parties. The company accrues for environmental remediation activities consistent with the policy as described in the company's 2011 Annual Report in Note 1, “Summary of Significant Accounting Policies.” Much of this liability results from the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, often referred to as Superfund), RCRA and similar state and global laws. These laws require the company to undertake certain investigative, remediation and restoration activities at sites where the company conducts or once conducted operations or at sites where company-generated waste was disposed. The accrual also includes estimated costs related to 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 enforcement activities.

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,

11

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

as well as the presence or absence of potentially responsible parties. At June 30, 2012, the Condensed Consolidated Balance Sheet included a liability of $430, relating to these matters and, in management's opinion, is appropriate based on existing facts and circumstances. The average time frame, over which the accrued or presently unrecognized amounts may be paid, based on past history, is estimated to be 15-20 years. Considerable uncertainty exists with respect to these costs and, under adverse changes in circumstances, potential liability may range up to three times the amount accrued as of June 30, 2012.

Other 
The company has various purchase commitments incident to the ordinary conduct of business. In the aggregate, such commitments are not at prices in excess of current market.

Note 8.  Stockholders’ Equity 
Share Repurchase Program
During the first quarter 2012, the company entered into an agreement with a financial institution in which the company paid $400 for the purchase of shares of common stock which were received in the second quarter 2012. As a result, during the second quarter 2012, the company purchased and retired 7.8 million shares in connection with this agreement. These purchases completed the 2001 $2,000 share buyback plan and began purchases under the 2011 $2,000 share buyback plan. Under the completed 2001 plan, the company purchased a total of 42.0 million shares. Under the 2011 plan, the company has purchased 5.5 million shares at a total cost of $284 as of June 30, 2012. There is no required completion date for the purchases under the 2011 plan.

During the three months ended June 30, 2011, there were no purchases of stock under the 2001 plan. During the six months ended June 30, 2011, the company purchased and retired 5.0 million shares at a total cost of $272 under this plan.

Noncontrolling Interest
In May 2012, the company completed the acquisition of the remaining 28 percent interest in the Solae, LLC joint venture from Bunge Limited for $447. As the purchase of the remaining interest did not result in a change of control, the difference between the carrying value of the noncontrolling interest of $362 and the consideration paid, net of taxes of $74, was recorded as an $11 reduction to additional paid-in capital.


12

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

Other Comprehensive Income
A summary of the changes in other comprehensive income for the three and six months ended June 30, 2012 and 2011 is provided as follows:
 
Three Months Ended
Three Months Ended
 
June 30, 2012
June 30, 2011
 
Pre-Tax
Tax
After-Tax
Pre-Tax
Tax
After-Tax
Cumulative translation adjustment
$
(412
)
$

$
(412
)
$
73

$

$
73

Net revaluation and clearance of cash flow hedges to earnings:
 
 
 
 
 
 
Additions and revaluations of derivatives designated as cash flow hedges
38

(15
)
23

(5
)
2

(3
)
Clearance of hedge results to earnings
(23
)
10

(13
)
25

(9
)
16

Net revaluation and clearance of cash flow hedges to earnings
15

(5
)
10

20

(7
)
13

Pension benefit plans:
 
 
 
 
 
 
Net gain (loss)
4

7

11

(3
)
1

(2
)
Prior service cost

(1
)
(1
)
(2
)

(2
)
Amortization of prior service cost
3

(1
)
2

4

(1
)
3

Amortization of loss
220

(77
)
143

153

(53
)
100

Pension benefit plans, net
227

(72
)
155

152

(53
)
99

Other benefit plans:
 
 
 
 
 
 
Amortization of prior service benefit
(30
)
9

(21
)
(31
)
11

(20
)
Amortization of loss
22

(7
)
15

15

(5
)
10

Other benefit plans, net
(8
)
2

(6
)
(16
)
6

(10
)
Net unrealized gain (loss) on securities:
 
 
 
 
 
 
Unrealized loss on securities arising during the period
(1
)

(1
)
(1
)

(1
)
Reclassification of loss realized in net income
2

(1
)
1




Net unrealized gain (loss) on securities
1

(1
)

