2012
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One) | ||
ý | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2012 | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
____________________________________________________________________________
Commission file number 1-815
E. I. DU PONT DE NEMOURS AND COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE (State or Other Jurisdiction of Incorporation or Organization) | 51-0014090 (I.R.S. Employer Identification No.) | |
1007 Market Street
Wilmington, Delaware 19898
(Address of principal executive offices)
Registrant's telephone number, including area code: 302-774-1000
Securities registered pursuant to Section 12(b) of the Act
(Each class is registered on the New York Stock Exchange, Inc.):
Title of Each Class
__________________________________________________
Common Stock ($.30 par value)
Preferred Stock
(without par value-cumulative)
$4.50 Series
$3.50 Series
No securities are registered pursuant to Section 12(g) of the Act.
_____________________________________________________
Indicate by check mark whether the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).
Yes ý No o
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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 ý 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 the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of voting stock held by nonaffiliates of the registrant (excludes outstanding shares beneficially owned by directors and officers and treasury shares) as of June 30, 2012, was approximately $47.0 billion.
As of January 31, 2013, 934,288,000 shares (excludes 87,041,000 shares of treasury stock) of the company's common stock, $0.30 par value, were outstanding.
Documents Incorporated by Reference
(Specific pages incorporated are indicated under the applicable Item herein):
Incorporated By Reference In Part No. | ||
The company's Proxy Statement in connection with the Annual Meeting of Stockholders to be held on April 24, 2013. | III | |
E. I. du Pont de Nemours and Company
Form 10-K
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 | |||
Note on Incorporation by Reference
Information pertaining to certain Items in Part III of this report is incorporated by reference to portions of the company's definitive 2013 Annual Meeting Proxy Statement to be filed within 120 days after the end of the year covered by this Annual Report on Form 10-K, pursuant to Regulation 14A (the Proxy).
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Part I
ITEM 1. BUSINESS
DuPont was founded in 1802 and was incorporated in Delaware in 1915. DuPont brings world-class science and engineering to the global marketplace in the form of innovative products, materials and services. The company believes that by collaborating with customers, governments, non-governmental organizations and thought leaders it can help find solutions to such global challenges as providing enough healthy food for people everywhere, decreasing dependence on fossil fuels, and protecting life and the environment. Total worldwide employment at December 31, 2012, was about 70,000 people. The company has operations in more than 90 countries worldwide and about 60 percent of consolidated net sales are made to customers outside the United States of America (U.S.). See Note 21 to the Consolidated Financial Statements for additional details on the location of the company's sales and property.
Subsidiaries and affiliates of DuPont conduct manufacturing, seed production or selling activities and some are distributors of products manufactured by the company. As a science and technology based company, DuPont competes on a variety of factors such as product quality and performance or specifications, continuity of supply, price, customer service and breadth of product line, depending on the characteristics of the particular market involved and the product or service provided. Most products are marketed primarily through the company's sales force, although in some regions, more emphasis is placed on sales through distributors. The company utilizes numerous suppliers as well as internal sources to supply a wide range of raw materials, energy, supplies, services and equipment. To ensure availability, the company maintains multiple sources for fuels and many raw materials, including hydrocarbon feedstocks. Large volume purchases are generally procured under competitively priced supply contracts.
In third quarter 2012, the company entered into a definitive agreement to sell its Performance Coatings business (which represented a reportable segment) for approximately $4.9 billion in cash and the assumption of certain liabilities. In accordance with generally accepted accounting principles in the U.S. (GAAP), the results of Performance Coatings are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. On February 1, 2013, the sale of Performance Coatings was completed.
Business Segments
The company consists of 13 businesses which are aggregated into eight reportable segments based on similar economic characteristics, the nature of the products and production processes, end-use markets, channels of distribution and regulatory environment. The company's reportable segments are Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Materials, Safety & Protection and Pharmaceuticals. The company includes certain embryonic businesses not included in the reportable segments, such as pre-commercial programs, and nonaligned businesses in Other. Additional information with respect to business segment results is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on page 22 of this report and Note 22 to the Consolidated Financial Statements.
Agriculture
Agriculture businesses, DuPont Pioneer and DuPont Crop Protection, leverage the company's technology, customer relationships and industry knowledge to improve the quantity, quality and safety of the global food supply and the global production agriculture industry. Land available for worldwide agricultural production is increasingly limited so production growth will need to be achieved principally through improving crop yields and productivity rather than through increases in planted area. The segment's businesses deliver a broad portfolio of products and services that are specifically targeted to achieve gains in crop yields and productivity, including Pioneer® brand seed products and well-established brands of insecticides, fungicides and herbicides. Research and development focuses on leveraging technology to increase grower productivity and enhance the value of grains and soy through improved seed traits, superior seed germplasm and effective use of insecticides, herbicides and fungicides. Agriculture accounted for approximately 50 percent of the company's total research and development expense in 2012.
Sales of the company's products in the segment are affected by the seasonality of global agriculture markets and weather patterns. Sales and earnings performance in the Agriculture segment are strongest in the first half of the year reflecting the northern hemisphere planting season. The segment generally operates at a loss during the third and fourth quarters of the year. As a result of the seasonal nature of its business, Agriculture's inventory is at its highest level at the end of the calendar year and is sold down in the first and second quarters. Trade receivables in the Agriculture segment are at a low point at year-end and increase through the selling season to peak at the end of the second quarter.
Pioneer is a world leader in developing, producing and marketing corn hybrid and soybean varieties which improve the productivity and profitability of its customers. Additionally, Pioneer develops, produces and markets canola, sunflower, sorghum, inoculants, wheat and rice. As the world's population grows and the middle class expands, the need for crops for animal feed, food, biofuels and industrial uses continues to increase. The business competes with other seed and plant biotechnology companies. Pioneer
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Part I
ITEM 1. BUSINESS, continued
seed sales amounted to 21 percent, 19 percent and 19 percent of the company's total consolidated net sales for the years ended December 31, 2012, 2011 and 2010, respectively.
Pioneer's research and development focuses on integrating high yielding germplasm with value added proprietary and/or licensed native and biotechnology traits with local environment and service expertise. Pioneer uniquely develops integrated products for specific regional application based on local product advancement and testing of the product concepts. Research and development in this arena requires long-term commitment of resources, extensive regulatory efforts and collaborations, partnerships and business arrangements to successfully bring products to market. Pioneer licenses biotechnology traits from third parties as a normal course of business. To protect its investment, the business employs the use of patents covering germplasm and native and biotechnology traits in accordance with country laws.
Pioneer is actively pursuing the development of innovations for corn hybrid, soybean varieties, canola, sunflower, wheat and rice based on market assessments of the most valuable opportunities. In corn hybrids, programs include innovations for drought and nitrogen efficiency, insect protection and herbicide tolerance. In soybean varieties, programs include products with high oleic content, multiple herbicide tolerance and insect protection.
Pioneer has seed production facilities located throughout the world. Seed production is performed directly by the business or contracted with independent growers and conditioners. Pioneer's ability to produce seeds primarily depends upon weather conditions and availability of reliable contract growers.
Pioneer markets and sells seed product primarily under the Pioneer® brand but also sells and distributes products utilizing additional brand names. Pioneer promotes its products through multiple marketing channels around the world. In the corn and soybean markets of the U.S. Corn Belt, Pioneer® brand products are sold primarily through a specialized force of independent sales representatives. Outside of North America, Pioneer's products are marketed through a network of subsidiaries, joint ventures and independent producer-distributors.
DuPont Crop Protection serves the global production agriculture industry with crop protection products for field crops such as wheat, corn, soybean and rice; specialty crops such as fruit, nut, vine and vegetables; and non-crop segments, including forestry and land management. Principle crop protection products are weed control, disease control and insect control offerings. Crop Protection products are marketed and sold to growers and other end users through a network of wholesale distributors and crop input retailers. The sales growth of the business' insect control portfolio is led by DuPontTM Rynaxypyr® insecticide, a product registered for sale in 80 countries and sold under four key brands for use across a broad range of core agricultural crops.
The major commodities, raw materials and supplies for the Agriculture segment include: benzene and carbamic acid related intermediates, copper, corn and soybean seeds, insect control products, natural gas, seed treatments and sulfonamides.
Agriculture segment sales outside the U.S. accounted for 53 percent of the segment's total sales in 2012.
Electronics & Communications
Electronics & Communications (E&C) is a leading supplier of differentiated materials and systems for photovoltaics (PV), consumer electronics, displays and advanced printing that enable superior performance and lower total cost of ownership for customers. The segment leverages the company's strong materials and technology base to target attractive growth opportunities in PV materials, circuit and semiconductor fabrication and packaging materials, display materials, packaging graphics, and ink-jet printing. In the growing PV market, E&C continues to be an industry-leading innovator and supplier of metalization pastes and backsheet materials that improve the efficiency and lifetime of solar cells and modules. In 2012, the segment commercialized new DuPontTM Solamet® PV metallization paste to drive step-change gains in efficiency of solar cells. DuPont is a leading global supplier of materials to the PV industry.
In the displays market, E&C has developed solution-process technology, which it licenses, and a growing range of materials for active matrix organic light emitting diode (AMOLED) television displays. The segment has a broad portfolio of materials for semiconductor fabrication and packaging, as well as innovative materials for circuit applications, to address critical needs of electronic component and device manufacturers. In consumer electronics, E&C materials add value in the high growth hand-held markets of tablets and smart phones. In packaging graphics, E&C is a leading supplier of flexographic printing systems, including Cyrel® photopolymer plates and platemaking systems. The segment is investing in new products to strengthen its market leadership position in advanced printing markets. The segment is also expanding its leadership position in black-pigmented inks and developing new color-pigmented inks for network printing applications.
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Part I
ITEM 1. BUSINESS, continued
The major commodities, raw materials and supplies for E&C include: block co-polymers, copper, difluoroethane, hydroxylamine, oxydianiline, polyester film, precious metals and pyromellitic dianhydride.
E&C segment sales outside the U.S. accounted for 84 percent of the segment's total sales in 2012.
Industrial Biosciences
Industrial Biosciences is a leader in developing and manufacturing a broad portfolio of enzymes. The segment's enzymes add value and functionality to a broad range of products and processes such as animal nutrition, detergents, food manufacturing, ethanol production and industrial applications resulting in cost and process benefits, better product performance and improved environmental outcomes. Industrial Biosciences also makes DuPontTM Sorona® PTT renewably sourced polymer for use in carpet and apparel fibers.
The segment includes a joint venture with Tate & Lyle PLC, DuPont Tate and Lyle Bio Products LLC, to produce BioPDOTM 1,3 propanediol using a proprietary fermentation and purification process. BioPDOTM is the key building block for DuPontTM Sorona® PTT polymer.
The major commodities, raw materials and supplies for the Industrial Biosciences segment include: glucoamylase, glycols, grain products, such as dextrose and glucose, and purified terephthalic acid.
Industrial Biosciences segment sales outside the U.S. accounted for 54 percent of the segment's total sales in 2012.
Nutrition & Health
Nutrition & Health is a premier provider of innovative solutions for specialty food ingredients, health and safety. The segment's products, which include cultures, emulsifiers, gums, natural sweeteners and soy-based food ingredients, hold leading market positions based on industry leading innovation, relevant product portfolio and close-partnering with the world's food manufacturers. Nutrition & Health serves various end markets within the food industry including meat, dairy, beverages and bakery segments. Nutrition & Health has research, production and distribution operations around the world.
Nutrition & Health products are marketed and sold under a variety of brand names and are distributed primarily through its direct route to market. The direct route to market focuses on strong customer collaborations and insights with multinational customers and regional customers alike.
The major commodities, raw materials and supplies for the Nutrition & Health segment include: acetyls, citrus peels, glycerin, grain products, locust bean gum, oils and fats, seaweed, soybean, soy flake, sugar and yeast.
Nutrition & Health segment sales outside the U.S. accounted for 69 percent of the segment's total sales in 2012.
Performance Chemicals
Performance Chemicals businesses, DuPont Titanium Technologies and DuPont Chemicals and Fluoroproducts, deliver customized solutions with a wide range of industrial and specialty chemical products for markets including plastics and coatings, textiles, mining, pulp and paper, water treatment and healthcare.
DuPont Titanium Technologies is the world's largest manufacturer of titanium dioxide, and is dedicated to creating greater value for the coatings, paper, plastics, specialties and minerals markets through service, brand and product. The business' main products include its broad line of DuPontTM Ti-Pure® titanium dioxide products. In 2011, the business announced a global expansion to support increased customer demand for titanium dioxide, including a $500 million investment in new production facilities at the company's Altamira, Mexico site scheduled for completion in 2015. In addition, the business continues to invest in facility upgrades to improve productivity at its other global manufacturing sites.
DuPont Chemicals and Fluoroproducts is a leading global manufacturer of industrial and specialty fluorochemicals, fluoropolymers and performance chemicals. The business' broad line of products that include refrigerants, lubricants, propellants, solvents, fire extinguishants and electronic gases, cover a wide range of industries and markets. Key brands include DuPontTM Teflon®, Capstone®, Dymel®, OpteonTM yf, Isceon®, Suva®, Vertrel®, Zyron®, Vazo® and Virkon®.
The major commodities, raw materials and supplies for the Performance Chemicals segment include: ammonia, benzene, chlorine, chloroform, fluorspar, hydrofluoric acid, industrial gases, methanol, natural gas, perchloroethylene, petroleum coke, sulfur and titanium ore.
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Part I
ITEM 1. BUSINESS, continued
Performance Chemicals segment sales outside the U.S. accounted for 56 percent of the segment's total sales in 2012.
Performance Materials
Performance Materials businesses, Performance Polymers and Packaging & Industrial Polymers, provide productive, higher performance polymers, elastomers, films, parts, and systems and solutions which improve the uniqueness, functionality and profitability of its customers' offerings. The key markets served by the segment include the automotive original equipment manufacturers (OEMs) and associated after-market industries, as well as electrical, packaging, construction, oil, electronics, photovoltaics, aerospace, chemical processing and consumer durable goods. The segment has several large customers, primarily in the motor vehicle OEM industry supply chain. The company has long-standing relationships with these customers and they are considered to be important to the segment's operating results.
Performance Polymers delivers a broad range of polymer-based high performance materials in its product portfolio, including elastomers and thermoplastic and thermoset engineering polymers which are used by customers to fabricate components for mechanical, chemical and electrical systems. The main products include: DuPontTM Zytel® nylon resins, Delrin® acetal resins, Hytrel® polyester thermoplastic elastomer resins, Tynex® filaments, Vespel® parts and shapes, Vamac® ethylene acrylic elastomer, Kalrez® perfluoroelastomer and Viton® fluoroelastomers. Performance Polymers also includes the DuPont Teijin Films joint venture, whose primary products are Mylar® and Melinex® polyester films.
Packaging & Industrial Polymers specializes in resins and films used in packaging and industrial polymer applications, sealants and adhesives, sporting goods, and interlayers for laminated safety glass. Key brands include: DuPontTM Surlyn® ionomer resins, Bynel® coextrudable adhesive resins, Elvax® EVA resins, SentryGlas®, Butacite® laminate interlayers and Elvaloy® copolymer resins.
The major commodities, raw materials and supplies for the Performance Materials segment include: acrylic monomers, adipic acid, butadiene, butanediol, dimethyl terephthalate, ethane, fiberglass, hexamethylenediamine, methanol, natural gas and purified terephthalic acid.
Performance Materials segment sales outside the U.S. accounted for 69 percent of the segment's total sales in 2012.
