SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D. C. 20549
FORM
10-K
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended June 30, 2007
OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
transition period from________ to _________
Commission
file number 1-44
ARCHER-DANIELS-MIDLAND
COMPANY
(Exact
name of registrant as specified in its charter)
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Delaware
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41-0129150
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(State
or other jurisdiction of
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(I.
R. S. Employer
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incorporation
or organization)
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Identification
No.)
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4666
Faries Parkway Box 1470 Decatur,
Illinois
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62525
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(Address
of principal executive offices)
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(Zip
Code)
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217-424-5200
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(Registrant's
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the
Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, no par value
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New
York Stock Exchange
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Chicago
Stock Exchange
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Swiss
Stock Exchange
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Frankfurt
Stock Exchange
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Securities
registered pursuant to Section 12(g) of the
Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes x No
o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
Yes
o No
x
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer” and “large accelerated filer” in Rule 12B-2 of the Exchange
Act.
Large
Accelerated Filer x Accelerated
Filer o Non-accelerated
Filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No
x
State
the
aggregate market value of the voting stock held by non-affiliates of the
registrant.
Common
Stock, no par value--$20.3 billion
(Based
on
the closing sale price of Common Stock as reported on the New York Stock
Exchange
as
of
December 31, 2006)
Indicate
the number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date.
Common
Stock, no par value—643,585,128 shares
(July
31,
2007)
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the proxy statement for the annual meeting of stockholders to be held
November 8, 2007, are incorporated by reference into Part III.
SAFE
HARBOR STATEMENT
This
Form
10-K contains forward-looking information that is subject to certain risks
and
uncertainties that could cause actual results to differ materially from those
projected, expressed, or implied by such forward-looking
information. In some cases, you can identify forward-looking
statements by our use of words such as “may, will, should, anticipates,
believes, expects, plans, future, intends, could, estimate, predict, potential
or contingent,” the negative of these terms or other similar
expressions. The Company’s actual results could differ materially
from those discussed or implied herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this Form 10-K for the fiscal year ended June 30, 2007. Among
these risks are legislative acts; changes in the prices of food, feed, and
other
commodities, including gasoline; and macroeconomic conditions in various
parts
of the world. To the extent permitted under applicable law, the
Company assumes no obligation to update any forward-looking statements as
a
result of new information or future events.
Table
of Contents
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Item
No.
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Description
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Page
No.
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Part
I
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1.
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Business
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4
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1A.
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Risk
Factors
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10
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1B.
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Unresolved
Staff Comments
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12
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2.
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Properties
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13
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3.
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Legal
Proceedings
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15
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4.
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Submission
of Matters to a Vote of Security Holders
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15
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Part
II
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5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities
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16
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6.
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Selected
Financial Data
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19
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7.
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Management’s
Discussion and Analysis of Financial Condition and Results
of Operations
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20
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7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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35
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8.
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Financial
Statements and Supplementary Data
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38
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9.
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Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure
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75
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9A.
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Controls
and Procedures
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75
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9B.
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Other
Information
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75
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Part
III
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10.
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Directors,
Executive Officers and Corporate Governance
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76
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11.
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Executive
Compensation
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79
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12.
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Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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80
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13.
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Certain
Relationships and Related Transactions, and Director
Independence
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80
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14.
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Principal
Accountant Fees and Services
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80
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Part
IV
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15.
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Exhibits
and Financial Statement Schedules
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80
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Signatures
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84
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PART
I
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Item
1.
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BUSINESS
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Company
Overview
Archer
Daniels Midland Company (the Company) was incorporated in Delaware in 1923,
successor to the Daniels Linseed Co. founded in 1902. The Company is
a world leader in BioEnergy and has a premier position in the agricultural
processing value chain. The Company is one of the world’s largest
processors of oilseeds, corn, wheat, and cocoa and is a leading manufacturer
of
biodiesel, ethanol, soybean oil and meal, corn sweeteners, flour, and other
value-added food and feed ingredients. The Company also has an
extensive grain elevator and transportation network to buy, store, clean,
and
transport agricultural commodities, such as oilseeds, corn, wheat, milo,
oats,
and barley.
During
the
last five years, the Company has experienced significant growth, spending
approximately $4.8 billion for construction of new plants, expansions of
existing plants, and the acquisitions of plants and transportation
equipment. The Company is constructing two dry corn milling plants
which will increase the Company’s annual ethanol production capacity by 550
million gallons to 1.7 billion gallons. In addition, the Company has
recently completed construction of, or is currently constructing, a polyhydroxy
alkanoate (PHA) natural plastics production facility, a propylene/ethylene
glycol production facility, United States and foreign cocoa processing
facilities, and United States and foreign biodiesel production
facilities. Construction of these plants is expected to be completed
during the next two fiscal years. The Company expects to spend
approximately $3.0 billion to construct these facilities and other approved
capital projects over the next four years. There have been no
significant dispositions during the last five years.
Segment
Descriptions
The
Company’s operations are classified into three reportable business segments:
Oilseeds Processing, Corn Processing, and Agricultural Services. Each
of these segments is organized based upon the nature of products and services
offered. The Company’s remaining operations are aggregated and
classified as Other. Financial information with respect to the
Company’s reportable business segments is set forth in “Note 14 of Notes to
Consolidated Financial Statements” included in Item 8 herein, “Financial
Statements and Supplementary Data.”
Oilseeds
Processing
The
Company is engaged in processing oilseeds such as soybeans, cottonseed,
sunflower seeds, canola, peanuts, and flaxseed into vegetable oils and meals
principally for the food and feed industries. Crude vegetable oil is
sold “as is” or is further processed by refining, bleaching, and deodorizing
into salad oils. Salad oils can be further processed by hydrogenating
and/or interesterifying into margarine, shortening, and other food
products. Partially refined oil is sold for use in chemicals, paints
and other industrial products. Refined oil can be further processed
for use in the production of biodiesel. Oilseed meals are primary
ingredients used in the manufacture of commercial livestock and poultry
feeds. Cottonseed flour is produced and sold primarily to the
pharmaceutical industry. Cotton cellulose pulp is manufactured and
sold to the chemical, paper, and filter markets.
