10-Q 1 a11-10576_110q.htm 10-Q

Table of Contents

 

 

 

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 March 31, 2011

 

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 Rule12b-2 of the Exchange Act).  Yes  o   No  x

 

The Registrant had 928,707,000 shares (excludes 87,041,000 shares of treasury stock) of common stock, $0.30 par value, outstanding at April 15, 2011.

 

 

 



Table of Contents

 

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

Part I

Financial Information

 

 

 

 

Item 1.

Consolidated Financial Statements (Unaudited)

 

 

Consolidated Income Statements

3

 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to the Consolidated Financial Statements

 

 

Note 1.

Summary of Significant Accounting Policies

6

 

Note 2.

Other Income, Net

6

 

Note 3.

Employee Separation / Asset Related Charges, Net

7

 

Note 4.

Provision for Income Taxes

7

 

Note 5.

Earnings Per Share of Common Stock

8

 

Note 6.

Fair Value Measurements

8

 

Note 7.

Restricted Cash

9

 

Note 8.

Inventories

10

 

Note 9.

Goodwill and Other Intangible Assets

10

 

Note 10.

Commitments and Contingent Liabilities

11

 

Note 11.

Stockholders’ Equity

15

 

Note 12.

Derivatives and Other Hedging Instruments

16

 

Note 13.

Long-Term Employee Benefits

21

 

Note 14.

Segment Information

22

 

Note 15.

Acquisition of Danisco

22

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

 

Cautionary Statements About Forward-Looking Statements

24

 

Results of Operations

24

 

Segment Reviews

26

 

Liquidity & Capital Resources

27

 

Contractual Obligations

29

 

PFOA

29

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.

Controls and Procedures

30

 

 

 

Part II

Other Information

 

 

 

 

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 5.

Other Information

35

Item 6.

Exhibits

35

Signature

 

36

Exhibit Index

 

37

 

2



Table of Contents

 

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
March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Net sales

 

$

10,034

 

$

8,484

 

Other income, net

 

25

 

360

 

Total

 

10,059

 

8,844

 

 

 

 

 

 

 

Cost of goods sold and other operating charges

 

6,831

 

5,796

 

Selling, general and administrative expenses

 

1,027

 

993

 

Research and development expense

 

399

 

365

 

Interest expense

 

100

 

103

 

Total

 

8,357

 

7,257

 

 

 

 

 

 

 

Income before income taxes

 

1,702

 

1,587

 

Provision for income taxes

 

258

 

450

 

Net income

 

1,444

 

1,137

 

Less: Net income attributable to noncontrolling interests

 

13

 

8

 

Net income attributable to DuPont

 

$

1,431

 

$

1,129

 

 

 

 

 

 

 

Basic earnings per share of common stock

 

$

1.54

 

$

1.24

 

Diluted earnings per share of common stock

 

$

1.52

 

$

1.24

 

Dividends per share of common stock

 

$

0.41

 

$

0.41

 

 

See Notes to the Consolidated Financial Statements beginning on page 6.

 

3



Table of Contents

 

E. I. du Pont de Nemours and Company

Condensed Consolidated Balance Sheets (Unaudited)

(Dollars in millions, except per share)

 

 

 

March 31,
2011

 

December 31,
2010

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

3,796

 

$

4,263

 

Marketable securities

 

1,026

 

2,538

 

Restricted cash

 

1,991

 

 

Accounts and notes receivable, net

 

7,936

 

5,635

 

Inventories

 

5,580

 

5,967

 

Prepaid expenses

 

225

 

122

 

Deferred income taxes

 

565

 

534

 

Total current assets

 

21,119

 

19,059

 

Property, plant and equipment, net of accumulated depreciation (March 31, 2011 - $18,869; December 31, 2010 - $18,628)

 

11,377

 

11,339

 

Goodwill

 

2,617

 

2,617

 

Other intangible assets

 

2,677

 

2,704

 

Investment in affiliates

 

1,081

 

1,041

 

Other assets

 

3,729

 

3,650

 

Total

 

$

42,600

 

$

40,410

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

3,836

 

$

4,360

 

Short-term borrowings and capital lease obligations

 

2,137

 

133

 

Income taxes

 

304

 

225

 

Other accrued liabilities

 

3,879

 

4,671

 

Total current liabilities

 

10,156

 

9,389

 

Long-term borrowings and capital lease obligations

 

10,114

 

10,137

 

Other liabilities

 

10,907

 

11,026

 

Deferred income taxes

 

144

 

115

 

Total liabilities

 

31,321

 

30,667

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock

 

237

 

237

 

Common stock, $0.30 par value; 1,800,000,000 shares authorized; Issued at March 31, 2011 - 1,014,417,000; December 31, 2010 - 1,004,351,000

 

304

 

301

 

Additional paid-in capital

 

9,772

 

9,227

 

Reinvested earnings

 

12,852

 

12,030

 

Accumulated other comprehensive loss

 

(5,629

)

(5,790

)

Common stock held in treasury, at cost (87,041,000 shares at March 31, 2011 and December 31, 2010)

 

(6,727

)

(6,727

)

Total DuPont stockholders’ equity

 

10,809

 

9,278

 

Noncontrolling interests

 

470

 

465

 

Total equity

 

11,279

 

9,743

 

Total

 

$

42,600

 

$

40,410

 

 

See Notes to the Consolidated Financial Statements beginning on page 6.

 

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Table of Contents

 

E. I. du Pont de Nemours and Company

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in millions)

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

Operating activities

 

 

 

 

 

Net income

 

$

1,444

 

$

1,137

 

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

 

 

 

 

 

Depreciation

 

294

 

308

 

Amortization of intangible assets

 

67

 

58

 

Contributions to pension plans

 

(105

)

(90

)

Other noncash charges and credits - net

 

385

 

104

 

Change in operating assets and liabilities - net

 

(3,569

)

(2,582

)

Cash used for operating activities

 

(1,484

)

(1,065

)

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(323

)

(185

)

Investments in affiliates

 

(12

)

(12

)

Proceeds from sales of assets - net of cash sold

 

7

 

14

 

Net decrease in short-term financial instruments

 

1,585

 

449

 

Forward exchange contract settlements

 

(210

)

191

 

Increase in restricted cash

 

(1,991

)

 

Other investing activities - net

 

(21

)

(73

)

Cash (used for) provided by investing activities

 

(965

)

384

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Dividends paid to stockholders

 

(383

)

(374

)

Net increase (decrease) in borrowings

 

1,991

 

(9

)

Repurchase of common stock

 

(272

)

 

Proceeds from exercise of stock options

 

605

 

21

 

Other financing activities - net

 

(12

)

(8

)

Cash provided by (used for) financing activities

 

1,929

 

(370

)

Effect of exchange rate changes on cash

 

53

 

(59

)

Decrease in cash and cash equivalents

 

$

(467

)

$

(1,110

)

Cash and cash equivalents at beginning of period

 

4,263

 

4,021

 

Cash and cash equivalents at end of period

 

$

3,796

 

$

2,911

 

 

See Notes to the Consolidated Financial Statements beginning on page 6.

 

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Table of Contents

 

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, 2010, collectively referred to as the ‘2010 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 classifications.

 

Note 2.  Other Income, Net

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Cozaar®/Hyzaar® income

 

$

48

 

$

219

 

Royalty income

 

31

 

32

 

Interest income

 

28

 

19

 

Equity in earnings of affiliates, excluding exchange gains/losses

 

48

 

42

 

Net gains on sales of assets

 

6

 

5

 

Net exchange (losses) gains1

 

(143

)

30

 

Miscellaneous income and expenses, net2

 

7

 

13

 

Total

 

$

25

 

$

360

 

 


1                   The company routinely uses forward exchange contracts to offset its net exposures, by currency, related to its 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 partially offset by the associated tax impact.

2                   Miscellaneous income and expenses, net, generally includes interest items, insurance recoveries, litigation settlements and other items.

 

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Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share)

 

Note 3.  Employee Separation / Asset Related Charges, Net

 

At March 31, 2011, total liabilities relating to prior restructuring activities were $40.  A complete discussion of restructuring initiatives is included in the company’s 2010 Annual Report in Note 4, “Employee Separation / Asset Related Charges, Net.”

 

2009 Restructuring Program

 

Account balances and activity for the 2009 restructuring program are summarized below:

 

 

 

Employee
Separation
Costs

 

Other Non-
personnel
Charges 
1

 

Total

 

Balance at December 31, 2010

 

$

46

 

$

1

 

$

47

 

Payments

 

(18

)

 

(18

)

Net translation adjustment

 

2

 

 

2

 

Balance at March 31, 2011

 

$

30

 

$

1

 

$

31

 

 


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

 

There were $18 of employee separation cash payments related to the 2009 restructuring program during the three months ended March 31, 2011.  The actions related to the 2009 restructuring program were substantially completed by the end of 2010 with payments continuing into 2011, primarily in Europe.

 

Note 4.  Provision for Income Taxes

 

In the first quarter 2011, the company recorded a tax provision of $258, including $135 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 first quarter 2010, the company recorded a tax provision of $450, including $85 of tax expense 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.