Safety & Protection
Safety & Protection businesses, Protection Technologies, Sustainable Solutions and Building Innovations, satisfy the growing global needs of businesses, governments and consumers for solutions that make life safer, healthier and more secure. By uniting market-driven science with the strength of highly regarded brands, the segment delivers products and services to a large number of markets, including construction, transportation, communications, industrial chemicals, oil and gas, electric utilities, automotive, manufacturing, defense, homeland security and safety consulting.
Protection Technologies is focused on finding solutions to protect people and the environment. With products like DuPont™ Kevlar® high strength material, Nomex® thermal resistant material and Tyvek® protective material, the business continues to hold strong positions in life protection markets and meet the continued demand for body armor and personal protective gear for the military, law enforcement personnel, firefighters and other first responders, as well as for workers in the oil and gas industry around the world. In 2011, the business announced the start up of its $500 million Cooper River Kevlar® facility near Charleston, South Carolina. The Cooper River Kevlar® plant uses state-of-the-art technology that will allow the business to meet increased customer demand for advanced protective materials in emerging industries around the world by expanding its portfolio of science-based innovations and boosting productivity. Commercial supply began at the end of 2011.
Sustainable Solutions continues to help organizations worldwide reduce workplace injuries and fatalities while improving operating costs, productivity and quality. Sustainable Solutions is a leader in the safety consulting field, selling training products, as well as consulting services. Additionally, Sustainable Solutions is dedicated to clean air, clean fuel and clean water with offerings that help reduce sulfur and other emissions, formulate cleaner fuels, or dispose of liquid waste. Its goal is to help maintain business continuity and environmental compliance for companies in the refining and petrochemical industries, as well as for government entities. The business includes MECS, Inc. (MECS), which is a leading global provider of process technology, proprietary specialty equipment and technical services to the sulfuric acid industry.
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Part I
ITEM 1. BUSINESS, continued
Building Innovations is committed to the building science behind increasing the performance of building systems, helping reduce operating costs and creating more sustainable structures. The business is a market leader of solid surfaces through its DuPontTM Corian® and Montelli® lines of products which offer durable and versatile materials for residential and commercial purposes. Other products such as DuPont™ Tyvek® and Typar® offer leading solutions for the protection and energy efficiency of buildings.
The major commodities, raw materials and supplies for the Safety & Protection segment include: alumina hydroxide, benzene, high density polyethylene, isophthaloyl chloride, metaphenylenediamine, methyl methacrylate, paraphenylenediamine, polyester fiber, terephthaloyl chloride and wood pulp.
Safety & Protection segment sales outside the U.S. accounted for 62 percent of the segment's total sales in 2012.
Pharmaceuticals
On October 1, 2001, DuPont Pharmaceuticals was sold to the Bristol-Myers Squibb Company. DuPont retained its interest in Cozaar® (losartan potassium) and Hyzaar® (losartan potassium with hydrochlorothiazide), which are used in the treatment of hypertension. DuPont has exclusively licensed worldwide marketing and manufacturing rights for Cozaar® and Hyzaar® to Merck & Co., Inc. (Merck).
Pharmaceuticals' Cozaar®/Hyzaar® income is the sum of two parts: income related to a share of the profits from North American sales and certain markets in Europe, and royalty income derived from worldwide contract net sales linked to the exclusivity term in a particular country. Patents and exclusivity started to expire in prior years and the U.S. exclusivity for Cozaar® ended in April 2010. The worldwide agreement with Merck expired December 31, 2012. The company expects 2013 earnings to be insignificant.
Backlog
In general, the company does not manufacture its products against a backlog of orders and does not consider backlog to be a significant indicator of the level of future sales activity. Production and inventory levels are based on the level of incoming orders as well as projections of future demand. Therefore, the company believes that backlog information is not material to understanding its overall business and should not be considered a reliable indicator of the company's ability to achieve any particular level of revenue or financial performance.
Intellectual Property
DuPont believes that its intellectual property estate provides it with an important competitive advantage. It has an established global network of attorneys, as well as branding, advertising and licensing professionals, to procure, maintain, protect, enhance and gain value from this estate.
The company has access to a large patent portfolio, both owned and licensed. These definite-lived patents cover many products, processes and product uses. These patents protect many aspects of the company's significant research programs and the goods and services it sells. The actual protection afforded by these patents varies from country to country and depends upon the scope of coverage of each individual patent as well as the availability of legal remedies in each country. DuPont owns about 25,635 worldwide patents and is awaiting action on about 20,925 worldwide patent applications. In 2012, the company was granted about 935 U.S. patents and about 2,910 international patents. DuPont's rights under its patents and licenses, as well as the products made and sold under them, are important to the company as a whole, and to varying degrees, important to each reportable segment.
Trade secrets are an important element of the company's intellectual property. Many of the processes used to make DuPont products are kept as trade secrets which, from time to time, may be licensed to third parties. DuPont vigilantly protects all of its intellectual property including its trade secrets. When the company discovers that its trade secrets have been unlawfully taken, it reports the matter to governmental authorities for investigation and potential criminal action, as appropriate. In addition, the company takes measures to mitigate any potential impact, which may include civil actions seeking redress, restitution and/or damages based on loss to the company and/or unjust enrichment.
Ownership of and access to intellectual property rights, particularly those relating to biotechnology and germplasm, will continue to be important to Pioneer and its competitors. The environment in which Pioneer competes is characterized by the use among competitors of intellectual property rights, including patent lawsuits, to gain advantage in commercial markets. In support of its business, Pioneer continues to build a large collection of intellectual property rights related to biotechnology and germplasm and to license technology from others, including competitors. Pioneer endeavors to obtain such licenses on commercially reasonable terms.
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Part I
ITEM 1. BUSINESS, continued
The company has about 2,065 unique trademarks for its products and services and approximately 19,395 registrations for these trademarks worldwide. Ownership rights in trademarks do not expire if the trademarks are continued in use and properly protected. The company has many trademarks that have significant recognition at the consumer retail level and/or business to business level.
Research and Development
The company conducts research at either dedicated research facilities or manufacturing plants. There are eleven major research locations in the U.S. & Canada, with the highest concentration of facilities being located in the Wilmington, Delaware area. Reflecting the company's global interests, five major research locations are located in the Asia Pacific region, four major research locations are located in Europe, Middle East and Africa (EMEA) region and one major location is located in Latin America.
The objectives of the company's research and development programs are to create new technologies, processes and business opportunities in relevant fields, as well as to improve existing products and processes. Each segment of the company funds research and development activities that support its business mission. The company is expanding its offerings addressing safety, environment, energy and climate challenges in the global marketplace by developing and commercializing renewable, bio-based materials; advanced biofuels; energy-efficient technologies; enhanced safety and protection products; and alternative energy products and technologies. The goals are tied directly to business growth, including increasing food production, increasing renewable sources for energy and raw materials, and providing greater safety and protection for people and the environment. All research and development activities are administered by senior research and development management to ensure consistency with the business and corporate strategy. The future of the company is not dependent upon the outcome of any single research program.
Additional information with respect to research and development, including the amount incurred during each of the last three fiscal years, is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on page 20 of this report.
Environmental Matters
Information related to environmental matters is included in several areas of this report: (1) Environmental Proceedings beginning on page 12, (2) Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on pages 31, 35-37 and (3) Notes 1 and 16 to the Consolidated Financial Statements.
Available Information
The company is subject to the reporting requirements under the Securities Exchange Act of 1934. Consequently, the company is required to file reports and information with the Securities and Exchange Commission (SEC), including reports on the following forms: annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
The public may read and copy any materials the company files with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
The company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are also accessible on the company's website at http://www.dupont.com by clicking on the section labeled "Investors", then on "Key Financials & Filings" and then on "SEC Filings." These reports are made available, without charge, as soon as is reasonably practicable after the company files or furnishes them electronically with the SEC.
Executive Officers of the Registrant
Information related to the company's Executive Officers is included in Item 10, Directors, Executive Officers and Corporate Governance, beginning on page 40 of this report.
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Part I
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, natural gas and raw materials, affect the company's operating results from period to period. Price increases for energy and raw materials were not significant to earnings in 2012 as compared to 2011. In 2011, price increases for energy and raw materials were about $2.0 billion as compared to 2010. 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 solutions to meet increasing demand for food productivity, decrease dependency on fossil fuels, and protect people, assets and the environment. The company develops new products through multiple methods including, but not limited to, internal research, collaborations, acquisitions, joint ventures and licensing technology or know-how. Developing and marketing new products 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 and maintain relevant regulatory approvals, obtain and maintain intellectual property protection, obtain technology 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 in which it will invest to develop, will achieve substantial commercial success. Not currently matching investment choices in new products with market need and competitive offerings could adversely affect business performance. 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 competes with major global companies that have strong intellectual property estates supporting the use of biotechnology to enhance products, particularly agricultural and bio-based products. Speed in discovering, developing and protecting new technologies and bringing related products to market is a significant competitive advantage. Failure to predict and respond effectively to this competition could cause the company's existing or candidate products to become less competitive, adversely affecting sales. Competitors are increasingly challenging intellectual property positions and the outcomes can be highly uncertain. If challenges are resolved adversely, it could negatively impact the company's ability to commercialize new products and generate sales from existing products.
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.
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ITEM 1A. RISK FACTORS, continued
In the ordinary course of business, the company may make certain commitments, including representations, warranties and indemnities relating to current and past operations, including those related to divested businesses and issue guarantees of third party obligations. If the company were required to make payments as a result, they could exceed the amounts accrued, thereby adversely affecting the company's results of operations.
The company's business, including its results of operations and reputation, could be adversely affected by process safety and product stewardship issues.
Failure to appropriately manage safety, human health, product liability and environmental risks associated with the company's products, product life cycles and production processes could adversely impact employees, communities, stakeholders, the environment, the company's reputation and its results of operations. Public perception of the risks associated with the company's products and production processes could impact product acceptance and influence the regulatory environment in which the company operates. While the company has procedures and controls to manage process safety risks, issues could be created by events outside of its control including natural disasters, severe weather events, acts of sabotage and substandard performance by the company's external partners.
As a result of the company's current and past operations, including operations related to divested businesses, the company could incur significant environmental liabilities.
The company is subject to various laws and regulations around the world governing the environment, including the discharge of pollutants and the management and disposal of hazardous substances. As a result of its operations, including its past operations and operations of divested businesses, the company could incur substantial costs, including remediation and restoration costs. The costs of complying with complex environmental laws and regulations, as well as internal voluntary programs, are significant and will continue to be so for the foreseeable future. The ultimate costs under environmental laws and the timing of these costs are difficult to predict. The company's accruals for such costs and liabilities may not be adequate because the estimates on which the accruals are based depend on a number of factors including the nature of the matter, the complexity of the site, site geology, the nature and extent of contamination, the type of remedy, the outcome of discussions with regulatory agencies and other Potentially Responsible Parties (PRPs) at multi-party sites and the number and financial viability of other PRPs.
Market acceptance, government policies, rules or regulations and competition could affect the company's ability to generate sales from products based on biotechnology.
The company is using biotechnology to create and improve products, particularly in its Agriculture and Industrial Biosciences segments. The use of biotechnology to characterize the genetic and performance characteristics of Pioneer seeds provides Pioneer with competitive advantages in the development of new products, and in the most effective placement of those products on customer planted area. Industrial Biosciences leverages the company's biotechnology capabilities to develop and manufacture a broad portfolio of enzymes and biomaterials. These products enable cost and process benefits, better product performance and improve environmental outcomes to a broad range of products and processes such as animal nutrition, detergents, food manufacturing, ethanol production and industrial applications. The company's ability to generate sales from such products could be impacted by market acceptance as well as governmental policies, laws and regulations that affect the development, manufacture and distribution of products, including the testing and planting of seeds containing biotechnology traits and the import of commodity grain grown from those seeds. The regulatory environment is lengthy and complex with requirements that can vary by industry and by country. The regulatory environment may be impacted by the activities of non-governmental organizations and special interest groups and stakeholder reaction to actual or perceived impacts of new technology on safety, health and the environment. Obtaining and maintaining regulatory approvals requires submitting a significant amount of information and data, which may require participation from technology providers. The ability to satisfy the requirements of regulatory agencies is essential to be able to continue to sell existing products or commercialize new products.
Changes in government policies and laws could adversely affect the company's financial results.
Sales to customers outside the U.S. constitute about 60 percent of the company's 2012 revenue. The company anticipates that international sales will continue to represent a substantial portion of its total sales and that continued growth and profitability will require further international expansion, particularly in developing markets. Sales from developing markets represent 34 percent of the company's revenue in 2012 and the company's growth plans include focusing on expanding its presence in developing markets. The company's financial results could be affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and non-U.S. governments, agencies and similar organizations. These conditions include, but are not limited to, changes in a country's or region's economic or political conditions, trade regulations affecting production, pricing and marketing of products, local labor conditions and regulations, reduced protection of intellectual property rights in some countries, changes in the regulatory or legal environment, restrictions on currency exchange activities, burdensome taxes and tariffs and
9
Part I
ITEM 1A. RISK FACTORS, continued
other trade barriers. International risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities and war, could lead to reduced sales and profitability.
Economic factors, including inflation, deflation and fluctuations in currency exchange rates, interest rates and commodity prices could affect the company's financial results.
The company is exposed to fluctuations in currency exchange rates, interest rates and commodity prices. Because the company has significant international operations, there are a large number of currency transactions that result from international sales, purchases, investments and borrowings. The company actively manages currency exposures that are associated with net monetary asset positions, committed currency purchases and sales, foreign currency-denominated revenues and other assets and liabilities created in the normal course of business. Failure to successfully manage these risks could have an adverse impact on the company's financial position, results of operations and cash flows.
Conditions in the global economy and global capital markets may adversely affect the company's results of operations, financial condition, and cash flows.
The company's business and operating results may in the future be adversely affected by global economic conditions, including instability in credit markets, declining consumer and business confidence, fluctuating commodity prices, volatile exchange rates, and other challenges that could affect the global economy. The company's customers may experience deterioration of their businesses, cash flow shortages, and difficulty obtaining financing. As a result, existing or potential customers may delay or cancel plans to purchase products and may not be able to fulfill their obligations in a timely fashion. Further, suppliers could experience similar conditions, which could impact their ability to fulfill their obligations to the company. Adversity within capital markets may impact future return on pension assets, thus resulting in greater future pension costs that impact the company's results. Future weakness in the global economy could adversely affect the company's results of operations, financial condition and cash flows in future periods.
The company's results of operations and financial condition could be seriously impacted by business disruptions and security breaches, including cybersecurity incidents.
Business and/or supply chain disruptions, plant and/or power outages and information technology system and/or network disruptions, regardless of cause including acts of sabotage, employee error or other actions, geo-political activity, weather events and natural disasters could seriously harm the company's operations as well as the operations of its customers and suppliers. Failure to effectively prevent, detect and recover from security breaches, including attacks on information technology and infrastructure by hackers; viruses; breaches due to employee error or actions; or other disruptions could result in misuse of the company's assets, business disruptions, loss of property including trade secrets and confidential business information, legal claims or proceedings, reporting errors, processing inefficiencies, negative media attention, loss of sales and interference with regulatory compliance. Although management does not believe that the company has experienced any material losses to date related to security breaches, including cybersecurity incidents, there can be no assurance that it will not suffer such losses in the future. The company actively manages the risks within its control that could lead to business disruptions and security breaches. As these threats continue to evolve, particularly around cybersecurity, the company may be required to expend significant resources to enhance its control environment, processes, practices and other protective measures. Despite these efforts, such events could materially adversely affect the company's business, financial condition or results of operations.
