10-Q 1 dd-2013930x10q.htm 10-Q DD-2013.9.30-10Q
 
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, 2013
 
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 926,103,000 shares (excludes 87,041,000 shares of treasury stock) of common stock, $0.30 par value, outstanding at October 15, 2013.
 
 



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,
 
2013
2012
2013
2012
Net sales
$
7,735

$
7,390

$
27,987

$
27,487

Other income (loss), net
70

(54
)
321

251

Total
7,805

7,336

28,308

27,738

Cost of goods sold
5,165

4,779

17,415

16,558

Other operating charges
990

937

2,843

3,064

Selling, general and administrative expenses
774

764

2,740

2,691

Research and development expense
540

521

1,603

1,562

Interest expense
108

116

340

347

Employee separation / asset related charges, net

394


394

Total
7,577

7,511

24,941

24,616

Income (loss) from continuing operations before income taxes
228

(175
)
3,367

3,122

(Benefit from) provision for income taxes on continuing operations
(35
)
(135
)
687

654

Income (loss) from continuing operations after income taxes
263

(40
)
2,680

2,468

Income from discontinued operations after income taxes
25

48

1,997

219

Net income
288

8

4,677

2,687

Less: Net income attributable to noncontrolling interests
3

3

14

24

Net income attributable to DuPont
$
285

$
5

$
4,663

$
2,663

Basic earnings (loss) per share of common stock:
 
 
 
 
Basic earnings (loss) per share of common stock from continuing operations
$
0.28

$
(0.05
)
$
2.87

$
2.61

Basic earnings per share of common stock from discontinued operations
0.03

0.05

2.16

0.24

Basic earnings per share of common stock
$
0.30

$

$
5.03

$
2.85

Diluted earnings (loss) per share of common stock:
 
 
 
 
Diluted earnings (loss) per share of common stock from continuing operations
$
0.28

$
(0.05
)
$
2.85

$
2.58

Diluted earnings per share of common stock from discontinued operations
0.03

0.05

2.14

0.23

Diluted earnings per share of common stock
$
0.30

$

$
4.99

$
2.82

Dividends per share of common stock
$
0.45

$
0.43

$
1.33

$
1.27

 
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,
 
2013
2012
2013
2012
Net income
$
288

$
8

$
4,677

$
2,687

Other comprehensive income (loss), before tax:
 
 
 
 
      Cumulative translation adjustment
177

189

(46
)
(53
)
      Net revaluation and clearance of cash flow hedges to earnings:
 
 
 
 
      Additions and revaluations of derivatives designated as cash flow hedges
(15
)
(6
)
(39
)
30

      Clearance of hedge results to earnings
1

(11
)
(27
)
(66
)
      Net revaluation and clearance of cash flow hedges to earnings
(14
)
(17
)
(66
)
(36
)
      Pension benefit plans:
 
 
 
 
      Net (loss) gain
(4
)
(609
)
52

(628
)
      Prior service benefit
62


62

22

      Reclassifications to net income:
 
 
 
 
                Amortization of prior service cost
2

3

8

10

                Amortization of loss
244

222

724

661

                Curtailment / settlement loss

2

153

2

      Pension benefit plans, net
304

(382
)
999

67

      Other benefit plans:
 
 
 
 
      Net gain (loss)
95

(141
)
140

(141
)
Prior service benefit
199

857

199

857

      Reclassifications to net income:
 
 
 
 
                Amortization of prior service benefit
(48
)
(44
)
(142
)
(104
)
                Amortization of loss
26

24

51

68

                Curtailment / settlement loss (gain)

3

(153
)
3

      Other benefit plans, net
272

699

95

683

      Net unrealized (loss) gain on securities

(5
)
1

(3
)
Other comprehensive income, before tax
739

484

983

658

      Income tax expense related to items of other comprehensive income
(195
)
(126
)
(337
)
(266
)
Other comprehensive income, net of tax
544

358

646

392

Comprehensive income
832

366

5,323

3,079

      Less: Comprehensive income attributable to noncontrolling interests
3

3

14

51

Comprehensive income attributable to DuPont
$
829

$
363

$
5,309

$
3,028


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,
2013
December 31,
2012
Assets
 

 

Current assets
 

 

Cash and cash equivalents
$
7,005

$
4,284

Marketable securities
184

123

Accounts and notes receivable, net
8,298

5,452

Inventories
7,031

7,565

Prepaid expenses
185

204

Deferred income taxes
840

613

Assets held for sale

3,076

Total current assets
23,543

21,317

Property, plant and equipment, net of accumulated depreciation
   (September 30, 2013 - $19,779; December 31, 2012 - $19,085)
12,908

12,741

Goodwill
4,718

4,616

Other intangible assets
5,135

5,126

Investment in affiliates
1,054

1,163

Deferred income taxes
3,739

3,936

Other assets
893

960

Total
$
51,990

$
49,859

Liabilities and Equity
 

 

Current liabilities
 

 