 

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Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share)

 

Note 5.  Earnings Per Share of Common Stock

 

Set forth below is a reconciliation of the numerator and denominator for basic and diluted earnings per share calculations for the periods indicated:

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

Numerator:

 

 

 

 

 

Net income attributable to DuPont

 

$

1,431

 

$

1,129

 

Preferred dividends

 

(3

)

(3

)

Net income available to DuPont common stockholders

 

$

1,428

 

$

1,126

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Weighted-average number of common shares - Basic

 

924,897,000

 

905,486,000

 

Dilutive effect of the company’s employee compensation plans

 

16,012,000

 

6,405,000

 

Weighted-average number of common shares - Diluted

 

940,909,000

 

911,891,000

 

 

The following average number of stock options were antidilutive, and therefore, were not included in the diluted earnings per share calculations:

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

Average number of stock options

 

 

64,343,000

 

 

The change in the average number of stock options that were antidilutive in the three months ended March 31, 2011 compared to the same period last year was primarily due to changes in the company’s average stock price.

 

Note 6.  Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The company uses the following valuation techniques to measure fair value for its financial assets and financial liabilities:

 

Level 1 —

Quoted market prices in active markets for identical assets or liabilities;

 

 

Level 2 —

Significant other observable inputs (e.g. quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs);

 

 

Level 3 —

Unobservable inputs for the asset or liability, which are valued based on management’s estimates of assumptions that market participants would use in pricing the asset or liability.

 

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Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share)

 

The company has determined that its financial assets and liabilities are level 1 and level 2 in the fair value hierarchy.  At March 31, 2011, the following financial assets and financial liabilities were measured at fair value on a recurring basis using the type of inputs shown:

 

 

 

 

 

Fair Value Measurements at
March 31, 2011 Using

 

 

 

March 31, 2011

 

Level 1 Inputs

 

Level 2 Inputs

 

Financial assets

 

 

 

 

 

 

 

Derivatives

 

$

97

 

$

 

$

97

 

Available-for-sale securities

 

18

 

18

 

 

 

 

$

115

 

$

18

 

$

97

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

Derivatives

 

$

235

 

$

 

$

235

 

 

At December 31, 2010, the following financial assets and liabilities were measured at fair value on a recurring basis using the type of inputs shown:

 

 

 

 

 

Fair Value Measurements at
December 31, 2010 Using

 

 

 

December 31, 2010

 

Level 1 Inputs

 

Level 2 Inputs

 

Financial assets

 

 

 

 

 

 

 

Derivatives

 

$

153

 

$

 

$

153

 

Available-for-sale securities

 

17

 

17

 

 

 

 

$

170

 

$

17

 

$

153

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

Derivatives

 

$

132

 

$

 

$

132

 

 

The estimated fair value of the company’s outstanding debt, including interest rate financial instruments, 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, was approximately $12,700 and $10,900 as of March 31, 2011 and December 31, 2010, respectively.  The carrying value of debt was approximately $12,300 and $10,300 as of March 31, 2011 and December 31, 2010, respectively.  The increase in the fair value and carrying value of debt was primarily due to the first quarter 2011 issuance of debt to finance the acquisition of Danisco A/S (Danisco) (see Note 15).

 

See Note 21, “Long-Term Employee Benefits” to the company’s 2010 Annual Report for information regarding the company’s pension assets measured at fair value on a recurring basis.

 

Note 7. Restricted Cash

 

As of March 31, 2011, $1,991 of cash is restricted for the acquisition of Danisco (see Note 15).

 

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Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share)

 

Note 8. Inventories

 

 

 

March 31,
2011

 

December 31,
2010

 

Finished products

 

$

3,842

 

$

3,191

 

Semifinished products

 

1,602

 

2,564

 

Raw materials, stores and supplies

 

804

 

855

 

 

 

6,248

 

6,610

 

Adjustment of inventories to a last-in, first-out (LIFO) basis

 

(668

)

(643

)

Total

 

$

5,580

 

$

5,967

 

 

Note 9.  Goodwill and Other Intangible Assets

 

There were no significant changes in goodwill for the three month period ended March 31, 2011.

 

The gross carrying amounts and accumulated amortization of other intangible assets by major class are as follows:

 

 

 

March 31, 2011

 

December 31, 2010

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

Intangible assets subject to amortization (Definite-lived):

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased and licensed technology

 

$

1,642

 

$

(800

)

$

842

 

$

1,617

 

$

(765

)

$

852

 

Patents

 

120

 

(47

)

73

 

118

 

(44

)

74

 

Trademarks

 

57

 

(22

)

35

 

57

 

(22

)

35

 

Other 1

 

858

 

(339

)

519

 

858

 

(323

)

535

 

 

 

2,677

 

(1,208

)

1,469

 

2,650

 

(1,154

)

1,496

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks/tradenames

 

233

 

 

233

 

233

 

 

233

 

Pioneer germplasm 2

 

975

 

 

975

 

975

 

 

975

 

 

 

1,208

 

 

1,208

 

1,208

 

 

1,208

 

Total

 

$

3,885

 

$

(1,208

)

$

2,677

 

$

3,858

 

$

(1,154

)

$

2,704

 

 


1          Primarily consists of sales and grower networks, customer lists, marketing and manufacturing alliances and noncompetition agreements.

2          Pioneer germplasm is the pool of genetic source material and body of knowledge gained from the development and delivery stage of plant breeding. The company recognized germplasm as an intangible asset upon the acquisition of Pioneer. This intangible asset is expected to contribute to cash flows beyond the foreseeable future and there are no legal, regulatory, contractual, or other factors which limit its useful life.

 

The aggregate pre-tax amortization expense for definite-lived intangible assets was $67 and $58 for the three month periods ended March 31, 2011 and 2010, respectively.  The estimated aggregate pre-tax amortization expense for 2011 and each of the next five years is approximately $215, $215, $215, $204, $172 and $85.

 

10



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share)

 

Note 10.  Commitments and Contingent Liabilities

 

Guarantees

 

Product Warranty Liability

 

The company warrants that its products meet standard specifications.  The company’s product warranty liability was $23 and $20 as of March 31, 2011 and December 31, 2010, respectively.  Estimates for warranty costs are based on historical claims experience.

 

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.  The carrying amounts recorded for all indemnifications as of March 31, 2011 and December 31, 2010 was $100.  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.

 

In connection with the 2004 sale of the majority of the net assets of Textiles and Interiors, the company indemnified the purchasers, subsidiaries of Koch Industries, Inc. (INVISTA), against certain liabilities primarily related to taxes, legal and environmental matters and other representations and warranties under the Purchase and Sale Agreement. The estimated fair value of the indemnity obligations under the Purchase and Sale Agreement was $70 and was included in the indemnifications balance of $100 at March 31, 2011.  Under the Purchase and Sale Agreement, the company’s total indemnification obligation for the majority of the representations and warranties cannot exceed $1,400. The other indemnities are not subject to this limit.  In March 2008, INVISTA filed suit in the Southern District of New York alleging that certain representations and warranties in the Purchase and Sale Agreement were breached and, therefore, that DuPont is obligated to indemnify it. DuPont disagrees with the extent and value of INVISTA’s claims. DuPont has not changed its estimate of its total indemnification obligation under the Purchase and Sale Agreement as a result of the lawsuit.

 

Obligations for Equity Affiliates & Others

 

The company has directly guaranteed various debt obligations under agreements with third parties related to equity affiliates, customers, suppliers and other affiliated companies.  At March 31, 2011 and December 31, 2010, the company had directly guaranteed $555 and $544, respectively, of such obligations. In addition, the company had $16 relating to guarantees of historical obligations for divested subsidiaries as of March 31, 2011 and December 31, 2010.  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.

 

At March 31, 2011 and December 31, 2010, a liability of $116 and $109, respectively, was recorded for these obligations, representing the amount of payment/performance risk for which the company deems probable. This liability is principally related to obligations of the company’s polyester films joint venture, which are guaranteed by the company.

 

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Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share)

 

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 43 percent of the $302 of guaranteed obligations of customers and suppliers. Set forth below are the company’s guaranteed obligations at March 31, 2011:

 

 

 

Short-Term

 

Long-Term

 

Total

 

Obligations for customers and suppliers1:

 

 

 

 

 

 

 

Bank borrowings (terms up to 5 years)

 

$

166

 

$

136

 

$

302

 

Obligations for other affiliated companies2:

 

 

 

 

 

 

 

Bank borrowings (terms up to 1 year)

 

210

 

 

210

 

Obligations for equity affiliates2:

 

 

 

 

 

 

 

Bank borrowings (terms up to 2 years)

 

6

 

14

 

20

 

Revenue bonds (terms up to 5 years)

 

 

23

 

23

 

Total obligations for customers, suppliers, other affiliated companies, and equity affiliates

 

382

 

173

 

555

 

Obligations for divested subsidiaries3:

 

 

 

 

 

 

 

Conoco (terms up to 16 years)

 

 

16

 

16

 

Total obligations for divested subsidiaries

 

 

16

 

16

 

 

 

$

382

 

$

189

 

$

571

 

 


1                   Existing guarantees for customers and suppliers arose as part of contractual agreements.

2                   Existing guarantees for equity affiliates and other affiliated companies arose for liquidity needs in normal operations.

