DD-2014.9.30-10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-815
 
E. I. du Pont de Nemours and Company
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
51-0014090
(State or other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
1007 Market Street, Wilmington, Delaware 19898
(Address of Principal Executive Offices)
 
(302) 774-1000
(Registrant’s Telephone Number)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.)  Yes  x   No  o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large Accelerated Filer x
 
Accelerated Filer o
 
 
 
Non-Accelerated Filer o
 
Smaller reporting company o
 
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes  o   No  x

The Registrant had 905,947,000 shares (excludes 87,041,000 shares of treasury stock) of common stock, $0.30 par value, outstanding at October 22, 2014.
 
 

Table of Contents

E. I. DU PONT DE NEMOURS AND COMPANY

Table of Contents
 
The terms “DuPont” or the “company” as used herein refer to E. I. du Pont de Nemours and Company and its consolidated subsidiaries, or to E. I. du Pont de Nemours and Company, as the context may indicate. 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Table of Contents

PART I.  FINANCIAL INFORMATION
 
Item 1.
CONSOLIDATED FINANCIAL STATEMENTS
 
E. I. du Pont de Nemours and Company
Consolidated Income Statements (Unaudited)
(Dollars in millions, except per share)
 
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2014
2013
2014
2013
Net sales
$
7,511

$
7,735

$
27,345

$
27,987

Other income, net
357

70

782

321

Total
7,868

7,805

28,127

28,308

Cost of goods sold
4,880

5,166

16,879

17,415

Other operating charges
839

989

2,461

2,843

Selling, general and administrative expenses
756

774

2,629

2,740

Research and development expense
514

540

1,577

1,603

Interest expense
93

108

290

340

Employee separation / asset related charges, net
—

—

263

—

Total
7,082

7,577

24,099

24,941

Income from continuing operations before income taxes
786

228

4,028

3,367

Provision for (benefit from) income taxes on continuing operations
352

(35
)
1,075

687

Income from continuing operations after income taxes
434

263

2,953

2,680

Income from discontinued operations after income taxes
—

25

—

1,997

Net income
434

288

2,953

4,677

Less: Net income attributable to noncontrolling interests
1

3

11

14

Net income attributable to DuPont
$
433

$
285

$
2,942

$
4,663

Basic earnings per share of common stock:
 
 
 
 
Basic earnings per share of common stock from continuing operations
$
0.47

$
0.28

$
3.20

$
2.87

Basic earnings per share of common stock from discontinued operations
—

0.03

—

2.16

Basic earnings per share of common stock
$
0.47

$
0.30

$
3.20

$
5.03

Diluted earnings per share of common stock:
 
 
 
 
Diluted earnings per share of common stock from continuing operations
$
0.47

$
0.28

$
3.17

$
2.85

Diluted earnings per share of common stock from discontinued operations
—

0.03

—

2.14

Diluted earnings per share of common stock
$
0.47

$
0.30

$
3.17

$
4.99

Dividends per share of common stock
$
0.47

$
0.45

$
1.37

$
1.33

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



3
Table of Contents

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

 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2014
2013
2014
2013
Net income
$
434

$
288

$
2,953

$
4,677

Other comprehensive (loss) income, before tax:
 
 
 
 
      Cumulative translation adjustment
(428
)
177

(559
)
(46
)
      Net revaluation and clearance of cash flow hedges to earnings:
 
 
 
 
      Additions and revaluations of derivatives designated as cash flow hedges
(3
)
(15
)
23

(39
)
      Clearance of hedge results to earnings
(2
)
1

29

(27
)
      Net revaluation and clearance of cash flow hedges to earnings
(5
)
(14
)
52

(66
)
      Pension benefit plans:
 
 
 
 
      Net (loss) gain
(5
)
(4
)
(107
)
52

      Prior service (cost) benefit
(1
)
62

(1
)
62

      Reclassifications to net income:
 
 
 
 
                Amortization of prior service cost
1

2

2

8

                Amortization of loss
151

244

450

724

                Curtailment / settlement loss
2

—

8

153

      Pension benefit plans, net
148

304

352

999

      Other benefit plans:
 
 
 
 
      Net (loss) gain
(33
)
95

(33
)
140

      Prior service benefit
50

199

50

199

      Reclassifications to net income:
 
 
 
 
                Amortization of prior service benefit
(54
)
(48
)
(160
)
(142
)
                Amortization of loss
15

26

43

51

                Curtailment / settlement gain
—

—

—

(153
)
      Other benefit plans, net
(22
)
272

(100
)
95

      Net unrealized gain on securities
—

—

—

1

Other comprehensive (loss) income, before tax
(307
)
739

(255
)
983

      Income tax expense related to items of other comprehensive income
(28
)
(195
)
(92
)
(337
)
Other comprehensive (loss) income, net of tax
(335
)
544

(347
)
646

Comprehensive income
99

832

2,606

5,323

      Less: Comprehensive income attributable to noncontrolling interests
1

3

11

14

Comprehensive income attributable to DuPont
$
98

$
829

$
2,595

$
5,309


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


4
Table of Contents

E. I. du Pont de Nemours and Company
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in millions, except per share) 
 
September 30,
2014
December 31,
2013
Assets
 

 

Current assets
 

 

Cash and cash equivalents
$
3,982

$
8,941

Marketable securities
566

145

Accounts and notes receivable, net
8,347

6,047

Inventories
7,295

8,042

Prepaid expenses
239

206

Deferred income taxes
739

775

Assets held for sale
—

228

Total current assets
21,168

24,384

Property, plant and equipment, net of accumulated depreciation
   (September 30, 2014 - $19,765; December 31, 2013 - $19,438)
13,114

12,993

Goodwill
4,602

4,713

Other intangible assets
4,730

5,096

Investment in affiliates
998

1,011

Deferred income taxes
2,263

2,353

Other assets
1,036

949

Total
$
47,911

$
51,499

Liabilities and Equity
 

 

Current liabilities
 

 

Accounts payable
$
3,757

$
5,180

Short-term borrowings and capital lease obligations
3,889

1,721

Income taxes
528

247

Other accrued liabilities
3,963

6,219

Total current liabilities
12,137

13,367

Long-term borrowings and capital lease obligations
9,279

10,741

Other liabilities
9,636

10,179

Deferred income taxes
877

926

Total liabilities
31,929

35,213

Commitments and contingent liabilities




Stockholders’ equity
 

 

Preferred stock
237

237

Common stock, $0.30 par value; 1,800,000,000 shares authorized;
   Issued at September 30, 2014 - 992,865,000; December 31, 2013 - 1,014,027,000
298