Accounts payable
$
3,876

$
4,853

Short-term borrowings and capital lease obligations
4,204

1,275

Income taxes
442

343

Other accrued liabilities
3,874

5,997

Liabilities related to assets held for sale

1,084

Total current liabilities
12,396

13,552

Long-term borrowings and capital lease obligations
10,755

10,465

Other liabilities
13,901

14,687

Deferred income taxes
973

856

Total liabilities
38,025

39,560

Commitments and contingent liabilities




Redeemable noncontrolling interest
65


Stockholders’ equity
 

 

Preferred stock
237

237

Common stock, $0.30 par value; 1,800,000,000 shares authorized;
   Issued at September 30, 2013 - 1,013,111,000; December 31, 2012 - 1,020,057,000
304

306

Additional paid-in capital
11,007

10,655

Reinvested earnings
17,020

14,383

Accumulated other comprehensive loss
(8,000
)
(8,646
)
Common stock held in treasury, at cost
   (87,041,000 shares at September 30, 2013 and December 31, 2012)
(6,727
)
(6,727
)
Total DuPont stockholders’ equity
13,841

10,208

Noncontrolling interests
59

91

Total equity
13,900

10,299

Total
$
51,990

$
49,859

 
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,
 
2013
2012
Operating activities
 

 

Net income
$
4,677

$
2,687

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

 

Depreciation
961

1,047

Amortization of intangible assets
255

266

Other operating charges and credits - net
447

907

Gain on sale of business
(2,689
)

Contributions to pension plans
(246
)
(762
)
Change in operating assets and liabilities - net
(5,738
)
(4,571
)
Cash used for operating activities
(2,333
)
(426
)
Investing activities
 

 

Purchases of property, plant and equipment
(1,223
)
(1,139
)
Investments in affiliates
(43
)
(31
)
Payments for businesses - net of cash acquired
(133
)
(18
)
Proceeds from sale of business - net
4,816


Proceeds from sales of assets - net
126

175

Net (increase) decrease in short-term financial instruments
(78
)
336

Forward exchange contract settlements
82

23

Other investing activities - net
31

(13
)
Cash provided by (used for) investing activities
3,578

(667
)
Financing activities
 

 

Dividends paid to stockholders
(1,242
)
(1,191
)
Net increase in borrowings
3,204

2,524

Repurchase of common stock
(1,000
)
(400
)
Proceeds from exercise of stock options
497

520

Payments for noncontrolling interest

(447
)
Other financing activities - net
3

38

Cash provided by financing activities
1,462

1,044

Effect of exchange rate changes on cash
(81
)
(23
)
Cash classified as held for sale

(96
)
Increase / (decrease) in cash and cash equivalents
$
2,626

$
(168
)
Cash and cash equivalents at beginning of period
4,379

3,586

Cash and cash equivalents at end of period
$
7,005

$
3,418

 
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, 2012, collectively referred to as the “2012 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. 

Basis of Presentation
Certain reclassifications of prior year's data have been made to conform to current year's presentation, including separately stating cost of goods sold and other operating charges on the interim Consolidated Income Statements. 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. The sum of the individual earnings per share amounts from continuing and discontinued operations may not equal the total company earnings per share amounts due to rounding. The assets and liabilities of Performance Coatings at December 31, 2012 are presented as held for sale in the Condensed Consolidated Balance Sheet. The cash flows and comprehensive income related to Performance Coatings have not been segregated and are included in the Condensed Consolidated Statements of Cash Flows and Comprehensive Income, respectively, for all periods presented. Amounts related to Performance Coatings are consistently included in or excluded from the Notes to the interim Consolidated Financial Statements based on the financial statement line item and period of each disclosure. See Note 2 for additional information.

Change in Accounting Policy
Effective January 1, 2013, the company changed its method of valuing inventory held at a majority of its foreign and certain United States locations from the last-in, first-out (LIFO) method to the average cost method. The company believes that the average cost method is preferable to the LIFO method as it more clearly aligns with how the company actually manages its inventory and will improve financial reporting by better matching revenues and expenses. In addition, the change from LIFO to average cost will enhance the comparability of our financial results with our peer companies. As described in the guidance for accounting changes, the comparative interim Consolidated Financial Statements of prior periods are adjusted to apply the new accounting method retrospectively.

The following line items within the interim Consolidated Income Statements were affected by the change in accounting policy for the three and nine months ended September 30, 2013 and 2012:

 
 
Three Months Ended
September 30, 2013
Nine Months Ended
September 30, 2013
 
 
 
As reported
As reported under LIFO
Change:
(Decrease)/Increase
As reported
As reported under LIFO
Change:
(Decrease)/Increase
 
Cost of goods sold
$
5,165

$
5,176

$
(11
)
$
17,415

$
17,447

$
(32
)
 
Income from continuing operations before income taxes
228

217

11

3,367

3,335

32

 
(Benefit from) provision for income taxes on continuing operations
(35
)
(38
)
3

687

678

9

 
Income from continuing operations after income taxes
263

255

8

2,680

2,657

23

 
Income from discontinued operations after income taxes
25

25


1,997

1,997


 
Net income
$
288

$
280

$
8

$
4,677

$
4,654

$
23



7

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



Basic and diluted earnings per share from continuing operations increased by $0.01 and $0.02 for the three and nine months ended September 30, 2013, respectively, as a result of the above accounting policy change.