3                   The company has guaranteed certain obligations and liabilities related to a divested subsidiary, Conoco, which has indemnified the company for any liabilities the company may incur pursuant to these guarantees.

 

Litigation

 

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 March 31, 2011, DuPont has accruals of $23 related to the PFOA matters discussed below.

 

Leach v DuPont

 

In August 2001, a class action, captioned Leach v DuPont, was filed in West Virginia state court against DuPont and the Lubeck Public Service District.  The complaint alleged that residents living near the Washington Works facility had suffered, or may suffer, deleterious health effects from exposure to PFOA in drinking water.  The relief sought included damages for medical monitoring, diminution of property values and punitive damages plus injunctive relief to stop releases of PFOA.  DuPont and attorneys for the class reached a settlement agreement in 2004 and as a result, the company established accruals of $108 in 2004.  The settlement binds a class of approximately 80,000 residents.  As defined by the court, the class includes those individuals who have consumed, for at least one year, water containing 0.05 parts per billion (ppb) or greater of PFOA from any of six designated public water sources or from sole source private wells.

 

In July 2005, the company paid the plaintiffs’ attorneys’ fees and expenses of $23 and made a payment of $70, which class counsel has designated to fund a community health project.  The company is also funding a series of health studies by an independent science panel of experts in the communities exposed to PFOA to evaluate available scientific evidence on whether any probable link exists between exposure to PFOA and human disease.  The company expects the independent science panel to complete these health studies between 2009 and year-end 2012 at a total estimated cost of $32.  In addition, the company is providing state-of-the-art water treatment systems designed to reduce the level of PFOA in water to six area water districts, including the Little Hocking Water Association (LHWA), until the science panel determines that PFOA does not cause disease or until applicable water standards can be met without such treatment.  All of the water treatment systems are operating.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share)

 

The settlement resulted in the dismissal of all claims asserted in the lawsuit except for personal injury claims.  If the independent science panel concludes that no probable link exists between exposure to PFOA and any diseases, then the settlement would also resolve personal injury claims.  If it concludes that a probable link does exist between exposure to PFOA and any diseases, then DuPont would also fund up to $235 for a medical monitoring program to pay for such medical testing.  In this event, plaintiffs would retain their right to pursue personal injury claims.  All other claims in the lawsuit would remain dismissed by the settlement.  DuPont believes that it is remote that the panel will find a probable link.  Therefore, at March 31, 2011, the company has not established any accruals related to medical monitoring or personal injury claims.  However, there can be no assurance as to what the independent science panel will conclude.

 

Civil Actions: Drinking Water

 

At March 31, 2011, there were four additional actions pending brought by or on behalf of water district customers in New Jersey, Ohio and West Virginia. The cases generally claim PFOA contamination of drinking water and seek a variety of relief including compensatory and punitive damages, testing, treatment, remediation and monitoring. In addition, the two New Jersey class actions and the Ohio action, brought by the LHWA, claim “imminent and substantial endangerment to health and or the environment” under the Resource Conservation and Recovery Act (RCRA).  In the first quarter 2011, the court preliminarily approved the agreement in principle to settle the two New Jersey class actions for $8.3. The final approval hearing is scheduled for the second quarter 2011.  Discovery continues in the Ohio action.  In the West Virginia class action, the court entered judgment for DuPont in the first quarter 2010 which was affirmed by the Fourth Circuit Court of Appeals in April 2011.

 

DuPont denies the claims alleged in these civil drinking water actions and is defending itself vigorously.

 

Environmental Actions

 

Of the total accrual, about $10 is to fund DuPont’s obligations under agreements with the U. S. Environmental Protection Agency (EPA) and the New Jersey Department of Environmental Protection.  In 2005, the company and EPA entered an agreement settling allegations that DuPont failed to comply with technical reporting requirements under the Toxic Substances Control Act and RCRA. Under the settlement, DuPont paid a fine of $10.25 and committed to undertaking two Supplemental Environmental Projects, one of which has been completed. In 2009, EPA and DuPont entered a Consent Order under the Safe Drinking Water Act. The Consent Order obligates DuPont to survey, sample and test drinking water in and around the company’s Washington Works site and offer treatment or an alternative supply of drinking water if tests indicate the presence of PFOA in drinking water at the national Provisional Health Advisory for PFOA of 0.40 ppb or greater.

 

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.

 

Benlate®

 

In 1991, DuPont began receiving claims by growers that use of Benlate® 50 DF fungicide had caused crop damage.  DuPont has since been served with thousands of lawsuits, most of which have been disposed of through trial, dismissal or settlement.

 

At March 31, 2011, there were nine cases in Florida courts alleging that Benlate® caused crop damage.  At the 2006 trial of two cases involving twenty-seven Costa Rican fern growers, the plaintiffs sought damages in the range of $270 to $400.  A $56 judgment was rendered against the company, but was reduced to $24 on DuPont’s motion.  In the fourth quarter 2009, on DuPont’s motion, the judgment was reversed, vacated and the cases were remanded to be tried separately or in small related groups. Plaintiffs sought appellate review of the decision. In December 2010, the appellate court upheld the decision to try the cases separately. The appellate court also affirmed dismissal of the verdicts for seven of the twenty-seven fern growers on grounds that their claims were barred by the statute of limitations.  Plaintiffs are seeking review by the Florida Supreme Court.  On January 19, 2011, the court entered an order in five of the remaining crop cases striking DuPont’s pleadings. The order essentially enters judgment against DuPont as to liability.  DuPont will appeal, but cannot do so until a damages trial results in a monetary judgment against it. Trial of the first of these crop cases is scheduled in June 2011.

 

Two cases alleging damage to shrimping operations were resolved in a single binding arbitration during the fourth quarter 2010. The arbiter awarded plaintiffs a total of $19 in compensatory damages plus attorneys’ fees and expenses. DuPont paid the compensatory damages in December 2010 and paid $8.5 for plaintiffs’ attorneys’ fees and expenses in the first quarter 2011.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share)

 

In January 2009, a case was filed in Florida state court claiming that plaintiff’s exposure to Benlate® allegedly contaminated with other fungicides and herbicides, caused plaintiff’s kidney cancer and pancreatic and brain tumors.  The case was tried to a verdict in September 2010 in federal court, to which it had been removed on DuPont’s motion, and the jury unanimously rejected allegations that exposure to Benlate® caused plaintiff’s diseases. In December 2010, the court denied plaintiff’s post trial motions. Plaintiff has appealed.

 

The company does not believe that Benlate® caused the damages alleged in each of these cases and denies the allegations of fraud and misconduct.  The company continues to defend itself in ongoing matters.  As of March 31, 2011, the company has incurred costs and expenses of approximately $2,000 associated with these matters, but does not expect additional significant costs or expenses associated with the remaining ten cases.  At March 31, 2011, the company has accruals of about $0.1 related to Benlate®. The company does not expect losses in excess of the accruals, if any, to be material.

 

Spelter, West Virginia

 

In September 2006, a West Virginia state court certified a class action captioned Perrine v DuPont, against DuPont that seeks relief including the provision of remediation services and property value diminution damages for 7,000 residential properties in the vicinity of a closed zinc smelter in Spelter, West Virginia.  The action also seeks medical monitoring for an undetermined number of residents in the class area.  The smelter was owned and operated by at least three companies between 1910 and 2001, including DuPont between 1928 and 1950.  DuPont performed remedial measures at the request of EPA in the late 1990s and in 2001 repurchased the site to facilitate and complete the remediation.  The fall 2007 trial was conducted in four phases: liability, medical monitoring, property and punitive damages. The jury found against DuPont in all four phases awarding $55.5 for property remediation and $196.2 in punitive damages. In post trial motions, the court adopted the plaintiffs’ forty-year medical monitoring plan estimated by plaintiffs to cost $130 and granted plaintiffs’ attorneys legal fees of $127 plus $8 in expenses based on and included in the total jury award.  DuPont appealed to the West Virginia Supreme Court (the Court) seeking review of a number of issues.  The Court issued its decision on March 26, 2010, affirming in part and reversing in part the trial court’s decision.

 

The Court conditionally affirmed the verdict, but reduced punitive damages to $97.7. The Court reversed the trial court’s order granting summary judgment to the adult plaintiffs on the issue of statute of limitations and ordered a new jury trial on the sole issue of when the plaintiffs possessed requisite knowledge to trigger the running of the statute.

 

In November 2010, plaintiffs and DuPont reached an agreement to settle this matter for $70 which the company paid in the first quarter 2011.  In addition, the agreement requires DuPont to fund a medical monitoring program.  The initial set-up costs associated with the program were included in the $70.  The company will reassess its liability related to funding the medical monitoring program as eligible members of the class elect to participate and enroll in the program, as those costs cannot be reasonably estimated at this time.  Enrollment in the program is expected to be completed in the third quarter 2011.  As of March 31, 2011, the company does not have any accruals related this matter.