Inability to protect and enforce the company's intellectual property rights could adversely affect the company's financial results.
Intellectual property rights, including patents, plant variety protection, trade secrets, confidential information, trademarks, tradenames and other forms of trade dress, are important to the company's business. The company endeavors to protect its intellectual property rights in jurisdictions in which its products are produced or used and in jurisdictions into which its products are imported. However, the company may be unable to obtain protection for its intellectual property in key jurisdictions. The company has designed and implemented internal controls to restrict access to and distribution of its intellectual property. Despite these precautions, the company's intellectual property is vulnerable to unauthorized access through employee error or actions, theft and cybersecurity incidents, and other security breaches. When unauthorized access and use or counterfeit products are discovered, the company reports such situations to governmental authorities for investigation, as appropriate, and takes measures to mitigate any potential impact.
10
Part I
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The company's corporate headquarters are located in Wilmington, Delaware. The company's manufacturing, processing, marketing and research and development facilities, as well as regional purchasing offices and distribution centers are located throughout the world.
Information regarding research and development facilities is incorporated by reference to Item 1, Business-Research and Development. Additional information with respect to the company's property, plant and equipment and leases is contained in Notes 10, 16 and 21 to the Consolidated Financial Statements.
The company has investments in property, plant and equipment related to global manufacturing operations. Collectively there are over 300 principal sites in total. The number of sites used by their applicable segment(s) by major geographic area around the world is as follows:
Number of Sites | ||||||||||||||||
Agriculture | Electronics & Communications | Industrial Biosciences | Nutrition & Health | Performance Chemicals | Performance Materials | Safety & Protection | Total 1 | |||||||||
Asia Pacific | 19 | 10 | 1 | 10 | 6 | 19 | 7 | 72 | ||||||||
EMEA | 17 | 3 | 7 | 20 | 4 | 11 | 5 | 67 | ||||||||
Latin America | 17 | — | 1 | 7 | 1 | 1 | — | 27 | ||||||||
U.S. & Canada | 56 | 18 | 6 | 12 | 29 | 19 | 11 | 151 | ||||||||
109 | 31 | 15 | 49 | 40 | 50 | 23 | 317 | |||||||||
1. | Sites that are used by multiple segments are included more than once in the figures above. |
The company's plants and equipment are well maintained and in good operating condition. The company believes it has sufficient capacity to meet demand in 2013. Properties are primarily owned by the company; however, certain properties are leased. No title examination of the properties has been made for the purpose of this report and certain properties are shared with other tenants under long-term leases.
DuPont recognizes that the security and safety of its operations are critical to its employees, community and to the future of the company. As such, the company has merged chemical site security into its safety core value where it serves as an integral part of its long standing safety culture. Physical security measures have been combined with process safety measures (including the use of inherently safer technology), administrative procedures and emergency response preparedness into an integrated security plan. The company has conducted vulnerability assessments at operating facilities in the U.S. and high priority sites worldwide and identified and implemented appropriate measures to protect these facilities from physical and cyber attacks. DuPont is partnering with carriers, including railroad, shipping and trucking companies, to secure chemicals in transit.
11
Part I
ITEM 3. 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 16 to the Consolidated Financial Statements.
Litigation
Imprelis® Herbicide Claims Process
Information related to this matter is included in Note 16 to the Consolidated Financial Statements under the heading Imprelis®.
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 16 to the Consolidated Financial Statements under the heading PFOA.
Monsanto Patent Dispute
Information related to this matter is included in Note 16 to the Consolidated Financial Statements under the heading Monsanto Patent Dispute.
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 2010, the government initiated an enforcement action alleging that the facility violated recordkeeping requirements of certain provisions of the Clean Air Act (CAA) and the Federal Clean Air Act Regulations (FCAR) governing Leak Detection and Reporting (LDAR) 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).
LaPorte Plant, LaPorte, Texas
EPA conducted a multimedia inspection at the LaPorte facility in January 2008. DuPont, EPA and DOJ began discussions in the fall of 2011 relating primarily to the management of certain materials in the facility's wastewater treatment system. These negotiations continue.
Sabine Plant, Orange, Texas
In June 2012, DuPont received allegations related to a multimedia inspection that the EPA conducted at the Sabine facility in March 2009. DuPont, EPA and DOJ are in discussions relating to the management of materials in the facility's waste water treatment system, hazardous waste management and air emissions.
Yerkes Plant, Buffalo, New York
The government alleges that the facility violated recordkeeping requirements of certain provisions of the CAA and FCAR governing LDAR and that it failed to accurately report emissions under the Emergency Planning and Community Right-to-Know Act. The alleged non-compliance was identified by EPA in 2006 and 2010 following separate environmental audits. DuPont is in settlement negotiations with EPA and DOJ.
Federal Insecticide, Fungicide and Rodenticide Act (FIFRA)
In July 2012, DuPont received a “notice of noncompliance and show cause” letter from EPA Region III for alleged violations of FIFRA related to product labeling and adverse effects reporting for Imprelis®.
Washington Works Plant, West Virginia
In 2011, the U.S. government initiated an enforcement action alleging that the Washington Works plant violated certain regulatory provisions of the CAA governing LDAR. The alleged non-compliance was identified between 2007 and 2010, following an environmental audit conducted in 2007 and the submission of responses to an information request received in 2009. DuPont is in settlement negotiations with the EPA and DOJ.
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Part I
ITEM 3. LEGAL PROCEEDINGS, continued
DuPont (Australia) Pty Limited
The New South Wales Environmental Protection Authority (NSWEPA) alleges that 2011 dust particulate emissions from a DuPont (Australia) Pty Limited facility caused damage to trees, shrubs, and garden plants. In April 2012, NSWEPA commenced proceedings against DuPont (Australia) Pty Limited and under applicable laws and regulations, fines of up to AUD 1,000,000 (approximately $1,000,000) can be imposed.
ITEM 4. MINE SAFETY DISCLOSURES
Information regarding mine safety and other regulatory actions at the company's surface mine in Starke, Florida is included in Exhibit 95 to this report.
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Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Registrant's Common Equity and Related Stockholder Matters
The company's common stock is listed on the New York Stock Exchange, Inc. (symbol DD) and certain non-U.S. exchanges. The number of record holders of common stock was approximately 73,000 at January 31, 2013.
Holders of the company's common stock are entitled to receive dividends when they are declared by the Board of Directors. While it is not a guarantee of future conduct, the company has continuously paid a quarterly dividend since the fourth quarter 1904. Dividends on common stock and preferred stock are usually declared in January, April, July and October. When dividends on common stock are declared, they are usually paid mid March, June, September and December. Preferred dividends are paid on or about the 25th of January, April, July and October. The Stock Transfer Agent and Registrar is Computershare Trust Company, N.A.
The company's quarterly high and low trading stock prices and dividends per common share for 2012 and 2011 are shown below.
Market Prices | |||||||||
2012 | High | Low | Per Share Dividend Declared | ||||||
Fourth Quarter | $ | 50.96 | $ | 41.67 | $ | 0.43 | |||
Third Quarter | 52.33 | 46.15 | 0.43 | ||||||
Second Quarter | 53.98 | 46.44 | 0.43 | ||||||
First Quarter | 53.95 | 45.84 | 0.41 | ||||||
2011 | |||||||||
Fourth Quarter | $ | 49.92 | $ | 37.10 | $ | 0.41 | |||
Third Quarter | 56.20 | 39.94 | 0.41 | ||||||
Second Quarter | 57.00 | 48.64 | 0.41 | ||||||
First Quarter | 56.19 | 47.22 | 0.41 | ||||||
Issuer Purchases of Equity Securities
There were no purchases of the company's common stock during the three months ended December 31, 2012.
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Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES, continued
Stock Performance Graph
The following graph presents the cumulative five-year total return for the company's common stock compared with the S&P 500 Stock Index and the Dow Jones Industrial Average.
12/31/2007 | 12/31/2008 | 12/31/2009 | 12/31/2010 | 12/31/2011 | 12/31/2012 | |||||||||||||
DuPont | $ | 100 | $ | 60 | $ | 85 | $ | 131 | $ | 124 | $ | 126 | ||||||
S&P 500 Index | 100 | 63 | 80 | 92 | 94 | 109 | ||||||||||||
Dow Jones Industrial Average | 100 | 68 | 84 | 95 | 103 | 114 | ||||||||||||
The graph assumes that the values of DuPont common stock, the S&P 500 Stock Index and the Dow Jones Industrial Average were each $100 on December 31, 2007 and that all dividends were reinvested.
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Part II
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in millions, except per share) | 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||
Summary of operations1 | |||||||||||||||
Net sales | $ | 34,812 | $ | 33,681 | $ | 27,700 | $ | 22,681 | $ | 26,169 | |||||
Employee separation / asset related charges, net | $ | 493 | $ | 53 | $ | (40 | ) | $ | 195 | $ | 331 | ||||
Income from continuing operations before income taxes | $ | 3,115 | $ | 3,781 | $ | 3,260 | $ | 1,943 | $ | 2,388 | |||||
Provision for income taxes on continuing operations | $ | 622 | $ | 626 | $ | 515 | $ | 326 | $ | 368 | |||||
Net income attributable to DuPont | $ | 2,788 | $ | 3,474 | $ | 3,031 | $ | 1,755 | $ | 2,007 | |||||
Basic earnings per share of common stock from continuing operations | $ | 2.63 | $ | 3.35 | $ | 2.99 | $ | 1.76 | $ | 2.22 | |||||
Diluted earnings per share of common stock from continuing operations | $ | 2.61 | $ | 3.30 | $ | 2.94 | $ | 1.75 | $ | 2.21 | |||||
Financial position at year-end | |||||||||||||||
Working capital2 | $ | 7,642 | $ | 6,873 | $ | 9,670 | $ | 7,898 | $ | 5,601 | |||||
Total assets3 | $ | 49,736 | $ | 48,492 | $ | 40,410 | $ | 38,185 | $ | 36,209 | |||||
Borrowings and capital lease obligations | |||||||||||||||
Short-term | $ | 1,275 | $ | 817 | $ | 133 | $ | 1,506 | $ | 2,012 | |||||
Long-term | $ | 10,465 | $ | 11,736 | $ | 10,137 | $ | 9,528 | $ | 7,638 | |||||
Total equity | $ | 10,179 | $ | 9,062 | $ | 9,743 | $ | 7,651 | $ | 7,552 | |||||
General1 | |||||||||||||||
For the year | |||||||||||||||
Purchases of property, plant & equipment and investments in affiliates | $ | 1,890 | $ | 1,910 | $ | 1,608 | $ | 1,432 | $ | 2,033 | |||||
Depreciation | $ | 1,319 | $ | 1,199 | $ | 1,118 | $ | 1,144 | $ | 967 | |||||
Research and development expense | $ | 2,067 | $ | 1,910 | $ | 1,603 | $ | 1,324 | $ | 1,326 | |||||
Average number of common shares outstanding (millions) | |||||||||||||||
Basic | 933 | 928 | 909 | 904 | 902 | ||||||||||
Diluted | 942 | 941 | 922 | 909 | 907 | ||||||||||
Dividends per common share | $ | 1.70 | $ | 1.64 | $ | 1.64 | $ | 1.64 | $ | 1.64 | |||||
At year-end | |||||||||||||||
Employees (thousands) | 70 | 70 | 60 | 58 | 60 | ||||||||||
Closing stock price | $ | 44.98 | $ | 45.78 | $ | 49.88 | $ | 33.67 | $ | 25.30 | |||||
Common stockholders of record (thousands) | 74 | 78 | 81 | 85 | 88 | ||||||||||
1. | Information has been restated to reflect the impact of discontinued operations, as applicable. See Note 1, Basis of Presentation, to the Consolidated Financial Statements for further information. |
2. | At December 31, 2012, working capital includes approximately $2.0 billion of net assets related to the Performance Coatings business, of which approximately $1.3 billion was previously considered to be noncurrent and is now classified as held for sale. See Note 2 to the Consolidated Financial Statements for further information. |
3. | During 2011, the company acquired approximately $8.8 billion of assets in connection with the Danisco acquisition. See Note 4 to the Consolidated Financial Statements for further information. |
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Part II
ITEM 7. 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,” “believes,” “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, regulatory approval, market position, anticipated benefits of recent acquisitions, outcome of contingencies, such as litigation and environmental matters, expenditures and financial results, are forward-looking statements.
Forward-looking statements are based on certain assumptions and expectations of future events which may not be accurate or realized. Forward-looking statements also involve risks and uncertainties, many of which are beyond the company's control. 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 are:
• | Fluctuations in energy and raw material prices; |
• | Failure to develop and market new products and optimally manage product life cycles; |
• | Outcome of significant litigation and environmental matters, including those related to divested businesses; |
• | Failure to appropriately manage process safety and product stewardship issues; |
• | Effect of changes in tax, environmental and other laws and regulations or political conditions in the U.S. and other countries in which the company operates; |
• | Conditions in the global economy and global capital markets, including economic factors, such as inflation, deflation and fluctuations in currency exchange rates, interest rates and commodity prices, as well as regulatory requirements; |
• | Impact of business disruptions, including supply disruptions, and security threats, regardless of cause, including acts of sabotage, cyber-attacks, terrorism or war, weather events and natural disasters; |
• | Inability to protect and enforce the company's intellectual property rights; and |
• | Successful integration of acquired businesses and completion of divestitures of underperforming or non-strategic assets or businesses. |
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 I, Item 1A beginning on page 8.
Overview
Purpose DuPont is a science company. We work collaboratively to find sustainable, innovative, market-driven solutions to solve some of the world's biggest challenges, making lives better, safer, and healthier for people everywhere.
Strategy The company's strategy for growth is to apply its science and technology to address three challenges driven by global population growth: feeding the world, reducing our dependence on fossil fuels and keeping people and the environment safe. Critical areas for the company's growth are innovation, differential management and productivity. Applying science to deliver innovative solutions and new products in the marketplace generates shareholder value and profitable growth. Differential management is a disciplined process to prioritize and allocate resources across businesses and geographies aligned with growth opportunities. The company continues to achieve fixed cost, working capital and variable cost productivity through disciplined business processes called DuPont Integrated Business Management (DIBM) and DuPont Production System (DPS). DIBM focuses on the business supply chain to maximize efficiency and optimize working capital, while DPS focuses on productivity outcomes to eliminate operational inefficiencies and improve lead time, cycle time and quality. The company is committed to maintain a strong balance sheet and to return excess cash to shareholders unless there is a compelling opportunity to invest for growth.
Results In 2012, sales were up 3 percent as strong increases in the Agriculture, Nutrition & Health, and Industrial Biosciences segments were partly offset by lower sales for the remaining segments, particularly Performance Chemicals. The latter had financial results reflecting a declining business trend after reaching cyclical peaks for sales and earnings in 2011 and the first half of 2012. Total company sales grew 6 percent in developing markets, which include China, India, and the countries located in Latin America, Eastern and Central Europe, Middle East, Africa, and Southeast Asia. Sales of new products introduced in the last four years also contributed to sales growth. The company exceeded its three-year 2010-2012 plan of $1 billion fixed cost productivity actions and $1 billion working capital productivity.
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Part II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
Analysis of Operations
Divestiture of Performance Coatings In third quarter 2012, the company entered into a definitive agreement with Flash Bermuda Co. Ltd., a Bermuda exempted limited liability company formed by affiliates of The Carlyle Group (collectively referred to as "Carlyle") in which Carlyle agreed to purchase certain subsidiaries and assets comprising the company's Performance Coatings business for approximately $4.9 billion in cash and the assumption of certain liabilities. On February 1, 2013, the sale of Performance Coatings was completed, resulting in about $4.0 billion in after-tax proceeds.
