XNYS:DD E I du Pont de Nemours & Company Quarterly Report 10-Q Filing - 9/30/2012

Effective Date 9/30/2012

XNYS:DD Fair Value Estimate
Premium
XNYS:DD Consider Buying
Premium
XNYS:DD Consider Selling
Premium
XNYS:DD Fair Value Uncertainty
Premium
XNYS:DD Economic Moat
Premium
XNYS:DD 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 September 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 932,471,000 shares (excludes 87,041,000 shares of treasury stock) of common stock, $0.30 par value, outstanding at October 15, 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
Nine Months Ended
 
September 30,
September 30,
 
2012
2011
2012
2011
Net sales
$
7,390

$
8,138

$
27,487

$
26,338

Other (loss) income, net
(54
)
165

251

404

Total
7,336

8,303

27,738

26,742

Cost of goods sold and other operating charges
5,722

6,345

19,621

18,947

Selling, general and administrative expenses
772

809

2,725

2,567

Research and development expense
506

546

1,520

1,383

Interest expense
116

116

347

331

Employee separation / asset related charges, net
394

36

394

36

Total
7,510

7,852

24,607

23,264

(Loss) income from continuing operations before income taxes
(174
)
451

3,131

3,478

(Benefit from) provision for income taxes on continuing operations
(134
)
75

657

616

(Loss) income from continuing operations after income taxes
(40
)
376

2,474

2,862

Income from discontinued operations after income taxes
53

84

227

271

Net income
13

460

2,701

3,133

Less: Net income attributable to noncontrolling interests
3

8

24

32

Net income attributable to DuPont
$
10

$
452

$
2,677

$
3,101

Basic (loss) earnings per share of common stock:
 
 
 
 
Basic (loss) earnings per share of common stock from continuing operations
$
(0.05
)
$
0.39

$
2.62

$
3.04

Basic earnings per share of common stock from discontinued operations
0.06

0.09

0.24

0.29

Basic earnings per share of common stock
$
0.01

$
0.48

$
2.86

$
3.33

Diluted (loss) earnings per share of common stock:
 
 
 
 
Diluted (loss) earnings per share of common stock from continuing operations
$
(0.05
)
$
0.39

$
2.59

$
2.99

Diluted earnings per share of common stock from discontinued operations
0.06

0.09

0.24

0.29

Diluted earnings per share of common stock
$
0.01

$
0.48

$
2.83

$
3.28

Dividends per share of common stock
$
0.43

$
0.41

$
1.27

$
1.23

 
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
Nine Months Ended
 
September 30,
September 30,
 
2012
2011
2012
2011
Net income
$
13

$
460

$
2,701

$
3,133

Other comprehensive income (loss), before tax:
 
 
 
 
      Cumulative translation adjustment
189

(348
)
(53
)
(231
)
      Net revaluation and clearance of cash flow hedges to earnings:
 
 
 
 
      Additions and revaluations of derivatives designated as cash flow hedges
(6
)
11

30

14

      Clearance of hedge results to earnings
(11
)
25

(66
)
77

      Net revaluation and clearance of cash flow hedges to earnings
(17
)
36

(36
)
91

      Pension benefit plans:
 
 
 
 
      Net loss
(609
)

(628
)
(3
)
      Prior service cost (benefit)


22

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

4

10

12

                Amortization of loss
222

153

661

459

                Curtailment
2


2


      Pension benefit plans, net
(382
)
157

67

466

      Other benefit plans:
 
 
 
 
      Net loss
(141
)

(141
)

      Prior service cost
857


857


      Reclassifications to net income:
 
 
 
 
                Amortization of prior service benefit
(44
)
(30
)
(104
)
(91
)
                Amortization of loss
24

15

68

45

                Curtailment
3


3


      Other benefit plans, net
699

(15
)
683

(46
)
      Net unrealized loss on securities
(5
)

(3
)

Other comprehensive income (loss), before tax
484

(170
)
658

280

      Income tax expense related to items of other comprehensive income
(126
)
(63
)
(266
)
(179
)
Other comprehensive income (loss), net of tax
358