Golden
Peanut Company LLC, a joint venture between the Company and Alimenta (U.S.A.),
Inc., is a major supplier of peanuts to both the domestic and export
markets. The Company has a 50% ownership interest in this joint
venture.
The
Company has an ownership interest in Wilmar International Limited, a Singapore
publicly listed company. Wilmar International Limited is the largest
agricultural processing business in Asia and operates palm plantations; soybean,
rapeseed, cottonseed, sunflower seed, peanut, palm kernel, and sesame seed
crushing facilities and related vegetable oil refineries and packaging
facilities; an oleochemical plant that produces fatty acids, glycerin, and
soap
noodles; a soy protein plant; wheat flour mills; rice mills; feed mills;
fertilizer operations; and related silos and storage
facilities.
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Item
1.
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BUSINESS
(Continued)
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Corn
Processing
The
Company is engaged in wet milling and dry milling corn
operations. Products produced for use in the food and beverage
industry include syrup, starch, glucose, dextrose, and
sweeteners. Dextrose is also produced for use by the Company as a
feedstock for its bioproducts operations. Corn gluten feed and meal
as well as distillers grains are produced for use as feed
ingredients. Corn germ, a by-product of the wet milling process, is
further processed as an oilseed into vegetable oil and meal.
By
fermentation of dextrose, the Company produces alcohol, amino acids, and
other
specialty food and feed ingredients. Ethyl alcohol is produced to
beverage grade or for industrial use as ethanol. In gasoline, ethanol
increases octane and is used as an extender and oxygenate. Amino
acids, such as lysine and threonine, are vital compounds used in swine feeds
to
produce leaner animals and in poultry feeds to enhance the speed and efficiency
of poultry production. The Company also produces, by fermentation,
astaxanthin, a product used in aquaculture to enhance flesh
coloration. The Company produces citric and lactic acids, lactates,
sorbitol and xanthan gum which are used in various food and industrial
products.
Almidones
Mexicanos S.A., of which the Company has a 50% interest, operates a wet corn
milling plant in Mexico.
Eaststarch
C.V. (Netherlands), of which the Company has a 50% interest, owns interests
in
companies that operate wet corn milling plants in Bulgaria, Hungary, Romania,
Slovakia, and Turkey.
Agricultural
Services
The
Agricultural Services segment utilizes the Company’s extensive grain elevator
and transportation network to buy, store, clean, and transport agricultural
commodities, such as oilseeds, corn, wheat, milo, oats, and barley, and resells
these commodities primarily as feed ingredients and as raw materials for
the
agricultural processing industry. Agricultural Services’ grain
sourcing and transportation network provides reliable and efficient services
to
the Company’s agricultural processing operations.
A.C.
Toepfer International (Toepfer), in which the Company has an 80% interest,
is a
global merchandiser of agricultural commodities and processed
products. Toepfer has 38 sales offices worldwide and operates export,
river, and country elevators in Argentina, Romania, and the
Ukraine.
The
Company has a 45% interest in Kalama Export Company, a grain export elevator
in
Washington.
Other
The
Company is engaged in milling wheat, corn, and milo into flour. Wheat
flour is sold primarily to commercial bakeries, food companies, food service
companies, and retailers. Bulgur, a gelatinized wheat food, is sold
to both the export and the domestic food markets. Corn meal and flour
is sold primarily to the cereal, snack, and bakery mix markets. The
Company produces bakery products and mixes which are sold to the baking
industry. The Company also mills milo to produce industrial flour
used in the manufacturing of wallboard for the building industry.
The
Company processes cocoa beans and produces cocoa liquor, cocoa butter, cocoa
powder, chocolate, and various compounds for the food processing
industry.
The
Company produces wheat starch and gluten for the baking
industry. Lecithin, an emulsifier produced in the vegetable oil
refining process, is marketed as a food and feed ingredient.
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Item
1.
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BUSINESS
(Continued)
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The
Company produces a wide range of edible soy protein products including soy
flour, soy grits, soy protein concentrates and soy isolates that are used
in
processed meats, baked foods, nutritional products, snacks, and dairy and
meat
analogs. The Company further processes these ingredients into dry and
frozen meat analogs that it markets to foodservice operators, retail and
private
label brand marketers, and direct-to-retail stores.
The
Company produces natural source vitamin E, tocopherol antioxidants and
phytosterols from co-products of oilseeds which are marketed to the dietary
supplement and food industry. The Company produces soy isoflavones, a
dietary supplement, from a co-product of edible soy processing. The
Company processes and distributes edible beans for use as a food
ingredient. The Company produces and distributes formula feeds and
animal health and nutrition products to the livestock, dairy, poultry, and
pet
food industries.
Gruma
S.A.
de C.V. and affiliates (Gruma), of which the Company has a 27% interest,
is the
world’s largest producer and marketer of corn flour and tortillas with
operations in the United States, Mexico, Central America, South America,
and
Europe. Additionally, the Company has a 20% interest in a joint
venture which consists of the combined United States corn flour operations
of
the Company and Gruma. The Company also has a 40% share, through a
joint venture with Gruma, in nine Mexican-based wheat flour mills.
International
Malting Company, a wholly owned subsidiary of the Company, operates malting
barley plants in the United States, Australia, New Zealand, and
Canada.
Hickory
Point Bank and Trust Company, fsb, a wholly owned subsidiary of the Company,
furnishes public banking and trust services, as well as cash management,
transfer agency, and securities safekeeping services, for the
Company.
ADM
Investor Services, Inc., a wholly owned subsidiary of the Company, is a
registered futures commission merchant and a clearing member of all principal
commodities exchanges. ADM Investor Services International, Ltd.
specializes in futures, options and foreign exchange in the European
marketplace. ADM Derivatives, Inc. offers foreign exchange services
to institutional and retail clients.
Agrinational
Insurance Company, a wholly owned subsidiary of the Company, provides insurance
coverage for certain property, casualty, marine, and other miscellaneous
risks
of the Company and participates in certain third-party reinsurance
arrangements.