In accordance with GAAP, the results of Performance Coatings are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. See Note 2 to the Consolidated Financial Statements for additional information.
Acquisition of Danisco In 2011, the company acquired Danisco in a transaction valued at $6.4 billion, plus net debt assumed of $0.6 billion. As part of this acquisition, DuPont incurred $85 million in transaction related costs during 2011, which were recorded in costs of goods sold and other operating charges. In 2011, the businesses acquired from Danisco contributed net sales of $1.7 billion and net income attributable to DuPont of $(7) million, which excludes $30 million after-tax ($39 million pre-tax) of additional interest expense related to the debt issued to finance the acquisition. Danisco's contributions included a $125 million after-tax ($175 million pre-tax) charge related to the fair value step-up of inventories acquired and sold during 2011. See Note 4 to the Consolidated Financial Statements for additional information.
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
NET SALES | $ | 34,812 | $ | 33,681 | $ | 27,700 | |||
2012 versus 2011 The table below shows a regional breakdown of 2012 consolidated net sales based on location of customers and percentage variances from prior year:
Percent Change Due to: | |||||||||||||
(Dollars in billions) | 2012 Net Sales | Percent Change vs. 2011 | Local Price | Currency Effect | Volume | Portfolio / Other | |||||||
Worldwide | $ | 34.8 | 3 | 4 | (2 | ) | (2 | ) | 3 | ||||
U.S. & Canada | 14.2 | 8 | 6 | — | — | 2 | |||||||
EMEA | 8.1 | (1 | ) | 3 | (6 | ) | (4 | ) | 6 | ||||
Asia Pacific | 8.0 | (4 | ) | (1 | ) | (1 | ) | (5 | ) | 3 | |||
Latin America | 4.5 | 11 | 9 | (5 | ) | 5 | 2 | ||||||
Sales increased 3 percent, reflecting a 3 percent net increase from portfolio changes, principally the Danisco acquisition, and 4 percent higher local prices, partly offset by 2 percent lower volume and a 2 percent negative currency impact. The 2 percent decline in worldwide sales volume principally reflects higher Agriculture, Nutrition & Health, and Industrial Biosciences volume, more than offset by lower volume for the other segments combined, particularly Performance Chemicals. Higher local prices were driven principally by increases for seeds, titanium dioxide, and specialty polymers. Currency effect primarily reflects the weaker Euro and Brazilian Real. Sales in developing markets of $11.9 billion improved 6 percent from 2011, and the percentage of total company sales in these markets increased to 34 percent from 33 percent in 2011.
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Part II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
2011 versus 2010 The table below shows a regional breakdown of 2011 consolidated net sales based on location of customers and percentage variances from 2010:
Percent Change Due to: | |||||||||||||
(Dollars in billions) | 2011 Net Sales | Percent Change vs. 2010 | Local Price | Currency Effect | Volume | Portfolio / Other | |||||||
Worldwide | $ | 33.7 | 22 | 12 | 2 | 1 | 7 | ||||||
U.S. & Canada | 13.1 | 16 | 9 | — | 1 | 6 | |||||||
EMEA | 8.2 | 26 | 11 | 4 | — | 11 | |||||||
Asia Pacific | 8.3 | 23 | 17 | 3 | (3 | ) | 6 | ||||||
Latin America | 4.1 | 33 | 14 | 2 | 12 | 5 | |||||||
Sales increased 22 percent, principally reflecting higher local selling prices and the sales added from businesses acquired from Danisco. Local selling prices were significantly higher for titanium dioxide, seeds, fluoroproducts and electronic products, with the latter reflecting pass through pricing for higher precious metals costs. Worldwide sales volume increased 1 percent as strong volume growth in Agriculture was largely offset by declines in Electronic & Communications, Performance Chemicals and Performance Materials. The declines occurred primarily during the fourth quarter, resulting from destocking in photovoltaics, polymer and industrial supply chains, as well as weaker demand for company products supplying consumer electronics and construction. Volume growth in Latin America was driven by Agriculture and Safety & Protection. Sales in developing markets of $11.2 billion improved 29 percent from 2010, and the percentage of total company sales in these markets increased to 33 percent from 31 percent in 2010.
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
OTHER INCOME, NET | $ | 498 | $ | 742 | $ | 1,199 | |||
2012 versus 2011 The $244 million decrease was largely attributable to a $228 million reduction of Cozaar®/Hyzaar® income, a decrease of $92 million in equity in earnings of affiliates, and an increase of $69 million in net pre-tax exchange losses, partially offset by a $122 million gain related to the sale of the company's interest in an equity method investment.
2011 versus 2010 The $457 million decrease was largely attributable to a $201 million reduction of Cozaar®/Hyzaar® income, an increase of $134 million in net pre-tax exchange losses, the absence of a benefit of $59 million recorded in 2010 related to accrued interest associated with settlements of income tax contingencies related to prior years, the absence of $41 million in insurance recoveries and a $32 million decrease in net gains on sales of assets.
Additional information related to the company's other income, net is included in Note 5 to the Consolidated Financial Statements.
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
COST OF GOODS SOLD AND OTHER OPERATING CHARGES | $ | 25,604 | $ | 24,874 | $ | 20,574 | |||
As a percent of net sales | 74 | % | 74 | % | 74 | % | |||
2012 versus 2011 Cost of goods sold and other operating charges (COGS) increased 3 percent to $25.6 billion. COGS as a percentage of net sales was 74 percent, unchanged from 2011. Increased charges of $537 million related to Imprelis® and other litigation matters were offset by higher selling prices. See Note 16 for additional information related to the Imprelis® matter.
2011 versus 2010 COGS of $24.9 billion increased 21 percent. COGS as a percentage of net sales was 74 percent, unchanged from prior year, as selling price increases offset inflation in raw material, energy and freight costs, and higher plant operating costs, including capacity expansions. 2011 COGS also included $175 million of additional costs related to the fair value step-up of inventory acquired from Danisco, $85 million of Danisco transaction related fees and $175 million for charges related to Imprelis® herbicide claims.
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Part II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | $ | 3,567 | $ | 3,358 | $ | 2,912 | |||
As a percent of net sales | 10 | % | 10 | % | 11 | % | |||
2012 versus 2011 The 2012 increase of $209 million was due to increased global commissions and selling and marketing investments, primarily in the Agriculture segment, and a full year of selling expense of acquired companies.
2011 versus 2010 The 2011 increase of $446 million was due to the additional selling expense of acquired companies and increased global commissions and selling and marketing investments, primarily in the Agriculture segment.
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
RESEARCH AND DEVELOPMENT EXPENSE | $ | 2,067 | $ | 1,910 | $ | 1,603 | |||
As a percent of net sales | 6 | % | 6 | % | 6 | % | |||
2012 versus 2011 The $157 million increase was primarily attributable to a full year of research and development expense from acquired companies and continued growth investments in the Agriculture segment offset by the absence of a $50 million charge for a payment related to a Pioneer licensing agreement in 2011.
2011 versus 2010 The $307 million increase was primarily attributable to research and development expense from acquired companies and continued growth investment in the Agriculture segment. Both periods include a $50 million charge for payments related to a Pioneer licensing agreement prior to the business receiving regulatory approval in the third quarter 2011.
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
INTEREST EXPENSE | $ | 464 | $ | 447 | $ | 590 | |||
The $17 million increase in 2012 was due primarily to higher average borrowings and lower capitalized interest partially offset by a lower average borrowing rate. The $143 million decrease in 2011 was due primarily to the absence of a $179 million pre-tax charge on the early extinguishment of debt and lower interest rates, partially offset by higher average debt resulting from financing for the Danisco acquisition.
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
EMPLOYEE SEPARATION/ASSET RELATED CHARGES, NET | $ | 493 | $ | 53 | $ | (40 | ) | ||
The $493 million in charges recorded during 2012 in employee separation / asset related charges, net consisted of $234 million in charges related to the 2012 restructuring program, a $16 million net reduction in the estimated costs associated with 2011 and prior years restructuring programs, and $275 million in asset impairment charges, as discussed below.
The net $53 million charge recorded during 2011 was primarily related to the 2011 restructuring program, as discussed below, and the $40 million credit recorded during 2010 was due to a net reduction in the estimated costs for prior years restructuring programs.
2012 Restructuring Program
In 2012, the company commenced a restructuring plan to increase productivity, enhance competitiveness and accelerate growth. The plan is designed to eliminate corporate costs previously allocated to the Performance Coatings business as well as utilize additional cost-cutting actions to improve competitiveness. As a result, pre-tax charges of $234 million were recorded in employee separation / asset related charges, net. The 2012 restructuring program charges consist of $157 million of employee separation costs, $8 million of other non-personnel charges, and $69 million of asset related charges, which includes $30 million of asset impairments and $39 million of asset shut downs. The company expects this plan and all related payments to be substantially complete by December 31, 2013. The actions related to this plan are expected to achieve pre-tax cost savings of approximately $300 million in 2013 increasing to $450 million per year in subsequent years.
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2011 Restructuring Program
In 2011, the company initiated a series of actions to achieve the expected cost synergies associated with the Danisco acquisition. As a result, the company recorded a $53 million charge in employee separation/asset related charges, net, primarily for employee separation costs in the U.S. and Europe.
In the fourth quarter 2012, the company recorded a net reduction of $15 million in the estimated costs associated with the 2011 restructuring program. This net reduction was primarily due to workforce reductions through non-severance programs and lower than estimated individual severance costs. The actions and payments related to the 2011 restructuring program were substantially complete as of December 31, 2012.
Asset Impairments
During 2012, the company recorded asset impairment charges of $275 million to write-down the carrying value of certain asset groups to fair value. These asset impairment charges resulted in a $150 million charge within the Electronics & Communications segment, a $92 million charge within the Performance Materials segment and a $33 million charge within the Performance Chemicals segment.
Additional details related to the restructuring programs and asset impairments discussed above can be found in Note 3 to the Consolidated Financial Statements.
Below is a summary of the net impact related to items recorded in employee separation / asset related charges, net:
(Dollars in millions) | 2012 (Charges) and Credits | 2011 (Charges) and Credits | 2010 (Charges) and Credits | ||||||
Agriculture | $ | (11 | ) | $ | — | $ | — | ||
Electronics & Communications | (159 | ) | — | 8 | |||||
Industrial Biosciences | (3 | ) | (9 | ) | — | ||||
Nutrition & Health | (49 | ) | (14 | ) | — | ||||
Performance Chemicals | (36 | ) | — | 10 | |||||
Performance Materials | (104 | ) | (2 | ) | 16 | ||||
Safety & Protection | (58 | ) | — | 5 | |||||
Other | 11 | (28 | ) | 1 | |||||
Corporate expenses | (84 | ) | — | — | |||||
Total (Charges) Credits | $ | (493 | ) | $ | (53 | ) | $ | 40 | |
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
PROVISION FOR INCOME TAXES ON CONTINUING OPERATIONS | $ | 622 | $ | 626 | $ | 515 | |||
Effective income tax rate | 20.0 | % | 16.6 | % | 15.8 | % | |||
In 2012, the company recorded a tax provision on continuing operations of $622 million, reflecting a marginal decrease from 2011. The increase in the 2012 effective tax rate compared to 2011 was primarily due to geographic mix of earnings, in addition to the absence of certain U.S. business tax provisions in 2012 (extended retroactively to 2012 in first quarter 2013).
In 2011, the company recorded a tax provision on continuing operations of $626 million, reflecting an increase from 2010 largely due to pre-tax earnings growth, which was partially offset by the impact associated with the company's policy of hedging the foreign currency-denominated monetary assets and liabilities of its operations.
See Note 6 to the Consolidated Financial Statements for additional details related to the provision for income taxes on continuing operations, as well as items that significantly impact the company's effective income tax rate.
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(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
INCOME FROM CONTINUING OPERATIONS AFTER INCOME TAXES | $ | 2,493 | $ | 3,155 | $ | 2,745 | |||
Income from continuing operations after income taxes for 2012 was $2.5 billion compared to $3.2 billion in 2011 and $2.7 billion in 2010. The changes between periods were due to the reasons noted above.
Corporate Outlook
The company expects 2013 sales and earnings to benefit from modest growth in global gross domestic product and industrial production. The company’s market position and financial results will continue to be enhanced by market-driven innovation and productivity. Raw material, energy and freight costs are expected to increase, principally due to higher seed input costs and titanium ore. Currency impact for the full-year 2013 versus 2012 is expected to be flat. The company expects a dynamic market environment, including strong Agriculture demand and significant headwinds related to the cyclical nature of the titanium dioxide industry affecting the Performance Chemicals segment.
Segment Reviews
Segment sales include transfers to another business segment. Products are transferred between segments on a basis intended to reflect, as nearly as practicable, the market value of the products. Segment pre-tax operating income (loss) (PTOI) is defined as income (loss) from continuing operations before income taxes excluding exchange gains (losses), corporate expenses and interest. All references to 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 from continuing operations before income taxes for 2012, 2011 and 2010 is included in Note 22 to the Consolidated Financial Statements.
AGRICULTURE
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
Segment sales | $ | 10,426 | $ | 9,166 | $ | 7,845 | |||
PTOI | $ | 1,594 | $ | 1,527 | $ | 1,293 | |||
PTOI margin | 15 | % | 17 | % | 16 | % | |||
2012 | 2011 | |||
Change in segment sales from prior period due to: | ||||
Price | 6 | % | 6 | % |
Volume | 8 | % | 10 | % |
Portfolio / Other | — | % | 1 | % |
Total change | 14 | % | 17 | % |
2012 versus 2011 Pioneer seed sales reflect growth primarily in corn and soybean seeds. Volume increases in all regions reflect increased planted area. Global pricing gains reflect continued penetration of new genetics and trait packages, including the Optimum® AcreMax® Family of integrated and reduced refuge corn hybrids and Optimum® AQUAmaxTM products for improved drought tolerance. Crop Protection sales grew in all regions reflecting volume and price gains from herbicides, insect control products and fungicides, particularly continued strong demand for Rynaxypyr® insect control products.
2012 PTOI increased as strong sales and a $117 million gain on the sale of a business more than offset $575 million of charges related to Imprelis®, higher input costs in seeds, unfavorable currency and higher investments in commercial and R&D activities to support growth. 2012 PTOI margin decreased due to increased charges related to Imprelis®. See Note 16 to the Consolidated Financial Statements for more information related to the Imprelis® matter.
2011 versus 2010 Pioneer seed sales reflect growth primarily in corn and soybean seeds. Volume increases in all regions reflect increased planted area and market position. Pricing gains in all regions reflect the introduction and penetration of new products including Optimum® AcreMax® 1 into the North America corn lineup. Crop Protection sales growth reflects both volume and price gains with increases in insect control, weed control and fungicides product sales, particularly continued strong demand for
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Rynaxypyr® insecticide and continued expansion of picoxystrobin fungicides. Sales grew in all regions, particularly Latin America and Europe.
2011 PTOI and PTOI margin increased on continued new product penetration and leverage on volume growth, partially offset by a $175 million charge related to Imprelis®. Additionally, aligned with the segment's long-term plan, research and development expense increased 15 percent to support continued growth in breeding, biotechnology and crop chemistry. 2011 and 2010 PTOI each included a licensing agreement charge of $50 million.
Outlook Pioneer anticipates continued strong demand in global corn and soybean markets, as well as pricing gains from new corn hybrids and soybean varieties and increased penetration of the Optimum® AcreMax® Family of integrated and reduced refuge corn hybrids and Optimum® AQUAmaxTM products for improved drought tolerance. Pioneer anticipates PTOI growth in 2013 reflecting higher sales, partially offset by higher seed input costs resulting from commodity price increases and the multi year weather related impact on production yields, as well as continued investment in commercial and R&D activities to support growth.
