DD-2015.6.30-10Q
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 June 30, 2015
 
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.)
974 Centre Road, Wilmington, Delaware 19805
(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 904,838,000 shares (excludes 87,041,000 shares of treasury stock) of common stock, $0.30 par value, outstanding at July 15, 2015.
 
 

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
Six Months Ended
 
June 30,
June 30,
 
2015
2014
2015
2014
Net sales
$
8,595

$
9,706

$
17,767

$
19,834

Other income, net
283

408

481

425

Total
8,878

10,114

18,248

20,259

Cost of goods sold
5,280

5,999

10,833

11,999

Other operating charges
349

300

632

586

Selling, general and administrative expenses
1,371

1,473

2,683

2,909

Research and development expense
515

545

1,014

1,063

Interest expense
127

94

211

197

Employee separation / asset related charges, net
61

263

99

263

Total
7,703

8,674

15,472

17,017

Income before income taxes
1,175

1,440

2,776

3,242

Provision for income taxes
230

366

796

723

Net income
945

1,074

1,980

2,519

Less: Net income attributable to noncontrolling interests
5

4

9

10

Net income attributable to DuPont
$
940

$
1,070

$
1,971

$
2,509

Basic earnings per share of common stock
$
1.04

$
1.16

$
2.17

$
2.72

Diluted earnings per share of common stock
$
1.03

$
1.15

$
2.15

$
2.70

Dividends per share of common stock
$
0.49

$
0.45

$
0.96

$
0.90

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



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

 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2015
2014
2015
2014
Net income
$
945

$
1,074

$
1,980

$
2,519

Other comprehensive income (loss), before tax:
 
 
 
 
      Cumulative translation adjustment
197

(59
)
(992
)
(131
)
      Net revaluation and clearance of cash flow hedges to earnings:
 
 
 
 
      Additions and revaluations of derivatives designated as cash flow hedges
8

(12
)
(14
)
26

      Clearance of hedge results to earnings
5

13

12

31

      Net revaluation and clearance of cash flow hedges to earnings
13

1

(2
)
57

      Pension benefit plans:
 
 
 
 
      Net loss
(2
)
(103
)
(6
)
(102
)
      Effect of foreign exchange rates
(62
)
—

38

—

      Reclassifications to net income:
 
 
 
 
                Amortization of prior service (benefit) cost
(1
)
—

(3
)
1

                Amortization of loss
210

150

419

299

                Curtailment / settlement loss
4

6

9

6

      Pension benefit plans, net
149

53

457

204

      Other benefit plans:
 
 
 
 
      Reclassifications to net income:
 
 
 
 
                Amortization of prior service benefit
(52
)
(53
)
(104
)
(106
)
                Amortization of loss
19

14

38

28

      Other benefit plans, net
(33
)
(39
)
(66
)
(78
)
Other comprehensive income (loss), before tax
326

(44
)
(603
)
52

      Income tax expense related to items of other comprehensive income
(50
)
(7
)
(136
)
(64
)
Other comprehensive income (loss), net of tax
276

(51
)
(739
)
(12
)
Comprehensive income
1,221

1,023

1,241

2,507

      Less: Comprehensive income attributable to noncontrolling interests
5

4

9

10

Comprehensive income attributable to DuPont
$
1,216

$
1,019

$
1,232

$
2,497


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) 
 
June 30,
2015
December 31,
2014
Assets
 

 

Current assets
 

 

Cash and cash equivalents
$
4,746

$
6,910

Marketable securities
556

124

Accounts and notes receivable, net
8,308

6,005

Inventories
6,514

7,841

Prepaid expenses
296

279

Deferred income taxes
625

589

Total current assets
21,045

21,748

Property, plant and equipment, net of accumulated depreciation
   (June 30, 2015 - $20,256; December 31, 2014 - $19,942)
13,061

13,386

Goodwill
4,455

4,529

Other intangible assets
4,286

4,580

Investment in affiliates
895

886

Deferred income taxes
3,223

3,349

Other assets
1,141

1,058

Total
$
48,106

$
49,536

Liabilities and Equity
 

 

Current liabilities
 

 

Accounts payable
$
3,399

$
4,822

Short-term borrowings and capital lease obligations
647

1,423

Income taxes
613

547

Other accrued liabilities
4,046

5,848

Total current liabilities
8,705

12,640

Long-term borrowings and capital lease obligations
12,088

9,233

Other liabilities
13,188

13,819

Deferred income taxes
472

466

Total liabilities
34,453

36,158

Commitments and contingent liabilities




Stockholders’ equity
 

 

Preferred stock
237

237

Common stock, $0.30 par value; 1,800,000,000 shares authorized;
   Issued at June 30, 2015 - 991,875,000; December 31, 2014 - 992,020,000
298

298

Additional paid-in capital
11,389

11,174

Reinvested earnings
17,838

17,045

Accumulated other comprehensive loss
(9,446
)
(8,707
)
Common stock held in treasury, at cost
(87,041,000 shares at June 30, 2015 and December 31, 2014)
(6,727
)
(6,727
)
Total DuPont stockholders’ equity
13,589

13,320

Noncontrolling interests
64

58

Total equity
13,653

13,378

Total
$
48,106

$
49,536

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

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Table of Contents

E. I. du Pont de Nemours and Company
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in millions)
 
 
Six Months Ended
 
June 30,
 
2015
2014
Operating activities
 
 
Net income
$
1,980

$
2,519

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

 