(233
)
392

101

Comprehensive income
371

227

3,093

3,234

      Less: Comprehensive income attributable to noncontrolling interests
3

3

51

24

Comprehensive income attributable to DuPont
$
368

$
224

$
3,042

$
3,210


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) 
 
September 30,
2012
December 31,
2011
Assets
 

 

Current assets
 

 

Cash and cash equivalents
$
3,418

$
3,586

Marketable securities
105

433

Accounts and notes receivable, net
7,879

6,022

Inventories
6,752

7,195

Prepaid expenses
135

151

Deferred income taxes
971

671

Assets held for sale
3,157


Total current assets
22,417

18,058

Property, plant and equipment, net of accumulated depreciation
   (September 30, 2012 - $18,892; December 31, 2011 - $19,349)
12,528

13,412

Goodwill
4,579

5,413

Other intangible assets
5,145

5,413

Investment in affiliates
1,098

1,117

Deferred income taxes
3,825

4,067

Other assets
1,015

1,012

Total
$
50,607

$
48,492

Liabilities and Equity
 

 

Current liabilities
 

 

Accounts payable
$
4,154

$
4,816

Short-term borrowings and capital lease obligations
4,564

817

Income taxes
644

255

Other accrued liabilities
3,831

5,297

Liabilities related to assets held for sale
1,010


Total current liabilities
14,203

11,185

Long-term borrowings and capital lease obligations
10,502

11,736

Other liabilities
14,136

15,508

Deferred income taxes
1,055

1,001

Total liabilities
39,896

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 September 30, 2012 - 1,019,411,000; December 31, 2011 - 1,013,164,000
306

304

Additional paid-in capital
10,594

10,107

Reinvested earnings
14,581

13,422

Accumulated other comprehensive loss
(8,385
)
(8,750
)
Common stock held in treasury, at cost
   (87,041,000 shares at September 30, 2012 and December 31, 2011)
(6,727
)
(6,727
)
Total DuPont stockholders’ equity
10,606

8,593

Noncontrolling interests
105

469

Total equity
10,711

9,062

Total
$
50,607

$
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)
 
 
Nine Months Ended
 
September 30,
 
2012
2011
Operating activities
 

 

Net income
$
2,701

$
3,133

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

 

Depreciation
1,047

944

Amortization of intangible assets
266

195

Contributions to pension plans
(762
)
(272
)
Other noncash charges and credits - net
907

846

Change in operating assets and liabilities - net
(4,585
)
(4,415
)
Cash (used for) provided by operating activities
(426
)
431

Investing activities
 

 

Purchases of property, plant and equipment
(1,139
)
(1,211
)
Investments in affiliates
(31
)
(35
)
Payments for businesses - net of cash acquired
(18
)
(6,459
)
Proceeds from sales of assets - net of cash sold
175

62

Net decrease in short-term financial instruments
336

2,365

Forward exchange contract settlements
23

(299
)
Other investing activities - net
(13
)
1

Cash used for investing activities
(667
)
(5,576
)
Financing activities
 

 

Dividends paid to stockholders
(1,191
)
(1,152
)
Net increase in borrowings
2,524

4,503

Repurchase of common stock
(400
)
(672
)
Proceeds from exercise of stock options
520

833

Payments for noncontrolling interest
(447
)

Other financing activities - net
38

52

Cash provided by financing activities
1,044

3,564

Effect of exchange rate changes on cash
(23
)
68

Cash classified as held for sale
(96
)

Decrease in cash and cash equivalents
$
(168
)
$
(1,513
)
Cash and cash equivalents at beginning of period
3,586

4,263

Cash and cash equivalents at end of period
$
3,418

$
2,750

 
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. 

Certain reclassifications of prior year's data have been made to conform to current year's presentation. In the third quarter 2012, the company signed a definitive agreement to sell its Performance Coatings business (which represented a reportable segment). In accordance with GAAP, the results of Performance Coatings are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. See Note 2 for additional information.