In the Crop Protection business, sales and earnings growth in 2013 is expected in all regions, and for all product groups, primarily in insect control products and fungicides. Sales and PTOI are expected to benefit from continued growth of Rynaxypyr®, broad registrations in new markets for CyazypyrTM insect control products, as well as the launch of picoxystrobin fungicides in the U.S. and continued expansion of penthiopyrad fungicide.
ELECTRONICS & COMMUNICATIONS
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
Segment sales | $ | 2,701 | $ | 3,173 | $ | 2,764 | |||
PTOI | $ | 135 | $ | 355 | $ | 445 | |||
PTOI margin | 5 | % | 11 | % | 16 | % | |||
2012 | 2011 | |||
Change in segment sales from prior period due to: | ||||
Price | (4 | )% | 23 | % |
Volume | (11 | )% | (8 | )% |
Portfolio / Other | — | % | — | % |
Total change | (15 | )% | 15 | % |
2012 versus 2011 Sales declined on lower volume in PV materials, partially offset by increased demand for smart phones and tablets. Lower price primarily reflects pass-through of lower metals prices.
2012 PTOI decreased on lower volume and a $150 million asset impairment charge noted above, partially offset by a $122 million gain related to the sale of an equity method investment. PTOI margin decreased primarily reflecting lower volume.
2011 versus 2010 Sales growth reflects higher selling prices, primarily pass-through of metals prices. Lower sales volume primarily reflects destocking in PV and softness in consumer electronics in the second half 2011, which more than offset strong demand in all market segments in the first half 2011.
2011 PTOI decreased primarily due to lower volume in the second half 2011. PTOI margin decreased primarily reflecting higher metal prices, as well as weaker product mix.
Outlook For 2013, sales are expected to increase slightly on higher volumes. PV installations are expected to be essentially flat versus 2012. Sales volumes are anticipated to improve as inventories across the value chain are at reasonable levels entering into 2013, offset in part by lower materials usage in modules. Sales into consumer electronics, driven by smart phones and tablets, are expected to be soft in the first half of the year with stronger demand in second half. Earnings are expected to increase reflecting the impact of higher volume.
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INDUSTRIAL BIOSCIENCES
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
Segment sales | $ | 1,180 | $ | 705 | $ | — | |||
PTOI | $ | 168 | $ | (1 | ) | $ | — | ||
PTOI margin | 14 | % | — | % | — | % | |||
2012 | 2011 | |||
Change in segment sales from prior period due to: | ||||
Price | (4 | )% | — | % |
Volume | 8 | % | — | % |
Portfolio / Other | 63 | % | — | % |
Total change | 67 | % | — | % |
2012 versus 2011 Sales were up primarily due to the Danisco enzyme business acquisition. Volume growth reflects strong sales of Sorona® polymer for carpeting, while lower price relates to unfavorable currency impact.
2012 PTOI and PTOI margin increased reflecting benefits of the acquisition and the absence of a $70 million charge recorded in the prior year for the fair value step-up of inventories acquired.
2011 versus 2010 Sales and PTOI primarily reflects the Danisco acquisition. 2011 PTOI included a $70 million charge for the fair value step-up of inventories that were acquired as part of the acquisition and a $9 million restructuring charge. PTOI also included $12 million of amortization expense associated with the fair value step-up of the acquired intangible assets.
Outlook Sales are expected to increase in 2013 as a result of continued strong demand for Sorona® polymer for carpeting and the introduction of new products in most enzyme markets. Demand for enzymes for ethanol production will remain soft until producer margins improve. Segment earnings are expected to increase consistent with volume growth, pricing gains and cost synergies derived from integration.
NUTRITION & HEALTH
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
Segment sales | $ | 3,422 | $ | 2,460 | $ | 1,240 | |||
PTOI | $ | 299 | $ | 44 | $ | 62 | |||
PTOI margin | 9 | % | 2 | % | 5 | % | |||
2012 | 2011 | |||
Change in segment sales from prior period due to: | ||||
Price | 1 | % | 5 | % |
Volume | 3 | % | 1 | % |
Portfolio / Other | 35 | % | 92 | % |
Total change | 39 | % | 98 | % |
2012 versus 2011 Sales were up primarily due to the Danisco specialty food ingredients business acquisition. Higher volume reflects strong demand for enablers, probiotics and cultures, particularly in North America. Higher local prices more than offset unfavorable currency impact.
2012 PTOI and PTOI margin increased reflecting benefits of the acquisition and the absence of a $112 million charge recorded in the prior year for transaction related costs and the fair value step-up of inventories acquired, partially offset by increased restructuring charges in 2012 as described above.
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2011 versus 2010 Sales were up primarily due to the Danisco acquisition. For Solae, higher selling prices and volume reflect strong demand for specialty soy products.
2011 PTOI and PTOI margin decreased as higher sales were more than offset by a $112 million charge for transaction related costs and the fair value step-up of inventories that were acquired and a $14 million restructuring charge. PTOI also included $49 million of amortization expense associated with the fair value step-up of the acquired intangible assets.
Outlook For 2013, sales are expected to increase driven by strong demand for enablers, probiotics and cultures. Growth is expected in all regions, particularly in Asia Pacific and Latin America, in the areas of nutrition solutions, improved health and food protection. Volume growth, mix enrichment, cost synergies derived from integration and productivity gains, partially offset by raw material increases, are expected to contribute to earnings and PTOI margin improvement.
PERFORMANCE CHEMICALS
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
Segment sales | $ | 7,188 | $ | 7,794 | $ | 6,322 | |||
PTOI | $ | 1,586 | $ | 1,923 | $ | 1,081 | |||
PTOI margin | 22 | % | 25 | % | 17 | % | |||
2012 | 2011 | |||
Change in segment sales from prior period due to: | ||||
Price | 4 | % | 26 | % |
Volume | (12 | )% | (3 | )% |
Portfolio / Other | — | % | — | % |
Total change | (8 | )% | 23 | % |
2012 versus 2011 Lower sales volume primarily reflects softness in titanium dioxide in all regions and weak demand in fluoropolymers. Higher local price primarily reflects favorable pricing for titanium dioxide in the first half 2012, which more than offset unfavorable currency impact.
2012 PTOI and PTOI margin decreased as higher local prices were more than offset by lower volume, lower plant utilization and a $33 million asset impairment charge noted above.
2011 versus 2010 Sales increased across all regions and market segments. The increase in sales reflects favorable pricing for titanium dioxide and fluoropolymers, as well as pass-through pricing of higher raw material costs for fluorochemicals and industrial chemicals.
2011 PTOI and PTOI margin improved driven by the higher selling prices and fixed cost productivity.
Outlook Sales are expected to decrease in 2013 reflecting weaker pricing for titanium dioxide and fluoropolymers, partially offset by strong demand for industrial chemicals. Segment earnings are also expected to decrease as productivity actions are more than offset by lower titanium dioxide prices. PTOI margins are expected to decline about 7 to 9 percentage points.
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PERFORMANCE MATERIALS
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
Segment sales | $ | 6,447 | $ | 6,815 | $ | 6,287 | |||
PTOI | $ | 1,013 | $ | 971 | $ | 994 | |||
PTOI margin | 16 | % | 14 | % | 16 | % | |||
2012 | 2011 | |||
Change in segment sales from prior period due to: | ||||
Price | (2 | )% | 13 | % |
Volume | — | % | (4 | )% |
Portfolio / Other | (3 | )% | (1 | )% |
Total change | (5 | )% | 8 | % |
2012 versus 2011 Lower sales reflect a 3 percent reduction from a portfolio change and lower prices due to unfavorable currency impact. Stable packaging markets and demand improvement in automotive were offset by continued softness in the industrial and electronics markets.
2012 PTOI and PTOI margin increased as lower feedstock costs more than offset a $92 million asset impairment charge noted above, unfavorable currency impact and the absence of a $49 million benefit from the gain on the sale of a business recorded in the prior year.
2011 versus 2010 Higher selling prices reflect pricing actions which offset higher feedstock costs. Lower sales volume reflect broad-based channel destocking with softening in consumer and industrial markets in the second half 2011, and production-related supply issues in ethylene-based polymers.
2011 PTOI was essentially flat. 2011 PTOI included a $49 million benefit from the gain on the sale of a business. 2010 PTOI included a combined $58 million gain on an asset purchase due to the acquisition and early termination of a supply agreement, a gain on the sale of a business and an insurance recovery. Lower PTOI margin primarily reflects feedstock costs increasing at a higher rate than selling prices.
Outlook 2013 sales are expected to grow due to anticipated increases in global motor vehicle OEM builds, particularly in China. The segment is also expected to benefit from volume growth in the consumer and industrial markets. PTOI is expected to improve due to the impact of higher volume and science-based innovations for products and processes, partially offset by higher feedstock costs.
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SAFETY & PROTECTION
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
Segment sales | $ | 3,825 | $ | 3,934 | $ | 3,364 | |||
PTOI | $ | 360 | $ | 500 | $ | 454 | |||
PTOI margin | 9 | % | 13 | % | 13 | % | |||
2012 | 2011 | |||
Change in segment sales from prior period due to: | ||||
Price | — | % | 6 | % |
Volume | (3 | )% | 4 | % |
Portfolio / Other | — | % | 7 | % |
Total change | (3 | )% | 17 | % |
2012 versus 2011 Lower U.S. public sector demand and softness in certain industrial markets, including stalled infrastructure projects in China, was partially offset by higher demand for Sustainable Solutions offerings. Higher local prices were offset by the impact of unfavorable currency.
2012 PTOI and PTOI margin decreased primarily due to a $58 million restructuring charge noted above, unfavorable currency and lower volume.
2011 versus 2010 Sales growth occurred in all regions. Sales growth primarily reflects the impact of the MECS acquisition and higher selling prices, including a favorable currency impact. Higher volume primarily reflects increased demand for aramid and nonwoven products primarily in the industrial markets in the first half 2011, with slower growth rates in the second half 2011.
2011 PTOI increased as the impact of the MECS acquisition and a favorable currency impact more than offset higher spending for growth initiatives and higher raw material costs. The Kevlar® expansion at Cooper River, South Carolina was completed and began commercial supply at the end of 2011.
Outlook For 2013, sales for Kevlar®, Nomex® and Tyvek® products are expected to benefit from improving industrial demand, including higher infrastructure spending in China. Additionally, Kevlar® and Nomex® sales are expected to improve as the year progresses from more consistent spending in the public sector. Higher demand for Sustainable Solutions offerings are expected, including growth in the areas of process safety management and sustainable operations. Building Innovations sales are expected to increase due to the continued recovery in the U.S. housing market, new product introductions and continued penetration in commercial construction applications. Earnings are expected to improve throughout the year from higher sales, reflecting innovative growth through products such as Kevlar® AP fiber, as well as continued productivity actions.
PHARMACEUTICALS
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
Segment sales | $ | — | $ | — | $ | — | |||
PTOI | $ | 62 | $ | 289 | $ | 489 | |||
Decreases in PTOI reflect the expiration of certain patents related to Cozaar®/Hyzaar®.
Outlook Earnings contributions to the company from the collaboration with Merck are expected to decline in 2013 to about $20 million.
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Liquidity & Capital Resources
December 31, | ||||||
(Dollars in millions) | 2012 | 2011 | ||||
Cash, cash equivalents and marketable securities | $ | 4,407 | $ | 4,019 | ||
Total debt | 11,740 | 12,553 | ||||
The company believes its 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, spending and capital productivity actions have been implemented. The company will continue to monitor the financial markets in order to respond to changing conditions. Depending on these conditions, the proceeds of commercial paper may be invested in cash equivalents or marketable securities.
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, cash equivalents and marketable securities provide primary liquidity to support all short-term debt obligations. A substantial majority of the company's cash, cash equivalents and marketable securities is held by foreign subsidiaries and is considered to be indefinitely reinvested and expected to be utilized to fund local operating activities and capital expenditure requirements. The company believes that it has sufficient sources of domestic liquidity to further support its assumption that undistributed earnings at December 31, 2012 can be considered reinvested indefinitely. The company has access to approximately $4.3 billion in unused credit lines with several major financial institutions, as additional support to meet short-term liquidity needs and general corporate purposes, including letters of credit.
The company continually reviews its debt portfolio and occasionally may rebalance it to ensure adequate liquidity and an optimum debt maturity schedule. In 2011, the company issued $2.0 billion in Senior Notes and $1.0 billion in commercial paper to finance the acquisition of Danisco. Additionally, the company assumed $0.7 billion in debt as part of the acquisition, which was refinanced through the issuance of commercial paper.
The company's credit ratings impact its access to the debt capital market and cost of capital. The company remains committed to a strong financial position and strong investment-grade rating. The company's long-term and short-term credit ratings are as follows:
Long-term | Short-term | Outlook | |
Standard & Poor's | A | A-1 | Stable |
Moody’s Investors Service | A2 | P-1 | Stable |
Fitch Ratings | A | F1 | Stable |
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
Cash provided by operating activities | $ | 4,849 | $ | 5,152 | $ | 4,559 | |||
Cash provided by operating activities decreased $303 million in 2012 compared to 2011 due mainly to lower earnings and a $500 million contribution to its principal U.S. pension plan, partially offset by less of an increase in operating assets and liabilities.
Cash provided by operating activities increased $593 million in 2011 compared to 2010. The increase was driven by higher earnings, lower contributions to pension plans and the weaker dollar, which was hedged with forward exchange contracts reflected in investing activities. These increases were partially offset by changes in operating assets and liabilities, mainly due to higher inventory.
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(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
Cash used for investing activities | $ | (1,346 | ) | $ | (6,238 | ) | $ | (2,439 | ) |
Cash used for investing activities decreased $4.9 billion in 2012 compared to 2011. The decrease was due mainly to the absence in 2012 of the company's Danisco acquisition in 2011.
The $3.8 billion increase in 2011 was mainly due to the payment for the Danisco acquisition, higher expenditures for the purchases of property, plant and equipment, and a net increase in payments for forward exchange contract settlements; partially offset by changes in investments in short-term financial instruments.
Purchases of property, plant and equipment totaled $1.8 billion in 2012 and 2011, and $1.5 billion in 2010. The company expects 2013 purchases of property, plant and equipment to be about $1.9 billion, an increase of $0.1 billion over 2012.
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
Cash (used for) provided by financing activities | $ | (2,697 | ) | $ | 403 | $ | (1,829 | ) | |
The $3.1 billion increase in cash used for financing activities in 2012 was due mainly to a decrease in borrowings in 2012 versus an increase in 2011, less cash received from options exercised and the company's increased investment in Solae, LLC in 2012, partially offset by reduced purchases of common stock in 2012 versus 2011.
The $2.2 billion change in 2011 was primarily due to an increase in borrowings in 2011 to finance the Danisco acquisition as compared to a decrease in borrowings in 2010.
Dividends paid to common and preferred shareholders were $1.6 billion, $1.5 billion, and $1.5 billion in 2012, 2011, and 2010, respectively. Dividends per share of common stock were $1.70, $1.64, and $1.64 in 2012, 2011, and 2010, respectively. The common dividend declared in the first quarter 2013 was the company's 434th consecutive dividend since the company's first dividend in the fourth quarter 1904.