Depreciation
615

635

Amortization of intangible assets
257

245

Net periodic pension benefit cost
294

205

Contributions to pension plans
(204
)
(168
)
Gain on sale of businesses
(22
)
(398
)
Other operating activities - net
59

430

Change in operating assets and liabilities - net
(5,024
)
(5,539
)
Cash used for operating activities
(2,045
)
(2,071
)
Investing activities
 

 

Purchases of property, plant and equipment
(938
)
(781
)
Investments in affiliates
(50
)
(23
)
Payments for businesses - net of cash acquired
(77
)
—

Proceeds from sales of businesses - net
34

639

Proceeds from sales of assets - net
14

10

Purchases of short-term financial instruments
(589
)
(330
)
Proceeds from maturities and sales of short-term financial instruments
167

308

Foreign currency exchange contract settlements
443

(63
)
Other investing activities - net
13

8

Cash used for investing activities
(983
)
(232
)
Financing activities
 

 

Dividends paid to stockholders
(875
)
(836
)
Net (decrease) increase in short-term (less than 90 days) borrowings
(1
)
1,021

Long-term and other borrowings:
 
 
Receipts
3,629

83

Payments
(1,518
)
(1,735
)
Repurchase of common stock
(353
)
(1,061
)
Proceeds from exercise of stock options
201

214

Other financing activities - net
(81
)
(76
)
Cash provided by (used for) financing activities
1,002

(2,390
)
Effect of exchange rate changes on cash
(138
)
(74
)
Decrease in cash and cash equivalents
$
(2,164
)
$
(4,767
)
Cash and cash equivalents at beginning of period
6,910

8,941

Cash and cash equivalents at end of period
$
4,746

$
4,174

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


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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, 2014, collectively referred to as the “2014 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.

The company’s cost structure has been impacted by the global, multi-year initiative to redesign its global organization and operating model to improve productivity and agility across all businesses and functions. Effective December 31, 2014, in order to better align to the transforming company’s organization and resulting cost structure, certain costs were reclassified from other operating charges to selling, general and administrative expenses. Prior year data has been reclassified to conform to current year presentation. Other operating charges primarily include, costs associated with the Performance Chemical separation, product claim charges and non-capitalizable costs associated with capital projects. Selling, general and administrative expense primarily includes selling and marketing expenses, commissions, functional costs, and business management expenses. Cost of goods sold primarily includes the cost of manufacture and delivery, ingredients or raw materials, direct salaries, wages and benefits and overhead.
 
Foreign Currency Translation
The company's worldwide operations utilize the U.S. dollar (USD) or local currency as the functional currency, where applicable. The company identifies its separate and distinct foreign entities and groups the foreign entities into two categories: 1) extension of the parent (USD functional currency) and 2) self-contained (local functional currency). If a foreign entity does not clearly align with either category, factors are evaluated and a judgment is made to determine the functional currency.

For foreign entities where the USD is the functional currency, all foreign currency asset and liability amounts are remeasured into USD at end-of-period exchange rates, except for inventories, prepaid expenses, property, plant and equipment, goodwill and other intangible assets, which are remeasured at historical rates. Foreign currency income and expenses are remeasured at average exchange rates in effect during the year, except for expenses related to balance sheet amounts remeasured at historical exchange rates. Exchange gains and losses arising from remeasurement of foreign currency-denominated monetary assets and liabilities are included in income in the period in which they occur.

For foreign entities where the local currency is the functional currency, assets and liabilities denominated in local currencies are translated into USD at end-of-period exchange rates and the resultant translation adjustments are reported, net of their related tax effects, as a component of accumulated other comprehensive income (loss) in equity. Assets and liabilities denominated in other than the local currency are remeasured into the local currency prior to translation into USD and the resultant exchange gains or losses are included in income in the period in which they occur. Income and expenses are translated into USD at average exchange rates in effect during the period.

The company changes the functional currency of its separate and distinct foreign entities only when significant changes in economic facts and circumstances indicate clearly that the functional currency has changed. As a result of the separation of its Performance Chemicals segment, coupled with the company’s redesign initiative, the functional currency at certain of the company’s foreign entities is being re-evaluated which, in some cases, has resulted in a change in the foreign entities’ functional currency.

Venezuelan Foreign Currency
Venezuela is considered a highly inflationary economy under GAAP and the USD is the functional currency for the company's subsidiaries in Venezuela. The official exchange rate continues to be set through the National Center for Foreign Commerce (CENCOEX, previously CADIVI). Based on its evaluation of the restrictions and limitations affecting the availability of specific exchange rate mechanisms, management concluded in the second quarter of 2014 that the SICAD 2 auction process would be the most likely mechanism available. As a result, in the second quarter of 2014, the company changed from the official exchange rate to the SICAD 2 exchange rate.

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

During the first quarter of 2015, the Venezuelan government enacted additional changes to the country’s foreign exchange systems including the introduction of the SIMADI (Foreign Exchange Marginal System) auction process. Management has concluded that the SIMADI auction process would be the most likely exchange mechanism available. As a result, effective in the first quarter of 2015, the company changed from the SICAD 2 to the SIMADI exchange rate, to remeasure its Bolivar Fuertes (VEF) denominated net monetary assets which resulted in a charge of $3 recorded within other income, net in the company's interim Consolidated Income Statements for the six months ended June 30, 2015. The remaining net monetary assets and non-monetary assets are immaterial at June 30, 2015.