Note 2. Discontinued Operations
On August 30, 2012, the company entered into a definitive agreement with Flash Bermuda Co. Ltd., a Bermuda exempted limited liability company formed by affiliates of The Carlyle Group (collectively referred to as "Carlyle") in which Carlyle has agreed to purchase certain subsidiaries and assets comprising the company's Performance Coatings business for approximately $4,900 in cash and the assumption of certain liabilities, including approximately $250 of unfunded pension liabilities. The transaction is expected to close in the first quarter of 2013, subject to customary closing conditions and regulatory approvals.

Beginning in third quarter 2012, the results of operations of Performance Coatings have been reclassified to reflect the business as discontinued operations for all periods presented and the assets and liabilities of the business have been reclassified as held for sale at September 30, 2012.

The results of discontinued operations are summarized below:
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2012
2011
2012
2011
Net sales
$
1,039

$
1,100

$
3,178

$
3,198

Income before income taxes
$
164

$
118

$
436

$
382

Provision for income taxes1
111

34

209

111

Income from discontinued operations after income taxes
$
53

$
84

$
227

$
271


 
Three and nine months ended September 30, 2012 includes expense of $62 to accrue taxes associated with earnings of certain Performance Coatings subsidiaries that were previously considered permanently reinvested as these entities have been reclassified as held for sale.

7

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

The key components of the assets and liabilities classified as held for sale at September 30, 2012 related to Performance Coatings consisted of the following:
 
September 30,
2012
Cash
$
96

Accounts and notes receivable, net
870

Inventories
487

Prepaid expenses
6

Deferred income taxes - current
25

Property, plant and equipment, net of accumulated depreciation
710

Goodwill
808

Other intangible assets
64

Deferred income taxes - noncurrent
29

Other assets - noncurrent
62

Total assets held for sale
$
3,157

Accounts payable
$
427

Income taxes
1

Other accrued liabilities
265

Other liabilities - noncurrent
284

Deferred income taxes - noncurrent
33

Total liabilities related to assets held for sale
$
1,010


Note 3. Employee Separation / Asset Related Charges, Net
2012 Restructuring Program
In the third quarter 2012, the company commenced a restructuring plan to increase productivity, enhance competitiveness and accelerate growth. The plan is designed to eliminate corporate costs previously allocated to the Performance Coatings business as well as utilize additional cost-cutting actions to improve competitiveness. As a result, a pre-tax charge of about $210 is expected related to this plan, of which $152 was recorded in the third quarter 2012 in employee separation / asset related charges, net. The third quarter 2012 charge consists of $133 of employee separation costs and $19 of asset related charges, which includes $17 of asset impairments and $2 of asset shut downs.

The third quarter 2012 charge impacted segment earnings as follows: Agriculture - $3, Electronics & Communications - $7, Industrial Biosciences - $3, Nutrition & Health - $13, Performance Chemicals - $3, Performance Materials - $9, and Safety & Protection - $55, as well as Corporate expenses - $59.

The company expects to record the remaining charges in connection with this plan during the fourth quarter 2012. The company expects this plan and all related payments to be substantially complete by December 31, 2013.

Account balances and activity for the 2012 restructuring program are summarized below:
 
Asset Related
Employee Separation Costs
Total
Charges to income for three and nine months ended September 30, 2012
$
19

$
133

$
152

Charges to accounts:
 
 
 
Payments



Asset write-offs and adjustments
(19
)