 
 
Three Months Ended
September 30, 2012
Nine Months Ended
September 30, 2012
 
 
 
As reported
As reported under LIFO
Change:
(Decrease)/Increase
As reported
As reported under LIFO
Change:
(Decrease)/Increase
 
Cost of goods sold
$
4,779

$
4,778

$
1

$
16,558

$
16,549

$
9

 
(Loss) income from continuing operations before income taxes
(175
)
(174
)
(1
)
3,122

3,131

(9
)
 
(Benefit from) provision for income taxes on continuing operations
(135
)
(134
)
(1
)
654

657

(3
)
 
(Loss) income from continuing operations after income taxes
(40
)
(40
)

2,468

2,474

(6
)
 
Income from discontinued operations after income taxes
48

53

(5
)
219

227

(8
)
 
Net income
$
8

$
13

$
(5
)
$
2,687

$
2,701

$
(14
)

Basic and diluted earnings per share from continuing operations decreased by $(0.01) for the nine months ended September 30, 2012, as a result of the above accounting policy change.

Inventory and Stockholder's Equity increased by $143 and $120, respectively, as of January 1, 2012, as a result of the above accounting policy change.

There was no impact on cash used by operating activities as a result of the above change.

Note 2. Discontinued Operations
In February 2013, the company sold its Performance Coatings business to Flash Bermuda Co. Ltd., a Bermuda exempted limited liability company formed by affiliates of The Carlyle Group (collectively referred to as "Carlyle"). The sale resulted in a pre-tax gain of $2,689 ($1,964 net of tax). The gain was recorded in income from discontinued operations after income taxes in the company's interim Consolidated Income Statements for the nine-months ended September 30, 2013.

The results of discontinued operations are summarized below:
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2013
2012
2013
2012
Net sales
$

$
1,039

$
331

$
3,178

Income before income taxes
$
7

$
158

$
2,720

$
426

(Benefit from) provision for income taxes1
(18
)
110

723

207

Income from discontinued operations after income taxes
$
25

$
48

$
1,997

$
219


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









8

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 December 31, 2012 related to Performance Coatings consisted of the following:
 
December 31,
2012
Cash and cash equivalents
$
95

Accounts and notes receivable, net
783

Inventories
488

Prepaid expenses
6

Deferred income taxes - current
32

Property, plant and equipment, net of accumulated depreciation
749

Goodwill
808

Other intangible assets
67

Deferred income taxes - noncurrent
14

Other assets - noncurrent
34

Total assets held for sale
$
3,076

Accounts payable
$
408

Income taxes
17

Other accrued liabilities
237

Other liabilities - noncurrent
388

Deferred income taxes - noncurrent
34

Total liabilities related to assets held for sale
$
1,084


Note 3. Employee Separation /Asset Related Charges, Net
2012 Restructuring Program
At September 30, 2013, total liabilities relating to the 2012 restructuring program were $91. A complete discussion of restructuring initiatives is included in the company's 2012 Annual Report in Note 3, "Employee Separation/Asset Related Charges, Net".

Account balances for the 2012 restructuring program are summarized below:

 
Employee Separation Costs
Other Non-Personnel Charges1
Total
Balance at December 31, 2012
$
154

$
7

$
161

Payments
(66
)
(3
)
(69
)
Net translation adjustment
(1
)

(1
)
Balance as of September 30, 2013
$
87

$
4

$
91


1 
Other non-personnel charges consist of contractual obligation costs.

The company expects this plan and all related payments to be substantially complete by December 31, 2013.


9

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 2012 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,
 
2013
2012
2013
2012
Cozaar®/Hyzaar® income
$

$
9

$
14

$
48

Royalty income
35

21

122

84

Interest income
34

27

106

87

Equity in earnings of affiliates, excluding exchange gains/losses
28

11

14

42

Gain on sale of equity method investment


9

122

Net gain on sales of other assets
7

1

17

11

Net exchange losses1
(101
)
(130
)
(55
)
(161
)
Miscellaneous income and expenses, net 2
67

7

94

18

Other income (loss), net
$
70

$
(54
)
$
321

$
251

 

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 (losses) are recorded in other income, net and the related tax impact is recorded in provision for income taxes on continuing operations on the interim Consolidated Income Statements. The $(55) net exchange loss for the nine months ended September 30, 2013, includes a $(33) exchange loss, associated with the devaluation of the Venezuelan bolivar.
 
Miscellaneous income and expenses, net, generally includes interest items, certain insurance recoveries and litigation settlements, and other items.