Recent Accounting Pronouncements
In May 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2015-07, Fair Value Measurement (Topic 820), Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share or its Equivalent. This guidance removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The guidance also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively to all periods presented and earlier application is permitted. The company anticipates that this guidance will only impact disclosure and will not have an impact on the company's financial position or results of operations.
In February 2015, the FASB issued ASU No. 2015-02 Consolidation (Topic 810), Amendments to the Consolidation Analysis. The amendments under the new guidance modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities and eliminate the presumption that a general partner should consolidate a limited partnership. The ASU is effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. A reporting entity also may apply the amendments retrospectively. The company is currently evaluating the impact of adopting this guidance on its financial position and results of operations.
In May 2014, the FASB and the International Accounting Standards Board (IASB) jointly issued 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. In July 2015, the FASB approved a deferral of the ASU effective date from annual and interim periods beginning after December 15, 2016 to annual and interim periods beginning after December 15, 2017. The company is currently evaluating the impact of adopting this guidance on its financial position and results of operations.
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 adopted 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 previous standards.
Note 2. Divestitures and Other Transactions
Performance Chemicals
On July 1, 2015 (the Distribution Date), DuPont completed the separation of its Performance Chemicals segment through the spin-off of all of the issued and outstanding stock of The Chemours Company (Chemours). As a result, beginning in the third quarter of 2015, Chemours' financial results will be reflected in DuPont's Consolidated Financial Statements as a discontinued operation, along with comparative periods. See Note 15 for additional information.

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

During the three and six months ended June 30, 2015, and the three and six months ended June 30, 2014, respectively, the company incurred, $119 and $200, and $35 and $51 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, tax, legal and information system functions. In addition, during the three months ended June 30, 2015, the company incurred $20 of transaction costs for a premium associated with the early retirement of DuPont debt. The company exchanged notes received from Chemours in May 2015 (as part of a dividend payment) for DuPont debt that it then retired. These costs were reported in interest expense in the company's interim Consolidated Income Statements.
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 three and six-months ended June 30, 2014.

Note 3. Employee Separation / Asset Related Charges, Net
Chemours Restructuring Program
During the three months ended June 30, 2015, a restructuring charge of $61 was recorded in employee separation / asset related charges, net, consisting of severance and related benefit costs in the Performance Chemicals segment to achieve fixed cost and operational productivity improvements for Chemours post-spin.

Account balances and activity for the Chemours restructuring program are summarized below:
 
Employee Separation Costs
Charges to income for the three and six months ended June 30, 2015
$
61

Payments
(8
)
Balance as of June 30, 2015
$
53


2014 Restructuring Program
At June 30, 2015, total liabilities related to the 2014 restructuring program were $183. A complete discussion of restructuring initiatives is included in the company's 2014 Annual Report in Note 3, "Employee Separation / Asset Related Charges, Net."

Account balances and activity related to the 2014 restructuring program are summarized below:
 
Employee Separation Costs
Other Non-Personnel Charges 1
Total
Balance at December 31, 2014
$
264

$
4

$
268

Payments
(77
)
(1
)
(78
)
Net translation adjustment
(7
)
—

(7
)
  Other adjustments
—

—

—

Balance as of June 30, 2015
$
180

$
3

$
183


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

During the three months ended June 30, 2015, the company recorded adjustments to the estimated costs associated with the 2014 restructuring program in employee separation / asset related charges, net in the company's interim Consolidated Income Statements. This was primarily due to lower than estimated individual severance costs and workforce reductions achieved through non-severance programs, partially offset by identification of additional projects in certain segments. There was no impact from these adjustments to the company's interim Consolidated Income Statements. The adjustments impacted segment results for the three months ended June 30, 2015 as follows: Agriculture - $(4), Electronics & Communications - $11, Industrial Biosciences - $(1), Nutrition & Health - $(4), Performance Chemicals - $2 , Performance Materials - $(2), and Safety & Protection $1, and Other - $(3).


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

During the three months ended June 30, 2014, a pre-tax charge of $263 was recorded in employee separation / asset related charges, net in the company's interim Consolidated Income Statements. The charge consisted of $166 employee separation costs, $3 of other non-personnel charges and $94 of asset shut down costs. The charge impacted segment results for the second quarter 2014 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.

Cost Basis Investment Impairment
During the first quarter 2015, a $38 pre-tax impairment charge was recorded in employee separation / asset related charges, net within the Other segment. The majority relates to a cost basis investment in which the assessment resulted from the venture's revised operating plan reflecting underperformance of its European wheat based ethanol facility and deteriorating European ethanol market conditions. One of the primary investors communicated that they would not fund the revised operating plan of the investee. As a result, the carrying value of DuPont's 6 percent cost basis investment in this venture exceeds its fair value by $37, such that an impairment charge was recorded.