304

Additional paid-in capital
10,991

11,072

Reinvested earnings
16,913

16,784

Accumulated other comprehensive loss
(5,789
)
(5,441
)
Common stock held in treasury, at cost
(87,041,000 shares at September 30, 2014 and December 31, 2013)
(6,727
)
(6,727
)
Total DuPont stockholders’ equity
15,923

16,229

Noncontrolling interests
59

57

Total equity
15,982

16,286

Total
$
47,911

$
51,499

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

5
Table of Contents

E. I. du Pont de Nemours and Company
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in millions)
 
 
Nine Months Ended
 
September 30,
 
2014
2013
Operating activities
 
 
Net income
$
2,953

$
4,677

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

 

Depreciation
944

961

Amortization of intangible assets
294

255

Other operating charges and credits - net
563

447

Gain on sales of businesses
(418
)
(2,689
)
Contributions to pension plans
(231
)
(246
)
Change in operating assets and liabilities - net
(5,907
)
(5,738
)
Cash used for operating activities
(1,802
)
(2,333
)
Investing activities
 

 

Purchases of property, plant and equipment
(1,311
)
(1,223
)
Investments in affiliates
(37
)
(43
)
Payments for businesses - net of cash acquired
—

(133
)
Proceeds from sales of businesses - net
727

4,816

Proceeds from sales of assets - net
29

126

Net increase in short-term financial instruments
(422
)
(78
)
Forward exchange contract settlements
97

82

Other investing activities - net
197

31

Cash (used for) provided by investing activities
(720
)
3,578

Financing activities
 

 

Dividends paid to stockholders
(1,268
)
(1,242
)
Net increase in borrowings
749

3,204

Prepayments / repurchase of common stock
(2,000
)
(1,000
)
Proceeds from exercise of stock options
285

497

Other financing activities - net
1

3

Cash (used for) provided by financing activities
(2,233
)
1,462

Effect of exchange rate changes on cash
(204
)
(81
)
(Decrease) / increase in cash and cash equivalents
$
(4,959
)
$
2,626

Cash and cash equivalents at beginning of period
8,941

4,379

Cash and cash equivalents at end of period
$
3,982

$
7,005

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


6
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)


Note 1.  Summary of Significant Accounting Policies
Interim Financial Statements
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included.  Results for interim periods should not be considered indicative of results for a full year.  These interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in the company’s Annual Report on Form 10-K for the year ended December 31, 2013, collectively referred to as the “2013 Annual Report”.  The Consolidated Financial Statements include the accounts of the company and all of its subsidiaries in which a controlling interest is maintained, as well as variable interest entities for which DuPont is the primary beneficiary. 

Basis of Presentation
Certain reclassifications of prior year's data have been made to conform to current year's presentation. In February 2013, the company sold its Performance Coatings business (which represented a reportable segment). In accordance with GAAP, the results of Performance Coatings are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. The sum of the individual earnings per share amounts from continuing and discontinued operations may not equal the total company earnings per share amounts due to rounding. The cash flows and comprehensive income related to Performance Coatings have not been segregated and are included in the Condensed Consolidated Statements of Cash Flows and Comprehensive Income, respectively, for all periods presented. Amounts related to Performance Coatings are consistently included in or excluded from the Notes to the interim Consolidated Financial Statements based on the financial statement line item and period of each disclosure. See Note 2 for additional information.

Venezuelan Foreign Currency
Venezuela is considered a highly inflationary economy under GAAP and the U.S. dollar (USD) is the functional currency for the company's subsidiaries in Venezuela. During the first quarter 2014, the Venezuelan government enacted certain changes to the country’s foreign exchange systems including the expansion of the use of the Complementary System of Foreign Currency Acquirement (“SICAD 1”) auction rate and introduction of the SICAD 2 auction process. The official exchange rate continues to be set through the National Center for Foreign Commerce (CENCOEX, previously CADIVI) at 6.3 Bolivar Fuertes (BsF) to USD. Based on its evaluation of the restrictions and limitations affecting the availability of specific exchange rate mechanisms, management has concluded that the SICAD 2 auction process would be the most likely mechanism available. As a result, effective June 30, 2014, the company changed from the official exchange rate to the SICAD 2 exchange rate to remeasure its BsF denominated net monetary assets which resulted in a pre-tax charge of $58. The charge is recorded within other income, net in the company's interim Consolidated Income Statements for the nine months ended September 30, 2014. The company expects it will continue to use the SICAD 2 exchange rate to remeasure its Venezuelan BsF denominated revenues, expenses and net monetary assets unless facts and circumstances change.

Goodwill and Other Intangible Assets
Goodwill and indefinite-lived intangible assets are tested for impairment at least annually; however, these tests are performed more frequently when events or changes in circumstances indicate that the asset may be impaired. During the third quarter 2014, the company changed its annual impairment testing from September 30th to July 1st. The company believes this timing is preferable as it better aligns the goodwill impairment test with its strategic business planning cycle. This change did not result in the delay, acceleration or avoidance of an impairment charge. The change was applied prospectively, as retrospective application would have been impractical because the company is unable to objectively select assumptions that would have been used in previous periods without the benefit of hindsight. The company completed its annual impairment testing in the third quarter of 2014 and determined that no adjustments to the carrying value of goodwill or indefinite lived intangible assets were necessary.

Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) jointly issued Accounting Standards Update (“ASU”) No. 2014-9, Revenue from Contracts with Customers (Topic 606), which clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards (“IFRS”). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The ASU is effective for public entities for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted under GAAP and retrospective application is permitted, but not required. The company is currently evaluating the impact of adopting this guidance on its financial position and results of operations.

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

In April 2014, the FASB issued authoritative guidance amending existing requirements for reporting discontinued operations.  Under the new guidance, discontinued operations reporting will be limited to disposal transactions that represent strategic shifts having a major effect on operations and financial results. The amended guidance also enhances disclosures and requires assets and liabilities of a discontinued operation to be classified as such for all periods presented in the financial statements. Public entities will apply the amended guidance prospectively to all disposals occurring within annual periods beginning on or after December 15, 2014 and interim periods within those years. The company will adopt this standard on January 1, 2015. Due to the change in requirements for reporting discontinued operations described above, presentation and disclosures of future disposal transactions after adoption may be different than under current standards.

Note 2. Divestitures and Other Transactions
Glass Laminating Solutions/Vinyls
In June 2014, the company sold Glass Laminating Solutions/Vinyls (GLS/Vinyls), a part of the Performance Materials segment, to Kuraray Co. Ltd. The sale resulted in a pre-tax gain of $391 ($273 net of tax). The gain was recorded in other income, net in the company's interim Consolidated Income Statements for the nine months ended September 30, 2014.