During 2012, the company purchased and retired 7.8 million shares at a total cost of $400 million. These purchases completed the 2001 $2 billion share buyback plan and began purchases under a $2 billion share buyback plan authorized by the company's Board of Directors in April 2011. Under the completed 2001 plan, the company purchased a total of 42.0 million shares. As of December 31, 2012, the company has purchased 5.5 million shares at a total cost of $284 million under the 2011 plan. There is no required completion date for the purchases under the 2011 plan.
In December 2012, the company's Board of Directors authorized a $1 billion share buyback plan, subject to receiving the proceeds from the Performance Coatings divestiture. On February 1, 2013, the sale of Performance Coatings was completed. The 2012 share buyback plan is expected to be completed in the first half 2013.
During 2011 and 2010, the company purchased and retired 13.8 million and 5.4 million shares at a total cost of $672 million and $250 million, respectively, under the 2001 plan.
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
Cash provided by operating activities | $ | 4,849 | $ | 5,152 | $ | 4,559 | |||
Purchases of property, plant and equipment | (1,793 | ) | (1,843 | ) | (1,508 | ) | |||
Free cash flow | $ | 3,056 | $ | 3,309 | $ | 3,051 | |||
Free cash flow is a measurement not recognized in accordance with 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 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.
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Critical Accounting Estimates
The company's significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements. Management believes that the application of these policies on a consistent basis enables the company to provide the users of the financial statements with useful and reliable information about the company's operating results and financial condition.
The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts, including, but not limited to, receivable and inventory valuations, impairment of tangible and intangible assets, long-term employee benefit obligations, income taxes, restructuring liabilities, environmental matters and litigation. Management's estimates are based on historical experience, facts and circumstances available at the time and various other assumptions that are believed to be reasonable. The company reviews these matters and reflects changes in estimates as appropriate. Management believes that the following represents some of the more critical judgment areas in the application of the company's accounting policies which could have a material effect on the company's financial position, liquidity or results of operations.
Long-term Employee Benefits
Accounting for employee benefit plans involves numerous assumptions and estimates. Discount rate and expected return on plan assets are two critical assumptions in measuring the cost and benefit obligation of the company's pension and other long-term employee benefit plans. Management reviews these two key assumptions annually as of December 31st. These and other assumptions are updated periodically to reflect the actual experience and expectations on a plan specific basis as appropriate. As permitted by GAAP, actual results that differ from the assumptions are accumulated on a plan by plan basis and to the extent that such differences exceed 10 percent of the greater of the plan's benefit obligation or the applicable plan assets, the excess is amortized over the average remaining service period of active employees.
About 76 percent of the company's benefit obligation for pensions and essentially all of the company's other long-term employee benefit obligations are attributable to the benefit plans in the U.S. In the U.S. the discount rate is developed by matching the expected cash flow of the benefit plans to a yield curve constructed from a portfolio of high quality fixed-income instruments provided by the plan's actuary as of the measurement date. For non-U.S. benefit plans, the company utilizes prevailing long-term high quality corporate bond indices to determine the discount rate, applicable to each country, at the measurement date.
Within the U.S., the company establishes strategic asset allocation percentage targets and appropriate benchmarks for significant asset classes with the aim of achieving a prudent balance between return and risk. Strategic asset allocations in other countries are selected in accordance with the laws and practices of those countries. Where appropriate, asset-liability studies are also taken into consideration. The long-term expected return on plan assets in the U.S. is based upon historical real returns (net of inflation) for the asset classes covered by the investment policy, expected performance, and projections of inflation over the long-term period during which benefits are payable to plan participants. Consistent with prior years, the long-term expected return on plan assets in the U.S. reflects the asset allocation of the plan and the effect of the company's active management of the plans' assets.
In determining annual expense for the principal U.S. pension plan, the company uses a market-related value of assets rather than its fair value. The market-related value of assets is calculated by averaging market returns over 36 months. Accordingly, there may be a lag in recognition of changes in market valuation. As a result, changes in the fair value of assets are not immediately reflected in the company's calculation of net periodic pension cost. The following table shows the market-related value and fair value of plan assets for the principal U.S. pension plan:
(Dollars in billions) | 2012 | 2011 | 2010 | ||||||
Market-related value of assets | $ | 14.8 | $ | 13.9 | $ | 13.9 | |||
Fair value of plan assets | 15.1 | 13.9 | 14.8 | ||||||
For plans other than the principal U.S. pension plan, pension expense is typically determined using the fair value of assets.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
The following table highlights the potential impact on the company's pre-tax earnings due to changes in certain key assumptions with respect to the company's pension and other long-term employee benefit plans, based on assets and liabilities at December 31, 2012:
Pre-tax Earnings Benefit (Charge) (Dollars in millions) | 1/2 Percentage Point Increase | 1/2 Percentage Point Decrease | ||||
Discount rate | $ | 107 | $ | (114 | ) | |
Expected rate of return on plan assets | 92 | (92 | ) | |||
Additional information with respect to pension and other long-term employee benefits expenses, liabilities and assumptions is discussed under "Long-term Employee Benefits" beginning on page 34 and in Note 18 to the Consolidated Financial Statements.
Environmental Matters
DuPont accrues for remediation activities when it is probable that a liability has been incurred and a reasonable estimate of the liability can be made. The company has recorded a liability of $436 million as of December 31, 2012; these accrued liabilities exclude claims against third parties and are not discounted. As remediation activities vary substantially in duration and cost from site to site, it is difficult to develop precise estimates of future site remediation costs. The company's estimates are based on a number of factors, including the complexity of the geology, the nature and extent of contamination, the type of remedy, the outcome of discussions with regulatory agencies and other PRPs at multi-party sites and the number of and financial viability of other PRPs. Therefore, considerable uncertainty exists with respect to environmental remediation costs and, under adverse changes in circumstances, the potential liability may range up to three times the amount accrued.
Legal Contingencies
The company's results of operations could be affected by significant litigation adverse to the company, including product liability claims, patent infringement and antitrust claims, and claims for third party property damage or personal injury stemming from alleged environmental torts. The company records accruals for legal matters when the information available indicates that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Management makes adjustments to these accruals to reflect the impact and status of negotiations, settlements, rulings, advice of counsel and other information and events that may pertain to a particular matter. Predicting the outcome of claims and lawsuits and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from estimates. In making determinations of likely outcomes of litigation matters, management considers many factors. These factors include, but are not limited to, the nature of specific claims including unasserted claims, the company's experience with similar types of claims, the jurisdiction in which the matter is filed, input from outside legal counsel, the likelihood of resolving the matter through alternative dispute resolution mechanisms and the matter's current status. Considerable judgment is required in determining whether to establish a litigation accrual when an adverse judgment is rendered against the company in a court proceeding. In such situations, the company will not recognize a loss if, based upon a thorough review of all relevant facts and information, management believes that it is probable that the pending judgment will be successfully overturned on appeal. A detailed discussion of significant litigation matters is contained in Note 16 to the Consolidated Financial Statements.
Income Taxes
The breadth of the company's operations and the global complexity of tax regulations require assessments of uncertainties and judgments in estimating taxes the company will ultimately pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal, state and international tax audits in the normal course of business. The resolution of these uncertainties may result in adjustments to the company's tax assets and tax liabilities. 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.
Deferred income taxes result from differences between the financial and tax basis of the company's assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Significant judgment is required in evaluating the need for and magnitude of appropriate valuation allowances against deferred tax assets. The realization of these assets is dependent on generating future taxable income, as well as successful implementation of various tax planning strategies. For example, changes in facts and circumstances that alter the probability that the company will realize deferred tax assets could result in recording a
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
valuation allowance, thereby reducing the deferred tax asset and generating a deferred tax expense in the relevant period. In some situations these changes could be material.
At December 31, 2012, the company had a deferred tax asset balance of $7.8 billion, net of valuation allowance of $1.9 billion. Realization of these assets is expected to occur over an extended period of time. As a result, changes in tax laws, assumptions with respect to future taxable income, and tax planning strategies could result in adjustments to these assets. See Note 6 to the Consolidated Financial Statements for additional details related to the deferred tax asset balance.
Valuation of Assets
The assets and liabilities of acquired businesses are measured at their estimated fair values at the dates of acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired, including identified intangibles, is recorded as goodwill. The determination and allocation of fair value to the assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment, including estimates based on historical information, current market data and future expectations. The principal assumptions utilized in the company's valuation methodologies include revenue growth rates, operating margin estimates, royalty rates, and discount rates. Although the estimates were deemed reasonable by management based on information available at the dates of acquisition, those estimates are inherently uncertain.
Assessment of the potential impairment of property, plant and equipment, goodwill, other intangible assets and investments in affiliates is an integral part of the company's normal ongoing review of operations. Testing for potential impairment of these assets is significantly dependent on numerous assumptions and reflects management's best estimates at a particular point in time. The dynamic economic environments in which the company's diversified businesses operate, and key economic and business assumptions with respect to projected selling prices, market growth and inflation rates, can significantly affect the outcome of impairment tests. Estimates based on these assumptions may differ significantly from actual results. Changes in factors and assumptions used in assessing potential impairments can have a significant impact on the existence and magnitude of impairments, as well as the time in which such impairments are recognized. In addition, the company continually reviews its diverse portfolio of assets to ensure they are achieving their greatest potential and are aligned with the company's growth strategy. Strategic decisions involving a particular group of assets may trigger an assessment of the recoverability of the related assets. Such an assessment could result in impairment losses. During 2012, the company recorded asset impairments charges of $275 million to write-down the carrying value of certain asset groups to fair value. See Note 3 to the Consolidated Financial Statements for additional details related to these charges.
Based on the results of the company's annual goodwill impairment test in 2012, no impairments exist at this time. The company's methodology for estimating the fair value of its reporting units is using the income approach based on the present value of future cash flows. The income approach has been generally supported by additional market transaction analyses. There can be no assurance that the company's estimates and assumptions regarding forecasted cash flow and revenue and operating income growth rates made for purposes of the annual goodwill impairment test will prove to be accurate predictions of the future. The company believes the current assumptions and estimates utilized are both reasonable and appropriate.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
Off-Balance Sheet Arrangements
Certain Guarantee Contracts
Information with respect to the company's guarantees is included in Note 16 to the Consolidated Financial Statements. Historically, the company has not had to make significant payments to satisfy guarantee obligations; however, the company believes it has the financial resources to satisfy these guarantees.
Contractual Obligations
Information related to the company's significant contractual obligations is summarized in the following table:
Payments Due In | |||||||||||||||
(Dollars in millions) | Total at December 31, 2012 | 2013 | 2014 – 2015 | 2016 – 2017 | 2018 and beyond | ||||||||||
Long-term debt obligations1 | $ | 11,693 | $ | 1,252 | $ | 3,124 | $ | 1,596 | $ | 5,721 | |||||
Expected cumulative cash requirements for interest payments through maturity | 3,247 | 422 | 699 | 585 | 1,541 | ||||||||||
Capital leases1 | 27 | 3 | 7 | 4 | 13 | ||||||||||
Operating leases | 1,414 | 320 | 473 | 331 | 290 | ||||||||||
Purchase obligations2 | |||||||||||||||
Information technology infrastructure & services | 184 | 120 | 57 | 7 | — | ||||||||||
Raw material obligations | 671 | 429 | 169 | 35 | 38 | ||||||||||
Utility obligations | 230 | 71 | 71 | 41 | 47 | ||||||||||
INVISTA-related obligations3 | 1,293 | 165 | 328 | 328 | 472 | ||||||||||
Human resource services | 83 | 28 | 55 | — | — | ||||||||||
Other | 206 | 152 | 34 | 19 | 1 | ||||||||||
Total purchase obligations | 2,667 | 965 | 714 | 430 | 558 | ||||||||||
Other liabilities1,4 | |||||||||||||||
Workers' compensation | 87 | 14 | 38 | 16 | 19 | ||||||||||
Asset retirement obligations | 64 | 1 | 21 | 3 | 39 | ||||||||||
Environmental remediation | 436 | 83 | 176 | 60 | 117 | ||||||||||
Legal settlements | 20 | 7 | 5 | 4 | 4 | ||||||||||
License agreements5 | 551 | 153 | 259 | 139 | — | ||||||||||
Other6 | 199 | 73 | 33 | 18 | 75 | ||||||||||
Total other long-term liabilities | 1,357 | 331 | 532 | 240 | 254 | ||||||||||
Total contractual obligations7,8 | $ | 20,405 | $ | 3,293 | $ | 5,549 | $ | 3,186 | $ | 8,377 | |||||
1. | Included in the Consolidated Financial Statements. |
2. | Represents enforceable and legally binding agreements in excess of $1 million to purchase goods or services that specify fixed or minimum quantities; fixed, minimum or variable price provisions; and the approximate timing of the agreement. |
3. | Primarily represents raw material supply obligations. |
4. | Pension and other long-term employee benefit obligations have been excluded from the table as they are discussed below within Long-term Employee Benefits. |
5. | Primarily represents remaining expected payments under Pioneer license agreements. |
6. | Primarily represents employee-related benefits other than pensions and other long-term employee benefits. |
7. | Due to uncertainty regarding the completion of tax audits and possible outcomes, the estimate of obligations related to unrecognized tax benefits cannot be made. See Note 6 to the Consolidated Financial Statements for additional detail. |
8. | At December 31, 2012, approximately $140 million of the company's contractual obligations relate to the Performance Coatings business, which primarily represents operating leases. |
The company expects to meet its contractual obligations through its normal sources of liquidity and believes it has the financial resources to satisfy these contractual obligations.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
Long-term Employee Benefits
The company has various obligations to its employees and retirees. The company maintains retirement-related programs in many countries that have a long-term impact on the company's earnings and cash flows. These plans are typically defined benefit pension plans, as well as medical, dental and life insurance benefits for pensioners and survivors and disability and life insurance protection for employees (other long-term employee benefits). Approximately 76 percent of the company's worldwide benefit obligation for pensions and essentially all of the company's worldwide other long-term employee benefit obligations are attributable to the U.S. benefit plans. Pension coverage for employees of the company's non-U.S. consolidated subsidiaries is provided, to the extent deemed appropriate, through separate plans. The company regularly explores alternative solutions to meet its global pension obligations in the most cost effective manner possible as demographics, life expectancy and country-specific pension funding rules change. Where permitted by applicable law, the company reserves the right to change, modify or discontinue its plans that provide pension, medical, dental, life insurance and disability benefits.
The majority of employees hired in the U.S. on or after January 1, 2007 are not eligible to participate in the pension and post-retirement medical, dental and life insurance plans, but receive benefits in the defined contribution plans.
Benefits under defined benefit pension plans are based primarily on years of service and employees' pay near retirement. Pension benefits are paid primarily from trust funds established to comply with applicable laws and regulations. Unless required by law, the company does not make contributions that are in excess of tax deductible limits. The actuarial assumptions and procedures utilized are reviewed periodically by the plans' actuaries to provide reasonable assurance that there will be adequate funds for the payment of benefits. The company made a contribution of $500 million in 2010 to its principal U.S. pension plan and no contributions were made in 2011. In January 2012, the company contributed $500 million to its principal U.S. pension plan and anticipates no contributions will be made in 2013. The company expects to make contributions to its principal U.S. pension plan beyond 2013; however, the amount of any contributions is heavily dependent on the future economic environment and investment returns on pension trust assets. U.S. pension benefits that exceed federal limitations are covered by separate unfunded plans and these benefits are paid to pensioners and survivors from operating cash flows.
Funding for each pension plan is governed by the rules of the sovereign country in which it operates. Thus, there is not necessarily a direct correlation between pension funding and pension expense. In general, however, improvements in plans funded status tends to moderate subsequent funding needs. The company contributed $848 million to its pension plans in 2012 and anticipates that it will make approximately $340 million in contributions in 2013 to pension plans other than the principal U.S. pension plan.