Note 4.  Other Income, Net 
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2015
2014
2015
2014
Royalty income
$
32

$
34

$
71

$
72

Interest income
40

43

65

71

Equity in earnings of affiliates, net
21

9

30

22

Net gain on sales of businesses and other assets
25

404

31

411

Net exchange gains (losses)1
26

(109
)
90

(205
)
Miscellaneous income and expenses, net 2
139

27

194

54

Other income, net
$
283

$
408

$
481

$
425

 

1 
The company routinely uses foreign currency exchange contracts to offset its net exposures, by currency, related to the foreign currency-denominated monetary assets and liabilities. The objective of this program is to maintain an approximately balanced position in foreign currencies in order to minimize, on an after-tax basis, the effects of exchange rate changes on net monetary asset positions. The net pre-tax exchange gains (losses) are recorded in other income, net and the related tax impact is recorded in provision for income taxes on the company's interim Consolidated Income Statements. The $26 net exchange gain (loss) for the three months ended June 30, 2015, was driven by an $88 adjustment for gains, attributable to the first quarter 2015, on foreign exchange contracts.  These contracts were used to align the hedge portfolio to the revised currency exposure of certain foreign entities associated with their change in functional currency during the first quarter of 2015 resulting from the Performance Chemicals separation, coupled with the company's redesign initiative.  The impact of the adjustment was not material to either period. The increase in year-to-date pre-tax exchange gains over prior year was driven by gains on foreign currency contracts due to strengthening of the USD versus global currencies partially offset by losses on the related foreign currency-denominated monetary assets and liabilities. The $90 net exchange gain (loss) for the six months ended June 30, 2015, includes a net $(32) pre-tax exchange loss associated with the devaluation of the Ukrainian hryvnia. The $(109) net exchange loss for the three months ended June 30, 2014, includes $(58) and $(7) exchange losses, associated with the devaluation of the Venezuelan bolivar and Ukrainian hryvnia, respectively. The $(205) net exchange loss for the six months ended June 30, 2014, includes $(58), $(46) and $(14) exchange losses, associated with the devaluation of the Venezuela bolivar, Ukrainian hryvnia, and Argentinian peso, respectively.

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

Note 5.  Income Taxes 
In the second quarter 2015, the company recorded a tax provision of $230, including $30 of tax benefit associated with the company’s policy of hedging the foreign currency-denominated monetary assets and liabilities of its operations and gains or losses on foreign currency contracts in addition to $26 of tax benefit associated with the reversal of a tax valuation allowance related to net operating losses. This valuation allowance reversal should have been recorded in the fourth quarter of 2014. The impact of this adjustment was not material in either period.

Year to date 2015, the company recorded a tax provision of $796, including $182 of tax expense primarily associated with the company’s policy of hedging the foreign currency-denominated monetary assets and liabilities of its operations and gains or losses on foreign currency contracts in addition to $26 of tax benefit discussed above.

In the second quarter 2014, the company recorded a tax provision of $366, including $3 of tax expense, primarily associated with the company's policy of hedging the foreign currency-denominated monetary assets and liabilities of its operations.


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

Year to date 2014, the company recorded a tax provision of $723, including $25 of tax benefit, primarily associated with the company's policy of hedging the foreign currency-denominated monetary assets and liabilities of its operations.

Each year the company files hundreds of tax returns in the various national, state and local income taxing jurisdictions in which it operates. These tax returns are subject to examination and possible challenge by the 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
Six Months Ended
 
June 30,
June 30,
 
2015
2014
2015
2014
Numerator:
 
 
 
 
Net income attributable to DuPont
$
940

$
1,070

$
1,971

$
2,509

Preferred dividends
(3
)
(3
)
(5
)
(5
)
Net income available to common stockholders
$
937

$
1,067

$
1,966

$
2,504

 
 
 
 
 
Denominator:
 
 
 
 
Weighted-average number of common shares outstanding - Basic
905,761,000

918,684,000

906,296,000

921,058,000

Dilutive effect of the company’s employee compensation plans
5,920,000

6,903,000

6,452,000

7,087,000

Weighted-average number of common shares outstanding - Diluted
911,681,000

925,587,000

912,748,000

928,145,000


The following average number of stock options were antidilutive, and therefore not included in the dilutive earnings per share calculations:
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2015
2014
2015
2014
Average number of stock options
5,357,000

4,000

2,678,000

2,000


The change in the average number of stock options that were antidilutive in the three and six months ended June 30, 2015 compared to the same period last year was due to changes in the company's average stock price.

Note 7. Inventories 
 
June 30,
2015
December 31,
2014
Finished products
$
4,006

$
4,628

Semi-finished products
1,853

2,451

Raw materials, stores and supplies
1,128

1,255

 
6,987

8,334

Adjustment of inventories to a last-in, first-out (LIFO) basis
(473
)
(493
)
Total
$
6,514

$
7,841



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

Note 8.  Other Intangible Assets 
The gross carrying amounts and accumulated amortization of other intangible assets by major class are as follows: 
 
June 30, 2015
December 31, 2014
 
Gross
Accumulated
Amortization
Net
Gross
Accumulated
Amortization
Net
Intangible assets subject to amortization (Definite-lived):
 

 

 

 

 

 

Customer lists
$
1,637

$
(500
)
$
1,137

$
1,706

$
(470
)
$
1,236

Patents
476

(215
)
261

493

(199
)
294

Purchased and licensed technology
1,777

(1,223
)
554

1,789

(1,074
)
715

Trademarks
31

(15
)
16

31

(14
)
17

Other 1
189

(72
)
117

207

(88
)
119

 
4,110

(2,025
)
2,085

4,226

(1,845
)
2,381

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

 