Performance Chemicals
On October 24, 2013, DuPont announced that it intends to separate its Performance Chemicals segment through a U.S. tax-free spin-off to shareholders, subject to customary closing conditions. The company expects to complete the separation about mid-2015. During the three and nine months ended September 30, 2014, the company incurred $61 and $112 of costs associated with the transaction which were reported in other operating charges in the company's interim Consolidated Income Statements. These transaction costs primarily relate to professional fees associated with preparation of regulatory filings and separation activities within finance, legal and information system functions.
Performance Coatings
In February 2013, the company sold its Performance Coatings business to Flash Bermuda Co. Ltd., a Bermuda exempted limited liability company formed by affiliates of The Carlyle Group (collectively referred to as "Carlyle"). The sale resulted in a pre-tax gain of $2,689 ($1,964 net of tax). The gain was recorded in income from discontinued operations after income taxes in the company's interim Consolidated Income Statements for the nine months ended September 30, 2013.

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

$
331

Income before income taxes
$
7

$
2,720

(Benefit from) provision for income taxes
(18
)
723

Income from discontinued operations after income taxes
$
25

$
1,997


Note 3. Employee Separation / Asset Related Charges, Net
2014 Restructuring Program
In the second quarter 2014, DuPont announced its global, multi-year initiative to redesign its global organization and operating model to improve productivity and agility across all businesses and functions. As the first step in this initiative, DuPont commenced a restructuring plan to realign and rebalance staff function support and to reduce residual costs associated with the separation of its Performance Chemicals segment. As a result, the company recorded a pre-tax charge of $263, consisting of $166 employee separation costs, $3 of other non-personnel charges and $94 of asset shut down costs. The charge was recorded in employee separation / asset related charges, net in the company's interim Consolidated Income Statements for the nine months ended September 30, 2014. The actions associated with this charge and all related payments are expected to be substantially complete by December 31, 2015. The company anticipates that it will incur future charges, which it cannot reasonably estimate at this time, related to this plan as it implements additional actions.

The year-to-date charge impacted segment earnings as follows: Agriculture - $47, Electronics & Communications - $68, Industrial Biosciences - $2, Nutrition & Health - $8, Performance Chemicals - $19, Performance Materials - $29, and Safety & Protection - $31, Other - $2, as well as Corporate expenses - $57.

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

Account balances and activity for the 2014 restructuring program are summarized below:
 
Employee Separation Costs
Other Non-Personnel Charges
Asset
Shut Down
 Costs
Total
Charges to income for the nine months ended September 30, 2014
$
166

$
3

$
94

$
263

Charges to accounts:
 
 
 
 
Payments
(22
)
—

—

(22
)
Net translation adjustment
(5
)
—

—

(5
)
Asset write-offs and adjustments
—

—

(94
)
(94
)
Balance as of September 30, 2014
$
139

$
3

$
—

$
142


Note 4.  Other Income, Net 
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2014
2013
2014
2013
Royalty income
$
48

$
35

$
120

$
122

Interest income
33

34

104

106

Equity in earnings of affiliates, excluding exchange gains/losses1
6

28

28

14

Gain on sale of equity method investment
—

—

—

9

Net gain on sales of businesses and other assets
29

7

440

17

Net exchange gains (losses)1
218

(101
)
13

(55
)
Cozaar®/Hyzaar® income
—

—

1

14

Miscellaneous income and expenses, net 2
23

67

76

94

Other income, net
$
357

$
70

$
782

$
321

 

1 
The company routinely uses foreign currency exchange contracts to offset its net exposures, by currency, related to the foreign currency-denominated monetary assets and liabilities. The objective of this program is to maintain an approximately balanced position in foreign currencies in order to minimize, on an after-tax basis, the effects of exchange rate changes on net monetary asset positions. The net pre-tax exchange gains (losses) are recorded in other income, net and the related tax impact is recorded in provision for (benefit from) income taxes on continuing operations on the company's interim Consolidated Income Statements. Exchange gains (losses) related to earnings of affiliates was $3 and $1 for the three and nine months ended September 30, 2014, respectively. Exchange gains (losses) related to earnings of affiliates was $(1) and $4 for the three and nine months ended September 30, 2013, respectively. The $13 net exchange gain for the nine months ended September 30, 2014, includes $(58), $(46) and $(14) exchange losses, associated with the devaluation of the Venezuelan bolivar, Ukrainian hryvnia, and Argentinian peso, respectively. The $(55) net exchange losses for the nine months ended September 30, 2013, includes a $(33) exchange loss associated with the devaluation of the Venezuelan bolivar.

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

Note 5.  Income Taxes 
In the third quarter 2014, the company recorded a tax provision on continuing operations of $352, including $257 of tax expense, primarily associated with the company’s policy of hedging the foreign currency-denominated monetary assets and liabilities of its operations.

Year-to-date 2014, the company recorded a tax provision on continuing operations of $1,075, including $232 of tax expense, primarily associated with the company’s policy of hedging the foreign currency-denominated monetary assets and liabilities of its operations.

In the third quarter 2013, the company recorded a tax benefit of $35 on continuing operations pre-tax income of $228. The benefit included $58 of tax benefit primarily associated with the company's policy of hedging the foreign currency-denominated monetary assets and liabilities of its operations.

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

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

Each year the company files hundreds of tax returns in the various national, state and local income taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the tax authorities. Positions challenged by the tax authorities may be settled or appealed by the company. As a result, there is an uncertainty in income taxes recognized in the company’s financial statements in accordance with accounting for income taxes and accounting for uncertainty in income taxes. It is reasonably possible that net reductions to the company’s global unrecognized tax benefits could be in the range of $100 to $125 within the next twelve months with the majority due to the settlement of uncertain tax positions with various tax authorities.

Note 6.  Earnings Per Share of Common Stock 
Set forth below is a reconciliation of the numerator and denominator for basic and diluted earnings per share calculations for the periods indicated:
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2014
2013
2014
2013
Numerator:
 
 
 
 
Income from continuing operations after income taxes attributable to DuPont
$
433

$
260

$
2,942

$
2,666

Preferred dividends
(2
)
(3
)
(7
)
(8
)
Income from continuing operations after income taxes available to DuPont common stockholders
$
431

$
257

$
2,935

$
2,658

 
 
 
 
 
Income from discontinued operations after income taxes
$
—

$
25

$
—

$
1,997

 
 
 
 
 
Net income available to common stockholders
$
431

$
282

$
2,935

$
4,655

 
 
 
 
 
Denominator:
 
 
 
 
Weighted-average number of common shares outstanding - Basic
910,764,000

925,645,000

917,589,000

925,548,000

Dilutive effect of the company’s employee compensation plans
6,997,000

7,360,000

7,057,000

6,994,000

Weighted-average number of common shares outstanding - Diluted
917,761,000

933,005,000

924,646,000

932,542,000


The following average number of stock options were antidilutive, and therefore, were not included in the diluted earnings per share calculations: 
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2014
2013
2014
2013
Average number of stock options
7,000

—

4,000

3,461,000

 
The change in the average number of stock options that were antidilutive in the three and nine months ended September 30, 2014 compared to the same period last year was due to changes in the company’s average stock price.