 

General

 

The company is subject to various lawsuits and claims arising out of the normal course of its business.  These lawsuits and claims include actions based on alleged exposures to products, intellectual property and environmental matters and contract and antitrust claims.  Management has noted a nationwide trend in purported class actions against chemical manufacturers generally seeking relief such as medical monitoring, property damages, off-site remediation and punitive damages arising from alleged environmental torts without claiming present personal injuries. Such cases may allege contamination from unregulated substances or remediated sites. The company also has noted a trend in public and private nuisance suits being filed on behalf of states, counties, cities and utilities alleging harm to the general public.  Although it is not possible to predict the outcome of these various lawsuits and claims, management does not anticipate they will have a materially adverse effect on the company’s consolidated financial position or liquidity.  However, the ultimate liabilities may be significant to results of operations in the period recognized.  The company accrues for contingencies when the information available indicates that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated.

 

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Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share)

 

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 set forth in Note 1 in the company’s 2010 Annual Report. 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 and remedial 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 March 31, 2011, the Condensed Consolidated Balance Sheets included a liability of $420, 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 two to three times the amount accrued as of March 31, 2011.

 

Other

 

The company has various purchase commitments incident to the ordinary conduct of business. In the aggregate, such commitments are not at prices in excess of current market nor are they significantly different than amounts disclosed in the company’s 2010 Annual Report.

 

Note 11.  Stockholders’ Equity

 

The company’s Board of Directors authorized a $2,000 share buyback plan in June 2001.  During the first quarter 2011, the company purchased and retired 5.0 million shares at a total cost of $272 under this plan.  During the first quarter 2010, there were no purchases of stock under this plan. As of March 31, 2011, the company has purchased 30.9 million shares at a total cost of $1,484. Management has not established a timeline for the buyback of the remaining stock under this plan.

 

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Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share)

 

A summary of the changes in equity for the three months ended March 31, 2011 and 2010 is provided below:

 

Consolidated Changes in Equity for the
Three Months Ended March 31, 2011

 

Total

 

Comprehensive
Income

 

Preferred
Stock

 

Common
Stock

 

Additional
Paid-in-
Capital

 

Reinvested
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Treasury
Stock

 

Noncontrolling
Interests

 

Beginning balance

 

$

9,743

 

 

 

$

237

 

$

301

 

$

9,227

 

$

12,030

 

$

(5,790

)

$

(6,727

)

$

465

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

1,444

 

1,444

 

 

 

 

 

 

 

1,431

 

 

 

 

 

13

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

44

 

44

 

 

 

 

 

 

 

 

 

44

 

 

 

 

 

Net revaluation and clearance of cash flow hedges to earnings

 

21

 

21

 

 

 

 

 

 

 

 

 

22

 

 

 

(1

)

Pension benefit plans

 

103

 

103

 

 

 

 

 

 

 

 

 

103

 

 

 

 

 

Other benefit plans

 

(9

)

(9

)

 

 

 

 

 

 

 

 

(9

)

 

 

 

 

Net unrealized gain on securities

 

1

 

1

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

Other comprehensive income, net of tax:

 

160

 

160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

1,604

 

1,604

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common dividends

 

(390

)

 

 

 

 

 

 

 

 

(383

)

 

 

 

 

(7

)

Preferred dividends

 

(3

)

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

 

Common stock issued - compensation plans

 

597

 

 

 

 

 

5

 

592

 

 

 

 

 

 

 

 

 

Common stock repurchased

 

(272

)

 

 

 

 

 

 

 

 

 

 

 

 

(272

)

 

 

Common stock retired

 

 

 

 

 

 

(2

)

(47

)

(223

)

 

 

272

 

 

 

Total Equity as of March 31, 2011

 

$

11,279

 

 

 

$

237

 

$

304

 

$

9,772

 

$

12,852

 

$

(5,629

)

$

(6,727

)

$

470

 

 

Consolidated Changes in Equity for the
Three Months Ended March 31, 2010

 

Total

 

Comprehensive
Income

 

Preferred
Stock

 

Common
Stock

 

Additional
Paid-in-
Capital

 

Reinvested
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Treasury
Stock

 

Noncontrolling
Interests

 

Beginning balance

 

$

7,651

 

 

 

$

237

 

$

297

 

$

8,469

 

$

10,710

 

$

(5,771

)

$

(6,727

)

$

436

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

1,137

 

1,137

 

 

 

 

 

 

 

1,129

 

 

 

 

 

8

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(61

)

(61

)

 

 

 

 

 

 

 

 

(61

)

 

 

 

 

Net revaluation and clearance of cash flow hedges to earnings

 

(31

)

(31

)

 

 

 

 

 

 

 

 

(30

)

 

 

(1

)

Pension benefit plans

 

80

 

80

 

 

 

 

 

 

 

 

 

80

 

 

 

 

 

Other benefit plans

 

(20

)

(20

)

 

 

 

 

 

 

 

 

(20

)

 

 

 

 

Net unrealized loss on securities

 

(2

)

(2

)

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

Other comprehensive loss, net of tax:

 

(34

)

(34

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

1,103

 

1,103

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common dividends

 

(374

)

 

 

 

 

 

 

 

 

(373

)

 

 

 

 

(1

)

Preferred dividends

 

(3

)

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

 

Common stock issued - compensation plans

 

46

 

 

 

 

 

1

 

45

 

 

 

 

 

 

 

 

 

Total Equity as of March 31, 2010

 

$

8,423

 

 

 

$

237

 

$

298

 

$

8,514

 

$

11,463

 

$

(5,804

)

$

(6,727

)

$

442

 

 


1          Includes comprehensive income attributable to noncontrolling interests of $12 and $7 for the three months ended March 31, 2011 and 2010, respectively.

 

Note 12. Derivatives and Other Hedging 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 under established procedures and controls. The company has established a variety of approved derivative instruments to be utilized in each financial risk management program, as well as varying levels of exposure coverage and time horizons based on an assessment of risk factors related to each hedging program. Derivative instruments utilized during the period include forwards, options, futures and swaps. The company has not designated any nonderivatives as hedging instruments.

 

The company established a financial risk management framework that incorporated the Corporate Financial Risk Management Committee and established financial risk management policies and guidelines that authorize the use of specific derivative instruments and further establishes procedures for control and valuation, counterparty credit approval and routine monitoring and reporting. The

 

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Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share)

 

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 manages this exposure to credit loss through the aforementioned credit approvals, limits and monitoring procedures and, to the extent possible, by restricting the period over which unpaid balances are allowed to accumulate. 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 company hedges foreign currency-denominated revenue and monetary assets and liabilities, certain business specific foreign currency exposures and certain energy feedstock purchases. In addition, the company enters into agricultural commodity derivatives to hedge exposures relevant to agricultural feedstocks.

 

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.

 

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 natural gas, 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

 

During the quarter ended March 31, 2011, the company maintained a number of interest rate swaps, implemented at the time the debt instruments were issued, that involve the exchange of fixed for floating rate interest payments.  These swaps allow the company to achieve a target range of floating rate debt.  All interest rate swaps qualify for the shortcut method of hedge accounting, thus there is no ineffectiveness related to these hedges. The company maintains no other significant fair value hedges.  At March 31, 2011 and December 31, 2010, the company had interest rate swap agreements with gross notional amounts of  $1,000.

 

Cash Flow Hedges

 

The company maintains a number of cash flow hedging programs to reduce risks related to foreign currency and commodity price risk. While each risk management program has a different time maturity period, most programs currently do not extend beyond the next two-year period.

 

The company 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 U.S. dollar value of the related foreign currency-denominated revenues.  At March 31, 2011 and December 31, 2010, the company had foreign currency exchange contracts with gross notional amounts of $1,100 and $1,220, respectively.

 

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Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share)

 

A portion of natural gas purchases are hedged to reduce price volatility using fixed price swaps and options.  At March 31, 2011 and December 31, 2010, the company had energy feedstock and other contracts with gross notional amounts of $115 and $151, respectively.

 

The company contracts with independent growers to produce seed inventory.  Under these contracts, growers are compensated with bushel equivalents that are sold to the company for the market price of grain for a period of time.  Derivative instruments, such as commodity futures and options that have a high correlation to the underlying commodity, are used to hedge the commodity price risk involved in compensating growers.

 

The company utilizes agricultural commodity futures to manage the price volatility of soybean meal.  These derivative instruments have a high correlation to the underlying commodity exposure and are deemed effective in offsetting soybean meal feedstock price risk.

 

At March 31, 2011 and December 31, 2010, the company had agricultural commodity contracts with gross notional amounts of $386 and $297, respectively.

 

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 effect of cash flow hedges on accumulated other comprehensive income (loss) for the three months ended March 31, 2011 and 2010:

 

 

 

Three Months Ended
March 31, 2011

 

Three Months Ended
March 31, 2010

 

 

 

Pre-tax

 

Tax

 

After-Tax

 

Pre-tax

 

Tax

 

After-Tax

 

Beginning balance

 

$

(47

)

$

16

 

$

(31

)

$

(101

)

$

36

 

$

(65

)

Additions and revaluations of derivatives designated as cash flow hedges

 

9

 

(3

)

6

 

(72

)

26

 

(46

)

Clearance of hedge results to earnings

 

27

 

(11

)

16

 

26

 

(10

)

16

 

Ending balance

 

$

(11

)

$

2

 

$

(9

)

$

(147

)

$

52

 

$

(95

)

 

At March 31, 2011, the pre-tax, tax and after-tax amounts expected to be reclassified from accumulated other comprehensive loss into earnings over the next 12 months are $(39), $13 and $(26), respectively.