The
Company has a 50% interest in Telles, LLC (Telles), a joint venture formed
between the Company and Metabolix to market and sell PHA produced in a facility
being constructed by the Company which is expected to be completed during
fiscal
2009. This facility will produce PHA to be sold to Telles for
marketing, sale, and distribution to the end consumer.
The
Company is a limited partner in various private equity funds which invest
primarily in emerging markets.
Methods
of Distribution
Since
the
Company’s customers are principally other manufacturers and processors, the
Company’s products are distributed mainly in bulk from processing plants or
storage facilities directly to the customers’ facilities. The Company
has developed a comprehensive transportation system utilizing trucks, railcars,
river barges, and ocean-going vessels to efficiently move both commodities
and
processed products virtually anywhere in the world. The Company owns
or leases large numbers of the trucks, trailers, railroad tank and hopper
cars,
river barges, and towboats used in this transportation system.
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Item
1.
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BUSINESS
(Continued)
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Status
of New Products
The
Company continues to expand its business in line with the Company’s strategy to
be a world leader in BioEnergy whilst maintaining its premier position in
the
agricultural processing value chain through the development of new
products.
The
Company’s researchers have developed a number of custom low trans fats and oils
for bakery and quick-service restaurants that utilize the Company’s Novalipid
portfolio of low trans fats and oils. These products meet the growing
needs of food service customers driven by legislated municipal bans on the
use
of fats and oils that contain trans fats.
Our
Aspire
business model continues to be developed to leverage the Company’s finished food
product development capabilities. Under this program, ADM works with
customers to supply finished food products such as nutrition bars, beverages
and
other items in a final packaged form ready for retail
distribution. The development of the prototypes is done by research
and development staff and the manufacturing is accomplished through a network
of
co-manufacturers. This program helps customers introduce more new
trait-enhanced products more quickly than they would otherwise be able to
accomplish.
The
Company’s cooked, dried edible bean products are finding a number of new
applications due to the increased interest among our customers in improving
nutrition, especially in the area of foods targeted for
children. These edible bean powders are being used in a wide range of
convenient foods.
The
Company’s alliance with Metabolix is proceeding on
schedule. Semi-works production of PHA, a biodegradable plastic, is
underway for market development, and construction of the Company’s 50,000 ton
per year commercial manufacturing facility is on schedule for startup in
December 2008.
The
Company is proceeding with construction of a commercial propylene glycol
(PG)
facility in Decatur, Illinois. Value-added derivatives of PG are
being pursued by research and development staff.
Source
and Availability of Raw Materials
Substantially
all of the Company’s raw materials are agricultural commodities. In
any single year, the availability and price of these commodities are subject
to
unpredictable factors such as weather, plantings, government (domestic and
foreign) farm programs and policies, changes in global demand created by
population growth and changes in standards of living, and global production
of
similar and competitive crops. The substantial majority of the
Company’s raw materials are procured from thousands of grain elevators and
wholesale merchants, principally in North America, South America, and Europe,
pursuant to short-term agreements (less than one year) or on a spot
basis. The Company does not grow crops and a relatively small
proportion of the Company’s raw materials are purchased directly from
growers. The Company is not dependent upon any particular grower,
elevator, or merchant or group of growers, elevators, or merchants as a source
for its raw materials.
Patents,
Trademarks, and Licenses
The
Company owns several valuable patents, trademarks, and licenses but does
not
consider any segment of its business dependent upon any single or group of
patents, trademarks or licenses.
|
Item
1.
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BUSINESS
(Continued)
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Seasonality,
Working Capital Needs, and Significant Customers
Since
the
Company is so widely diversified in global agribusiness markets, there are
no
material seasonal fluctuations in the manufacture, sale, and distribution
of its
products and services. There is a degree of seasonality in the
growing season and procurement of the Company’s principal raw materials:
oilseeds, corn, wheat, cocoa beans, and other grains. However, the
actual physical movement of the millions of bushels of these crops through
the
Company’s storage and processing facilities is reasonably constant throughout
the year.
Price
variations and availability of raw agricultural commodities may cause
fluctuations in the Company’s receivables, inventories, and short-term
borrowings. No material part of the Company’s business in any segment
is dependent upon a single customer or very few customers.
Competition
The
Company has significant competition in the markets in which it operates based
principally on price, quality, products and alternative products, some of
which
are made from different raw materials than those utilized by the
Company. Given the commodity-based nature of many of its businesses,
the Company, on an ongoing basis, focuses on managing unit
costs and improving efficiency through technology improvements, productivity
enhancements, and regular evaluation of the Company’s asset
portfolio.
Research
and Development Expenditures
The
Company’s research and development expenditures are focused on developing
BioEnergy, food, feed, and industrial products from renewable, agricultural
crops. The Company uses technical services representatives to
interact with customers to understand the customers’ product
needs. These technical service representatives then interact with
researchers who are familiar with the Company’s wide range of food, feed, fuel,
and industrial products as well as applications technology. These
individuals form quick-acting teams to develop solutions to customer
needs.
The
Company is completing the two projects currently funded by the United States
Department of Energy. The projects studied ways of converting corn
fiber into either biofuels or animal feed. The results are being used
to evaluate the commercial feasibility.
The
Company was recently awarded additional funding from the Department of
Energy to develop yeasts capable of fermenting 5-carbon sugars, which is
a key
technology for producing ethanol from lignocellulosic biomass. The
Company is partnered with Purdue University on this project.
The
Company’s biodiesel research is focused on cost, product quality, and alternate
feed stocks. Several new technologies have been developed to minimize
the chemical input costs for biodiesel production while simultaneously reducing
waste streams and improving yield.
A
joint
research project with Argonne National Laboratory is focused on the development
of a separative bioreactor which utilizes the principles of
electrodeionization. The new approach allows the production of
chemicals from biomass feedstocks without the usual production of salt
byproducts. This technology is being tested at pilot scale to
quantify cost and performance.