(19
)
Balance as of September 30, 2012
$

$
133

$
133



8

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

Asset Impairments
During the third quarter 2012, as a result of conditions in the thin film photovoltaic market, the company determined that an impairment triggering event had occurred and that an assessment of the asset group related to its thin film photovoltaic modules and systems was warranted. This assessment determined that the carrying value of the asset group exceeded its fair value. The basis of the fair value was calculated utilizing a discounted cash flow approach which included assumptions concerning future operating performance and economic conditions that may differ from actual cash flows. As a result of our impairment test, a $150 pre-tax impairment charge was recorded at September 30, 2012. The charge was recorded within the Electronics & Communications segment.
During the third quarter 2012, as a result of deteriorating conditions in an industrial polymer market, the company determined that an impairment triggering event had occurred and that an assessment of the asset group related to this polymer product was warranted. This assessment determined that the carrying value of the asset group exceeded its fair value. The basis of the fair value was calculated utilizing a discounted cash flow approach which included assumptions concerning future operating performance and economic conditions that may differ from actual cash flows. As a result of our impairment test, a $92 pre-tax impairment charge was recorded at September 30, 2012. The charge was recorded within the Performance Materials segment.
In connection with the matters discussed above, at September 30, 2012, the company had long-lived assets with a remaining net book value of approximately $125 accounted for at fair value on a nonrecurring basis after initial recognition. These nonrecurring fair value measurements were determined using level 3 inputs within the fair value hierarchy, as described in the company's 2011 Annual Report in Note 1, "Summary of Significant Accounting Policies".
Note 4.  Other Income, Net 
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2012
2011
2012
2011
Cozaar®/Hyzaar® income
$
9

$
68

$
48

$
195

Royalty income
21

29

84

91

Interest income
27

28

87

88

Equity in earnings of affiliates, excluding exchange gains/losses
11

35

42

117

Gain on sale of equity method investment


122


Net gain (losses) on sales of other assets
1

(1
)
11

38

Net exchange (losses) gains 1
(130
)
6

(161
)
(132
)
Miscellaneous income and expenses, net 2
7


18

7

Other (loss) income, net
$
(54
)
$
165

$
251

$
404

 

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 (loss) income, net and the related tax impact is recorded in (benefit from) provision for income taxes on continuing operations on the interim Consolidated Income Statements.
 
Miscellaneous income and expenses, net, generally includes interest items, insurance recoveries, litigation settlements and other items.

Note 5.  Income Taxes 
In the third quarter 2012, the company recorded a tax benefit of $134 on the pre-tax loss from continuing operations of $174, including $71 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 2012, the company recorded a tax provision on continuing operations of $657, including $48 of tax benefit primarily associated with the company's policy of hedging the foreign currency denominated monetary assets and liabilities of its operations.

In the third quarter 2011, the company recorded a tax provision on continuing operations of $75, including $42 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 2011, the company recorded a tax provision on continuing operations of $616, including $101 of tax benefit primarily associated with the company's policy of hedging the foreign currency denominated monetary assets and liabilities of its operations.

9

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


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.

Note 6.  Earnings Per Share of Common Stock 
Set forth below is a reconciliation of the numerator and denominator for basic and diluted (loss) earnings per share calculations for the periods indicated:
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2012
2011
2012
2011
Numerator:
 
 
 
 
(Loss) income from continuing operations after income taxes attributable to DuPont
$
(43
)
$
368

$
2,450

$
2,830

Preferred dividends
(3
)
(3
)
(8
)
(8
)
(Loss) income from continuing operations after income taxes available to DuPont common stockholders
$
(46
)
$
365

$
2,442

$
2,822

 
 
 
 
 
Income from discontinued operations after income taxes
$
53

$
84

$
227

$
271

 
 
 
 
 
Net income available to common stockholders
$
7

$
449

$
2,669

$
3,093

 
 
 
 
 
Denominator:
 
 
 
 
Weighted-average number of common shares outstanding - Basic
931,737,000

932,356,000

933,227,000

929,369,000

Dilutive effect of the company’s employee compensation plans1
8,789,000

11,129,000

9,297,000

13,443,000

Weighted-average number of common shares outstanding - Diluted
940,526,000

943,485,000

942,524,000

942,812,000

1 
Dilutive effect of the company's employee compensation plans are excluded from calculation of dilutive loss per share of common stock from continuing operations for the three months ended September 30, 2012.

The following average number of stock options were antidilutive, and therefore, were not included in the diluted earnings per share calculations: 
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2012
2011
2012
2011
Average number of stock options
12,631,000

8,678,000

12,035,000

2,904,000

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


10

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

Note 7. Inventories 
 
September 30,
2012
December 31,
2011
Finished products
$
3,505

$
4,541

Semifinished products
2,820

2,293

Raw materials, stores and supplies
1,291

1,262

 
7,616

8,096

Adjustment of inventories to a last-in, first-out (LIFO) basis
(864
)
(901
)
Total
$
6,752

$
7,195

 
Note 8.  Goodwill and Other Intangible Assets 
The decrease in goodwill from $5,413 at December 31, 2011 to $4,579 at September 30, 2012 primarily relates to goodwill associated with the Performance Coatings business that has been reclassified as held for sale. See Note 2 for additional information.