10

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

Note 5.  Income Taxes 
In the third quarter 2013, the company recorded a tax benefit of $35 on continuing operations pre-tax income of $228. The benefit included $58 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 2013, the company recorded a tax provision on continuing operations of $687, including $8 of tax benefit primarily associated with the company’s policy of hedging the foreign currency-denominated monetary assets and liabilities of its operations. Included in the provision was a $33 tax benefit related to an enacted foreign tax law change, a $68 tax benefit derived from the 2013 extension of certain U.S. business tax provisions partially offset by $49 of tax expense related to a change in accrual for a prior year tax position and $26 of tax expense related to the global distribution of the proceeds from the sale of the Performance Coatings business.

In the third quarter 2012, the company recorded a tax benefit of $135 on the pre-tax loss from continuing operations of $175. The benefit included $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 $654, 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.

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.


11

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

Note 6.  Earnings Per Share of Common Stock 
Set forth below is a reconciliation of the numerator and denominator for basic and diluted earnings (loss) per share calculations for the periods indicated:
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2013
2012
2013
2012
Numerator:
 
 
 
 
Income (loss) from continuing operations after income taxes attributable to DuPont
$
260

$
(43
)
$
2,666

$
2,444

Preferred dividends
(3
)
(3
)
(8
)
(8
)
Income (loss) from continuing operations after income taxes available to DuPont common stockholders
$
257

$
(46
)
$
2,658

$
2,436

 
 
 
 
 
Income from discontinued operations after income taxes
$
25

$
48

$
1,997

$
219

 
 
 
 
 
Net income available to common stockholders
$
282

$
2

$
4,655

$
2,655

 
 
 
 
 
Denominator:
 
 
 
 
Weighted-average number of common shares outstanding - Basic
925,645,000

931,737,000

925,548,000

933,227,000

Dilutive effect of the company’s employee compensation plans1
7,360,000

8,789,000

6,994,000

9,297,000

Weighted-average number of common shares outstanding - Diluted
933,005,000

940,526,000

932,542,000

942,524,000


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,
 
2013
2012
2013
2012
Average number of stock options

12,631,000

3,461,000

12,035,000

 
The change in the average number of stock options that were antidilutive in the three and nine months ended September 30, 2013 compared to the same period last year was primarily due to changes in the company’s average stock price.

Note 7. Inventories 
 
September 30,
2013
December 31,
2012
Finished products
$
3,857

$
4,449

Semi-finished products
2,443

2,407

Raw materials, stores and supplies
1,323

1,313

 
7,623

8,169

Adjustment of inventories to a last-in, first-out (LIFO) basis
(592
)
(604
)
Total
$
7,031

$
7,565



12

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

Note 8.  Goodwill and Other Intangible Assets 
There were no significant changes in goodwill for the nine months ended September 30, 2013.

The gross carrying amounts and accumulated amortization of other intangible assets by major class are as follows: 
 
September 30, 2013
December 31, 2012
 
Gross
Accumulated
Amortization
Net
Gross
Accumulated
Amortization
Net
Intangible assets subject to amortization (Definite-lived):
 

 

 

 

 

 

Customer lists
$
1,844

$
(397
)
$
1,447

$
1,847

$
(330
)
$
1,517

Patents
531

(164
)
367

525

(127
)
398

Purchased and licensed technology
2,021

(1,140
)
881

1,929

(1,016
)
913

Trademarks
57

(31
)
26

57

(29
)
28

Other 1
221

(107
)
114

206

(98
)
108

 
4,674

(1,839
)
2,835

4,564

(1,600
)
2,964

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

 

 

 

 

 

In-process research and development
71


71

62


62

Microbial cell factories 2
306


306

306


306

Pioneer germplasm 3
1,053


1,053

975


975

Trademarks/tradenames
870


870

819


819

 
2,300


2,300

2,162


2,162

Total
$
6,974

$
(1,839
)
$
5,135

$
6,726

$
(1,600
)
$
5,126


 
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 $255 for the three and nine months ended September 30, 2013, respectively, and $62 and $247 for the three and nine months ended September 30, 2012, respectively. The estimated aggregate pre-tax amortization expense from continuing operations for the remainder of 2013 and each of the next five years is approximately $52, $348, $366, $318, $187 and $181, respectively, which are primarily reported in cost of goods sold.
                                                                                                           


13

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.

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, 2013 and December 31, 2012, the company had directly guaranteed $502 and $535, 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 44 percent of the $320 of guaranteed obligations of customers and suppliers. Set forth below are the company's guaranteed obligations at September 30, 2013:
 
Short-Term
Long-Term
Total
Obligations for customers and suppliers1:
 

 

 

Bank borrowings (terms up to 7 years)
$
187

$
132

$
319

Leases on equipment and facilities (terms up to 4 years)

1

1

Obligations for equity affiliates2:
 

 

 

Bank borrowings (terms less than 2 years)
181

1

182

Total
$
368

$
134

$
502


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

Imprelis® 
The company has received claims and has been served with multiple lawsuits alleging that the use of Imprelis® herbicide caused damage to certain trees. Sales of Imprelis® were suspended in August 2011 and the product was last applied during the 2011 spring application season. The lawsuits seeking class action status have been consolidated in multidistrict litigation in federal court in Philadelphia, Pennsylvania.