 

Hedges of Net Investment in a Foreign Operation

 

During the quarter ended March 31, 2011, the company did not maintain any hedges of net investment in a foreign operation.

 

Derivatives not Designated in Hedging Relationships

 

The company uses forward exchange contracts to reduce its net exposure, by currency, related to foreign currency-denominated monetary assets and liabilities. 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 results in a minimal earnings impact, after taxes.  At March 31, 2011 and December 31, 2010, the company had foreign currency contracts with gross notional amounts of $10,802 and $7,449, respectively.

 

In addition, the company has risk management programs for agricultural commodities that do not qualify for hedge accounting treatment.  At March 31, 2011 and December 31, 2010, the company had agricultural commodities contracts with gross notional amounts of $318 and $310, respectively.

 

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Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share)

 

Contingent Features

 

During the quarter ended March 31, 2011, the company did not maintain any derivative contracts with credit-risk-related contingent features.

 

The following tables provide information on the location and amounts of derivative fair values in the Condensed Consolidated Balance Sheet and derivative gains and losses in the Consolidated Income Statement:

 

Fair Values of Derivative Instruments

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

March 31, 2011

 

December 31, 2010

 

March 31, 2011

 

December 31, 2010

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

29

2

$

40

2

$

 

$

 

Foreign currency contracts

 

7

1

20

1

6

3

3

3

Energy feedstocks

 

2

2

3

1

54

3

75

3

Total derivatives designated as hedging instruments

 

$

38

 

$

63

 

$

60

 

$

78

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

59

1

90

1

175

3

54

3

Total derivatives not designated as hedging instruments

 

$

59

 

$

90

 

$

175

 

$

54

 

Total derivatives

 

$

97

 

$

153

 

$

235

 

$

132

 

 


1                    Current portion recorded in accounts and notes receivable, net.

2                    Long-term portion recorded in other assets.

3                    Current portion recorded in other accrued liabilities.

 

The Effect of Derivative Instruments on the Consolidated Income Statement

 

Fair Value Hedging

 

 

 

Amount of Gain or
(Loss) Recognized in
Income of Derivative

 

Amount of Gain or
(Loss) Recognized in
Income on Hedged Item

 

Amount of Gain or
(Loss) Recognized in
Income of Derivative

 

Amount of Gain or
(Loss) Recognized in
Income on Hedged Item

 

Derivatives in Fair Value
Hedging Relationships

 

Three Months Ended
March 31, 2011

 

Three Months Ended
March 31, 2011

 

Three Months Ended
March 31, 2010

 

Three Months Ended
March 31, 2010

 

Interest rate swaps

 

$

(10

)1

$

10

1

$

5

1

$

(5

)1

Total

 

$

(10

)

$

10

 

$

5

 

$

(5

)

 


1                Gain (loss) was recognized in interest expense, which offset to $0.

 

19



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share)

 

Cash Flow Hedging

 

 

 

Amount of Gain or
(Loss) Recognized in
OCI
1 on Derivative
(Effective Portion)

 

Amount of Gain or

(Loss) Reclassified from
Accumulated OCI
1 into
Income (Effective
Portion)

 

Amount of Gain or
(Loss) Recognized in
Income on Derivative
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)

 

Derivatives in Cash Flow
Hedging Relationships

 

Three Months Ended
March 31, 2011

 

Three Months Ended
March 31, 2011

 

Three Months Ended
March 31, 2011

 

Foreign currency contracts

 

$

(21

)

$

(5

)2

$

 

Agricultural feedstocks

 

32

 

(1

)3

4

3

Energy feedstocks

 

(2

)

(21

)3

 

Total

 

$

9

 

$

(27

)

$

4

 

 

 

 

Three Months Ended
March 31, 2010

 

Three Months Ended
March 31, 2010

 

Three Months Ended
March 31, 2010

 

Foreign currency contracts

 

$

5

 

$

6

2

$

 

Agricultural feedstocks

 

(46

)

(14

)3

(3

)3

Energy feedstocks

 

(31

)

(18

)3

 

Total

 

$

(72

)

$

(26

)

$

(3

)

 


1                    OCI is defined as other comprehensive income (loss).

2                    Gain (loss) was reclassified from accumulated other comprehensive income into net sales.

3                    Gain (loss) was recognized in cost of goods sold and other operating charges.

 

Derivatives not Designated in Hedging Instruments

 

Derivatives Not Designated in

 

Amount of Gain or (Loss) Recognized in Income on
Derivative for the Three Months Ended March 31,

 

Hedging Instruments 

 

2011

 

2010

 

Foreign currency contracts

 

$

(373

)1

$

214

1

Agricultural feedstocks

 

1

2

7

2

Total

 

$

(372

)

$

221

 

 


1                    Gain (loss) recognized in other income, net, was partially offset by the related gain (loss) on the foreign currency-denominated monetary assets and liabilities of the company’s operations, which were $230 and $(184) for the three months ended March 31, 2011 and 2010, respectively.

2                    Gain was recognized in cost of goods sold and other operating charges.

 

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Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share)

 

Note 13. Long-Term Employee Benefits

 

The following sets forth the components of the company’s net periodic benefit cost for pensions:

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

Service cost

 

$

59

 

$

51

 

Interest cost

 

310

 

316

 

Expected return on plan assets

 

(365

)

(360

)

Amortization of unrecognized loss

 

153

 

126

 

Amortization of prior service cost

 

4

 

4

 

Net periodic benefit cost

 

$

161

 

$

137

 

 

The following sets forth the components of the company’s net periodic benefit cost for other long-term employee benefits:

 

 

 

Three Months Ended
March 31,

 

 

 

2011

 

2010

 

Service cost

 

$

8

 

$

7

 

Interest cost

 

53

 

60

 

Amortization of unrecognized loss

 

15

 

15

 

Amortization of prior service benefit

 

(30

)

(27

)

Net periodic benefit cost

 

$

46

 

$

55

 

 

21



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share)

 

Note 14.  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 operating income (loss) before income taxes, exchange gains (losses), corporate expenses and interest.

 

Three Months Ended
March 31,

 

Agriculture
& Nutrition
2

 

Electronics &
Communications

 

Performance
Chemicals

 

Performance
Coatings

 

Performance
Materials

 

Safety &
Protection

 

Pharmaceuticals

 

Other

 

Total 1

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment sales

 

$

3,828

 

$

811

 

$

1,797

 

$

993

 

$

1,707

 

$

965

 

$

 

$

36

 

$

10,137

 

Less transfers

 

 

(5

)

(67

)

 

(28

)

(3

)

 

 

(103

)

Net sales

 

3,828

 

806

 

1,730

 

993

 

1,679

 

962

 

 

36

 

10,034

 

PTOI

 

1,136

 

111

 

394

 

65

 

288

 

145

 

50

 

(64

)

2,125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment sales

 

$

3,242

 

$

631

 

$

1,414

 

$

902

 

$

1,534

 

$

789

 

$

 

$

48

 

$

8,560

 

Less transfers

 

 

(4

)

(50

)

(1

)

(19

)

(2

)

 

 

(76

)

Net sales

 

3,242

 

627

 

1,364

 

901

 

1,515

 

787

 

 

48

 

8,484

 

PTOI

 

941

 

105

 

190

 

45

 

230

 

102

 

221

 

(31

)

1,803

 

 


1                A reconciliation of the pre-tax operating income totals reported for the operating segments to the applicable line item on the Consolidated Financial Statements is as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

Total segment PTOI

 

$

2,125

 

$

1,803

 

Net exchange (losses) gains, including affiliates

 

(143

)

30

 

Corporate expenses and net interest

 

(280

)

(246

)

Income before income taxes

 

$

1,702

 

$

1,587

 

 

2                    As of March 31, 2011, Agriculture & Nutrition net assets were $8,325, an increase of $2,448 from $5,877 at December 31, 2010. The increase was primarily due to higher trade receivables due to normal seasonality in the sales and cash collections cycle.

 

Note 15.  Acquisition of Danisco

 

In January 2011, DuPont and its wholly owned subsidiary, DuPont Denmark Holding ApS, entered into a definitive announcement agreement for the acquisition of Danisco for $6,300.  This includes $5,800 in cash, based on an offer price of DKK 665 per share, and the assumption of $500 of Danisco’s net debt.

 

Pursuant to the announcement agreement, on January 21, 2011, DuPont Denmark Holding ApS made a voluntary recommended public offer (the “Offer”) to the shareholders of Danisco pursuant to the terms and conditions set forth in its Offer Document, dated January 21, 2011.  The Offer is scheduled to expire on April 29, 2011.  If all conditions to the obligations of DuPont Denmark Holding ApS under the Offer have been satisfied or waived at expiration, DuPont Denmark Holding ApS will then accept and purchase all shares tendered in the Offer.  DuPont Denmark Holding ApS has received the necessary competition approvals from authorities in the United States, the European Union and China in connection with the Offer.