 

 

 

 

In-process research and development
77

—

77

29

—

29

Microbial cell factories
306

—

306

306

—

306

Pioneer germplasm
1,062

—

1,062

1,064

—

1,064

Trademarks/tradenames
756

—

756

800

—

800

 
2,201

—

2,201

2,199

—

2,199

Total
$
6,311

$
(2,025
)
$
4,286

$
6,425

$
(1,845
)
$
4,580


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

The aggregate pre-tax amortization expense for definite-lived intangible assets was $117 and $257 for the three and six months ended June 30, 2015, respectively, and $119 and $245 for the three and six months ended June 30, 2014, respectively. The estimated aggregate pre-tax amortization expense for the remainder of 2015 and each of the next five years is approximately $100, $354, $218, $218, $204 and $187, respectively.
                                                                                                            


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

Note 9.  Long-Term Borrowings
In connection with the spin-off, as previously discussed in Note 2, the company received a dividend from Chemours in May 2015 of $3,923 comprised of a cash distribution of $3,416 and a distribution in-kind of $507 of 7% senior unsecured notes due 2025 (Chemours Notes Received). Chemours financed the dividend payment through issuance of approximately $4,000 of debt comprised of $1,500 aggregate principal amount of borrowing under a senior secured term loan facility with variable interest rates and a term of seven years, $1,350 of 6.625% senior unsecured notes due 2023, $750 of 7% senior unsecured notes due 2025 and €360 of 6.125% senior unsecured notes due 2023 (collectively, Chemours' Debt). As of June 30, 2015, Chemours was a wholly-owned, consolidated subsidiary of the company, as a result, the Condensed Consolidated Balance Sheet as of June 30, 2015 includes Chemours' Debt. The transfer of the liabilities associated with Chemours' Debt, as well as all other assets and liabilities transferred to Chemours, will be reflected in the company's financial statements in the third quarter of 2015.

In the second quarter of 2015, DuPont exchanged the Chemours Notes Received for $488 of company debt due in 2016 as follows: $152 of 1.95% notes, $277 of 2.75% notes, and $59 of 5.25% notes. The company paid a premium of $20, recorded in interest expense in the company's interim Consolidated Income Statements, in connection with the early retirement of the $488 of 2016 notes. The debt for debt exchange was considered an extinguishment.

Note 10.  Commitments and Contingent Liabilities 
Guarantees 
Indemnifications
In connection with acquisitions and divestitures as of June 30, 2015, 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 June 30, 2015 and December 31, 2014, the company had directly guaranteed $409 and $513, 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 42 percent of the $229 of guaranteed obligations of customers and suppliers. Set forth below are the company's guaranteed obligations at June 30, 2015:
 
Short-Term
Long-Term
Total
Obligations for customers and suppliers1:
 

 

 

Bank borrowings (terms up to 7 years)
$
155

$
73

$
228

Leases on equipment and facilities (terms up to 3 years)
—

1

1

Obligations for equity affiliates2:
 

 

 

Bank borrowings (terms up to 1 year)
180

—

180

Total
$
335

$
74

$
409


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





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

Imprelis® 
The company has received claims and 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. DuPont also provided a warranty, which expired on May 31, 2015, against new damage, if any, caused by the use of Imprelis® on class members' properties. In the third quarter 2014, the company settled the majority of claims from class members that opted out of the class action settlement. About 30 opt-out actions are pending at June 30, 2015, a decrease of 10 from December 31, 2014.

DuPont recorded income of $35 for insurance recoveries, within other operating charges in the interim Consolidated Income Statements, for the six months ended June 30, 2015. At June 30, 2015, DuPont had an accrual balance of $216 related to these claims and insurance receivables of $15.

Insurance recoveries are recognized when collection of payment is considered probable. The remaining coverage under the insurance program is $300 for costs and expenses. DuPont has submitted requests for payment to its insurance carriers for costs associated with this matter. The timing and outcome remain uncertain.

Litigation
The company is subject to various legal proceedings arising out of the normal course of its business including product liability, intellectual property, commercial, environmental and antitrust lawsuits. It is not possible to predict the outcome of these various proceedings. Although considerable uncertainty exists, management does not anticipate that the ultimate disposition of these matters will have a material adverse effect on the company's results of operations, consolidated financial position or liquidity.  However, the ultimate liabilities could be material 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 June 30, 2015, DuPont has an accrual balance 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.


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

In May 2013, a panel of three independent medical doctors released its initial recommendations for screening and diagnostic testing of eligible class members. 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 and the registration process, as well as eligibility screening, is ongoing. Diagnostic screening and testing has begun and associated payments to service providers are being disbursed from the escrow account.

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.

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 June 30, 2015 and March 31, 2015, there were approximately 3,500 lawsuits pending in various federal and state courts in Ohio and West Virginia. The number of lawsuits pending at June 30, 2015, reflects the filing of about 50 additional cases and plaintiffs' voluntary dismissal of about 40 cases during the second quarter 2015. 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). Based on information currently available to the company the majority of the lawsuits allege personal injury claims associated with high cholesterol and thyroid disease from exposure to PFOA in drinking water.  At June 30, 2015, 37 of the pending lawsuits allege wrongful death. While attorneys for the plaintiffs have indicated that additional lawsuits may be filed, the rate of such filings has substantially decreased. In 2014, six plaintiffs from the MDL were selected for 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 and LHWA moved for partial summary judgment. In the first quarter of 2015, the court granted in part and denied in part both parties’ motions. As a result, the litigation process is continuing with respect to certain of the plaintiffs’ claims and trial has been set for October 2015.