(1
)

(1
)
Other comprehensive (loss) income
$
(177
)
$
(76
)
$
(253
)
$
228

$
(54
)
$
174



13

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

 
Six Months Ended
Six Months Ended
 
June 30, 2012
June 30, 2011
 
Pre-Tax
Tax
After-Tax
Pre-Tax
Tax
After-Tax
Cumulative translation adjustment
$
(242
)
$

$
(242
)
$
117

$

$
117

Net revaluation and clearance of cash flow hedges to earnings:
 
 
 
 
 
 
Additions and revaluations of derivatives designated as cash flow hedges
36

(15
)
21

3

(1
)
2

Clearance of hedge results to earnings
(55
)
23

(32
)
52

(20
)
32

Net revaluation and clearance of cash flow hedges to earnings
(19
)
8

(11
)
55

(21
)
34

Pension benefit plans:
 
 
 
 
 
 
Net loss
(19
)
10

(9
)
(3
)
1

(2
)
Prior service cost
22

(8
)
14

(2
)

(2
)
Amortization of prior service cost
7

(2
)
5

8

(2
)
6

Amortization of loss
439

(152
)
287

306

(106
)
200

Pension benefit plans, net
449

(152
)
297

309

(107
)
202

Other benefit plans:
 
 
 
 
 
 
Amortization of prior service benefit
(60
)
20

(40
)
(61
)
22

(39
)
Amortization of loss
44

(15
)
29

30

(10
)
20

Other benefit plans, net
(16
)
5

(11
)
(31
)
12

(19
)
Net unrealized gain on securities:
 
 
 
 
 
 
Unrealized gain on securities arising during the period






Reclassification of loss realized in net income
2

(1
)
1




Unrealized gain on securities
2

(1
)
1




Other comprehensive income
$
174

$
(140
)
$
34

$
450

$
(116
)
$
334



Note 9. Financial Instruments
Debt
The estimated fair value of the company's total debt including interest rate financial instruments was determined using level 2 inputs within the fair value hierarchy, as described in the company's 2011 Annual Report in Note 1, Summary of Significant Accounting Policies. Based on quoted market prices for the same or similar issues or on current rates offered to the company for debt of the same remaining maturities, the fair value of the company's debt was approximately $16,313 and $13,880 as of June 30, 2012 and December 31, 2011, respectively.

Cash Equivalents
The estimated fair value of the company's cash equivalents was determined using level 2 inputs. Based on current interest rates for similar investments with comparable credit risk and time to maturity, the fair value of the company's cash equivalents approximates its stated value of $1,628 and $1,932 as of June 30, 2012 and December 31, 2011, respectively.

Derivative Instruments
Objectives and Strategies for Holding Derivative Instruments
In the ordinary course of business, the company enters into contractual arrangements (derivatives) to reduce its exposure to foreign currency, interest rate and commodity price risks. The company has established a variety of derivative programs to be utilized for financial risk management. These programs reflect varying levels of exposure coverage and time horizons based on an assessment of risk.

Derivative programs have procedures and controls and are approved by the Corporate Financial Risk Management Committee, consistent with the company's financial risk management policies and guidelines. Derivative instruments used are forwards, options, futures and swaps. The company has not designated any nonderivatives as hedging instruments.
 
The company's financial risk management procedures also address counterparty credit approval, limits and routine exposure monitoring and reporting. The counterparties to these contractual arrangements are major financial institutions and major

14

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

commodity exchanges. The company is exposed to credit loss in the event of nonperformance by these counterparties. The company anticipates performance by counterparties to these contracts and therefore no material loss is expected. Market and counterparty credit risks associated with these instruments are regularly reported to management.

The notional amounts of the company's derivative instruments were as follows:
 
June 30, 2012
December 31, 2011
Derivatives designated as hedging instruments:
 
 
Interest rate swaps
$
1,000

$
1,000

Foreign currency contracts
1,547

2,032

Commodity contracts
90

553

Derivatives not designated as hedging instruments:


Foreign currency contracts
8,040

6,444

Commodity contracts
95

437


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 value of its existing foreign currency-denominated assets, liabilities, commitments and cash flows.