10
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

Note 7. Inventories 
 
September 30,
2014
December 31,
2013
Finished products
$
4,150

$
4,645

Semi-finished products
2,515

2,576

Raw materials, stores and supplies
1,144

1,360

 
7,809

8,581

Adjustment of inventories to a last-in, first-out (LIFO) basis
(514
)
(539
)
Total
$
7,295

$
8,042


Note 8.  Goodwill and Other Intangible Assets 
There were no significant changes in goodwill for the nine months ended September 30, 2014.

The gross carrying amounts and accumulated amortization of other intangible assets by major class are as follows: 
 
September 30, 2014
December 31, 2013
 
Gross
Accumulated
Amortization
Net
Gross
Accumulated
Amortization
Net
Intangible assets subject to amortization (Definite-lived):
 

 

 

 

 

 

Customer lists
$
1,742

$
(452
)
$
1,290

$
1,818

$
(393
)
$
1,425

Patents
503

(192
)
311

519

(160
)
359

Purchased and licensed technology
1,799

(1,055
)
744

1,999

(1,129
)
870

Trademarks
36

(15
)
21

43

(17
)
26

Other 1
213

(87
)
126

242

(106
)
136

 
4,293

(1,801
)
2,492

4,621

(1,805
)
2,816

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

 

 

 

 

 

In-process research and development
40

—

40

43

—

43

Microbial cell factories 2
306

—

306

306

—

306

Pioneer germplasm 3
1,071

—

1,071

1,050

—

1,050

Trademarks/tradenames
821

—

821

881

—

881

 
2,238

—

2,238

2,280

—

2,280

Total
$
6,531

$
(1,801
)
$
4,730

$
6,901

$
(1,805
)
$
5,096


1  
Primarily consists of sales and grower networks, marketing and manufacturing alliances and noncompetition agreements.
2  
Microbial cell factories, derived from natural microbes, are used to sustainably produce enzymes, peptides and chemicals using natural metabolic processes. The company recognized the microbial cell factories as an intangible asset upon the acquisition of Danisco. This intangible asset is expected to contribute to cash flows beyond the foreseeable future and there are no legal, regulatory, contractual, or other factors which limit its useful life.
3  
Pioneer germplasm is the pool of genetic source material and body of knowledge gained from the development and delivery stage of plant breeding. The company recognized germplasm as an intangible asset upon the acquisition of Pioneer. This intangible asset is expected to contribute to cash flows beyond the foreseeable future and there are no legal, regulatory, contractual, or other factors which limit its useful life.       

The aggregate pre-tax amortization expense from continuing operations for definite-lived intangible assets was $49 and $294 for the three and nine months ended September 30, 2014, respectively, and $62 and $255 for the three and nine months ended September 30, 2013, respectively. The estimated aggregate pre-tax amortization expense from continuing operations for the remainder of 2014 and each of the next five years is approximately $79, $382, $352, $232, $229 and $224, respectively.
                                                                                                            


11
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

Note 9.  Commitments and Contingent Liabilities 
Guarantees 
Indemnifications
In connection with acquisitions and divestitures, the company has indemnified respective parties against certain liabilities that may arise in connection with these transactions and business activities prior to the completion of the transaction. The term of these indemnifications, which typically pertain to environmental, tax and product liabilities, is generally indefinite. In addition, the company indemnifies its duly elected or appointed directors and officers to the fullest extent permitted by Delaware law, against liabilities incurred as a result of their activities for the company, such as adverse judgments relating to litigation matters. If the indemnified party were to incur a liability or have a liability increase as a result of a successful claim, pursuant to the terms of the indemnification, the company would be required to reimburse the indemnified party. The maximum amount of potential future payments is generally unlimited.

Obligations for Equity Affiliates & Others 
The company has directly guaranteed various debt obligations under agreements with third parties related to equity affiliates, customers and suppliers. At September 30, 2014 and December 31, 2013, the company had directly guaranteed $488 and $561, respectively, of such obligations. These amounts represent the maximum potential amount of future (undiscounted) payments that the company could be required to make under the guarantees. The company would be required to perform on these guarantees in the event of default by the guaranteed party.

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

In certain cases, the company has recourse to assets held as collateral, as well as personal guarantees from customers and suppliers. Assuming liquidation, these assets are estimated to cover 37 percent of the $302 of guaranteed obligations of customers and suppliers. Set forth below are the company's guaranteed obligations at September 30, 2014:
 
Short-Term
Long-Term
Total
Obligations for customers and suppliers1:
 

 

 

Bank borrowings (terms up to 8 years)
$
210

$
90

$
300

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

2

2

Obligations for equity affiliates2:
 

 

 

Bank borrowings (terms less than 1 year)
186

—

186

Total
$
396

$
92

$
488


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

Imprelis® 
The company has received claims and has been served with multiple lawsuits alleging that the use of Imprelis® herbicide caused damage to certain trees. Sales of Imprelis® were suspended in August 2011 and the product was last applied during the 2011 spring application season. The lawsuits seeking class action status were consolidated in multidistrict litigation in federal court in Philadelphia, Pennsylvania. In February 2014, the court entered the final order dismissing these lawsuits as a result of the class action settlement.

As part of the settlement, DuPont paid about $7 in plaintiffs' attorney fees and expenses. In addition, DuPont is providing a warranty against new damage, if any, caused by the use of Imprelis® on class members' properties through May 2015. Certain class members opted out of the class action settlement and made independent claims or filed suit in various state courts, the majority of which were removed to federal court in Philadelphia. At September 30, 2014, the company has settled or reached settlements in principle for the majority of these claims and lawsuits. Approximately 35 lawsuits remain pending claiming property and related damage. This represents a decrease of about 90 over the number of lawsuits pending at June 30, 2014.