The
Company has also acquired a semi-works/toll-processing facility in Decatur,
Illinois to be able to produce small scale commercial quantities of new
bio-based industrial chemicals.
|
Item
1.
|
BUSINESS
(Continued)
|
The
Company maintains a research laboratory in Decatur, Illinois, where product
and
process development activities are conducted. To develop new
bioproducts and to improve existing bioproducts, new cultures are developed
using classical mutation and genetic engineering. Protein and
vegetable oil research is conducted at facilities in Decatur where bakery,
meat
and dairy pilot plants support application research. Vegetable oil
research is also conducted in Hamburg, Germany; Erith, UK; and Arras,
France. Research to support sales and development for bakery products
is done at a laboratory in Olathe, Kansas. Research to support sales
and development for cocoa and chocolate products is done in Milwaukee,
Wisconsin, and the Netherlands. Research and technical support for industrial
and food wheat starch applications is conducted in a Montreal, Canada research
center. The Company conducts research for corn starches in paper and
textile industries as well as fuel ethanol research in Clinton,
Iowa. The Company maintains research centers in Quincy, Illinois, and
Decatur, Indiana, that conduct swine and cattle feeding trials to test new
formula feed products and to develop improved feeding efficiencies.
The
amounts spent during the three years ended June 30, 2007, 2006 and 2005 for
such
technical efforts were approximately $45 million, $45 million, and $40 million,
respectively.
Environmental
Compliance
During
the
year ended June 30, 2007, $106 million was spent for equipment, facilities,
and
programs for pollution control and compliance with the requirements of various
environmental agencies.
There
have
been no material effects upon the earnings and competitive position of the
Company resulting from compliance with federal, state, and local laws or
regulations enacted or adopted relating to the protection of the
environment.
Number
of Employees
The
number
of persons employed by the Company was approximately 27,300 at June 30,
2007.
Financial
Information About Foreign and Domestic Operations
Item
1A,
“Risk Factors,” and Item 2, “Properties,” includes information relating to the
Company’s foreign operations. Geographic financial information is set
forth in “Note 14 of Notes to Consolidated Financial Statements” included in
Item 8 herein, “Financial Statements and Supplementary Data”.
Available
Information
The
Company’s Internet address is http://www.admworld.com. The Company
makes available, free of charge, through its Internet site, the Company’s annual
reports on Form 10-K; quarterly reports on Form 10-Q; current reports on
Form
8-K; Directors and Officers Forms 3, 4, and 5; and amendments to those reports,
as soon as reasonably practicable after electronically filing such materials
with, or furnishing them to, the Securities and Exchange Commission
(SEC).
In
addition, the Company makes available, through its Internet site, the Company’s
Business Code of Conduct and Ethics, Corporate Governance Guidelines, and
the
written charters of the Audit, Compensation/Succession, Nominating/Corporate
Governance, and Executive Committees.
|
Item
1.
|
BUSINESS
(Continued)
|
The
public
may read and copy any materials filed by the Company with the SEC at the
SEC’s
Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site which contains reports, proxy and information
statements, and other information regarding issuers that file information
electronically with the SEC. The SEC’s Internet address is
http://www.sec.gov.
|
Item
1A.
|
RISK
FACTORS
|
The
availability and price of the agricultural commodities and agricultural
commodity products the Company produces and merchandises can be affected
by
weather, disease, government programs, and various other factors beyond the
Company’s control and could adversely affect the Company’s operating
results.
The
availability and price of agricultural commodities are subject to wide
fluctuations due to unpredictable factors such as weather, plantings, government
(domestic and foreign) farm programs and policies, changes in global demand
resulting from population growth and changes in standards of living, and
global
production of similar and competitive crops. These factors have
historically caused volatility in the agricultural commodities industry and,
consequently, in the Company’s operating results. Reduced supply of
agricultural commodities due to weather-related factors or other reasons
could
adversely affect the Company’s profitability by increasing the cost of raw
materials used in the Company’s agricultural processing
operations. Reduced supplies of agricultural commodities could also
limit the Company’s ability to procure, transport, store, process, and
merchandise agricultural commodities in an efficient manner which could
adversely affect the Company’s profitability. In addition, the
availability and price of agricultural commodities can be affected by other
factors, such as plant disease, which can result in crop failures and reduced
harvests.
Also,
with
respect to prices, to the extent production capacity is added within the
agricultural processing industry, the disruption to the balance of supply
and
demand may result in downward pressure on the relevant product prices, thereby
adversely affecting revenues and operating results.
Fluctuations
in energy prices could adversely affect the Company’s operating
results.
The
Company’s operating costs and selling prices of certain finished products are
sensitive to changes in energy prices. The Company’s processing
plants are powered principally by electricity, natural gas, and
coal. The Company’s transportation operations are dependent upon
diesel fuel and other petroleum products. Significant increases in
the cost of these items could adversely affect the Company’s production costs
and operating results.
The
Company has certain finished products, such as ethanol and biodiesel, which
are
closely related to, or may be substituted for, petroleum
products. Therefore, the selling prices of ethanol and biodiesel
relate to the selling prices of unleaded gasoline and diesel fuel. A
significant decrease in the price of unleaded gasoline or diesel fuel could
result in a significant decrease in the selling price of the Company’s ethanol
and biodiesel and could adversely affect the Company’s revenues and operating
results.
The
Company is subject to economic downturns, political instability and other
risks
of doing business globally which could adversely affect the Company’s operating
results.