The company's other long-term employee benefits are unfunded and the cost of the approved claims is paid from operating cash flows. Pre-tax cash requirements to cover actual net claims costs and related administrative expenses were $261 million, $312 million and $321 million for 2012, 2011 and 2010, respectively. This amount is expected to be about $260 million in 2013. Changes in cash requirements reflect the net impact of higher per capita health care costs, demographic changes, plan amendments and changes in participant premiums, co-pays and deductibles.
During the third quarter 2012, the company amended its U.S. parent company retiree medical and dental plans for Medicare-eligible pensioners and survivors. Beginning in 2013, the company is replacing the coverage for Medicare-eligible plan participants in the company sponsored plans with a new company-funded Health Reimbursement Arrangement (HRA). Medicare-eligible plan participants will enroll in individual health plans in the open market and the company will reimburse their health care expenses with an HRA based on the provisions of the amended plans. As a result of this change, the company's other long-term employee benefit expense was reduced by approximately $46 million in 2012. For 2013, the plan amendment is expected to result in a reduction in other long-term employee benefit expense by about $120 million. Additional information related to these changes in the plans noted above is included in Note 18 to the Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
The company's income can be significantly affected by pension and defined contribution benefits as well as other long-term employee benefits. The following table summarizes the extent to which the company's income over each of the last 3 years was affected by pre-tax charges related to long-term employee benefits:
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
Long-term employee benefit plan charges 1 | $ | 1,321 | $ | 1,134 | $ | 1,030 | |||
1. | The long-term employee benefit plan charges relating to discontinued operations was $74, $72 and $71 for 2012, 2011 and 2010, respectively. |
The above charges for pension and other long-term employee benefits are determined as of the beginning of each year. The increase in long-term employee benefit expense in 2012 is primarily related to the decrease in discount rates and lower return on plan assets, partially offset by plan amendments to the company's U.S. parent company retiree medical and dental plans. The increase in long-term employee benefit expense in 2011 is primarily related to the decrease in discount rates. See "Long-term Employee Benefits" under the Critical Accounting Estimates section beginning on page 30 of this report for additional information on determining annual expense for the principal U.S. pension plan.
The company's key assumptions used in calculating its pension and other long-term employee benefits are the expected return on plan assets, the rate of compensation increases and the discount rate (see Note 18 to the Consolidated Financial Statements). For 2013, long-term employee benefits expense from continuing operations is expected to decrease by about $30 million.
Environmental Matters
The company operates global manufacturing, product handling and distribution facilities that are subject to a broad array of environmental laws and regulations. Such rules are subject to change by the implementing governmental agency, and the company monitors these changes closely. Company policy requires that all operations fully meet or exceed legal and regulatory requirements. In addition, the company implements voluntary programs to reduce air emissions, minimize the generation of hazardous waste, decrease the volume of water use and discharges, increase the efficiency of energy use and reduce the generation of persistent, bioaccumulative and toxic materials. Management has noted a global upward trend in the amount and complexity of proposed chemicals regulation. The costs to comply with complex environmental laws and regulations, as well as internal voluntary programs and goals, are significant and will continue to be significant for the foreseeable future.
Pre-tax environmental expenses charged to current operations are summarized below:
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
Environmental operating costs | $ | 595 | $ | 562 | $ | 521 | |||
Increase in remediation accrual | 110 | 92 | 93 | ||||||
$ | 705 | $ | 654 | $ | 614 | ||||
About 75 percent of total pre-tax environmental expenses charged to current operations in 2012 resulted from operations in the U.S. The increases in total pre-tax environmental expenses charged to operations were due primarily to increased environmental research activities and acquired businesses. Based on existing facts and circumstances, management does not believe that year over year changes, if any, in environmental expenses charged to current operations will have a material impact on the company's financial position, liquidity or results of operations.
Environmental Operating Costs
As a result of its operations, the company incurs costs for pollution abatement activities including waste collection and disposal, installation and maintenance of air pollution controls and wastewater treatment, emissions testing and monitoring, and obtaining permits. The company also incurs costs related to environmental related research and development activities including environmental field and treatment studies as well as toxicity and degradation testing to evaluate the environmental impact of products and raw materials.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
Remediation Accrual
Changes in the remediation accrual balance are summarized below:
(Dollars in millions) | |||
Balance at December 31, 2010 | $ | 407 | |
Remediation payments | (83 | ) | |
Increase in remediation accrual | 92 | ||
Balance at December 31, 2011 | $ | 416 | |
Remediation payments | (90 | ) | |
Increase in remediation accrual | 110 | ||
Balance at December 31, 2012 | $ | 436 | |
Annual expenditures are expected to continue to increase in the near future; however, they are not expected to vary significantly from the range of such expenditures experienced in the past few years. Longer term, expenditures are subject to considerable uncertainty and may fluctuate significantly.
As of December 31, 2012, the company has been notified of potential liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund) or similar state laws at about 415 sites around the U.S., with active remediation under way at approximately 160 of these sites. In addition, the company has resolved its liability at approximately 175 sites, either by completing remedial actions with other PRPs or by participating in "de minimis buyouts" with other PRPs whose waste, like the company's, represented only a small fraction of the total waste present at a site. The company received notice of potential liability at five new sites during 2012 compared with six and ten similar notices in 2011 and 2010, respectively.
Considerable uncertainty exists with respect to environmental remediation costs, and, under adverse changes in circumstances, potential liability may range up to three times the amount accrued as of December 31, 2012. However, based on existing facts and circumstances, management does not believe that any loss, in excess of amounts accrued, related to remediation activities at any individual site will have a material impact on the financial position, liquidity or results of operations of the company.
Environmental Capital Expenditures
In 2012, the company spent approximately $65 million on environmental capital projects either required by law or necessary to meet the company's internal environmental goals. The company currently estimates expenditures for environmental-related capital projects to be approximately $85 million in 2013. In the U.S., additional capital expenditures are expected to be required over the next decade for treatment, storage and disposal facilities for solid and hazardous waste and for compliance with the CAA. Until all CAA regulatory requirements are established and known, considerable uncertainty will remain regarding estimates for future capital expenditures. However, management does not believe that the costs to comply with these requirements will have a material impact on the financial position or liquidity of the company.
Climate Change
The company believes that climate change is an important global issue that presents risks and opportunities. Expanding upon significant global greenhouse gas (GHG) emissions and other environmental footprint reductions made in the period 1990-2004, the company reduced its environmental footprint achieving in 2011 year-over-year reductions of eight percent in GHG emissions and nine percent in water consumption. In addition, the company achieved a year-over-year reduction of 2.4 percent in 2011 in energy use from non-renewable resources. The company continuously evaluates opportunities for existing and new product and service offerings in light of the anticipated demands of a low-carbon economy. About $1.9 billion of the company's 2012 revenue was generated from sales of products that help direct and downstream customers GHG emissions.
The company is actively engaged in the effort to develop constructive public policies to reduce GHG emissions and encourage lower carbon forms of energy. Legislative efforts to control or limit GHG emissions could affect the company's energy source and supply choices as well as increase the cost of energy and raw materials derived from fossil fuels. Such efforts are also anticipated to provide the business community with greater certainty for the regulatory future, help guide investment decisions, and drive growth in demand for low-carbon and energy-efficient products, technologies, and services.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
At the national and regional level, there are existing efforts to address climate change. Several of the company's facilities in the European Union (EU) are regulated under the EU Emissions Trading Scheme. In other countries, including the U.S., policy debate continues. The current unsettled policy environment in the U.S. adds an element of uncertainty to business decisions particularly those relating to long-term capital investments. If in the absence of federal legislation, states were to implement programs mandating GHG emissions reductions, the company, its suppliers and customers could be competitively disadvantaged by the added administrative costs of complying with a variety of state-specific requirements.
In 2010, EPA launched a phased-in scheme to regulate GHG emissions first from large stationary sources under CAA permitting requirements administered by state and local authorities. As a result, large capital investments may be required to install Best Available Control Technology on major new or modified sources of GHG emissions. This type of GHG emissions regulation by EPA, in the absence of or in addition to federal legislation, could result in more costly, less efficient facility-by-facility controls versus a federal program that incorporates policies that provide an economic balance that does not severely distort markets. Differences in regional or national legislation could present challenges in a global marketplace highlighting the need for coordinated global policy action.
Registration
The European Union's regulatory framework concerning the Registration, Evaluation and Authorization of Chemicals (REACH) entered into force in 2007 and requires manufacturers and importers to gather and register information on the properties of their substances that meet certain volume or toxicological criteria. The company has successfully integrated REACH registration requirements into its safety, health & environment processes and timely met all such requirements to date. REACH also contains a mechanism for the progressive substitution of the most dangerous chemicals when suitable alternatives have been identified. Depending on which chemicals are identified, the requirement to use safer alternatives could necessitate changes in production processes.
PFOA
The Performance Chemicals segment uses a form of PFOA (collectively, perfluorooctanoic acid and its salts, including the ammonium salt) as a processing aid to manufacture some fluoropolymer resins. The Performance Materials segment uses PFOA in the manufacture of certain raw materials for perfluoroelastomer parts (and some fluoroelastomers). In the fall of 2002, DuPont began producing rather than purchasing PFOA to support these manufacturing processes. PFOA is not used in the manufacture of fluorotelomers; however, it is an unintended by-product present at trace levels in some fluorotelomer-based products.
PFOA is bio-persistent and has been detected at very low levels in the blood of the general population. As a result, EPA initiated a process to enhance its understanding of the sources of PFOA in the environment and the pathways through which human exposure to PFOA is occurring. Although EPA has stated that there remains considerable scientific uncertainty regarding potential risks associated with PFOA, it also stated that it does not believe that there is any reason for consumers to stop using any products because of concerns about PFOA.
DuPont respects EPA's position raising questions about exposure routes and the potential toxicity of PFOA. DuPont and other companies continue research, emission reduction and product stewardship activities to help address EPA's questions. In January 2006, DuPont pledged its commitment to EPA's 2010/15 PFOA Stewardship Program. The EPA program asks participants (1) to commit to achieve, no later than 2010, a 95 percent reduction in both facility emissions and product content levels of PFOA, PFOA precursors and related higher homologue chemicals and (2) to commit to working toward the elimination of PFOA, PFOA precursors and related higher homologue chemicals from emissions and products by no later than 2015. DuPont has exceeded the EPA's 2010 objective. In February 2007, DuPont announced its commitment to no longer make, use or buy PFOA by 2015, or sooner if possible. To achieve this goal, DuPont developed PFOA replacement technology and is converting customers to fluoropolymer resins and dispersions manufactured using the replacement technology. DuPont has been introducing its next generation fluorotelomers products and converting customers to their use.
For additional information regarding PFOA matters, see Note 16 to the Consolidated Financial Statements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivatives and Other Hedging Instruments
In the ordinary course of business, the company enters into contractual arrangements (derivatives) to hedge its exposure to foreign currency, interest rate and commodity price risks under established procedures and controls. For additional information on these derivatives and related exposures, see Note 20 to the Consolidated Financial Statements.
The following table summarizes the impacts of the company's foreign currency hedging program on the company's results of operations for the years ended December 31, 2012, 2011, and 2010, and includes the company's pro rata share of its equity affiliates' exchange gains and losses and corresponding gains and losses on foreign currency exchange contracts:
(Dollars in millions) | 2012 | 2011 | 2010 | ||||||
Pre-tax exchange loss | $ | (215 | ) | $ | (146 | ) | $ | (11 | ) |
Tax benefit (expense) | 73 | 81 | (69 | ) | |||||
After-tax exchange loss | $ | (142 | ) | $ | (65 | ) | $ | (80 | ) |
In addition to the contracts disclosed in Note 20 to the Consolidated Financial Statements, from time to time, the company will enter into foreign currency exchange contracts to establish with certainty the USD amount of future firm commitments denominated in a foreign currency. Decisions regarding whether or not to hedge a given commitment are made on a case-by-case basis, taking into consideration the amount and duration of the exposure, market volatility and economic trends. Foreign currency exchange contracts are also used, from time to time, to manage near-term foreign currency cash requirements.
Sensitivity Analysis
The following table illustrates the fair values of outstanding derivative contracts at December 31, 2012 and 2011, and the effect on fair values of a hypothetical adverse change in the market prices or rates that existed at December 31, 2012 and 2011. The sensitivity for interest rate swaps is based on a one percent change in the market interest rate. Foreign currency and commodity contracts sensitivities are based on a 10 percent change in market rates.
Fair Value Asset/(Liability) | Fair Value Sensitivity | |||||||||||
(Dollars in millions) | 2012 | 2011 | 2012 | 2011 | ||||||||
Interest rate swaps | $ | 55 | $ | 66 | $ | (29 | ) | $ | (40 | ) | ||
Foreign currency contracts | 9 | 154 | (659 | ) | (541 | ) | ||||||
Commodity contracts | (1 | ) | (3 | ) | (3 | ) | (103 | ) | ||||
Since the company's risk management programs are highly effective, the potential loss in value for each risk management portfolio described above would be largely offset by changes in the value of the underlying exposure.
Concentration of Credit Risk
The company maintains cash and cash equivalents, marketable securities, derivatives and certain other financial instruments with various financial institutions. These financial institutions are generally highly rated and geographically dispersed and the company has a policy to limit the dollar amount of credit exposure with any one institution.
As part of the company's financial risk management processes, it continuously evaluates the relative credit standing of all of the financial institutions that service DuPont and monitors actual exposures versus established limits. The company has not sustained credit losses from instruments held at financial institutions.
The company's sales are not materially dependent on any single customer. As of December 31, 2012, no one individual customer balance represented more than 5 percent of the company's total outstanding receivables balance. Credit risk associated with its receivables balance is representative of the geographic, industry and customer diversity associated with the company's global businesses.
The company also maintains strong credit controls in evaluating and granting customer credit. As a result, it may require that customers provide some type of financial guarantee in certain circumstances. Length of terms for customer credit varies by industry and region.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item are included herein, commencing on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. 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 December 31, 2012, 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.
There has been no change in the company's internal control over financial reporting that occurred during the fourth quarter of 2012 that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. The company has completed its evaluation of its internal controls and has concluded that the company's system of internal controls over financial reporting was effective as of December 31, 2012 (see page F-2).
ITEM 9B. OTHER INFORMATION
None.
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Part III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information with respect to this Item is incorporated herein by reference to the Proxy. Information related to directors is included within the section entitled, "Election of Directors." The company has not made any material changes to the procedures by which security holders may recommend nominees to its Board of Directors since these procedures were communicated in the company's 2012 Proxy Statement for the Annual Meeting of Stockholders held on April 25, 2012. Information related to the Audit Committee is incorporated herein by reference to the Proxy and is included within the sections entitled "Committees of the Board" and "Committee Membership." Information regarding executive officers is contained in the Proxy section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" and as set forth below.
The company has adopted a Code of Ethics for its CEO, CFO, and Controller that may be accessed from the company's website at www.dupont.com by clicking on "Investors" and then "Corporate Governance". Any amendments to, or waiver from, any provision of the code will be posted on the company's website at the above address.