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

12
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

At September 30, 2014, DuPont had recorded charges of $1,175, within other operating charges, to resolve these claims, which represents the company's best estimate of the loss associated with resolving these claims. The company did not take any charges related to this matter during the three and nine months ended September 30, 2014. The three months ended September 30, 2013 included net charges of $40, consisting of a $65 charge offset by $25 of insurance recoveries. The nine months ended September 30, 2013 included net charges of $155, consisting of charges of $180 offset by $25 of insurance recoveries received in the third quarter 2013. At September 30, 2014, DuPont had accruals of $312 related to these claims. The company has an applicable insurance program with a deductible equal to the first $100 of costs and expenses. The insurance program limits are $725 for costs and expenses in excess of the $100. Insurance recoveries are recognized when realized. DuPont has submitted and will continue to submit requests for payment to its insurance carriers for costs associated with this matter. The company has begun to receive payment from its insurance carriers and continues to seek recovery although the timing and outcome remain uncertain. To date the company has recognized and received insurance recoveries of $73.

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

PFOA 
DuPont used PFOA (collectively, perfluorooctanoic acids and its salts, including the ammonium salt), as a processing aid to manufacture some fluoropolymer resins at various sites around the world including its Washington Works plant in West Virginia. At September 30, 2014, DuPont has accruals of $14 related to the PFOA matters discussed below.

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

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

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

The C8 Science Panel found probable links, as defined in the settlement agreement, between exposure to PFOA and pregnancy-induced hypertension, including preeclampsia; kidney cancer; testicular cancer; thyroid disease; ulcerative colitis; and diagnosed high cholesterol.

In May 2013, a panel of three independent medical doctors released its initial recommendations for screening and diagnostic testing of eligible class members. In September 2014, the medical panel recommended follow-up screening and diagnostic testing three years after initial testing, based on individual results. The medical panel has not communicated its anticipated schedule for completion of its protocol. The company is obligated to fund up to $235 for a medical monitoring program for eligible class members and, in addition, administrative costs associated with the program, including class counsel fees.  In January 2012, the company put $1 in an escrow account to fund medical monitoring as required by the settlement agreement.  The court appointed Director of Medical Monitoring has established the program to implement the medical panel's recommendations.  Under the program, notice has been given and the registration process, as well as eligibility screening, to participate in diagnostic testing has begun. As of September 30, 2014, no money has been disbursed from the fund. 

In addition, under the settlement agreement, the company must continue to provide water treatment designed to reduce the level of PFOA in water to six area water districts, including the Little Hocking Water Association (LHWA), and private well users.

13
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)


Class members may pursue personal injury claims against DuPont only for those human diseases for which the C8 Science Panel determined a probable link exists. At September 30, 2014, there were approximately 2,545 lawsuits filed in various federal and state courts in Ohio and West Virginia, an increase of about 255 over June 30, 2014. In accordance with a stipulation reached in the third quarter 2014 and other court procedures, these lawsuits have been or will be served and consolidated in multi-district litigation in Ohio federal court (“MDL”). The majority of the lawsuits allege personal injury claims associated with high cholesterol and thyroid disease from exposure to PFOA in drinking water.  There are 18 lawsuits alleging wrongful death. Based on comments from attorneys for the plaintiffs, DuPont expects additional lawsuits may be filed. In the third quarter 2014, six plaintiffs from the MDL were selected for the individual trial. The first trial is scheduled to begin in September 2015, and the second in November 2015. DuPont denies the allegations in these lawsuits and is defending itself vigorously.

Additional Actions
An Ohio action brought by the LHWA is ongoing. In addition to general claims of PFOA contamination of drinking water, the action claims “imminent and substantial endangerment to health and or the environment” under the Resource Conservation and Recovery Act (RCRA). In the second quarter 2014, DuPont filed a motion for summary judgment which if granted, will be dispositive of this matter. The LHWA has moved for partial summary judgment. DuPont denies these claims and is defending itself vigorously.

While it is probable that the company will incur costs related to funding the medical monitoring program, such costs cannot be reasonably estimated due to uncertainties surrounding the level of participation by eligible class members and the scope of testing. DuPont believes that it is reasonably possible that it could incur losses related to the other PFOA matters discussed above; however, a range of such losses, if any, cannot be reasonably estimated at this time.

Environmental 
The company is also subject to contingencies pursuant to environmental laws and regulations that in the future may require the company to take further action to correct the effects on the environment of prior disposal practices or releases of chemical or petroleum substances by the company or other parties. The company accrues for environmental remediation activities consistent with the policy as described in the company's 2013 Annual Report in Note 1, “Summary of Significant Accounting Policies.” Much of this liability results from the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, often referred to as Superfund), RCRA and similar state and global laws. These laws require the company to undertake certain investigative, remediation and restoration activities at sites where the company conducts or once conducted operations or at sites where company-generated waste was disposed. The accrual also includes estimated costs related to a number of sites identified by the company for which it is probable that environmental remediation will be required, but which are not currently the subject of enforcement activities.

Remediation activities vary substantially in duration and cost from site to site. These activities, and their associated costs, depend on the mix of unique site characteristics, evolving remediation technologies, diverse regulatory agencies and enforcement policies, as well as the presence or absence of potentially responsible parties. At September 30, 2014, the Condensed Consolidated Balance Sheet included a liability of $479, relating to these matters and, in management's opinion, is appropriate based on existing facts and circumstances. The average time frame over which the accrued or presently unrecognized amounts may be paid, based on past history, is estimated to be 15-20 years. Considerable uncertainty exists with respect to these costs and, under adverse changes in circumstances, potential liability may range up to three times the amount accrued as of September 30, 2014.

Note 10.  Stockholders’ Equity 
Share Repurchase Program
In January 2014, the company's Board of Directors authorized a $5,000 share buyback plan that replaced the 2011 plan. There is no required completion date for purchases under the 2014 plan. In February and August 2014, the company entered into two separate accelerated share repurchase ("ASR") agreements. The February 2014 ASR agreement was completed in the second quarter of 2014, under which the company purchased and retired 15.1 million shares for $1,000. Under the terms of the August 2014 ASR agreement, the company paid $700 to the financial institution and received and retired an initial delivery of 8.6 million shares, which represents 80 percent of the $700 notional amount of the agreement. The purchase price per share and final number of shares retired will be determined using the volume-weighted price of the company’s stock over the term of the ASR agreement. The August 2014 ASR will be completed in the fourth quarter 2014. In addition to the ASR agreements, during the three and nine months ended September 30, 2014, the company repurchased and retired 3.1 million shares and 4.7 million shares in the open market for a total cost of $203 and $300, respectively.


14
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

In December 2012, the company's Board of Directors authorized a $1,000 share buyback plan. In February 2013, the company entered into an ASR agreement under which the company used $1,000 of the proceeds from the sale of Performance Coatings for the purchase of shares of common stock. The 2012 $1,000 share buyback plan was completed in the second quarter 2013 through the ASR agreement, under which the company purchased and retired 20.4 million shares.