In February 2013, the court granted preliminary approval of a class action settlement. The settlement incorporates the company's existing claims process and provides certain additional relief. The proposed settlement class includes affected property owners and lawn care companies who do not "opt out" of the settlement. As part of the settlement, DuPont will pay about $7 in plaintiffs' attorney fees and expenses. In addition, DuPont is providing a warranty against new damage, if any, caused by the use of Imprelis® on class members' properties through May 2015. The settlement notification process began on March 25, 2013 and ended on June 28, 2013 which was also the last day to “opt out” of the settlement or file a new claim. The final approval hearing was held on September 27, 2013 and on October 17, 2013, the court issued an order approving the settlement. In addition, about 125 individual actions encompassing about 400 claims for property damage have been filed in state court in various jurisdictions. DuPont has removed most of these cases to federal court in Philadelphia, Pennsylvania. Once removed to federal court, the individual actions remain stayed pending further action by the court.


14

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

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 September 30, 2013, DuPont had recorded charges of $930, within other operating charges, to resolve these claims. The three months ended September 30, 2013 included net charges of $40, consisting of a $65 charge offset by $25 of insurance recoveries. The nine months ended September 30, 2013 included net charges of $155, consisting of charges of $180 offset by $25 of insurance recoveries received in the third quarter 2013. The three and nine months ended September 30, 2012 included charges of $125 and $440, respectively. The company currently estimates that total charges could be about $1,200; however, there is a high degree of uncertainty. Predicting the impact of Imprelis® on living organisms and how those organisms may react over time as well as variability regarding the extended warranty period under the class action settlement are significant factors driving the uncertainty of future charges. Imprelis® was applied throughout the United States and the ability of any particular species of tree to naturally recover over time may be different depending on the property's geography and associated climate. The company has an applicable insurance program with a deductible equal to the first $100 of costs and expenses. The insurance program limits are $725 for costs and expenses in excess of the $100. DuPont has submitted and will continue to submit requests for payment to its insurance carriers for costs associated with this matter. The company has begun to receive payment from its insurance carriers and continues to seek recovery although the timing and outcome remain uncertain.

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 used PFOA (collectively, perfluorooctanoic acids and its salts, including the ammonium salt), as a processing aid to manufacture some fluoropolymer resins at various sites around the world including its Washington Works plant in West Virginia. At September 30, 2013, DuPont has accruals of $15 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 funded a series of health studies which were completed in October 2012 by an independent science panel of experts (the “C8 Science Panel”). The studies were conducted in 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 C8 Science Panel found probable links, as defined in the settlement agreement, between exposure to PFOA and pregnancy-induced hypertension, including preeclampsia; kidney cancer; testicular cancer; thyroid disease; ulcerative colitis; and diagnosed high cholesterol.


15

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

In May 2013, a panel of three independent medical doctors released its initial recommendations for screening and diagnostic testing of eligible class members. The medical panel is expected to address monitoring and may make additional recommendations in a subsequent report.  The medical panel has not communicated its anticipated schedule for completion. The company is obligated to fund up to $235 for a medical monitoring program for eligible class members.  In January 2012, the company put $1 in an escrow account to fund medical monitoring as required by the settlement agreement.  The court has appointed a Medical Monitoring Director to implement the medical panel's recommendations who is in the process of setting up a program.  Testing has not yet begun and no money has been disbursed from the fund.  While it is probable that the company will incur losses related to funding the medical monitoring program, such losses cannot be reasonably estimated due to uncertainties surrounding implementation.

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.

Additional Actions
An Ohio action brought by the LHWA is ongoing. 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.

Class members may pursue personal injury claims against DuPont only for those human diseases for which the C8 Science Panel determined a probable link exists. At September 30, 2013, 45 lawsuits alleging personal injury and 2 lawsuits alleging wrongful death from exposure to PFOA in drinking water are pending in federal court in Ohio and West Virginia. This is an increase in pending cases of 1 and 21 over the second quarter 2013 and year end 2012, respectively. These cases have been consolidated for discovery purposes in multi-district litigation in Ohio federal court. DuPont denies the allegations in these lawsuits and is defending itself vigorously.

While DuPont believes that it is reasonably possible that it could incur losses related to these additional actions, 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® 1 glyphosate herbicide tolerance soybean seed technology.

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.

In March 2013, Pioneer and Monsanto entered into technology license agreements. As part of those agreements, the company received, among other things, a non-exclusive royalty bearing license in the United States and Canada for Monsanto's Genuity® Roundup Ready 2 Yield® glyphosate tolerance trait and its dicamba tolerance trait for soybeans, post-patent regulatory access and maintenance support for Roundup Ready® 1 glyphosate tolerance trait for soybeans, Genuity® Roundup Ready 2 glyphosate tolerance trait for corn and YieldGard® corn borer insect resistance trait. The agreements require the company to make a series of up-front and variable payments subject to Monsanto delivering enabling soybean genetic material. Total annual fixed royalty payments of $802 contemplated under the arrangement for trait technology, associated data and soybean lines to support commercial introduction are expected to come due in years 2014 - 2017. Additionally, beginning in 2018, DuPont will pay royalties on a per unit basis related to the Genuity® Roundup Ready 2 Yield® and dicamba tolerance traits for the life of the license, subject to annual minimum payments through 2023 totaling $950.