The
Company conducts its business and has substantial assets located in many
countries and geographic areas. The Company’s operations are principally in
developed countries in the United States, Europe, and South America but the
Company also operates in, or plans to expand or develop its business in,
emerging market areas such as Asia. Both developed and emerging market areas
are
subject to economic downturns and emerging market areas could be subject
to more
volatile economic, political and market conditions. Such economic downturns
and
volatile conditions may have a negative impact on the Company’s ability to
execute its business strategies and on its operating results.
|
Item
1A.
|
RISK
FACTORS (Continued)
|
The
Company’s operating results could be affected by changes in trade, monetary and
fiscal policies, laws and regulations, and other activities of United States
and foreign, agencies, and similar organizations. These
conditions include but are not limited to changes in a country’s or region’s
economic or political conditions, trade regulations affecting production,
pricing and marketing of products, local labor conditions and regulations,
reduced protection of intellectual property rights, changes in the regulatory
or
legal environment, restrictions on currency exchange activities, currency
exchange fluctuations, burdensome taxes and tariffs, and other trade
barriers. International risks and uncertainties, including changing
social and economic conditions as well as terrorism, political hostilities,
and
war, could limit the Company’s ability to transact business in these markets and
could adversely affect the Company’s revenues and operating results.
Government
policies and regulations, in general, and specifically affecting the
agricultural sector and related industries, could adversely affect the
Company’s operating results.
Agricultural
production and trade flows are subject to government policies and regulations.
Governmental policies affecting the agricultural industry, such as taxes,
tariffs, duties, subsidies, and import and export restrictions on agricultural
commodities and commodity products, can influence the planting of certain
crops,
the location and size of crop production, whether unprocessed or processed
commodity products are traded, the volume and types of imports and exports,
the
availability and competitiveness of feedstocks as raw materials, and industry
profitability. In addition, international trade disputes can adversely
affect agricultural commodity trade flows by limiting or disrupting trade
between countries or regions. Future government policies may adversely affect
the supply of, demand for, and prices of the Company’s products, restrict the
Company’s ability to do business in its existing and target markets, and could
negatively impact revenues and operating results.
The
Company is subject to food industry risks which include, but are not limited
to,
food spoilage or food contamination, shifting consumer preferences, federal,
state, and local food processing regulations, and customer product liability
claims. The liability which could result from these risks may not
always be covered or could exceed liability insurance related to product
liability and food safety matters maintained by the Company. The
occurrence of any of the matters described above could adversely affect the
Company’s revenues and operating results.
Certain
of
the Company’s merchandised commodities and finished products are used as
ingredients in livestock and poultry feed. The Company is subject to
risks associated with the outbreak of disease in livestock and poultry,
including, but not limited to, mad-cow disease and avian
influenza. The outbreak of disease could adversely affect demand for
the Company’s products used as ingredients in livestock and poultry
feed. A decrease in demand for these products could adversely affect
the Company’s revenues and operating results.
|
Item
1A.
|
RISK
FACTORS (Continued)
|
The
Company is subject to numerous laws and regulations globally which could
adversely affect the Company’s operating results.
The
Company is required to comply with the numerous and broad reaching laws and
regulations administered by United States federal, state, local, and foreign
governmental agencies relating to, but not limited to, the sourcing,
transporting, storing, and processing of agricultural raw materials as well
as
the transporting, storing and distributing of related agricultural products
including commercial activities conducted by Company employees and third
parties globally. Any failure to comply with applicable laws and
regulations could subject the Company to administrative penalties and injunctive
relief, civil remedies, including fines, injunctions, and recalls of its
products.
The
production of the Company’s products requires the use of materials which can
create emissions of certain regulated substances. Although the
Company has programs in place throughout the organization globally to guard
against non-compliance, failure to comply with these regulations can have
serious consequences, including civil and administrative penalties as well
as a
negative impact on the Company’s reputation.
In
addition, changes to regulations may require the Company to modify existing
processing facilities and/or processes which could significantly increase
operating costs and negatively impact operating results.
The
Company is exposed to potential business disruption, including but not limited
to transportation services, and other serious adverse impacts resulting from
acts of terrorism or war, natural disasters and severe weather conditions,
and
accidents which could adversely affect the Company’s operating
results.
The
assets
and operations of the Company are subject to damage and disruption from various
events which include, but are not limited to, acts of terrorism or war, natural
disasters and severe weather conditions, accidents, explosions, and
fires.
The
potential effects of the conditions cited above include, but are not limited
to,
extensive property damage, extended business interruption, personal injuries,
and damage to the environment. The Company’s operations also rely on
dependable and efficient transportation services. A disruption in
transportation services could result in supply problems at the Company’s
processing plants and impair the Company’s ability to deliver processed products
to its customers in a timely manner.
|
Item
1B.
|
UNRESOLVED
STAFF COMMENTS
|
The
Company has no unresolved staff comments.
|
Item
2.
|
PROPERTIES
|
|
The
Company owns or leases the following processing plants and procurement
facilities:
|
|
Processing
Plants
|
Procurement
Facilities
|
||||||
|
United
|
Foreign
|
Total
|
United
|
Foreign
|
Total
|
||
|
States
|
States
|
||||||
|
Owned
|
137
|
98
|
235
|
173
|
104
|
277
|
|
|
Leased
|
4
|
1
|
5
|
9
|
30
|
39
|
|
|
141
|
99
|
240
|
182
|
134
|
316
|
||
|
The
Company’s operations are such that most products are efficiently processed
near the source of raw materials. Consequently, the Company has
many plants strategically located in grain producing areas. The
annual volume of commodities processed will vary depending upon
availability of raw materials and demand for finished
products.
|
|
Oilseeds
Processing
|
|
Processing
Plants
|
Procurement
Facilities
|
||||||
|
United
States
|
Foreign
|
Total
|
United
States
|
Foreign
|
Total
|
||
|
Owned
|
44
|
48
|
92
|
15
|
79
|
94
|
|
|
Leased
|
–
|
–
|
–
|
–
|
20
|
20
|
|
|
44
|
48
|
92
|
15
|
99
|
114
|
||
|
The
Company operates twenty-one domestic and seventeen foreign oilseed
crushing plants with a daily processing capacity of approximately
91,000
metric tons (3.3 million bushels). The domestic plants are
located in Georgia, Illinois, Indiana, Iowa, Kansas, Minnesota,
Missouri,
Nebraska, North Dakota, Ohio, South Carolina, Tennessee, and
Texas. The foreign plants are located in Bolivia, Brazil,
Canada, England, Germany, India, Mexico, the Netherlands, Poland,
and the
Ukraine.