Other Comprehensive (Loss) Income
A summary of the changes in other comprehensive (loss) income for the three and nine months ended September 30, 2014 and 2013 is provided as follows:
 
Three Months Ended
Three Months Ended
Affected Line Item in Consolidated Income Statements1
 
September 30, 2014
September 30, 2013
 
Pre-Tax
Tax
After-Tax
Pre-Tax
Tax
After-Tax
 
Cumulative translation adjustment
$
(428
)
$
—

$
(428
)
$
177

$
—

$
177

 
Net revaluation and clearance of cash flow hedges to earnings:
 
 
 
 
 
 
 
Additions and revaluations of derivatives designated as cash flow hedges
(3
)
2

(1
)
(15
)
6

(9
)
See (2) below
Clearance of hedge results to earnings:
 
 
 
 
 
 
 
Foreign currency contracts
(2
)
1

(1
)
1

—

1

Net sales
Net revaluation and clearance of cash flow hedges to earnings
(5
)
3

(2
)
(14
)
6

(8
)
 
Pension benefit plans:
 
 
 
 
 
 
 
Net loss
(5
)
1

(4
)
(4
)
—

(4
)
See (2) below
Prior service (cost) benefit
(1
)
—

(1
)
62

(22
)
40

See (2) below
Reclassifications to net income:
 
 
 
 
 
 
 
Amortization of prior service cost
1

—

1

2

—

2

See (3) below
Amortization of loss
151

(52
)
99

244

(83
)
161

See (3) below
Settlement loss
2

(1
)
1

—

—

—

See (3) below
Pension benefit plans, net
148

(52
)
96

304

(105
)
199

 
Other benefit plans:
 
 
 
 
 
 
 
Net (loss) gain
(33
)
10

(23
)
95

(34
)
61

See (2) below
Prior service benefit
50

(1
)
49

199

(69
)
130

See (2) below
Reclassifications to net income:
 
 
 
 
 
 
 
Amortization of prior service benefit
(54
)
18

(36
)
(48
)
16

(32
)
See (3) below
Amortization of loss
15

(6
)
9

26

(9
)
17

See (3) below
Other benefit plans, net
(22
)
21

(1
)
272

(96
)
176

 
Other comprehensive (loss) income
$
(307
)
$
(28
)
$
(335
)
$
739

$
(195
)
$
544

 


15
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

 
Nine Months Ended
Nine Months Ended
Affected Line Item in Consolidated Income Statements1
 
September 30, 2014
September 30, 2013
 
Pre-Tax
Tax
After-Tax
Pre-Tax
Tax
After-Tax
 
Cumulative translation adjustment
$
(559
)
$
—

$
(559
)
$
(46
)
$
—

$
(46
)
 
Net revaluation and clearance of cash flow hedges to earnings:
 
 
 
 
 
 
 
Additions and revaluations of derivatives designated as cash flow hedges
23

(8
)
15

(39
)
15

(24
)
See (2) below
Clearance of hedge results to earnings:
 
 
 
 
 
 
 
Foreign currency contracts
—

—

—

(2
)
1

(1
)
Net sales
Commodity contracts
29

(11
)
18

(25
)
10

(15
)
Cost of goods sold
Net revaluation and clearance of cash flow hedges to earnings
52

(19
)
33

(66
)
26

(40
)
 
Pension benefit plans:
 
 
 
 
 
 
 
Net (loss) gain
(107
)
34

(73
)
52

(14
)
38

See (2) below
Prior service (cost) benefit
(1
)
—

(1
)
62

(22
)
40

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

—

2

8

(2
)
6

See (3) below
Amortization of loss
450

(155
)
295

724

(247
)
477

See (3) below
Curtailment loss
4

(1
)
3

1

—

1

See (3) below
Settlement loss
4

(1
)
3

152

(45
)
107

See (3) below
Pension benefit plans, net
352

(123
)
229

999

(330
)
669

 
Other benefit plans:
 
 
 
 
 
 
 
Net (loss) gain
(33
)
10

(23
)
140

(49
)
91

See (2) below
Prior service benefit
50

(1
)
49

199

(69
)
130

See (2) below
Reclassifications to net income:
 
 
 
 
 
 
 
Amortization of prior service benefit
(160
)
56

(104
)
(142
)
50

(92
)
See (3) below
Amortization of loss
43

(15
)
28

51

(18
)
33

See (3) below
Curtailment gain
—

—

—

(154
)
54

(100
)
See (3) below
Settlement loss
—

—

—

1

—

1

See (3) below
Other benefit plans, net
(100
)
50

(50
)
95

(32
)
63

 
Net unrealized gain on securities
—

—

—

1

(1
)
—

 
Other comprehensive (loss) income
$
(255
)
$
(92
)
$
(347
)
$
983

$
(337
)
$
646

 

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




16
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

The changes and after-tax balances of components comprising accumulated other comprehensive loss are summarized below:
 
Cumulative Translation Adjustment
Net Revaluation and Clearance of Cash Flow Hedges to Earnings
Pension Benefit Plans
Other Benefit Plans
Unrealized Gain on Securities
Total
2014
 

 

 

 

 

 

Balance January 1, 2014
$
(140
)
$
(48
)
$
(5,749
)
$
494

$
2

$
(5,441
)
Other comprehensive (loss) income before reclassifications
(559
)
15

(74
)
26

—

(592
)
Amounts reclassified from accumulated other comprehensive loss
—

18

302

(76
)
—

244

Balance September 30, 2014
$
(699
)
$
(15
)
$
(5,521
)
$
444

$
2

$
(5,789
)

 
Cumulative Translation Adjustment
Net Revaluation and Clearance of Cash Flow Hedges to Earnings
Pension Benefit Plans
Other Benefit Plans
Unrealized Gain on Securities
Total
2013
 

 

 

 

 

 

Balance January 1, 2013
$
(167
)
$
3

$
(8,686
)
$
202

$
2

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

221

—

229

Amounts reclassified from accumulated other comprehensive income (loss)
—

(16
)
591

(158
)
—

417

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

$
2

$
(8,000
)

Note 11. Financial Instruments
Debt
The estimated fair value of the company's total debt including interest rate financial instruments was determined using level 2 inputs within the fair value hierarchy, as described in the company's 2013 Annual Report in Note 1, “Summary of Significant Accounting Policies.” Based on quoted market prices for the same or similar issues or on current rates offered to the company for debt of the same remaining maturities, the fair value of the company's debt was approximately $13,792 and $12,860 as of September 30, 2014 and December 31, 2013, respectively.