The company routinely uses forward 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 USD 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.

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 for 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 achieve a target range of floating rate debt.

Commodity Price Risk
Commodity price risk management programs serve to reduce exposure to price fluctuations on purchases of inventory such as copper, corn, soybeans, soybean meal and natural gas. The company enters into over-the-counter and exchange-traded derivative commodity instruments to hedge the commodity price risk associated with energy feedstock and agricultural commodity exposures.

Fair Value Hedges
Interest Rate Swaps
At June 30, 2012, the company maintained a number of interest rate swaps, which were implemented at the time debt instruments were issued. All interest rate swaps qualify for the shortcut method of hedge accounting, thus there is no ineffectiveness related to these hedges.

Cash Flow Hedges
Foreign Currency Contracts
The company uses foreign currency exchange instruments such as forwards and options 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 USD value of the related foreign currency-denominated revenues.

Commodity Contracts
The company enters into over-the-counter and exchange-traded derivative commodity instruments, including options, futures and swaps, to hedge the commodity price risk associated with energy feedstock and agriculture commodity exposures.


15

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

While each risk management program has a different time maturity period, most programs currently do not extend beyond the next two-year period. Cash flow hedge results are reclassified into earnings during the same period in which the related exposure impacts earnings. Reclassifications are made sooner if it appears that a forecasted transaction will not materialize. The following table summarizes the after-tax effect of cash flow hedges on accumulated other comprehensive income (loss) for the three and six months ended June 30, 2012 and 2011:
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2012
2011
2012
2011
Beginning balance
$
19

$
(9
)
$
41

$
(31
)
Net revaluation and clearance of cash flow hedges to earnings
10

15

(12
)
37

Ending balance
$
29

$
6

$
29

$
6


At June 30, 2012, the after-tax amount expected to be reclassified from accumulated other comprehensive income (loss) into earnings over the next 12 months is $28.

Derivatives not Designated in Hedging Relationships
Foreign Currency Contracts
The company routinely uses forward exchange contracts to reduce its net exposure, by currency, related to foreign currency-denominated monetary assets and liabilities of its operations so that exchange gains and losses resulting from exchange rate changes are minimized. The netting of such exposures precludes the use of hedge accounting; however, the required revaluation of the forward contracts and the associated foreign currency-denominated monetary assets and liabilities intends to achieve a minimal earnings impact, after taxes. Additionally, the company has cross-currency swaps to hedge foreign currency fluctuations on long-term intercompany loans.

Commodity Contracts
The company utilizes options, futures and swaps that are not designated as hedging instruments to reduce exposure to commodity price fluctuations on purchases of inventory such as corn, soybeans and soybean meal.


16

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

Fair Values of Derivative Instruments
The table below presents the fair values of the company's derivative assets and liabilities within the fair value hierarchy, as described in the company's 2011 Annual Report in Note 1, “Summary of Significant Accounting Policies.”
 
 
Fair Value Using Level 2 Inputs
 
Balance Sheet Location
June 30, 2012
December 31, 2011
Asset derivatives:
 
 
 
Derivatives designated as hedging instruments:
 
 
 
Interest rate swaps
Other assets
$
62

$
66

Foreign currency contracts
Accounts and notes receivable, net
35

44

 
 
97

110

Derivatives not designated as hedging instruments:
 
 
 
Foreign currency contracts
Accounts and notes receivable, net
102

100

Foreign currency contracts
Other assets
83

43

 
 
185

143

Total asset derivatives
 
$
282

$
253

Liability derivatives:
 
 
 
Derivatives designated as hedging instruments:
 
 
 
Foreign currency contracts
Other accrued liabilities
$
1

$
12

Commodity contracts
Other accrued liabilities
1

1

 
 
2

13

Derivatives not designated as hedging instruments:
 
 
 
Foreign currency contracts
Other accrued liabilities
32

21

Commodity contracts
Other accrued liabilities
2

2

 
 