PFOA Summary
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, due to the uniqueness of the individual MDL plaintiff's claims and the company's defenses to those claims both as to potential liability and damages on an individual claims basis, among other factors.

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 2014 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), Resource Conservation and Recovery Act (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.

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

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 June 30, 2015, the Condensed Consolidated Balance Sheet included a liability of $477, 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, the potential liability may range up to $1,100 above the amount accrued as of June 30, 2015.


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

Note 11.  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. During the three and six months ended June 30, 2015, the company purchased and retired 1.0 million and 4.6 million shares, respectively, in the open market, which offset the dilution from employee compensation plans in the first and second quarter of 2015. As of June 30, 2015, the company has purchased 34.7 million shares at a total cost of $2,353 under the plan. There is no required completion date for the remaining stock purchases.

In the first quarter 2015, DuPont announced its intention to buy back shares of about $4,000 using the distribution proceeds received from Chemours. In connection with the completion of the spin-off of Chemours, the Board of Directors authorized the use of the distribution proceeds to buy back shares of the company's common stock as follows: $2,000 to be purchased and retired by December 31, 2015 with the remainder to be purchased and retired by December 31, 2016.

Other Comprehensive Income (Loss)
A summary of the changes in other comprehensive income (loss) for the three and six months ended June 30, 2015 and 2014 is provided as follows:
 
Three Months Ended
Three Months Ended
Affected Line Item in Consolidated Income Statements
 
June 30, 2015
June 30, 2014
 
Pre-Tax
Tax
After-Tax
Pre-Tax
Tax
After-Tax
 
Cumulative translation adjustment(3)
$
197

$
—

$
197

$
(59
)
$
—

$
(59
)
 
Net revaluation and clearance of cash flow hedges to earnings:
 
 
 
 
 
 
 
Additions and revaluations of derivatives designated as cash flow hedges
8

(3
)
5

(12
)
4

(8
)
See (1) below
Clearance of hedge results to earnings:
 
 
 
 
 
 
 
Foreign currency contracts
(2
)
1

(1
)
1

(1
)
—

Net sales
Commodity contracts
7

(3
)
4

12

(4
)
8

Cost of goods sold
Net revaluation and clearance of cash flow hedges to earnings
13

(5
)
8

1

(1
)
—

 
Pension benefit plans:
 
 
 
 
 
 
 
Net (loss) gain
(2
)
1

(1
)
(103
)
33

(70
)
See (1) below
Effect of foreign exchange rates
(62
)
18

(44
)
—

—

—

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

(1
)
—

—

—

See (2) below
Amortization of loss
210

(75
)
135

150

(52
)
98

See (2) below
Curtailment loss
—

—

—

4

(1
)
3

See (2) below
Settlement loss
4

(1
)
3

2

—

2

See (2) below
Pension benefit plans, net
149

(57
)
92

53

(20
)
33

 
Other benefit plans:
 
 
 
 
 
 
 
Reclassifications to net income:
 
 
 
 
 
 
 
Amortization of prior service benefit
(52
)
18

(34
)
(53
)
19

(34
)
See (2) below
Amortization of loss
19

(6
)
13

14

(5
)
9

See (2) below
Other benefit plans, net
(33
)
12

(21
)
(39
)
14

(25
)
 
Other comprehensive income (loss)
$
326

$
(50
)
$
276

$
(44
)
$
(7
)
$
(51
)
 






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

 
Six Months Ended
Six Months Ended
Affected Line Item in Consolidated Income Statements
 
June 30, 2015
June 30, 2014
 
Pre-Tax
Tax
After-Tax
Pre-Tax
Tax
After-Tax
 
Cumulative translation adjustment(3)
$
(992
)
$
—

$
(992
)
$
(131
)
$
—

$
(131
)
 
Net revaluation and clearance of cash flow hedges to earnings:
 
 
 
 
 
 
 
Additions and revaluations of derivatives designated as cash flow hedges
(14
)
3

(11
)
26

(10
)
16

See (1) below
Clearance of hedge results to earnings:
 
 
 
 
 
 
 
Foreign currency contracts
(10
)
4

(6
)
2

(1
)
1

Net sales
Commodity contracts
22

(9
)
13

29

(11
)
18

Cost of goods sold
Net revaluation and clearance of cash flow hedges to earnings
(2
)
(2
)
(4
)
57

(22
)
35

 
Pension benefit plans:
 
 
 
 
 
 
 
Net (loss) gain
(6
)
2

(4
)
(102
)
33

(69
)
See (1) below
Effect of foreign exchange rates
38

(9
)
29

—

—

—

See (1) below
Reclassifications to net income:
 
 
 
 
 
 
 
Amortization of prior service (benefit) cost
(3
)
1

(2
)
1

—

1

See (2) below
Amortization of loss
419

(149
)
270

299

(103
)
196

See (2) below
Curtailment loss
—

—

—

4

(1
)
3

See (2) below
Settlement loss
9

(3
)
6

2

—

2

See (2) below
Pension benefit plans, net
457

(158
)
299

204

(71
)
133

 
Other benefit plans:
 