In a separate agreement, the company agreed to dismiss with prejudice its antitrust claims against Monsanto in exchange for a dismissal with prejudice of Monsanto's patent infringement claims and the related damages verdict. Accordingly, as of the first quarter 2013 this matter was resolved, but for the court-ordered sanctions against the company for “fraud against the court.” The court unsealed the order in November 2012. The parties agreed to present the sanctions and related rulings for immediate appeal and those matters are presently on appeal.


16

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

Titanium Dioxide Antitrust Litigation
In February 2010, two suits were filed in Maryland federal district court alleging conspiracy among DuPont, Huntsman International LLC, Kronos Worldwide Inc., Millenium Inorganics Chemicals Inc. and others to fix prices of titanium dioxide sold in the United States between March 2002 and the present. The cases were subsequently consolidated and in August 2012, the court certified a class consisting of United States customers that have directly purchased titanium dioxide since February 1, 2003.

During the third quarter 2013, DuPont and plaintiffs agreed to settle this matter, subject to court approval. In connection therewith, the company has recorded charges of $72, within other operating charges, at September 30, 2013. The settlement explicitly acknowledges that DuPont denies all allegations and does not admit liability. The court has preliminarily approved the settlement and scheduled the final approval hearing for November 25, 2013.
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 2012 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, 2013, the Condensed Consolidated Balance Sheet included a liability of $456, 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, 2013.

Redeemable Noncontrolling Interest
On July 31, 2013, the company acquired a controlling interest in Pannar Seed Pty. Ltd (Pannar). As part of the acquisition, the minority shareholders of Pannar have the right, at any time, to exercise a put option requiring the company to purchase the remaining equity interest at a price based on a specified formula. Due to this redemption feature, the minority shareholders interest is classified outside of Stockholders’ equity under the caption “Redeemable noncontrolling interest” in the Condensed Consolidated Balance Sheet. At September 30, 2013, the carrying amount of the Redeemable noncontrolling interest approximates the estimated redemption value. In October 2013, the company received notice that the minority shareholders exercised their put option. As the exercise does not result in a change in control of Pannar, the exercise of the put option will be accounted for as an equity transaction during the fourth quarter.
Note 10.  Stockholders’ Equity 
Share Repurchase Program
In December 2012, the company's Board of Directors authorized a $1,000 share buyback plan. In February 2013, the company entered into an accelerated share repurchase (ASR) agreement with a financial institution under which the company used $1,000 of the proceeds from the sale of Performance Coatings for the purchase of shares of common stock. The 2012 $1,000 share buyback plan was completed in the second quarter 2013 through the ASR agreement, under which the company purchased and retired 20.4 million shares.

During the nine months ended September 30, 2012, the company paid $400 for the purchase and receipt of shares of common stock. During 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 authorized by the company's Board of Directors in April 2011. 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, 2013. There is no required completion date for the purchases under the 2011 plan.



17

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

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 $378 and the consideration paid, net of taxes of $78, was recorded as a $9 increase to additional paid-in capital.

Other Comprehensive Income
A summary of the changes in other comprehensive income for the three and nine months ended September 30, 2013 and 2012 is provided as follows:
 
Three Months Ended
Three Months Ended
Affected Line Item in Consolidated Income Statements1
 
September 30, 2013
September 30, 2012
 
Pre-Tax
Tax
After-Tax
Pre-Tax
Tax
After-Tax
 
Cumulative translation adjustment
$
177

$

$
177

$
189

$

$
189

 
Net revaluation and clearance of cash flow hedges to earnings:
 
 
 
 
 
 
 
Additions and revaluations of derivatives designated as cash flow hedges
(15
)
6

(9
)
(6
)
1

(5
)
See (2) below
Clearance of hedge results to earnings:
 
 
 
 
 
 
 
Foreign currency contracts
1


1

(9
)
5

(4
)
Net sales
Commodity contracts



(2
)

(2
)
Cost of goods sold
Net revaluation and clearance of cash flow hedges to earnings
(14
)
6

(8
)
(17
)
6

(11
)
 
Pension benefit plans:
 
 
 
 
 
 
 
Net loss
(4
)

(4
)
(609
)
185

(424
)
See (2) below
Prior service benefit
62

(22
)
40




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


2

3

(1
)
2

See (3) below
Amortization of loss
244

(83
)
161

222

(75
)
147

See (3) below
Curtailment loss



2

(1
)
1

See (3) below
Pension benefit plans, net
304

(105
)
199

(382
)
108

(274
)
 
Other benefit plans:
 
 
 
 
 
 
 
Net gain (loss)
95

(34
)
61

(141
)
51

(90
)
See (2) below
Prior service benefit
199

(69
)
130

857

(299
)
558

See (2) below
Reclassifications to net income:
 
 
 
 
 
 
 