 

In January 2011, the company entered into a $4,000 bridge loan facility and a $2,000 bridge loan facility in connection with the acquisition of Danisco.  The latter requires the company have cash, cash equivalents and marketable securities at least equal to $2,000 on hand at all times and readily available for use to purchase Danisco’s shares.  Commitments under the $4,000 bridge loan facility are reduced as the company completes financing for the acquisition.

 

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Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share)

 

In March 2011, the company issued $400 of 1.75% Senior Notes due 2014, $600 of Floating Rate Senior Notes due 2014, $500 of 2.75% Senior Notes due 2016 and $500 of 4.25% Senior Notes due 2021 (collectively referred to as the “Notes”) to finance the acquisition.  The Floating Rate Notes bear interest at three-month USD LIBOR plus 0.42%.  The net proceeds of $1,991 from the issuance of the Notes are classified as restricted cash on the Condensed Consolidated Balance Sheets as of March 31, 2011 and reduced the $4,000 bridge loan facility by a corresponding amount.  The Notes, which were classified as short-term borrowings as of March 31, 2011, contain a mandatory redemption feature which would require the company to redeem all of the Notes if the company does not acquire at least 80% of Danisco’s outstanding shares by October 31, 2011, or if the company abandons the acquisition of Danisco prior to such date.  The redemption price is equal to 101% of the aggregate principal amount of the Notes plus accrued and unpaid interest from the date of issuance.

 

23



Table of Contents

 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Statements About Forward-Looking Statements

 

This report contains forward-looking statements which may be identified by their use of words like “plans,” “expects,” “will,” “anticipates,” “intends,” “projects,” “estimates” or other words of similar meaning.  All statements that address expectations or projections about the future, including statements about the company’s strategy for growth, product development, market position, expenditures and financial results, are forward-looking statements.

 

Forward-looking statements are based on certain assumptions and expectations of future events.  The company cannot guarantee that these assumptions and expectations are accurate or will be realized.  For some of the important factors that could cause the company’s actual results to differ materially from those projected in any such forward-looking statements, see the Risk Factors discussion set forth under Part II, Item 1A beginning on page 32.

 

Results of Operations

 

Overview

 

Sales of $10.0 billion for the first quarter increased 18 percent versus prior year, principally reflecting higher volume and selling prices.  Higher volume reflects economic growth across all regions with particular strength in developing markets1.  Demand remains strong for many of the company’s key product lines including crop protection products, seeds, titanium dioxide, photovoltaic materials, and specialty polymers.  Net income attributable to DuPont for the first quarter was $1.4 billion versus $1.1 billion in 2010, reflecting higher sales.  Programs for productivity remain on track while focus continues on actions to support a strong balance sheet, cash generation, and capital productivity.  The company continues to execute strategies for further development and growth of new products, particularly for agriculture, photovoltaics, other alternative energy and materials and to address global megatrend needs for increased food supply, reduced environmental footprint and security.

 

Japan Earthquake and Tsunami

 

In March 2011, an earthquake and tsunami struck the northeast coast of Japan.  The company is continuing to assess the impact of this disaster on its supply chains and customers.  The company recorded charges in the first quarter 2011 which were not material to its results of operations.  These charges related to the write-off of inventory and plant assets that were damaged and charges for the cleanup and restoration of manufacturing operations.

 

Net Sales

 

Net sales for the first quarter 2011 were $10.0 billion versus $8.5 billion in the prior year, an increase of 18 percent, reflecting 9 percent higher sales volume, an 8 percent increase in local selling prices and a 1 percent net increase from portfolio changes.  Local selling prices principally reflect higher prices for titanium dioxide, seeds, fluoroproducts and pass-through of significantly higher precious metals costs. Sales volume was higher across all segments with volume improving 5 percent in the United States and 12 percent outside the United States.  Sales in developing markets of $3.0 billion improved 30 percent from 2010, and the percentage of total company sales in these markets for the quarter increased to 30 percent from 28 percent.

 


1   Developing markets include China, India and countries located in Latin America, Eastern and Central Europe, Middle East, Africa and Southeast Asia.

 

24



Table of Contents

 

The table below shows a regional breakdown of net sales based on location of customers and percentage variances from the prior year:

 

 

 

Three Months Ended
March 31, 2011

 

Percent Change Due to:

 

 

 

Net Sales
($ Billions)

 

Percent
Change vs.
2010

 

Local
Price

 

Currency
Effect

 

Volume

 

Portfolio

 

Worldwide

 

$

10.0

 

18

 

8

 

 

9

 

1

 

U.S.

 

4.0

 

14

 

6

 

 

5

 

3

 

Europe, Middle East & Africa (EMEA)

 

2.8

 

15

 

7

 

(2

)

10

 

 

Asia Pacific

 

2.0

 

28

 

13

 

3

 

13

 

(1

)

Latin America

 

1.0

 

30

 

10

 

3

 

19

 

(2

)

Canada

 

0.2

 

10

 

2

 

4

 

4

 

 

 

Other Income, Net

 

Other income, net, totaled $25 million for the first quarter 2011 as compared to $360 million in the prior year, a decrease of $335 million. The decrease is largely attributable to a $173 million change in net pre-tax exchange gain (losses) and a $171 million reduction of Cozaar®/Hyzaar® income.

 

Additional information related to the company’s other income, net, is included in Note 2 to the interim Consolidated Financial Statements.

 

Cost of Goods Sold and Other Operating Charges (COGS)

 

COGS totaled $6.8 billion in the first quarter 2011 versus $5.8 billion in the prior year, an increase of 18 percent.  COGS as a percent of net sales was 68 percent, unchanged versus the first quarter 2010.  Local selling prices increased 8 percent, while costs for raw material, energy and freight rose 8 percent after adjusting for the impact of higher volume and currency changes. These costs for the full year are anticipated to increase approximately 10 percent versus 2010.

 

Selling, General and Administrative Expenses (SG&A)

 

SG&A totaled $1,027 million for the first quarter 2011 versus $993 million in the prior year. The increase was due to higher selling expenses, primarily in the Agriculture & Nutrition segment, as a result of increased global commissions and selling and marketing investments related to the company’s seed products.  SG&A was approximately 10 percent of net sales for the first quarter 2011 and 12 percent in 2010.

 

Research and Development Expense (R&D)

 

R&D totaled $399 million for the first quarter 2011 compared to $365 million in 2010. The increase in R&D was primarily due to continued growth investment in the Agriculture & Nutrition segment.  R&D was constant at approximately 4 percent of net sales for the first quarter 2011 and 2010.

 

Interest Expense

 

Interest expense totaled $100 million in the first quarter 2011, essentially flat compared to $103 million in 2010.

 

Provision for Income Taxes

 

The company’s effective tax rate for the first quarter 2011 was 15.2 percent as compared to 28.4 percent in 2010.  The lower effective tax rate in 2011 versus 2010 principally relates to the tax impact associated with the company’s policy of hedging the foreign currency-denominated monetary assets and liabilities of its operations and geographic mix of earnings.  See Note 4 to the interim Consolidated Financial Statements for additional information.

 

25



Table of Contents

 

Net Income Attributable to DuPont (Earnings)

 

Earnings for the first quarter of 2011 were $1.4 billion versus $1.1 billion in the first quarter 2010, a 27 percent increase. The increase in earnings principally reflects higher sales volume and selling prices, partially offset by higher raw material, energy and freight costs, increased spending for growth initiatives and lower Pharmaceuticals income.

 

Corporate Outlook

 

The company increased its full-year 2011 earnings outlook to a range of $3.65 to $3.85 per share from its previous range of $3.45 to $3.75.  This revision reflects strong first quarter earnings and execution of the company’s growth plans with the expectation of continued global economic growth.  The outlook excludes the impact of the planned Danisco A/S (Danisco) acquisition which could reduce 2011 earnings by $0.30 to $0.45 per share.

 

Segment Reviews

 

Summarized below are comments on individual segment sales and pre-tax operating income (loss) (PTOI) for the three month period ended March 31, 2011 compared with the same period in 2010. 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 PTOI is defined as operating income before income taxes, exchange gains (losses), corporate expenses and interest.  All references to selling prices are on a U.S. dollar (USD) basis, including the impact of currency.  A reconciliation of segment sales to consolidated net sales and segment PTOI to income before income taxes for the three month periods ended March 31, 2011 and 2010 is included in Note 14 to the interim Consolidated Financial Statements.

 

The following table summarizes first quarter 2011 segment sales and related variances versus prior year:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

March 31, 2011

 

Percentage Change Due to:

 

 

 

Segment
Sales
1
($ Billions)

 

Percent
Change vs.
2010

 

Selling
Price

 

Volume

 

Portfolio
and Other

 

Agriculture & Nutrition

 

$

3.8

 

18

 

4

 

13

 

1

 

Electronics & Communications

 

0.8

 

29

 

20

 

9

 

 

Performance Chemicals

 

1.8

 

27

 

21

 

6

 

 

Performance Coatings

 

1.0

 

10

 

6

 

4

 

 

Performance Materials

 

1.7

 

11

 

6

 

7

 

(2

)

Safety & Protection

 

1.0

 

22

 

1

 

14

 

7

 

 


1    Segment sales include transfers.

 

Agriculture & Nutrition — Sales of $3.8 billion were up $586 million, or 18 percent, with 13 percent volume growth, 4 percent higher selling prices and a 1 percent increase from a portfolio change.  Seed sales growth primarily reflects strong North American performance in both Pioneer® brand and PROaccess® products and a strong, early start to the European season.  Crop protection product sales growth reflects a strong and early start to the northern hemisphere season.  Higher value product mix and pricing actions to offset the increase in raw material costs led to higher selling prices.  PTOI of $1.1 billion improved 21 percent on higher volume.