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

 

 

 

 

 

Customer lists
$
1,821

$
(301
)
$
1,520

$
1,841

$
(220
)
$
1,621

Patents
519

(113
)
406

518

(77
)
441

Purchased and licensed technology
1,926

(995
)
931

1,854

(878
)
976

Trademarks
57

(28
)
29

57

(25
)
32

Other 1
213

(101
)
112

330

(151
)
179

 
4,536

(1,538
)
2,998

4,600

(1,351
)
3,249

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

 

 

 

 

 

In-process research and development
61


61

70


70

Microbial cell factories 2
306


306

306


306

Pioneer germplasm 3
975


975

975


975

Trademarks/tradenames
805


805

813


813

 
2,147


2,147

2,164


2,164

Total
$
6,683

$
(1,538
)
$
5,145

$
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 from continuing operations for definite-lived intangible assets was $62 and $247 for the three and nine months ended September 30, 2012, respectively, and $51 and $178 for the three and nine months ended September 30, 2011, respectively. The estimated aggregate pre-tax amortization expense from continuing operations for the remainder of 2012 and each of the next five years is approximately $66, $312, $333, $341, $301 and $175.


11

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

Note 9.  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 September 30, 2012 and December 31, 2011 were $36 and $105, respectively. The decrease in the carrying amount at September 30, 2012 primarily relates to the payment associated with the settlement of the 2008 lawsuit filed by subsidiaries of Koch Industries, Inc. (INVISTA).

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 September 30, 2012 and December 31, 2011, the company had directly guaranteed $455 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 44 percent of the $268 of guaranteed obligations of customers and suppliers. Set forth below are the company's guaranteed obligations at September 30, 2012:
 
Short-Term
Long-Term
Total
Obligations for customers and suppliers1:
 

 

 

Bank borrowings (terms up to 5 years)
$
171

$
97

$
268

Obligations for equity affiliates2:
 

 

 

Bank borrowings (terms up to 1 year)
187


187

Total
$
358

$
97

$
455

 
1 
Existing guarantees for customers and suppliers arose as part of contractual agreements. As of September 30, 2012, approximately $21 of these guarantees relate to customers of the Performance Coatings business.
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 multidistrict litigation in federal court in Philadelphia, Pennsylvania. In addition, about 80 individual actions on behalf of approximately 180 plaintiffs have been filed in state court in various jurisdictions. DuPont has removed most of these cases to federal court in Philadelphia, Pennsylvania.

In August 2011, the company suspended sales of Imprelis® and in September 2011 began a process to fairly resolve claims associated with the use of Imprelis®. 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

12

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

accuracy and validity which often requires physical review of the property.

At September 30, 2012, DuPont had recorded charges of $615 related to the Imprelis® matter, which included charges of $125 and $440 recorded during the third 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 up to $700. 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.  

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 September 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

The C8 Science Panel announced its findings of a probable link, as defined in the settlement agreement, between exposure to PFOA and pregnancy-induced hypertension, which includes preeclampsia, in December 2011; kidney and testicular cancer in April 2012; and thyroid disease and ulcerative colitis in July 2012. 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.

A lawsuit was filed in August 2012 in Ohio state court on behalf of a plaintiff claiming bodily injury from exposure to PFOA in his drinking water. DuPont denies the allegations in the lawsuit and is defending itself vigorously.
 

13

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

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.

Monsanto Patent Dispute
On August 1, 2012, a St. Louis, Missouri jury awarded $1,000 in damages to Monsanto on its claims that the company willfully infringed Monsanto's RE 39,247 patent directed to Roundup® Ready® soybean seed technology. The company intends to appeal this verdict when it is appropriate to do so. The company believes that it will prevail on appeal. Accordingly, as of September 30, 2012, no amounts have been accrued related to this matter.