The
Company operates thirteen domestic oilseed refineries in Georgia,
Illinois, Indiana, Iowa, Minnesota, Missouri, Nebraska, North Dakota,
and
Tennessee, as well as sixteen foreign refineries in Bolivia, Brazil,
Canada, England, France, Germany, India, the Netherlands, and
Poland. The Company packages oils at seven domestic plants
located in California, Florida, Georgia, and Illinois, as well
as at six
foreign plants located in Bolivia, Brazil, England, and
Germany. The Company operates one domestic and six foreign
biodiesel plants located in North Dakota, Brazil, Germany, and
India. In addition, the Company operates two fertilizer
blending plants in Brazil.
The
Oilseeds Processing segment operates fifteen domestic country grain
elevators as adjuncts to its processing plants. These
elevators, with an aggregate storage capacity of 8 million bushels,
are
located in Illinois, Missouri, North Carolina, and Ohio.
This
segment also operates ninety-eight foreign elevators, including
port
facilities, in Bolivia, Brazil, Canada, Germany, Mexico, the Netherlands,
Paraguay, and Poland as adjuncts to its processing
plants. These facilities have a storage capacity of 125 million
bushels.
|
|
Item
2.
|
PROPERTIES
(Continued)
|
|
Corn
Processing
|
|
Processing
Plants
|
Procurement
Facilities
|
||||||
|
United
States
|
Foreign
|
Total
|
United
States
|
Foreign
|
Total
|
||
|
Owned
|
13
|
–
|
13
|
5
|
–
|
5
|
|
|
The
Company operates five wet corn milling and two dry corn milling
plants
with a daily grind capacity of approximately 50,000 metric tons
(2.0
million bushels). The Company also operates corn germ
extraction plants, sweeteners and starches production facilities,
and
bioproducts production facilities in Illinois, Iowa, Minnesota,
Nebraska,
North Carolina, and North Dakota. The Corn Processing segment
also operates five domestic grain terminal elevators as adjuncts
to its
processing plants. These elevators, with an aggregate storage
capacity of 12 million bushels, are located in
Minnesota.
|
|
Agricultural
Services
|
|
Processing
Plants
|
Procurement
Facilities
|
||||||
|
United
States
|
Foreign
|
Total
|
United
States
|
Foreign
|
Total
|
||
|
Owned
|
1
|
–
|
1
|
130
|
18
|
148
|
|
|
Leased
|
1
|
–
|
1
|
8
|
6
|
14
|
|
|
2
|
–
|
2
|
138
|
24
|
162
|
||
|
The
Company operates a rice mill located in California and an animal
feed
facility in Illinois. The Agricultural Services segment
operates one hundred thirty-eight domestic terminal, sub-terminal,
country, and river elevators covering the major grain producing
states,
including fifty-one country elevators, seventy-nine sub-terminal,
terminal
and river loading facilities, and eight grain export elevators
in Florida,
Louisiana, Ohio, and Texas. Elevators are located in Arkansas,
Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota,
Missouri,
Montana, Nebraska, North Dakota, Ohio, Oklahoma, Tennessee, and
Texas. These elevators have an aggregate storage capacity of
approximately 342 million bushels. The Company has five grain
export elevators in Argentina, Mexico, and the Ukraine that have
an
aggregate storage capacity of approximately 29 million
bushels. The Company has thirteen country elevators located in
the Ukraine, Romania, and the Dominican Republic. In addition,
the Company has six river elevators located in Romania and the
Ukraine.
|
|
Other
|
|
Processing
Plants
|
Procurement
Facilities
|
||||||
|
United
States
|
Foreign
|
Total
|
United
States
|
Foreign
|
Total
|
||
|
Owned
|
79
|
50
|
129
|
23
|
7
|
30
|
|
|
Leased
|
3
|
1
|
4
|
1
|
4
|
5
|
|
|
82
|
51
|
133
|
24
|
11
|
35
|
||
|
Item
2.
|
PROPERTIES
(Continued)
|
|
The
Company operates twenty-three domestic wheat flour mills, a domestic
bulgur plant, two domestic corn flour mills, two domestic milo
mills, and
twenty foreign flour mills with a total daily milling capacity
of
approximately 26,700 metric tons (1.0 million bushels). The
Company also operates six bakery mix plants. These plants and
related properties are located in California, Illinois, Indiana,
Kansas,
Minnesota, Missouri, Nebraska, New York, North Carolina, Oklahoma,
Pennsylvania, Tennessee, Texas, Washington, Barbados, Belize, Canada,
England, Grenada, and Jamaica. The Company operates two foreign
formula feed plants as adjuncts to the wheat flour mills in Belize
and
Grenada. The Company operates a rice milling plant in
Jamaica.
The
Company operates three domestic and nine foreign chocolate and
cocoa bean
processing plants with a total daily grind capacity of approximately
1,800
metric tons. The domestic plants are located in Massachusetts,
New Jersey, and Wisconsin, and the foreign plants are located in
Brazil,
Canada, England, Ivory Coast, the Netherlands, and
Singapore. The Company operates ten cocoa bean procurement and
handling facilities/port sites in the Ivory Coast, Indonesia, Malaysia,
and Brazil.
The
Company operates two domestic soy protein specialty plants in Illinois
and
one foreign plant in the Netherlands. Lecithin products are
produced at six domestic and four foreign plants in Illinois, Iowa,
Nebraska, Canada, Germany, and the Netherlands. The Company
also operates a starch and gluten plant in Iowa and one in
Canada. The Company produces soy-based foods at plants in
Illinois and North Dakota. The Company produces vitamin E,
sterols, and isoflavones at plants in Illinois. The Company
also operates a honey drying operation in Wisconsin.
The
Company operates twenty-three domestic edible bean procurement
facilities
with an aggregate storage capacity of approximately 12 million
bushels,
located in Colorado, Idaho, Michigan, Minnesota, North Dakota,
and
Wyoming.