Amortization of prior service benefit
(48
)
16

(32
)
(44
)
16

(28
)
See (3) below
Amortization of loss
26

(9
)
17

24

(9
)
15

See (3) below
Curtailment loss



3

(1
)
2

See (3) below
Other benefit plans, net
272

(96
)
176

699

(242
)
457

 
Net unrealized loss on securities



(5
)
2

(3
)
 
Other comprehensive income
$
739

$
(195
)
$
544

$
484

$
(126
)
$
358

 










18

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

 
Nine Months Ended
Nine Months Ended
Affected Line Item in Consolidated Income Statements1
 
September 30, 2013
September 30, 2012
 
Pre-Tax
Tax
After-Tax
Pre-Tax
Tax
After-Tax
 
Cumulative translation adjustment
$
(46
)
$

$
(46
)
$
(53
)
$

$
(53
)
 
Net revaluation and clearance of cash flow hedges to earnings:
 
 
 
 
 
 
 
Additions and revaluations of derivatives designated as cash flow hedges
(39
)
15

(24
)
30

(14
)
16

See (2) below
Clearance of hedge results to earnings:
 
 
 
 
 
 
 
Foreign currency contracts
(2
)
1

(1
)
(20
)
7

(13
)
Net sales
Commodity contracts
(25
)
10

(15
)
(46
)
21

(25
)
Cost of goods sold
Net revaluation and clearance of cash flow hedges to earnings
(66
)
26

(40
)
(36
)
14

(22
)
 
Pension benefit plans:
 
 
 
 
 
 
 
Net gain (loss)
52

(14
)
38

(628
)
195

(433
)
See (2) below
Prior service benefit
62

(22
)
40

22

(8
)
14

See (2) below
Reclassifications to net income:
 
 

 
 

 
Amortization of prior service cost
8

(2
)
6

10

(3
)
7

See (3) below
Amortization of loss
724

(247
)
477

661

(227
)
434

See (3) below
Curtailment loss
1


1

2

(1
)
1

See (3) below
Settlement loss
152

(45
)
107




See (3) below
Pension benefit plans, net
999

(330
)
669

67

(44
)
23

 
Other benefit plans:
 
 
 
 
 
 
 
Net gain (loss)
140

(49
)
91

(141
)
51

(90
)
See (2) below
Prior service benefit
199

(69
)
130

857

(299
)
558

See (2) below
Reclassifications to net income:
 
 
 
 
 
 
 
Amortization of prior service benefit
(142
)
50

(92
)
(104
)
36

(68
)
See (3) below
Amortization of loss
51

(18
)
33

68

(24
)
44

See (3) below
Curtailment (gain) loss
(154
)
54

(100
)
3

(1
)
2

See (3) below
Settlement loss
1


1




See (3) below
Other benefit plans, net
95

(32
)
63

683

(237
)
446

 
Net unrealized gain (loss) on securities
1

(1
)

(3
)
1

(2
)
 
Other comprehensive income
$
983

$
(337
)
$
646

$
658

$
(266
)
$
392

 

1 
Represents the income statement line item within the interim Consolidated Income Statement affected by the pre-tax reclassification out of other comprehensive income (loss).
2 
These amounts represent changes in accumulated other comprehensive income excluding changes due to reclassifying amounts to the interim Consolidated Income Statements.
3 
These accumulated other comprehensive income components are included in the computation of net periodic benefit cost of the company's pension and other long-term employee benefit plans. See Note 12 for additional information.









19

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

The changes and after-tax balances of components comprising accumulated other comprehensive income (loss) are summarized below:
 
Cumulative Translation Adjustment
Net Revaluation and Clearance of Cash Flow Hedges to Earnings
Pension Benefit Plans
Other Benefit Plans
Unrealized Gain on Securities
Total
2013
 

 

 

 

 

 

Balance January 1, 2013
$
(167
)
$
3

$
(8,686
)
$
202

$
2

$
(8,646
)
Other comprehensive (loss) income before reclassifications
(46
)
(24
)
78

221


229

Amounts reclassified from accumulated other comprehensive income (loss)

(16
)
591

(158
)

417

Balance September 30, 2013
$
(213
)
$
(37
)
$
(8,017
)
$
265

$
2

$
(8,000
)

 
Cumulative Translation Adjustment
Net Revaluation and Clearance of Cash Flow Hedges to Earnings
Pension Benefit Plans
Other Benefit Plans
Unrealized Gain on Securities
Total
2012
 

 

 

 

 

 

Balance January 1, 2012
$
(244
)
$
41

$
(8,276
)
$
(274
)
$
3

$
(8,750
)
Other comprehensive (loss) income before reclassifications
(53
)
15

(444
)
467

(2
)
(17
)
Amounts reclassified from accumulated other comprehensive income (loss)

(38
)
442

(22
)

382

Balance September 30, 2012
$
(297
)
$
18

$
(8,278
)
$
171

$
1

$
(8,385
)

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 2012 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 $15,490 and $13,015 as of September 30, 2013 and December 31, 2012, respectively. The increase was primarily due to the issuance in the first quarter 2013 of $1,250 of 2.80% Notes due February 15, 2023 and $750 of 4.15% Notes due February 15, 2043 and an increase in short-term borrowings, partially offset by debt maturities and a decrease in the fair value due to changes in market interest rates during the nine months ended September 30, 2013.