34

23

Total liability derivatives
 
$
36

$
36



17

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

Effect of Derivative Instruments
 
Amount of Gain (Loss)
Recognized in OCI1
(Effective Portion)
Amount of Gain (Loss)
Recognized in Income2
 
Three Months Ended June 30,
2012
2011
2012
2011
Income Statement Classification
Derivatives designated as hedging instruments:
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
Interest rate swaps
$

$

$
(1
)
$
20

Interest expense3
Cash flow hedges:
 
 
 
 
 
Foreign currency contracts
27

1

4

(7
)
Net sales
Commodity contracts
12

(4
)
19

(18
)
COGS4
 
39

(3
)
22

(5
)
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
Foreign currency contracts


238

(51
)
Other income, net5
Commodity contracts


(3
)
10

COGS4
Interest rate swaps



(1
)
COGS4
 


235

(42
)
 
Total derivatives
$
39

$
(3
)
$
257

$
(47
)
 

 
Amount of Gain (Loss)
Recognized in OCI1
(Effective Portion)
Amount of Gain (Loss)
Recognized in Income2
 
Six Months Ended June 30,
2012
2011
2012
2011
Income Statement Classification
Derivatives designated as hedging instruments:
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
Interest rate swaps
$

$

$
(4
)
$
9

Interest expense3
Cash flow hedges:
 
 
 
 
 
Foreign currency contracts
17

(20
)
7

(12
)
Net sales
Commodity contracts
18

26

48

(40
)
COGS4
 
35

6

51

(43
)
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
Foreign currency contracts


110

(424
)
Other income, net5
Commodity contracts


(14
)
11

COGS4
Interest rate swaps



(1
)
COGS4
 


96

(414
)
 
Total derivatives
$
35

$
6

$
147

$
(457
)
 

 
OCI is defined as other comprehensive income (loss).
 
For cash flow hedges, this represents the effective portion of the gain (loss) reclassified from accumulated OCI into income during the period. For the three and six months ended June 30, 2012 and 2011, there was no material ineffectiveness with regard to the company's cash flow hedges.
 
Gain (loss) recognized in income of derivative is offset to $0 by gain (loss) recognized in income of the hedged item.
 
COGS is defined as costs of goods sold and other operating charges.
 
Gain (loss) recognized in other income, net, was partially offset by the related gain (loss) on the foreign currency-denominated monetary assets and liabilities of the company's operations, which were $(210) and $55 for the three months ended June 30, 2012 and 2011, respectively, and $(162) and $285 for the six months ended June 30, 2012 and 2011, respectively.

18

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)



Note 10. Long-Term Employee Benefits 
The following sets forth the components of the company’s net periodic benefit cost for pensions:  
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2012
2011
2012
2011
Service cost
$
66

$
61

$
134

$
120

Interest cost
295

314

592

624

Expected return on plan assets
(379
)
(369
)
(760
)
(734
)
Amortization of unrecognized loss
220

153

439

306

Amortization of prior service cost
3

4

7

8

Net periodic benefit cost
$
205

$
163

$
412

$
324

 
The following sets forth the components of the company’s net periodic benefit cost for other long-term employee benefits:  
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2012
2011
2012
2011
Service cost
$
10

$
9

$
19

$
17

Interest cost
48

53

96

106

Amortization of unrecognized loss
22

15

44

30

Amortization of prior service benefit
(30
)
(31
)
(60
)
(61
)
Net periodic benefit cost
$
50

$
46

$
99

$
92

 
Note 11.  Segment Information 
Segment sales include transfers to another business segment. Products are transferred between segments on a basis intended to reflect, as nearly as practicable, the market value of the products. Segment pre-tax operating income (loss) (PTOI) is defined as income (loss) before income taxes excluding exchange gains (losses), corporate expenses and interest.