The
Company also operates thirty domestic and six foreign formula feed
and
animal health and nutrition plants. The domestic plants are
located in Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky,
Michigan,
Minnesota, Missouri, Nebraska, Ohio, Pennsylvania, South Dakota,
Texas,
Washington, and Wisconsin. The foreign plants are located in
Canada, China, Puerto Rico, and
Trinidad.
|
|
Item
3.
|
LEGAL
PROCEEDINGS
|
Environmental
Matters
The Company is involved in approximately twenty administrative and judicial proceedings in which it has been identified as a potentially responsible party (PRP) under the federal Superfund law and its state analogs for the study and cleanup of sites contaminated by material discharged into the environment. In all of these matters there are numerous PRPs. Due to various factors, such as the required level of remediation and participation in the cleanup effort by others, the Company’s future cleanup costs at these sites cannot be reasonably estimated. In management’s opinion, these proceedings will not, either individually or in the aggregate, have a material adverse affect on the Company’s financial condition or results of operations.
|
Item
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
PART
II
|
Item
5.
|
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER
PURCHASES OF EQUITY
SECURITIES
|
Common
Stock Market Prices and Dividends
The
Company’s common stock is listed and traded on the New York Stock Exchange,
Chicago Stock Exchange, Frankfurt Stock Exchange, and Swiss Stock Exchange.
The
following table sets forth, for the periods indicated, the high and low market
prices of the common stock as reported on the New York Stock Exchange and
common
stock cash dividends declared per share.
|
Cash
|
||||||||||||
|
Market
Price
|
Dividends
|
|||||||||||
|
High
|
Low
|
Per
Share
|
||||||||||
|
Fiscal
2007-Quarter Ended
|
||||||||||||
|
June
30
|
$ |
39.65
|
$ |
32.05
|
$ |
0.115
|
||||||
|
March
31
|
37.84
|
30.20
|
0.115
|
|||||||||
|
December
31
|
40.00
|
31.20
|
0.100
|
|||||||||
|
September
30
|
45.05
|
36.44
|
0.100
|
|||||||||
|
Fiscal
2006-Quarter Ended
|
||||||||||||
|
June
30
|
$ |
46.71
|
$ |
34.60
|
$ |
0.100
|
||||||
|
March
31
|
35.50
|
24.05
|
0.100
|
|||||||||
|
December
31
|
25.55
|
23.00
|
0.085
|
|||||||||
|
September
30
|
24.75
|
19.75
|
0.085
|
|||||||||
The
number
of registered shareholders of the Company’s common stock at June 30, 2007, was
18,252. The Company expects to continue its policy of paying regular
cash dividends, although there is no assurance as to future dividends because
they are dependent on future earnings, capital requirements, and financial
condition.
|
Item
5.
|
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER
PURCHASES OF EQUITY SECURITIES
(Continued)
|
Issuer
Purchases of Equity Securities
|
Total
Number of
|
Number
of Shares
|
|||||||||||||||
|
Total
Number
|
Average
|
Shares
Purchased as
|
Remaining
to be
|
|||||||||||||
|
of
Shares
|
Price
Paid
|
Part
of Publicly
|
Purchased
Under the
|
|||||||||||||
|
Period
|
Purchased
(1)
|
per
Share
|
Announced
Program (2)
|
Program (2)
|
||||||||||||
|
April
1, 2007 to
April
30, 2007
|
4
|
$ |
37.25
|
4
|
77,502,074
|
|||||||||||
|
May
1, 2007 to
May
31, 2007
|
33,372
|
36.47
|
235
|
77,501,839
|
||||||||||||
|
June
1, 2007 to
June
30, 2007
|
9,260
|
34.47
|
184
|
77,501,655
|
||||||||||||
|
Total
|
42,636
|
$ |
36.04
|
423
|
77,501,655
|
|||||||||||
|
(1) Total
shares purchased represents those shares purchased as part of the
Company’s publicly announced share repurchase program described below and
shares received as payment of the exercise price for stock option
exercises. During the three-month period ended June 30, 2007,
the Company received 42,213 shares as payment of the exercise price
for
stock option exercises.
(2) On
November 4, 2004, the Company’s Board of Directors approved a stock
repurchase program authorizing the Company to repurchase up to
100,000,000
shares of the Company’s common stock during the period commencing January
1, 2005 and ending December 31,
2009.
|
|
Item
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES
(Continued)
|
Performance
Graph
The
graph
below compares five-year returns of the Company’s common stock with those of the
S&P 500 Index and the S&P Packaged Foods and Meats Index. The
graph assumes all dividends have been reinvested and assumes an
initial
investment of $100 on June 30, 2002. Information in the graph is
presented on a June 30 fiscal year basis.
Graph
produced by Research Data Group, Inc.
|
Item
6.
|
SELECTED
FINANCIAL DATA
|
|
Selected
Financial Data
|
||||||||||||||||||||
|
(In
millions, except ratio and per share data)
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Net
sales and other operating income
|
$ |
44,018
|
$ |
36,596
|
$ |
35,943
|
$ |
36,151
|
$ |
30,708
|
||||||||||
|
Depreciation
|
701
|
657
|
665
|
686
|
644
|
|||||||||||||||
|
Net
earnings
|
2,162
|
1,312
|
1,044
|
495
|
451
|
|||||||||||||||
|
Basic
earnings per common share
|
3.32
|
2.01
|
1.60
|
0.76
|
0.70
|
|||||||||||||||
|
Diluted
earnings per common share
|
3.30
|
2.00
|
1.59
|
0.76
|
0.70
|
|||||||||||||||
|
Cash
dividends
|
281
|
242
|
209
|
174
|
156
|
|||||||||||||||
|
Per
common share
|
0.43
|
0.37
|
0.32
|
0.27
|
0.24
|
|||||||||||||||
|
Working
capital
|
$ |
7,254
|
$ |
5,661
|
$ |
4,344
|
$ |
3,589
|
$ |
3,274
|
||||||||||
|
Per
common share
|
11.28
|
8.63
|
6.68
|
5.51
|
5.08
|
|||||||||||||||
|
Current
ratio
|
1.9
|
1.9
|
1.8
|
1.5
|
1.6
|
|||||||||||||||
|
Inventories
|
6,060
|
4,677
|
3,907
|
4,592
|
3,550
|
|||||||||||||||
|
Net
property, plant, and equipment
|
6,010
|
5,293
|
5,184
|
5,255
|
5,469
|
|||||||||||||||
|
Gross
additions to property, plant, and
equipment
|
1,404
|
841
|
647
|
621
|
1,246
|
|||||||||||||||
|
Total
assets
|
25,118
|
21,269
|
18,598
|
19,369
|
17,183
|
|||||||||||||||
|
Long-term
debt
|
4,752
|
4,050
|
3,530
|
3,740
|
3,872
|
|||||||||||||||
|
Shareholders’
equity
|
11,253
|
9,807
|
8,435
|
7,698
|
7,069
|
|||||||||||||||
|
Per
common share
|
17.50
|
14.95
|
12.96
|
11.83
|
10.96
|
|||||||||||||||
|
Weighted
average shares outstanding-basic
|
651
|
654
|
654
|
648
|
646
|
|||||||||||||||
|
Weighted
average shares outstanding-diluted
|
656
|
656
|
656
|
650
|
647
|
|||||||||||||||
Significant
items affecting the comparability of the financial data shown above are
as
follows.