Cash Equivalents
The fair value of cash equivalents approximates its stated value.  The estimated fair value of the company's cash equivalents was determined using level 1 and level 2 inputs within the fair value hierarchy, as described in the company's 2013 Annual Report in Note 1, “Summary of Significant Accounting Policies.”  Level 1 measurements are based on quoted market prices and level 2 measurements are based on current interest rates for similar instruments with comparable credit risk and time to maturity.  The company held $0 and $5,116 of money market funds (level 1 measurements) as of September 30, 2014 and December 31, 2013, respectively.  The company held $2,355 and $2,256 of other cash equivalents (level 2 measurements) as of September 30, 2014 and December 31, 2013, respectively.     

Derivative Instruments
Objectives and Strategies for Holding Derivative Instruments
In the ordinary course of business, the company enters into contractual arrangements (derivatives) to reduce its exposure to foreign currency, interest rate and commodity price risks. The company has established a variety of derivative programs to be utilized for financial risk management. These programs reflect varying levels of exposure coverage and time horizons based on an assessment of risk.
 
Derivative programs have procedures and controls and are approved by the Corporate Financial Risk Management Committee, consistent with the company's financial risk management policies and guidelines. Derivative instruments used are forwards, options, futures and swaps. The company has not designated any nonderivatives as hedging instruments.


17
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

The company's financial risk management procedures also address counterparty credit approval, limits and routine exposure monitoring and reporting. The counterparties to these contractual arrangements are major financial institutions and major commodity exchanges. The company is exposed to credit loss in the event of nonperformance by these counterparties. The company utilizes collateral support annex agreements with certain counterparties to limit its exposure to credit losses. The company's derivative assets and liabilities are reported on a gross basis in the Condensed Consolidated Balance Sheets. The company anticipates performance by counterparties to these contracts and therefore no material loss is expected. Market and counterparty credit risks associated with these instruments are regularly reported to management.

The notional amounts of the company's derivative instruments were as follows:
 
September 30, 2014
December 31, 2013
Derivatives designated as hedging instruments:
 
 
Interest rate swaps
$
1,000

$
1,000

Foreign currency contracts
671

1,107

Commodity contracts
96

606

Derivatives not designated as hedging instruments:
 
 
Foreign currency contracts
10,570

9,553

Commodity contracts
9

281


Foreign Currency Risk
The company's objective in managing exposure to foreign currency fluctuations is to reduce earnings and cash flow volatility associated with foreign currency rate changes. Accordingly, the company enters into various contracts that change in value as foreign exchange rates change to protect the value of its existing foreign currency-denominated assets, liabilities, commitments and cash flows.

The company routinely uses forward exchange contracts to offset its net exposures, by currency, related to the foreign currency-denominated monetary assets and liabilities of its operations. The primary business objective of this hedging program is to maintain an approximately balanced position in foreign currencies so that exchange gains and losses resulting from exchange rate changes, net of related tax effects, are minimized. The company also uses foreign currency exchange contracts to offset a portion of the company's exposure to certain foreign currency-denominated revenues so that gains and losses on these contracts offset changes in the USD value of the related foreign currency-denominated revenues. The objective of the hedge program is to reduce earnings and cash flow volatility related to changes in foreign currency exchange rates.

Interest Rate Risk
The company uses interest rate swaps to manage the interest rate mix of the total debt portfolio and related overall cost of borrowing. Interest rate swaps involve the exchange of fixed for floating rate interest payments to effectively convert fixed rate debt into floating rate debt based on USD LIBOR. Interest rate swaps allow the company to achieve a target range of floating rate debt.

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

Fair Value Hedges
Interest Rate Swaps
At September 30, 2014, the company maintained a number of interest rate swaps, which were implemented at the time debt instruments were issued. All interest rate swaps qualify for the shortcut method of hedge accounting, thus there is no ineffectiveness related to these hedges.

Cash Flow Hedges
Foreign Currency Contracts
The company uses foreign currency exchange instruments such as forwards and options to offset a portion of the company's exposure to certain foreign currency-denominated revenues so that gains and losses on these contracts offset changes in the USD value of the related foreign currency-denominated revenues.


18
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

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

While each risk management program has a different time maturity period, most programs currently do not extend beyond the next two-year period. Cash flow hedge results are reclassified into earnings during the same period in which the related exposure impacts earnings. Reclassifications are made sooner if it appears that a forecasted transaction will not materialize. The following table summarizes the after-tax effect of cash flow hedges on accumulated other comprehensive loss for the three and nine months ended September 30, 2014 and 2013:
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2014
2013
2014
2013
Beginning balance
$
(13
)
$
(29
)
$
(48
)
$
3

Additions and revaluations of derivatives designated as
   cash flow hedges
(1
)
(9
)
15

(24
)
Clearance of hedge results to earnings
(1
)
1

18

(16
)
Ending balance
$
(15
)
$
(37
)
$
(15
)
$
(37
)

At September 30, 2014, an after-tax net loss of $4 is expected to be reclassified from accumulated other comprehensive loss into earnings over the next 12 months.

Derivatives not Designated in Hedging Relationships
Foreign Currency Contracts
The company routinely uses forward exchange contracts to reduce its net exposure, by currency, related to foreign currency-denominated monetary assets and liabilities of its operations so that exchange gains and losses resulting from exchange rate changes are minimized. The netting of such exposures precludes the use of hedge accounting; however, the required revaluation of the forward contracts and the associated foreign currency-denominated monetary assets and liabilities intends to achieve a minimal earnings impact, after taxes. Additionally, the company had cross-currency swaps to hedge foreign currency fluctuations on long-term intercompany loans. These swaps matured during 2013.

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


19
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

Fair Values of Derivative Instruments
The table below presents the fair values of the company's derivative assets and liabilities within the fair value hierarchy, as described in the company's 2013 Annual Report in Note 1, “Summary of Significant Accounting Policies.”
 
 
Fair Value Using Level 2 Inputs
 
Balance Sheet Location
September 30, 2014
December 31, 2013
Asset derivatives:
 
 
 
Derivatives designated as hedging instruments:
 
 
 
Interest rate swaps1
Accounts and notes receivable, net
$
8

$
—

Interest rate swaps1
Other assets
—

29

Foreign currency contracts
Accounts and notes receivable, net
15

6

 
 
23

35

Derivatives not designated as hedging instruments:
 
 

 
Foreign currency contracts2
Accounts and notes receivable, net
278

86

 
 




Total asset derivatives3
 
$
301

$
121

Cash collateral1,2
Other accrued liabilities
$
110

$
30

 
 
 
 
Liability derivatives:
 
 

 
Derivatives designated as hedging instruments:
 
 

 
Foreign currency contracts
Other accrued liabilities
$
—

$
4

 
 
 
 
Derivatives not designated as hedging instruments:
 
 

 
Foreign currency contracts
Other accrued liabilities
48

70

Commodity contracts
Other accrued liabilities
1

1

 
 
49

71

Total liability derivatives3
 
$
49

$
75


1 
Cash collateral held as of September 30, 2014 and December 31, 2013 represents $6 and $17, respectively, related to interest rate swap derivatives designated as hedging instruments.
2 
Cash collateral held as of September 30, 2014 and December 31, 2013 represents $104 and $13, respectively, related to foreign currency derivatives not designated as hedging instruments.
3 
The company's derivative assets and liabilities subject to enforceable master netting arrangements totaled $45 at September 30, 2014 and $54 at December 31, 2013.