 

Electronics & Communications — Sales of $0.8 billion were up 29 percent, with 20 percent higher selling prices, primarily pass-through of metals prices, and 9 percent higher volume.  Higher volume was driven by strong demand for photovoltaics and consumer electronics in Asia Pacific.  PTOI of $111 million increased 6 percent, reflecting higher volume.

 

Performance Chemicals — Sales of $1.8 billion were up 27 percent, with 21 percent higher selling prices and 6 percent higher volume.  Sales increased across all regions, especially in the United States and Asia Pacific.  Higher selling prices stemmed from strong global demand for titanium dioxide, refrigerants and fluoroproducts.  PTOI was $394 million, increasing $204 million due to higher selling prices and volume.

 

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Table of Contents

 

Performance Coatings — Sales of $1.0 billion were up 10 percent, reflecting 6 percent higher selling prices and 4 percent higher volume.  Global automotive markets improved primarily due to a significant increase in North American auto builds.  Strong demand continued in industrial coatings, particularly in the North American heavy-duty truck market.  Higher selling prices primarily reflect pricing actions taken to offset the increase in raw material costs.  PTOI was $65 million, an improvement of $20 million versus prior year on strong sales and operating leverage.

 

Performance Materials — Sales of $1.7 billion were up 11 percent, with 7 percent higher volume, 6 percent higher selling prices, and a 2 percent reduction from a portfolio change.  Continued strength in automotive, electronic, and packaging markets resulted in higher volume.  Strong demand and improved product sales mix, coupled with pricing actions taken to offset higher feedstock costs led to higher selling prices.  PTOI was $288 million, up $58 million on higher selling prices and volume.

 

Safety & Protection — Sales of $1.0 billion were up 22 percent, with 14 percent higher volume and a 7 percent increase from a portfolio change as a result of the MECS, Inc. acquisition that was completed in the fourth quarter 2010.  Growth came from increased demand for aramid and nonwoven products in industrial markets across all regions.  PTOI was $145 million, up $43 million on higher volume and a portfolio change, partially offset by higher spending for growth initiatives.

 

Pharmaceuticals — First quarter PTOI was $50 million compared to $221 million in the first quarter 2010.  The decreased income reflects the expiration of certain patents for Cozaar®/Hyzaar®.

 

Other — The company includes embryonic businesses not included in growth platforms, such as Applied BioSciences and nonaligned businesses in Other.  Sales in the first quarter 2011 of $36 million decreased 25 percent from the first quarter 2010 due to lower sales from the Applied BioSciences business.  PTOI for the first quarter 2011 was a loss of $64 million, compared to a loss of $31 million in the first quarter 2010.  The increase in losses reflects lower sales, as well as charges related to discontinued businesses.

 

Liquidity & Capital Resources

 

Management believes the company’s ability to generate cash from operations and access to capital markets will be adequate to meet anticipated cash requirements to fund working capital, capital spending, dividend payments, debt maturities and other cash needs.  The company’s liquidity needs can be met through a variety of sources, including: cash provided by operating activities, cash and cash equivalents, marketable securities, commercial paper, syndicated credit lines, bilateral credit lines, equity and long-term debt markets and asset sales.  The company’s current strong financial position, liquidity and credit ratings provide excellent access to the capital markets.  In addition, cash generating actions have been implemented including spending and working capital reductions.  The company will continue to monitor the financial markets in order to respond to changing conditions.

 

Pursuant to its cash discipline policy, the company seeks first to maintain a strong balance sheet and second, to return excess cash to shareholders unless the opportunity to invest for growth is compelling.  Cash and cash equivalents and marketable securities balances of $4.8 billion as of March 31, 2011, provide primary liquidity to support all short-term obligations.  The company has access to approximately $4.3 billion in unused credit lines with several major financial institutions, an increase of $1.7 billion from December 31, 2010.  The unused credit lines provide additional support to meet short-term liquidity needs and general corporate purposes including letters of credit.  The increase in unused credit lines is primarily due to the company’s refinancing in the first quarter 2011 of the previous $2.0 billion credit facility with a four year $3.5 billion credit facility.

 

The company continually reviews its debt portfolio and occasionally may rebalance it to ensure adequate liquidity and an optimum debt maturity schedule.

 

Financing of the Danisco Acquisition

 

In January 2011, the company entered into a $4 billion bridge loan facility and a $2 billion bridge loan facility in connection with the acquisition of Danisco.  Commitments under the $4 billion bridge loan facility are reduced as the company completes financing for the acquisition.

 

In March 2011, the company issued $400 million of 1.75% Senior Notes due 2014, $600 million of Floating Rate Senior Notes due 2014, $500 million of 2.75% Senior Notes due 2016 and $500 million of 4.25% Senior Notes due 2021 (collectively referred to as the “Notes”) to finance the acquisition.  The Floating Rate Notes bear interest at three-month USD LIBOR plus 0.42%.  The net proceeds of $1,991 million from the issuance of the Notes were classified as restricted cash on the Condensed Consolidated Balance Sheets as of March 31, 2011 and reduced the $4 billion bridge loan facility by a corresponding amount.  The Notes, which were classified as short-term borrowings as of March 31, 2011, contain a mandatory redemption feature which would require the company to redeem all of the Notes if the company does not acquire at least 80% of Danisco’s outstanding shares by October 31, 2011, or if the company abandons the

 

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acquisition of Danisco prior to such date.  The redemption price is equal to 101% of the aggregate principal amount of the Notes plus accrued and unpaid interest from the date of issuance.

 

In April 2011, the company issued a total of $1.0 billion in short-term commercial paper at a weighted-average interest rate of 0.33% to finance the acquisition.  The net proceeds from the issuance of commercial paper increased restricted cash and reduced the $4 billion bridge loan facility by a corresponding amount.

 

The company expects the acquisition to be completed in the second quarter 2011.

 

Credit Ratings

 

After the announcement of the potential acquisition of Danisco, Moody’s Investors Service placed all of the company’s credit ratings under review for possible downgrade. Standard & Poor’s has responded to the acquisition announcement by placing the company on credit watch with negative implications.  During the first quarter 2011, Fitch Ratings revised the company’s credit outlook to “Stable” from “Negative” and affirmed their current ratings.

 

The company remains committed to a strong financial position and strong investment-grade rating. The company’s credit ratings impact its access to the debt capital market and cost of capital.  The company’s long-term and short-term credit ratings are as follows:

 

 

 

Long term

 

Short term

 

Outlook

Standard & Poor’s

 

A

 

A-1

 

Watch negative

Moody’s Investors Service

 

A2

 

P-1

 

Under review for possible downgrade

Fitch Ratings

 

A

 

F1

 

Stable

 

Summary of Cash Flows

 

Cash used for operating activities was $1.5 billion for the three months ended March 31, 2011 compared to $1.1 billion during the same period ended in 2010.  The $0.4 billion change was primarily due to changes in operating assets and liabilities, mainly due to higher sales; partially offset by higher earnings and the weaker dollar, which was hedged with forward exchange contracts reflected in investing activities.

 

Cash used for investing activities was $1.0 billion for the three months ended March 31, 2011 compared to cash provided by investing activities of $0.4 billion for the same period last year.  The $1.4 billion change was primarily due to an increase in restricted cash from the issuance of debt in connection with the Danisco acquisition, a net reduction in proceeds from forward exchange contract settlements and higher capital expenditures, partially offset by higher proceeds from the sale of short-term financial instruments.  Purchases of property, plant and equipment (PP&E) for the three months ended March 31, 2011 totaled $323 million, an increase of $138 million compared to the prior year.

 

Cash provided by financing activities was $1.9 billion for the three months ended March 31, 2011 compared to cash used for financing activities of $0.4 billion in the prior year.  The $2.3 billion increase in cash provided by financing activities was primarily due to net proceeds from borrowings to fund the Danisco acquisition and an increase in the proceeds from the exercise of stock options, partially offset by cash used to repurchase common stock.

 

 

 

Three Months Ended
March 31,

 

(Dollars in millions) 

 

2011

 

2010

 

Cash used for operating activities

 

$

(1,484

)

$

(1,065

)

Purchases of property, plant and equipment

 

(323

)

(185

)

Free cash flow

 

$

(1,807

)

$

(1,250

)

 

Free cash flow for the three months ended March 31, 2011 was an outflow of $1.8 billion, as compared to an outflow of $1.3 billion for the same period last year.