Cash Equivalents
The fair value of cash equivalents approximates its stated value.  The estimated fair value of the company's cash equivalents was determined using level 1 and level 2 inputs within the fair value hierarchy, as described in the company's 2012 Annual Report in Note 1, Summary of Significant Accounting Policies.”  Level 1 measurements are based on quoted market prices and level 2 measurements are based on current interest rates for similar instruments with comparable credit risk and time to maturity.  The company held $1,334 and $0 of money market funds (level 1 measurements) as of September 30, 2013 and December 31, 2012, respectively.  The company held $3,697 and $2,026 of other cash equivalents (level 2 measurements) as of September 30, 2013 and December 31, 2012, 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.


20

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, 2013
December 31, 2012
Derivatives designated as hedging instruments:
 
 
Interest rate swaps
$
1,000

$
1,000

Foreign currency contracts
683

1,083

Commodity contracts
168

753

Derivatives not designated as hedging instruments:
 
 
Foreign currency contracts
11,611

6,733

Commodity contracts
15

242


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, 2013, 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.




21

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, 2013 and 2012:
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2013
2012
2013
2012
Beginning balance
$
(29
)
$
29

$
3

$
41

Additions and revaluations of derivatives designated as cash flow hedges
(9
)
(5
)
(24
)
15

Clearance of hedge results to earnings
1

(6
)
(16
)
(38
)
Ending balance
$
(37
)
$
18

$
(37
)
$
18


At September 30, 2013, the after-tax amount expected to be reclassified from accumulated other comprehensive income (loss) into earnings over the next 12 months is $(30).

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 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.


22

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 2012 Annual Report in Note 1, “Summary of Significant Accounting Policies.”
 
 
Fair Value Using Level 2 Inputs
 
Balance Sheet Location
September 30, 2013
December 31, 2012
Asset derivatives:
 
 
 
Derivatives designated as hedging instruments:
 
 
 
Interest rate swaps1
Other assets
$
35

$
55

Foreign currency contracts
Accounts and notes receivable, net
3

7

 
 
38

62

Derivatives not designated as hedging instruments:
 
 

 
Foreign currency contracts2
Accounts and notes receivable, net
94

88

 
 




Total asset derivatives3
 
$
132

$
150

Cash collateral1,2
Other accrued liabilities
$
31

$
44

 
 
 
 
Liability derivatives:
 
 

 
Derivatives designated as hedging instruments:
 
 

 
Foreign currency contracts
Other accrued liabilities
$
1

$
10

Commodity contracts
Other accrued liabilities
1


 
 
2

10

Derivatives not designated as hedging instruments:
 
 

 
Foreign currency contracts
Other accrued liabilities
99

76

Commodity contracts
Other accrued liabilities
1

1

 
 
100

77

Total liability derivatives3
 
$
102

$
87


1 
Cash collateral held as of September 30, 2013 and December 31, 2012 represents $16 and $13, respectively, related to interest rate swap derivatives designated as hedging instruments.
2 
Cash collateral held as of September 30, 2013 and December 31, 2012 represents $15 and $31, respectively, related to foreign currency derivatives not designated as hedging instruments.
3 
The company's derivative assets and liabilities subject to enforceable master netting arrangements totaled $73 at September 30, 2013 and $40 at December 31, 2012.




23

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,
2013
2012
2013
2012
Income Statement Classification
Derivatives designated as hedging instruments:
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
Interest rate swaps
$

$

$
(5
)
$

Interest expense3
Cash flow hedges:
 
 
 
 
 
Foreign currency contracts
(5
)
(16
)
(1
)
13

Net sales
Commodity contracts
(10
)
10


(2
)
Cost of goods sold
 
(15
)
(6
)
(6
)
11

 
Derivatives not designated as hedging instruments:
 
 
 
 
 
Foreign currency contracts


(130
)
(221
)
Other income (loss), net4
Commodity contracts


(1
)
(8
)
Cost of goods sold
 


(131
)
(229
)
 
Total derivatives
$
(15
)
$
(6
)
$
(137
)
$
(218
)
 

 
Amount of Gain (Loss)
Recognized in OCI1
(Effective Portion)
Amount of Gain (Loss)
Recognized in Income2
 
Nine Months Ended September 30,
2013
2012
2013
2012
Income Statement Classification
Derivatives designated as hedging instruments:
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
Interest rate swaps
$

$

$
(20
)
$
(4
)
Interest expense3
Cash flow hedges:
 
 
 
 
 
Foreign currency contracts
11

1

2

20

Net sales
Commodity contracts
(50
)
28

25

46

Cost of goods sold
 
(39
)
29

7

62

 
Derivatives not designated as hedging instruments:
 
 
 
 
 
Foreign currency contracts