Executive Officers of the Registrant
The following is a list, as of February 6, 2013, of the company's Executive Officers:
Age | Executive Officer Since | |
Chair of the Board of Directors and Chief Executive Officer: | ||
Ellen J. Kullman | 57 | 2006 |
Other Executive Officers: | ||
James C. Borel | 57 | 2004 |
Executive Vice President | ||
Benito Cachinero-Sánchez | 54 | 2011 |
Senior Vice President - Human Resources | ||
Thomas M. Connelly, Jr. | 60 | 2000 |
Executive Vice President and Chief Innovation Officer | ||
Nicholas C. Fanandakis | 56 | 2009 |
Executive Vice President and Chief Financial Officer | ||
Thomas L. Sager | 62 | 2008 |
Senior Vice President and General Counsel | ||
Mark P. Vergnano | 55 | 2009 |
Executive Vice President | ||
The company's Executive Officers are elected or appointed for the ensuing year or for an indefinite term and until their successors are elected or appointed.
Ellen J. Kullman joined DuPont in 1988 as marketing manager and progressed through various roles as global business director and was named Vice President and General Manager of White Pigment & Mineral Products in 1995. In 2000, Mrs. Kullman was named Group Vice President and General Manager of several businesses and new business development. She became Group Vice President-DuPont Safety & Protection in 2002. In June 2006, Mrs. Kullman was named Executive Vice President and assumed leadership of Marketing & Sales along with Safety and Sustainability. She was appointed President on October 1, 2008 and became Chief Executive Officer on January 1, 2009. On December 31, 2009, she became Chair of the Board of Directors.
James C. Borel joined DuPont in 1978, and held a variety of product and sales management positions for Agricultural Products. In 1993, he transferred to Tokyo, Japan with Agricultural Products as regional manager, North Asia and was appointed regional director, Asia Pacific in 1994. In 1997, he was appointed regional director, North America and was appointed Vice President and General Manager-DuPont Crop Protection later that year. In January 2004, he was named Senior Vice President-DuPont Global Human Resources. He became Group Vice President in 2008 and was named Executive Vice President with responsibility for DuPont Crop Protection and Pioneer in October 2009. In 2011, he assumed responsibility for DuPont Nutrition & Health.
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Part III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE, continued
Benito Cachinero-Sánchez joined DuPont in April 2011 as Senior Vice President - Human Resources. Prior to joining DuPont, he was Corporate Vice President of Human Resources at Automatic Data Processing (ADP). Prior to ADP, he was Vice President, Human Resources for the Medical Devices & Diagnostics Group of Johnson & Johnson.
Thomas M. Connelly, Jr. joined DuPont in 1977 as a research engineer. Since then, Mr. Connelly has served in various research and plant technical leadership roles, as well as product management and business director roles. Mr. Connelly served as Vice President and General Manager-DuPont Fluoroproducts from 1999 until September 2000, when he was named Senior Vice President and Chief Science and Technology Officer. In June 2006, Mr. Connelly was named Executive Vice President and Chief Innovation Officer. In October 2009, responsibility for DuPont Performance Polymers, Packaging & Industrial Polymers as well as integrated operations was added. In 2011, he assumed responsibility for DuPont Industrial Biosciences and Performance Coatings.
Nicholas C. Fanandakis joined DuPont in 1979 as an accounting and business analyst. Since then, Mr. Fanandakis served in a variety of plant, marketing, and product management and business director roles. Mr. Fanandakis served as Vice President and General Manager—DuPont Chemical Solutions Enterprise from 2003 until February 2007 when he was named Vice President—Corporate Plans. In January 2008, Mr. Fanandakis was named Group Vice President—DuPont Applied BioSciences. In November 2009, he was named Senior Vice President and Chief Financial Officer. In August 2010, he was named Executive Vice President and Chief Financial Officer.
Thomas L. Sager joined DuPont in 1976 as an attorney in the labor and security group. In 1998, he was named Chief Litigation Counsel and assumed oversight responsibility for all company litigation matters. He was named Vice President and Assistant General Counsel in 1999. In July 2008, he was appointed Senior Vice President and General Counsel.
Mark P. Vergnano joined DuPont in 1980 as a process engineer. He has had several assignments in manufacturing, technology, marketing, sales and business strategy. He has held assignments in various DuPont locations including Geneva, Switzerland. In February 2003 he was named Vice President and General Manager—Nonwovens and Vice President and General Manager—Surfaces and Building Innovations in October 2005. In June 2006, he was named Group Vice President of DuPont Safety & Protection. In October 2009, Mr. Vergnano was appointed Executive Vice President with responsibility for DuPont Protection Technologies, Building Innovations, Sustainable Solutions, Chemicals & Fluoroproducts, Titanium Technologies and Electronics & Communications. He also leads the company's sustainability, safety, communications, and sales and marketing functions.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this Item is incorporated herein by reference to the Proxy and is included in the sections "Compensation Discussion and Analysis," "2012 Summary Compensation Table," "2012 Grants of Plan-Based Awards," "Outstanding Equity Awards," "2012 Option Exercises and Stock Vested," "Pension Benefits," "Nonqualified Deferred Compensation," "Potential Payments Upon Termination or Change in Control," and "Directors' Compensation." Information related to the Compensation Committee is included within the sections entitled "Compensation Committee Interlocks and Insider Participation" and "Compensation Committee Report."
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Part III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information with respect to Beneficial Owners is incorporated herein by reference to the Proxy and is included in the section entitled "Ownership of Company Stock."
Securities authorized for issuance under equity compensation plans as of December 31, 2012
(Shares in thousands, except per share)
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights2 | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans3 | ||||||
Equity compensation plans approved by security holders | 38,089 | 1 | $ | 39.70 | 59,953 | ||||
Equity compensation plans not approved by security holders | 87 | 4 | $ | 37.39 | — | 5 | |||
Total | 38,176 | $ | 39.70 | 59,953 | |||||
1. | Includes stock-settled time-vested and performance-based restricted stock units granted and stock units deferred under the company's Equity and Incentive Plan, Stock Performance Plan, Variable Compensation Plan and the Stock Accumulation and Deferred Compensation Plan for Directors. Performance-based restricted stock units reflect the maximum number of shares to be awarded at the conclusion of the performance cycle (200 percent of the original grant). The actual award payouts can range from zero to 200 percent of the original grant. |
2. | Represents the weighted-average exercise price of the outstanding stock options only; the outstanding stock-settled time-vested and performance-based restricted stock units and deferred stock units are not included in this calculation. |
3. | Reflects shares available pursuant to the issuance of stock options, restricted stock, restricted stock units or other stock-based awards under the amended Equity and Incentive Plan approved by the shareholders in April 2011 (see Note 19 to the company's Consolidated Financial Statements). The maximum number of shares of stock reserved for the grant or settlement of awards under the Equity and Incentive Plan (Share Limit) shall be 110,000 and shall be subject to adjustment as provided therein; provided that each share in excess of 30,000 issued under the Equity and Incentive Plan pursuant to any award settled in stock, other than a stock option or stock appreciation right, shall be counted against the foregoing Share Limit as four and one-half shares for every one share actually issued in connection with such award. (For example, if 32,000 shares of restricted stock are granted under the Equity and Incentive Plan, 39,000 shall be charged against the Share Limit in connection with that award.) |
4. | Includes 16 deferred stock units resulting from base salary and short-term incentive (STIP) deferrals under the Management Deferred Compensation Plan (MDCP). Under the MDCP, a select group of management or highly compensated employees can elect to defer the receipt of their base salary, STIP or Long Term Incentive (LTI) award. LTI deferrals are included in footnote 1 to the above chart. The company does not match deferrals under the MDCP. There are seven core investment options under the MDCP for base salary and STIP deferrals, including deferred stock units with dividend equivalents credited as additional stock units. In general, deferred stock units are distributed in the form of DuPont common stock and may be made in the form of lump sum at a specified future date prior to retirement or a lump sum or annual installments after separation from service. Shareholder approval of the MDCP was not required under the rules of the New York Stock Exchange. This column also includes 71 options from the conversion of DuPont Canada options to DuPont options in connection with the company's acquisition of the minority interest in DuPont Canada. |
5. | There is no limit on the number of shares that can be issued under the MDCP and no further shares are available for issuance under the other equity compensation arrangements described in footnote 4 to the above chart. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information with respect to the company's policy and procedures for the review, approval or ratification of transactions with related persons is incorporated by reference herein to the Proxy and is included in the section entitled "Review and Approval of Transactions with Related Persons." Information with respect to director independence is incorporated by reference herein to the Proxy and is included in the sections entitled "DuPont Board of Directors—Corporate Governance Guidelines," "Guidelines for Determining the Independence of DuPont Directors," "Committees of the Board," "Committee Membership" and "Election of Directors".
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to this Item is incorporated herein by reference to the Proxy and is included in the sections entitled "Ratification of Independent Registered Public Accounting Firm."
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Part IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) | Financial Statements, Financial Statement Schedules and Exhibits: |
1. | Financial Statements (See the Index to the Consolidated Financial Statements on page F-1 of this report). |
2. | Financial Statement Schedules |
Schedule II—Valuation and Qualifying Accounts
(Dollars in millions)
Year Ended December 31, | 2012 | 2011 | 2010 | ||||||
Accounts Receivable—Allowance for Doubtful Receivables | |||||||||
Balance at beginning of period | $ | 292 | $ | 326 | $ | 322 | |||
Additions charged to cost and expenses | 33 | 73 | 75 | ||||||
Deductions from reserves | (64 | ) | (107 | ) | (71 | ) | |||
Amounts related to the Performance Coatings business | (18 | ) | — | — | |||||
Balance at end of period | $ | 243 | $ | 292 | $ | 326 | |||
Deferred Tax Assets—Valuation Allowance | |||||||||
Balance at beginning of period | $ | 1,971 | $ | 1,666 | $ | 1,759 | |||
Net (benefits) charges to income tax expense | (77 | ) | 73 | (19 | ) | ||||
Additions charged to other comprehensive income (loss) | 10 | 236 | — | ||||||
Currency translation | 10 | (4 | ) | (74 | ) | ||||
Balance at end of period | $ | 1,914 | $ | 1,971 | $ | 1,666 | |||
Financial Statement Schedules listed under SEC rules but not included in this report are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto incorporated by reference.
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Part IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, continued
3. | Exhibits |
The following list of exhibits includes both exhibits submitted with this Form 10-K as filed with the SEC and those incorporated by reference to other filings:
Exhibit Number | Description | |
3.1 | Company's Restated Certificate of Incorporation. | |
3.2 | Company’s Bylaws, as last amended effective November 1, 2009 (incorporated by reference to Exhibit 3.2 to the company’s Annual Report on Form 10-K for the year ended December 31, 2009). | |
4 | The company agrees to provide the Commission, on request, copies of instruments defining the rights of holders of long-term debt of the company and its subsidiaries. | |
10.1* | The DuPont Stock Accumulation and Deferred Compensation Plan for Directors, as last amended effective January 1, 2009 (incorporated by reference to Exhibit 10.1 to the company’s Annual Report on Form 10-K for the year ended December 31, 2008). | |
10.2* | Company’s Supplemental Retirement Income Plan, as last amended effective June 4, 1996 (incorporated by reference to Exhibit 10.2 to the company's Annual Report on Form 10-K for the year ended December 31, 2011). | |
10.3* | Company’s Pension Restoration Plan, as restated effective July 17, 2006 (incorporated by reference to Exhibit 10.3 to the company’s Quarterly Report on Form 10-Q for the period ended June 30, 2011). | |
10.4* | Company’s Rules for Lump Sum Payments, as last amended effective December 20, 2007 (incorporated by reference to Exhibit 10.4 to the company’s Quarterly Report on Form 10-Q for the period ended June 30, 2011). | |
10.5* | Company’s Stock Performance Plan, as last amended effective January 25, 2007 (incorporated by reference to Exhibit 10.5 to the company's Annual Report on Form 10-K for the year ended December 31, 2011). | |
10.6* | Company’s Equity and Incentive Plan as amended and restated effective March 2, 2011 and approved by the company’s shareholders on April 27, 2011 (incorporated by reference to pages B1-B15 of the company’s Annual Meeting Proxy Statement dated March 18, 2011). | |
10.7* | Form of Award Terms under the company’s Equity and Incentive Plan (incorporated by reference to Exhibit 10.8 to the company’s Quarterly Report on Form 10-Q for the period ended March 31, 2009). | |
10.8* | Company’s Retirement Savings Restoration Plan, as last amended effective January 1, 2013. | |
10.9* | Company’s Retirement Income Plan for Directors, as last amended January 2011 (incorporated by reference to Exhibit 10.9 to the company's Quarterly Report on Form 10-Q for the period ended March 31, 2012). | |
10.10* | Company's Management Deferred Compensation Plan, adopted on May 2, 2008, as last amended May 12, 2010 (incorporated by reference to Exhibit 10.11 to the company's Quarterly Report on Form 10-Q for the period ended June 30, 2010). | |
10.11* | Supplemental Deferral Terms for Deferred Long Term Incentive Awards and Deferred Variable Compensation Awards (incorporated by reference to Exhibit 10.15 to the company’s Annual Report on Form 10-K for the year ended December 31, 2008). | |
10.12* | Purchase Agreement dated as of August 30 2012, by and between E. I. du Pont de Nemours and Company and Flash Bermuda Co. Ltd. (incorporated by reference to Exhibit 2.1 to the company's Current Report on Form 8-K filed on September 4, 2012)(the "Purchase Agreement"). The company agrees to furnish supplementally a copy of any omitted schedules to the Commission upon request. | |
10.13* | Amendment to Purchase Agreement, dated as of January 31, 2013, by and between E. I. du Pont de Nemours and Company and Flash Bermuda Co. Ltd. | |
12 | Computation of Ratio of Earnings to Fixed Charges. | |
21 | Subsidiaries of the Registrant. | |
23 | Consent of Independent Registered Public Accounting Firm. | |
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Part IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, continued
Exhibit Number | Description | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of the company’s Principal Executive Officer. | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of the company’s Principal Financial Officer. | |
32.1 | Section 1350 Certification of the company’s Principal Executive Officer. The information contained in this Exhibit shall not be deemed filed with the Securities and Exchange Commission nor incorporated by reference in any registration statement filed by the registrant under the Securities Act of 1933, as amended. | |
32.2 | Section 1350 Certification of the company’s Principal Financial Officer. The information contained in this Exhibit shall not be deemed filed with the Securities and Exchange Commission nor incorporated by reference in any registration statement filed by the registrant under the Securities Act of 1933, as amended. | |
95 | Mine Safety Disclosures. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
* | Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. |
45
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
February 6, 2013 | ||
E. I. DU PONT DE NEMOURS AND COMPANY | ||
By: | /s/ Nicholas C. Fanandakis | |
Nicholas C. Fanandakis Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | ||
_____________________________________________
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated:
Signature | Title(s) | Date | ||
/s/ E.J. Kullman | Chair of the Board of Directors and Chief Executive Officer and Director (Principal Executive Officer) | February 6, 2013 | ||
E. J. Kullman | ||||
/s/ L. Andreotti | Director | February 6, 2013 | ||
L. Andreotti | ||||
/s/ R.H. Brown | Director | February 6, 2013 | ||
R. H. Brown | ||||
/s/ R.A. Brown | Director | February 6, 2013 | ||
R. A. Brown | ||||
/s/ B.P. Collomb | Director | February 6, 2013 | ||
B. P. Collomb | ||||
/s/ C.J. Crawford | Director | February 6, 2013 | ||
C. J. Crawford | ||||
/s/ A.M. Cutler | Director | February 6, 2013 | ||
A. M. Cutler | ||||
/s/ E.I. du Pont, II | Director | February 6, 2013 | ||
E. I. du Pont, II | ||||
/s/ M.A. Hewson | Director | February 6, 2013 | ||
M. A. Hewson | ||||
/s/ L.D. Juliber | Director | February 6, 2013 | ||
L. D. Juliber | ||||