 

Free cash flow is a measurement not recognized in accordance with generally accepted accounting principles (GAAP) and should not be viewed as an alternative to GAAP measures of performance.  All companies do not calculate non-GAAP financial measures in the same manner and, accordingly, the company’s free cash flow definition may not be consistent with the methodologies used by other

 

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companies.  The company defines free cash flow as cash provided by operating activities less purchases of property, plant and equipment, and therefore indicates operating cash flow available for payment of dividends, other investing activities, and other financing activities.  Free cash flow is useful to investors and management to evaluate the company’s cash flow and financial performance, and is an integral financial measure used in the company’s financial planning process.

 

Dividends paid to shareholders during the three months ended March 31, 2011 totaled $383 million.  In January 2011, the company’s Board of Directors declared a first quarter common stock dividend of $0.41 per share.  The first quarter dividend was the company’s 426th consecutive quarterly dividend since the company’s first dividend in the fourth quarter 1904.

 

Cash and Cash Equivalents and Marketable Securities

 

Cash and cash equivalents and marketable securities were $4.8 billion at March 31, 2011, a decrease of $2.0 billion from $6.8 billion at December 31, 2010.  The reduction was primarily due to the seasonality in the cash collections cycle in the Agriculture & Nutrition segment.  In connection with the $2 billion bridge loan facility discussed above, the company is required to have cash, cash equivalents and marketable securities at least equal to $2 billion on hand at all times and readily available for use to purchase Danisco’s shares.

 

Debt

 

Total debt at March 31, 2011 was $12.3 billion, an increase of $2.0 billion from $10.3 billion at December 31, 2010.  The increase was primarily due to the first quarter 2011 issuance of debt to finance the acquisition of Danisco.

 

Guarantees and Off-Balance Sheet Arrangements

 

For detailed information related to Guarantees, Indemnifications, and Obligations for Equity Affiliates and Others, see pages 37 - 38 of the company’s 2010 Annual Report, and Note 10 to the interim Consolidated Financial Statements.

 

Contractual Obligations

 

Information related to the company’s contractual obligations at December 31, 2010 can be found on page 39 of the company’s 2010 Annual Report.  The company’s contractual obligations at March 31, 2011 has increased approximately $2.2 billion versus prior year-end.  The increase is primarily attributable to the debt issued to finance the Danisco acquisition.

 

PFOA

 

See discussion under “PFOA” on pages 46-47 of the company’s 2010 Annual Report.

 

DuPont has established reserves in connection with certain PFOA environmental and litigation matters (see Note 10 to the interim Consolidated Financial Statements).

 

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

See Note 12, “Derivatives and Other Hedging Instruments”, to the interim Consolidated Financial Statements.  See also Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, on pages 47 - 49 of the company’s 2010 Annual Report for information on the company’s utilization of financial instruments and an analysis of the sensitivity of these instruments.

 

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Item 4.  CONTROLS AND PROCEDURES

 

a)         Evaluation of Disclosure Controls and Procedures

 

The company maintains a system of disclosure controls and procedures to give reasonable assurance that information required to be disclosed in the company’s reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.  These controls and procedures also give reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to management to allow timely decisions regarding required disclosures.

 

As of March 31, 2011, the company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), together with management, conducted an evaluation of the effectiveness of the company’s disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act.  Based on that evaluation, the CEO and CFO concluded that these disclosure controls and procedures are effective.

 

b)                          Changes in Internal Control over Financial Reporting

 

There has been no change in the company’s internal control over financial reporting that occurred during the quarter ended March 31, 2011 that has materially affected or is reasonably likely to materially affect the company’s internal control over financial reporting.

 

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PART II.  OTHER INFORMATION

 

Item 1.  LEGAL PROCEEDINGS

 

The company is subject to various litigation matters, including, but not limited to, product liability, patent infringement, antitrust claims, and claims for third party property damage or personal injury stemming from alleged environmental torts. Information regarding certain of these matters is set forth below and in Note 10 to the interim Consolidated Financial Statements.

 

Litigation

 

PFOA: Environmental and Litigation Proceedings

 

For purposes of this report, the term PFOA means collectively perfluorooctanoic acid and its salts, including the ammonium salt and does not distinguish between the two forms.  Information related to this matter is included in Note 10 to the interim Consolidated Financial Statements under the heading PFOA.

 

Environmental Proceedings

 

Belle Plant, West Virginia

 

The U.S. Environmental Protection Agency (EPA) is investigating three chemical releases at DuPont’s Belle facility in West Virginia which occurred in January 2010. One of the releases involved the death of a DuPont employee after exposure to phosgene.

 

Chambers Works Plant, Deepwater, New Jersey

 

In January 2010, EPA and the U.S. Attorney’s Office for New Jersey, informed DuPont that the government was initiating an enforcement action arising from alleged environmental non-compliance at the Chambers Works facility. The government alleges that the facility violated recordkeeping requirements of certain provisions of the Clean Air Act and the Federal Clean Air Act Regulations governing Leak Detection and Reporting and that it failed to report emissions of a compound from Chambers Works’ waste water treatment facility under the Emergency Planning and Community Right-to-Know Act.  The alleged non-compliance was identified by EPA in 2007 and 2009 following separate environmental audits.  DuPont is in settlement negotiations with EPA and the Department of Justice (DOJ).

 

Chambers Works Plant, Deepwater, New Jersey

 

On September 29, 2010, DuPont received a draft Administrative Consent Order from the New Jersey Department of Environmental Protection (NJDEP) seeking a penalty for alleged violations of New Jersey hazardous waste regulations dating back to April 2009 based on a facility-wide hazardous waste audit conducted in May 2010.  DuPont is in negotiations with NJDEP.

 

Chambers Works Plant, Deepwater, New Jersey

 

DuPont is in settlement negotiations with EPA and DOJ concerning allegations of environmental non-compliance at the Chambers Works facility. The allegations arose from an ongoing investigation into DuPont’s management of hazardous waste in rail cars.

 

Edge Moors Plant, Edgemoor, Delaware

 

DuPont is in settlement negotiations with the State of Delaware, EPA and DOJ concerning allegations of permit non-compliance under certain Clean Water Act regulations at the Edge Moor facility. The allegations arose from sampling data of plant discharges into water sources that the company self-reported to the State between 2005 and 2010.

 

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Item 1A.  RISK FACTORS

 

The company’s operations could be affected by various risks, many of which are beyond its control. Based on current information, the company believes that the following identifies the most significant risk factors that could affect its businesses. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

 

Price increases for energy and raw materials could have a significant impact on the company’s ability to sustain and grow earnings.

 

The company’s manufacturing processes consume significant amounts of energy and raw materials, the costs of which are subject to worldwide supply and demand as well as other factors beyond the control of the company. Significant variations in the cost of energy, which primarily reflect market prices for oil and natural gas and raw materials affect the company’s operating results from period to period. Legislation to address climate change by reducing greenhouse gas emissions and establishing a price on carbon could create increases in energy costs and price volatility. When possible, the company purchases raw materials through negotiated long-term contracts to minimize the impact of price fluctuations. Additionally, the company enters into over-the-counter and exchange traded derivative commodity instruments to hedge its exposure to price fluctuations on certain raw material purchases. The company takes actions to offset the effects of higher energy and raw material costs through selling price increases, productivity improvements and cost reduction programs.  Success in offsetting higher raw material costs with price increases is largely influenced by competitive and economic conditions and could vary significantly depending on the market served.  If the company is not able to fully offset the effects of higher energy and raw material costs, it could have a significant impact on the company’s financial results.

 

Failure to develop and market new products and manage product life cycles could impact the company’s competitive position and have an adverse effect on the company’s financial results.

 

Operating results are largely dependent on the company’s assessment and management of its portfolio of current, new and developing products and services and its ability to bring those products and services to market. The company plans to grow earnings by focusing on developing markets and solutions to meet increasing demand for food productivity, decrease dependency on fossil fuels and protect people, assets and the environment.  This ability could be adversely affected by difficulties or delays in product development such as the inability to identify viable new products, successfully complete research and development, obtain relevant regulatory approvals, obtain intellectual property protection, or gain market acceptance of new products and services. Because of the lengthy development process, technological challenges and intense competition, there can be no assurance that any of the products the company is currently developing, or could begin to develop in the future, will achieve substantial commercial success. Sales of the company’s new products could replace sales of some of its current products, offsetting the benefit of even a successful product introduction.

 

The company’s results of operations could be adversely affected by litigation and other commitments and contingencies.

 

The company faces risks arising from various unasserted and asserted litigation matters, including, but not limited to, product liability, patent infringement, antitrust claims, and claims for third party property damage or personal injury stemming from alleged environmental torts. The company has noted a nationwide trend in purported class actions against chemical manufacturers generally seeking relief such as medical monitoring, property damages, off-site remediation and punitive damages arising from alleged environmental torts without claiming present personal injuries. The company also has noted a trend in public and private nuisance suits being filed on behalf of states, counties, cities and utilities alleging harm to the general public. Various factors or developments can lead to changes in current estimates of liabilities such as a final adverse judgment, significant settlement or changes in applicable law. A future adverse ruling or unfavorable development could result in future charges that could have a material adverse effect on the company. An adverse outcome in any one or more of these matters could be material to the company’s financial results.

 

In the ordinary course of business, the company may make certain commitments