Monsanto alleged that by combining Pioneer's Optimum® GAT® trait with Monsanto's patented Roundup® Ready® trait, Pioneer violated its 2002 Amended and Restated Roundup® Ready® Soybean License Agreement and, in doing so, infringed Monsanto's RE 39,247 patent. The company has never sold soybeans containing a combination of the Optimum® GAT® and Roundup® Ready® traits and discontinued in 2011 its commercialization efforts for such soybeans.

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, as well as the presence or absence of potentially responsible parties. At September 30, 2012, the Condensed Consolidated Balance Sheet included a liability of $434, 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 September 30, 2012.

Note 10.  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 September 30, 2012. There is no required completion date for the purchases under the 2011 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.


14

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 nine months ended September 30, 2012 and 2011 is provided as follows:
 
Three Months Ended
Three Months Ended
 
September 30, 2012
September 30, 2011
 
Pre-Tax
Tax
After-Tax
Pre-Tax
Tax
After-Tax
Cumulative translation adjustment
$
189

$

$
189

$
(348
)
$

$
(348
)
Net revaluation and clearance of cash flow hedges to earnings:
 
 
 
 
 
 
Additions and revaluations of derivatives designated as cash flow hedges
(6
)
1

(5
)
11

(5
)
6

Clearance of hedge results to earnings
(11
)
5

(6
)
25

(9
)
16

Net revaluation and clearance of cash flow hedges to earnings
(17
)
6

(11
)
36

(14
)
22

Pension benefit plans:
 
 
 
 
 
 
Net loss
(609
)
185

(424
)



Prior service cost






Amortization of prior service cost
3

(1
)
2

4

(2
)
2

Amortization of loss
222

(75
)
147

153

(52
)
101

Curtailment
2

(1
)
1




Pension benefit plans, net
(382
)
108

(274
)
157

(54
)
103

Other benefit plans:
 
 
 
 
 
 
Net loss
(141
)
51

(90
)



Prior service cost
857

(299
)
558




Amortization of prior service benefit
(44
)
16

(28
)
(30
)
10

(20
)
Amortization of loss
24

(9
)
15

15

(5
)
10

Curtailment
3

(1
)
2




Other benefit plans, net
699

(242
)
457

(15
)
5

(10
)
Net unrealized loss on securities:
 
 
 
 
 
 
Unrealized loss on securities arising during the period
(5
)
2

(3
)



Reclassification of loss realized in net income






Net unrealized loss on securities
(5
)
2

(3
)



Other comprehensive income (loss) income
$
484

$
(126
)
$
358

$
(170
)
$
(63
)
$
(233
)


15

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

 
Nine Months Ended
Nine Months Ended
 
September 30, 2012
September 30, 2011
 
Pre-Tax
Tax
After-Tax
Pre-Tax
Tax
After-Tax
Cumulative translation adjustment
$
(53
)
$

$
(53
)
$
(231
)
$

$
(231
)
Net revaluation and clearance of cash flow hedges to earnings:
 
 
 
 
 
 
Additions and revaluations of derivatives designated as cash flow hedges
30

(14
)
16

14

(6
)
8

Clearance of hedge results to earnings
(66
)
28

(38
)
77

(29
)
48

Net revaluation and clearance of cash flow hedges to earnings
(36
)
14

(22
)
91

(35
)
56

Pension benefit plans:
 
 
 
 
 
 
Net loss
(628
)
195

(433
)
(3
)
1

(2
)
Prior service cost (benefit)
22

(8
)
14

(2
)

(2
)
Amortization of prior service cost
10

(3
)
7

12

(4
)
8

Amortization of loss
661

(227
)
434

459

(158
)
301

Curtailment
2

(1
)
1




Pension benefit plans, net
67

(44
)
23

466

(161
)
305

Other benefit plans:
 
 
 
 
 
 
Net loss
(141
)
51

(90
)