20
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

Effect of Derivative Instruments
 
Amount of Gain (Loss)
Recognized in OCI1
(Effective Portion)
Amount of Gain (Loss)
Recognized in Income2
 
Three Months Ended September 30,
2014
2013
2014
2013
Income Statement Classification
Derivatives designated as hedging instruments:
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
Interest rate swaps
$
—

$
—

$
(7
)
$
(5
)
Interest expense3
Cash flow hedges:
 
 
 
 
 
Foreign currency contracts
20

(5
)
2

(1
)
Net sales
Commodity contracts
(23
)
(10
)
—

—

Cost of goods sold
 
(3
)
(15
)
(5
)
(6
)
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
Foreign currency contracts
—

—

403

(130
)
Other income, net4
Commodity contracts
—

—

4

(1
)
Cost of goods sold
 
—

—

407

(131
)
 
Total derivatives
$
(3
)
$
(15
)
$
402

$
(137
)
 

 
Amount of Gain (Loss)
Recognized in OCI1 (Effective Portion)
Amount of Gain (Loss)
Recognized in Income2
 
Nine Months Ended September 30,
2014
2013
2014
2013
Income Statement Classification
Derivatives designated as hedging instruments:
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
Interest rate swaps
$
—

$
—

$
(20
)
$
(20
)
Interest expense3
Cash flow hedges:
 
 
 
 
 
Foreign currency contracts
19

11

—

2

Net sales
Commodity contracts
4

(50
)
(29
)
25

Cost of goods sold
 
23

(39
)
(49
)
7


Derivatives not designated as hedging instruments:
 
 
 
 
 
Foreign currency contracts
—

—

287

66

Other income, net4
Commodity contracts
—

—

(21
)
(9
)
Cost of goods sold
 
—

—

266

57

 
Total derivatives
$
23

$
(39
)
$
217

$
64

 

1  
OCI is defined as other comprehensive income (loss).
2  
For cash flow hedges, this represents the effective portion of the gain (loss) reclassified from accumulated OCI into income during the period. For the three and nine months ended September 30, 2014 and 2013, there was no material ineffectiveness with regard to the company's cash flow hedges.
3  
Gain (loss) recognized in income of derivative is offset to $0 by gain (loss) recognized in income of the hedged item.
4  
Gain (loss) recognized in other income, net, was partially offset by the related gain (loss) on the foreign currency-denominated monetary assets and liabilities of the company's operations, which were $(185) and $29 for the three months ended September 30, 2014 and 2013, respectively, and $(274) and $(121) for the nine months ended September 30, 2014 and 2013, respectively.


21
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

Note 12. Long-Term Employee Benefits 
Pension Plans
In February 2013, DuPont completed the sale of its Performance Coatings business. As a result of the sale, the company recorded settlement and curtailment losses of $153. See Note 2 for additional information.

The following sets forth the components of the company’s net periodic benefit cost for pensions:  
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2014
2013
2014
2013
Service cost
$
61

$
67

$
181

$
206

Interest cost
290

272

875

816

Expected return on plan assets
(405
)
(379
)
(1,211
)
(1,139
)
Amortization of loss
151

244

450

724

Amortization of prior service cost
1

2

2

8

Curtailment loss
—

—

4

1

Settlement loss
2

—

4

152

Net periodic benefit cost
$
100

$
206

$
305

$
768


Other Long-Term Employee Benefit Plans
In conjunction with the sale of the Performance Coatings business noted above, the company recorded a net $153 settlement and curtailment gain. See Note 2 for additional information.
During the third quarter 2013, the company amended its U.S. parent company retiree life insurance plan for employees retiring on and after January 1, 2015 and subsidiary retiree health care plans. As a result of these changes, the company was required to re-measure the associated plans as of August 31, 2013, which included updating the discount rate assumption to 4.75 percent from 3.85 percent assumed at December 31, 2012. The re-measurement and amendment resulted in a net decrease of $294 to the company's other long-term employee benefit obligation, which included an actuarial gain of $95 due to a higher discount rate and prior service benefit of $199.

The following sets forth the components of the company’s net periodic benefit cost for other long-term employee benefits:  
 
Three Months Ended
Nine Months Ended
 
September 30,
September 30,
 
2014
2013
2014
2013
Service cost
$
4

$
7

$
13

$
23

Interest cost
30

32

91

98

Amortization of loss
15

26

43

51

Amortization of prior service benefit
(54
)
(48
)
(160
)
(142
)
Curtailment gain
—

—

—

(154
)
Settlement loss
—

—

—

1

Net periodic benefit cost
$
(5
)
$
17

$
(13
)
$
(123
)

22
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

Note 13.  Segment Information 
Segment sales include transfers to another business segment. Segment pre-tax operating income (loss) (PTOI) is defined as income (loss) from continuing operations before income taxes excluding non-operating pension and other postretirement employee benefit costs, exchange gains (losses), corporate expenses and interest.

The earnings from the previous Pharmaceuticals segment are expected to be insignificant in 2014 and therefore, effective January 1, 2014, the results are reported within Other. Viton® fluoroelastomer products ("Viton®") will be included in the Performance Chemicals separation and therefore, effective April 30, 2014, the results are reported within Performance Chemicals. Viton® was previously reported within Performance Materials. Reclassifications of prior year data have been made to conform to current year classifications.
Three Months
Ended September 30,
Agriculture1
Electronics &
Communications
Industrial Biosciences
Nutrition & Health
Performance
Chemicals
Performance
Materials
Safety &
Protection
Other
Total
2014
 

 
 

 
 
 
 
 
 

 
 

 
 

 
 

 
 

Segment sales
$
1,563

 
$
623

 
$
318

 
$
899

 
$
1,646

 
$
1,552

 
$
977

 
$
2

 
$
7,580

Less: Transfers
—

 
3

 
4

 
—

 
40

 
21

 
1

 
—

 
69

Net sales
1,563

 
620

 
314

 
899

 
1,606

 
1,531

 
976

 
2

 
7,511

PTOI
(55
)
 
94

 
47

 
100

 
249

 
370

 
201

 
(83
)
 
923