 
 
 
 
 
 
Reclassifications to net income:
 
 
 
 
 
 
 
Amortization of prior service benefit
(104
)
37

(67
)
(106
)
38

(68
)
See (2) below
Amortization of loss
38

(13
)
25

28

(9
)
19

See (2) below
Other benefit plans, net
(66
)
24

(42
)
(78
)
29

(49
)
 
Other comprehensive (loss) income
$
(603
)
$
(136
)
$
(739
)
$
52

$
(64
)
$
(12
)
 

1 
These amounts represent changes in accumulated other comprehensive loss excluding changes due to reclassifying amounts to the interim Consolidated Income Statements.
2 
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 13 for additional information.
3 
The increase over prior year is driven by the strengthening USD against primarily the Euro and Brazilian real, and changes in certain foreign entity's functional currency as described in Note 1.


18
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
2015
 

 

 

 

 

 

Balance January 1, 2015
$
(1,016
)
$
(6
)
$
(7,949
)
$
262

$
2

$
(8,707
)
Other comprehensive (loss) income before reclassifications
(992
)
(11
)
25

—

—

(978
)
Amounts reclassified from accumulated other comprehensive loss
—

7

274

(42
)
—

239

Balance June 30, 2015
$
(2,008
)
$
(10
)
$
(7,650
)
$
220

$
2

$
(9,446
)

 
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
(131
)
16

(69
)
—

—

(184
)
Amounts reclassified from accumulated other comprehensive loss
—

19

202

(49
)
—

172

Balance June 30, 2014
$
(271
)
$
(13
)
$
(5,616
)
$
445

$
2

$
(5,453
)

Note 12. 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 2014 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 $13,217 and $11,394 as of June 30, 2015 and December 31, 2014, 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 2014 Annual Report in Note 1, “Summary of Significant Accounting Policies.”  Level 1 measurements are based on observable net asset values and level 2 measurements are based on current interest rates for similar investments with comparable credit risk and time to maturity.  The company held $334 and $1,436 of money market funds (level 1 measurements) as of June 30, 2015 and December 31, 2014, respectively.  The company held $2,214 and $3,293 of other cash equivalents (level 2 measurements) as of June 30, 2015 and December 31, 2014, 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.


19
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:
 
June 30, 2015
December 31, 2014
Derivatives designated as hedging instruments:
 
 
Interest rate swaps
$
—

$
1,000

Foreign currency contracts
14

434

Commodity contracts
126

388

Derivatives not designated as hedging instruments:
 
 
Foreign currency contracts
9,015

10,586

Commodity contracts
17

166


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 and option 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.

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.

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. In addition, the company occasionally uses forward exchange contracts to offset a portion of the company's exposure to certain foreign currency-denominated transactions such as capital expenditures.

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 is not probable of occurring. The following table summarizes the after-tax effect of cash flow hedges on accumulated other comprehensive loss for the three and six months ended June 30, 2015 and 2014:

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

 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2015
2014
2015
2014
Beginning balance
$
(18
)
$
(13
)
$
(6
)
$
(48
)
Additions and revaluations of derivatives designated as cash flow hedges
5

(8
)
(11
)
16

Clearance of hedge results to earnings
3

8

7

19

Ending balance
$
(10
)
$
(13
)
$
(10
)
$
(13
)

At June 30, 2015, an after-tax net loss of $3 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 and options 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. 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.

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.


21
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 2014 Annual Report in Note 1, “Summary of Significant Accounting Policies.”
 
 
Fair Value Using Level 2 Inputs
 
Balance Sheet Location
June 30, 2015
December 31, 2014
Asset derivatives:
 
 
 
Derivatives designated as hedging instruments:
 
 
 
Interest rate swaps1
Accounts and notes receivable, net
$
—

$
1

Foreign currency contracts
Accounts and notes receivable, net
—

10

 
 
—

11

Derivatives not designated as hedging instruments:
 
 

 
Foreign currency contracts2
Accounts and notes receivable, net
61

254

 
 




Total asset derivatives3
 
$
61

$
265

Cash collateral1,2
Other accrued liabilities
$
4

$
47

 
 
 
 
Liability derivatives:
 
 

 
Derivatives designated as hedging instruments:
 
 

 
Foreign currency contracts
Other accrued liabilities
$
1

$
10

 
 
 
 
Derivatives not designated as hedging instruments:
 
 

 
Foreign currency contracts
Other accrued liabilities
54

62

Commodity contracts
Other accrued liabilities
1

1

 
 
55

63

Total liability derivatives3
 
$
56

$
73


1 
Cash collateral held as of June 30, 2015 and December 31, 2014 represents $0 and $6, respectively, related to interest rate swap derivatives designated as hedging instruments.
2 
Cash collateral held as of June 30, 2015 and December 31, 2014 represents $4 and $41, 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 $36 at June 30, 2015 and $67 at December 31, 2014.