Prior service cost
857

(299
)
558




Amortization of prior service benefit
(104
)
36

(68
)
(91
)
32

(59
)
Amortization of loss
68

(24
)
44

45

(15
)
30

Curtailment
3

(1
)
2




Other benefit plans, net
683

(237
)
446

(46
)
17

(29
)
Net unrealized loss on securities:
 
 
 
 
 
 
Unrealized loss on securities arising during the period
(5
)
2

(3
)



Reclassification of loss realized in net income
2

(1
)
1




Unrealized loss on securities
(3
)
1

(2
)



Other comprehensive income
$
658

$
(266
)
$
392

$
280

$
(179
)
$
101



Note 11. 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 $16,441 and $13,880 as of September 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 $1,709 and $1,932 as of September 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.



16

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

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 commodity exchanges. The company is exposed to credit loss in the event of nonperformance by these counterparties. The company utilizes collateral support annex agreements with certain counterparties to limit its exposure to credit losses. The company's derivative assets and liabilities are reported on a gross basis in the Condensed Consolidated Balance Sheets. 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:
 
September 30, 2012
December 31, 2011
Derivatives designated as hedging instruments:
 
 
Interest rate swaps
$
1,000

$
1,000

Foreign currency contracts
1,389

2,032

Commodity contracts
8

553

Derivatives not designated as hedging instruments:


Foreign currency contracts
7,692

6,444

Commodity contracts
21

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 and soybean meal. 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 September 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.




17

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

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.

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 nine months ended September 30, 2012 and 2011:
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2012
2011
2012
2011
Beginning balance
$
29

$
6

$
41

$
(31
)
Net revaluation and clearance of cash flow hedges to earnings
(11
)
24

(23
)
61

Ending balance
$
18

$
30

$
18

$
30


At September 30, 2012, the after-tax amount expected to be reclassified from accumulated other comprehensive income (loss) into earnings over the next 12 months is $15.

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.

In third quarter 2012, the company initiated a program to utilize forward exchange contracts to reduce the net exposure related to foreign currency-denominated monetary assets and liabilities of its discontinued operations.

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.


18

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
September 30, 2012
December 31, 2011
Asset derivatives:
 
 
 
Derivatives designated as hedging instruments:
 
 
 
Interest rate swaps1
Other assets
$
62

$
66

Foreign currency contracts
Accounts and notes receivable, net
10

44

 
 
72

110

Derivatives not designated as hedging instruments:
 
 
 
Foreign currency contracts
Accounts and notes receivable, net
30

100

Foreign currency contracts1
Other assets
65

43

 
 
95

143

Total asset derivatives
 
$
167

$
253

Cash collateral1
Other accrued liabilities
$
44

$

 
 
 
 
Liability derivatives:
 
 
 
Derivatives designated as hedging instruments:
 
 
 
Foreign currency contracts
Other accrued liabilities
$
8

$
12

Commodity contracts
Other accrued liabilities

1

 
 
8

13

Derivatives not designated as hedging instruments:
 
 
 
Foreign currency contracts
Other accrued liabilities
105

21

Commodity contracts
Other accrued liabilities
1

2

 
 
106

23

Total liability derivatives
 
$
114

$
36


1 
Cash collateral held as of September 30, 2012 represents $13 related to interest rate swap derivatives designated as hedging instruments and $31 related to foreign currency derivatives not designated as hedging instruments. No cash collateral was held as of December 31, 2011.

19

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 September 30,
2012
2011
2012
2011
Income Statement Classification
Derivatives designated as hedging instruments:
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
Interest rate swaps
$

$

$

$
22

Interest expense3
Cash flow hedges:
 
 
 
 
 
Foreign currency contracts
(16
)
15

13

(7
)
Net sales
Commodity contracts
10

(2
)
(2
)
(18
)
COGS4
 
(6
)
13

11

(3
)
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
Foreign currency contracts


(221
)
222

Other (loss) income, net5
Commodity contracts


(8
)
(7
)
COGS4
 


(229
)
215

 
Total derivatives
$
(6
)
$
13

$
(218
)
$
212

 

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

$

$
(4
)
$
31

Interest expense3
Cash flow hedges:
 
 
 
 
 