Three Months
Ended June 30,
Agriculture1
Electronics &
Communications
Industrial Biosciences
Nutrition & Health
Performance
Chemicals
Performance
Coatings
Performance
Materials
Safety &
Protection
Pharm-aceuticals
Other
Total
2012
 

 
 

 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Segment sales
$
3,388

 
$
795

 
$
300

 
$
885

 
$
1,968

 
$
1,089

 
$
1,699

 
$
986

 
$

 
$
1

 
$
11,111

Less: Transfers
2

 
5

 
2

 

 
69

 

 
24

 
3

 

 

 
105

Net sales
3,386

 
790

 
298

 
885

 
1,899

 
1,089

 
1,675

 
983

 

 
1

 
11,006

PTOI
661

2 
197

3 
44

 
112

 
538

 
92

 
317

 
127

 
16

 
(206
)
4 
1,898

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
 

 
 

 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Segment sales
$
2,997

 
$
891

 
$
123

 
$
486

 
$
1,995

 
$
1,105

 
$
1,745

 
$
1,025

 
$

 
$
1

 
$
10,368

Less: Transfers

 
5

 
1

 

 
69

 

 
26

 
3

 

 

 
104

Net sales
2,997

 
886

 
122

 
486

 
1,926

 
1,105

 
1,719

 
1,022

 

 
1

 
10,264

PTOI
826

 
103

 
(7
)
5 

5

5 
503

 
73

 
254

 
143

 
80

 
(37
)
 
1,943



19

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

Six Months
Ended June 30,
Agriculture1
Electronics &
Communications
Industrial Biosciences
Nutrition & Health
Performance
Chemicals
Performance
Coatings
Performance
Materials
Safety &
Protection
Pharm-aceuticals
Other
Total
2012
 

 
 

 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Segment sales
$
7,468

 
$
1,472

 
$
588

 
$
1,693

 
$
3,868

 
$
2,139

 
$
3,299

 
$
1,927

 
$

 
$
2

 
$
22,456

Less: Transfers
4

 
9

 
5

 

 
146

 

 
50

 
6

 

 

 
220

Net sales
7,464

 
1,463

 
583

 
1,693

 
3,722

 
2,139

 
3,249

 
1,921

 

 
2

 
22,236

PTOI
1,925

2 
230

3 
85

 
195

 
1,050

 
179

 
557

 
227

 
43

 
(266
)
4 
4,225

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
 

 
 

 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Segment sales
$
6,501

 
$
1,702

 
$
123

 
$
810

 
$
3,792

 
$
2,098

 
$
3,452

 
$
1,990

 
$

 
$
37

 
$
20,505

Less: Transfers

 
10

 
1

 

 
136

 

 
54

 
6

 

 

 
207

Net sales
6,501

 
1,692

 
122

 
810

 
3,656

 
2,098

 
3,398

 
1,984

 

 
37

 
20,298

PTOI
1,937

 
214

 
(7
)
5 
30

5 
897

 
138

 
542

 
288

 
130

 
(101
)
 
4,068


1 
As of June 30, 2012, Agriculture net assets were $8,221, an increase of $3,456 from $4,765 at December 31, 2011. The increase was primarily due to higher trade receivables due to normal seasonality in the sales and cash collections cycle.
2 
Included charges of $(265) and $(315) during the three and six months ended June 30, 2012, respectively, recorded in cost of goods sold and other operating charges associated with the company's process to fairly resolve claims associated with the use of Imprelis®. See Note 7 for additional information.
3 
Included a $122 gain recorded in other income, net related to the sale of the company's interest in an equity method investment.
4 
Included a $(137) charge recorded in cost of goods sold and other operating charges primarily related to the company's settlement of litigation with INVISTA. See Note 7 for additional information.
5 
Included a $(50) charge for transaction related costs and the fair value step-up of inventories that were acquired as part of the Danisco acquisition in 2011, which impacted the segments as follows: Industrial Biosciences - $(17) and Nutrition & Health - $(33).

Reconciliation to Consolidated Income Statements 
 
Three Months Ended
 June 30,
Six Months Ended
 June 30,
 
2012
2011
2012
2011
Total segment PTOI
$
1,898

$
1,943

$
4,225

$
4,068

Net exchange gains (losses), including affiliates
28

4

(52
)
(139
)
Corporate expenses and net interest
(289
)
(358
)
(595
)
(638
)
Income before income taxes
$
1,637

$
1,589

$
3,5