22
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 June 30,
2015
2014
2015
2014
Income Statement Classification
Derivatives designated as hedging instruments:
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
Interest rate swaps
$
—

$
—

$
—

$
(6
)
Interest expense
Cash flow hedges:
 
 
 
 
 
Foreign currency contracts
1

—

2

(1
)
Net sales
Commodity contracts
7

(12
)
(7
)
(12
)
Cost of goods sold
 
8

(12
)
(5
)
(19
)
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
Foreign currency contracts
—

—

(7
)
(70
)
Other income, net3
Foreign currency contracts
—

—

(3
)
—

Net sales
Commodity contracts
—

—

3

(1
)
Cost of goods sold
 
—

—

(7
)
(71
)
 
Total derivatives
$
8

$
(12
)
$
(12
)
$
(90
)
 

 
Amount of Gain (Loss)
Recognized in OCI1
(Effective Portion)
Amount of Gain (Loss)
Recognized in Income2
 
Six Months Ended June 30,
2015
2014
2015
2014
Income Statement Classification
Derivatives designated as hedging instruments:
 
 
 
 
 
Fair value hedges:
 
 
 
 
 
Interest rate swaps
$
—

$
—

$
(1
)
$
(13
)
Interest expense
Cash flow hedges:
 
 
 
 
 
Foreign currency contracts
(1
)
(1
)
10

(2
)
Net sales
Commodity contracts
(13
)
27

(22
)
(29
)
Cost of goods sold
 
(14
)
26

(13
)
(44
)
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
Foreign currency contracts
—

—

261

(116
)
Other income, net3
Foreign currency contracts
—

—

(3
)
—

Net sales
Commodity contracts
—

—

5

(25
)
Cost of goods sold
 
—

—

263

(141
)
 
Total derivatives
$
(14
)
$
26

$
250

$
(185
)
 


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 three and six months ended June 30, 2015 and 2014, there was no material ineffectiveness with regard to the company's cash flow hedges.
3  
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 $33 and $(39) for the three months ended June 30, 2015 and 2014, respectively, and $(171) and $(89) for the six months ended June 30, 2015 and 2014, respectively. See Note 4 for additional information.


23
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

Note 13. Long-Term Employee Benefits 
Pension Plans
In determining the U.S. pension plan 2015 net periodic benefit costs, the company updated the expected return on plan assets assumption from 8.75 percent to 8.50 percent.

The following sets forth the components of the company’s net periodic benefit cost for pensions:  
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2015
2014
2015
2014
Service cost
$
63

$
60

$
129

$
120

Interest cost
272

293

545

585

Expected return on plan assets
(401
)
(404
)
(805
)
(806
)
Amortization of loss
210

150

419

299

Amortization of prior service (benefit) cost
(1
)
—

(3
)
1

Curtailment loss
—

4

—

4

Settlement loss
4

2

9

2

Net periodic benefit cost
$
147

$
105

$
294

$
205


Other Long-Term Employee Benefit Plans
The following sets forth the components of the company’s net periodic benefit cost for other long-term employee benefits:  
 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
 
2015
2014
2015
2014
Service cost
$
5

$
5

$
9

$
9

Interest cost
27

30

55

61

Amortization of loss
19

14

38

28

Amortization of prior service benefit
(52
)
(53
)
(104
)
(106
)
Net periodic benefit cost
$
(1
)
$
(4
)
$
(2
)
$
(8
)

24
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share)

Note 14.  Segment Information 
Segment sales include transfers to another business segment. Segment pre-tax operating income (loss) (PTOI) is defined as income (loss) before income taxes excluding non-operating pension and other postretirement employee benefit costs, exchange gains (losses), corporate expenses and interest.
Three Months
Ended June 30,
Agriculture1
Electronics &
Communications
Industrial Biosciences
Nutrition & Health
Performance
Chemicals
Performance
Materials
Safety &
Protection
Other
Total
2015
 

 
 

 
 
 
 
 
 

 
 

 
 

 
 

 
 

Segment sales
$
3,218

 
$
534

 
$
288

 
$
826

 
$
1,502

 
$
1,365

 
$
925

 
$
2

 
$
8,660

Less: Transfers
—

 
6

 
3

 
—

 
28

 
27

 
1

 
—

 
65

Net sales
3,218

 
528

 
285

 
826

 
1,474

 
1,338

 
924

 
2

 
8,595

PTOI
774

2 
104

2 
49

2 
99

2 
54

2,3 
309

2 
308

2,7 
(60
)
2 
1,637

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 

 
 

 
 
 
 
 
 

 
 

 
 

 
 

 
 

Segment sales
$
3,615

 
$
617

 
$
317

 
$
926

 
$
1,696

 
$
1,582

 
$
1,029

 
$
1

 
$
9,783

Less: Transfers
5

 
4

 
4

 
—

 
48

 
15

 
1

 
—

 
77

Net sales
3,610

 
613

 
313

 
926

 
1,648

 
1,567

 
1,028

 
1

 
9,706

PTOI
789

4 
21

4 
57

4 
97

4 
232

4 
665

4,5 
178

4 
(84
)
4 
1,955


Six Months
Ended June 30,
Agriculture1
Electronics &
Communications
Industrial Biosciences
Nutrition & Health
Performance
Chemicals
Performance
Materials
Safety &
Protection
Other
Total
2015
 

 
 

 
 
 
 
 
 

 
 

 
 

 
 

 
 

Segment sales
$
7,155

 
$
1,055

 
$
573

 
$
1,639

 
$
2,866

 
$
2,776

 
$
1,834

 
$
3

 
$
17,901

Less: Transfers
—

 
10

 
8

 
—

 
57

 
57

 
2

 
—

 
134