Foreign currency contracts
1

(5
)
20

(19
)
Net sales
Commodity contracts
28

24

46

(58
)
COGS4
 
29

19

62

(46
)
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
Foreign currency contracts


(111
)
(202
)
Other (loss) income, net5
Commodity contracts


(22
)
4

COGS4
Interest rate swaps



(1
)
COGS4
 


(133
)
(199
)
 
Total derivatives
$
29

$
19

$
(71
)
$
(245
)
 

 
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 nine months ended September 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 (loss) 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 $91 and $(216) for the three months ended September 30, 2012 and 2011, respectively, and $(50) and $70 for the nine months ended September 30, 2012 and 2011, respectively.

20

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



Note 12. Long-Term Employee Benefits 
Pension Plans
In August 2012, the company announced the sale of its Performance Coatings business (See Note 2). As a result of the planned sale, the company recorded a pension curtailment charge of $2 and re-measured the principal U.S. pension plan and certain other pension plans as of August 31, 2012. In connection with the re-measurement, the company updated the discount rate and expected return on plan assets, assumed at December 31, 2011, from 4.50 percent to 4.10 percent and from 9.00 percent to 8.75 percent, respectively. The curtailment and re-measurement increased the underfunded status of the pension plans and the pre-tax net loss by $609.

The following sets forth the components of the company’s net periodic benefit cost for pensions:  
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2012
2011
2012
2011
Service cost
$
67

$
62

$
201

$
182

Interest cost
290

316

882

940

Expected return on plan assets
(378
)
(371
)
(1,138
)
(1,105
)
Amortization of unrecognized loss
222

153

661

459

Amortization of prior service cost
3

4

10

12

Curtailment charge
2


2


Net periodic benefit cost
$
206

$
164

$
618

$
488

 
Other Long-Term Employee Benefit Plans
During the third quarter 2012, the company amended its U.S. parent company retiree medical and dental plans for Medicare-eligible retirees and survivors. Beginning in 2013, the company is replacing the coverage for Medicare-eligible plan participants in the company sponsored plans with a new company-funded Health Reimbursement Arrangement (HRA). Medicare-eligible plan participants will enroll in individual health plans in the open market and the company will reimburse their health care expenses with HRA based on the provisions of the amended plans. As a result of this change, the company was required to re-measure the associated plans as of July 31, 2012, which included updating the discount rate assumption to 4.00 percent from 4.50 percent assumed at December 31, 2011. The re-measurement and amendment resulted in a net decrease of $700 to the company's other long-term employee benefit obligation, which included an actuarial loss of $138 due to a lower discount rate and a credit of $838 to the prior service cost due to the plan amendment. The company's other long-term employee benefit expense was reduced by approximately $18 for the three and nine months ended September 30, 2012.

The following sets forth the components of the company’s net periodic benefit cost for other long-term employee benefits:  
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2012
2011
2012
2011
Service cost
$
9

$
8

$
28

$
25

Interest cost
41

53

137

159

Amortization of unrecognized loss
24

15

68

45

Amortization of prior service benefit
(44
)
(30
)
(104
)
(91
)
Curtailment charge
3


3


Net periodic benefit cost
$
33

$
46

$
132

$
138

 

21

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

Note 13.  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) from continuing operations before income taxes excluding exchange gains (losses), corporate expenses and interest.

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

 
 

 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Segment sales
$
1,423

 
$
607

 
$
292

 
$
876

 
$
1,732

 
$
1,614

 
$
934

 
$

 
$
2

 
$
7,480

Less: Transfers

 
4

 
3

 

 
56

 
24

 
3

 

 

 
90

Net sales
1,423

 
603

 
289

 
876

 
1,676

 
1,590

 
931

 

 
2

 
7,390

PTOI
(213
)
2,3 
(117
)
3,4 
39

3 
74

3 
369

3 
205

3,4 
48

3 
10

 
(59
)
 
356

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
 

 
 

 
 
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Segment sales
$
1,368

 
$
841

 
$
293

 
$
844

 
$
2,142

 
$
1,745

 
$
1,001

 
$

 
$
2

 
$
8,236

Less: Transfers
1