|
·
|
Net
earnings for 2007 include a gain of $440 million ($286 million
after tax,
equal to $0.44 per share) related to the exchange of the Company’s
interests in certain Asian joint ventures for shares of Wilmar
International Limited, realized securities gains of $357 million
($225
million after tax, equal to $0.34 per share) related to the
Company’s sale
of equity securities of Tyson Foods Inc. and Overseas Shipholding
Group
Inc. and a $209 million gain ($132 million after tax, equal
to $0.20 per
share) related to the sale of
businesses.
|
|
·
|
Net
earnings for 2005 include a gain of $159 million ($119 million
after tax,
equal to $0.18 per share) related to sales of the Company’s interest in
Tate & Lyle PLC.
|
|
·
|
Net
earnings for 2004 include a $400 million charge ($252 million
after tax,
equal to $0.39 per share) related to the settlement of fructose
litigation
and a $51 million charge ($32 million after tax, equal to $0.05
per share)
related to the abandonment and write-down of long-lived
assets.
|
|
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Company
Overview
The
Company is principally engaged in procuring, transporting, storing, processing,
and merchandising agricultural commodities and products. The
Company’s operations are classified into three reportable business
segments: Oilseeds Processing, Corn Processing, and Agricultural
Services. Each of these segments is organized based upon the nature
of products and services offered. The Company’s remaining operations
are aggregated and classified as Other.
The
Oilseeds Processing segment includes activities related to processing oilseeds
such as soybeans, cottonseed, sunflower seeds, canola, peanuts, and flaxseed
into vegetable oils and meals principally for the food and feed
industries. In addition, oilseeds may be resold into the marketplace
as a raw material for other processors. Crude vegetable oil is sold
"as is" or is further processed by refining, bleaching, and deodorizing into
salad oils. Salad oils can be further processed by hydrogenating
and/or interesterifying into margarine, shortening, and other food
products. Partially refined oil is sold for use in chemicals, paints,
and other industrial products. Refined oil can be further processed
for use in the production of biodiesel. Oilseed meals are primary
ingredients used in the manufacture of commercial livestock and poultry
feeds. Oilseeds Processing also includes activities related to the
Company’s interest in Wilmar International Limited, the largest agricultural
processing business in Asia.
The
Corn
Processing segment includes activities related to the production of sweeteners,
starches, dextrose, and syrups for the food and beverage industry as well
as
activities related to the production, by fermentation, of bioproducts such
as
alcohol, amino acids, and other specialty food and feed
ingredients.
The
Agricultural Services segment utilizes the Company’s extensive grain elevator
and transportation network to buy, store, clean, and transport agricultural
commodities, such as oilseeds, corn, wheat, milo, oats, and barley, and resells
these commodities primarily as feed ingredients and as raw materials for
the
agricultural processing industry. Agricultural Services’ grain
sourcing and transportation network provides reliable and efficient services
to
the Company’s agricultural processing operations. Also included in
Agricultural Services are the activities of A.C. Toepfer International, a
global
merchandiser of agricultural commodities and processed products.
Other
includes the Company’s remaining operations, consisting principally of food,
feed, and industrial businesses and financial activities. Food, feed,
and industrial includes: Wheat Processing, with activities related to the
production of wheat flour; Cocoa Processing, with activities related to the
production of chocolate and cocoa products; the production of natural health
and
nutrition products; and the production of other food, feed, and industrial
products. Financial activities include banking, captive insurance,
private equity fund investments, and futures commission merchant
activities.
Operating
Performance Indicators
The
Company’s Oilseeds Processing, Agricultural Services, and Wheat Processing
operations are principally agricultural commodity-based businesses where
changes
in segment selling prices move in relationship to changes in prices of the
commodity-based agricultural raw materials. Therefore, changes in
agricultural commodity prices have relatively equal impacts on both net sales
and cost of products sold and minimal impact on the gross profit of underlying
transactions. As a result, changes in net sales amounts of these business
segments do not necessarily correspond to the changes in gross profit realized
by these businesses.
The
Company’s Corn Processing operations and certain other food and feed processing
operations also utilize agricultural commodities (or products derived from
agricultural commodities) as raw materials. In these operations,
agricultural commodity price changes can result in significant fluctuations
in
cost of products sold, and such price changes cannot necessarily be passed
directly through to the selling price of the finished products. For
products such as ethanol, selling prices bear no direct relationship to the
raw
material cost of the agricultural commodity from which it is
produced.
|
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
The
Company conducts its business in many countries. For the majority of
the Company’s subsidiaries located outside the United States, the local currency
is the functional currency. Revenues and expenses denominated in
foreign currencies are translated into U.S. dollars at the weighted average
exchange rates for the applicable periods. Fluctuations in the
exchange rates of foreign currencies, primarily the Euro and British pound,
as
compared to the U.S. dollar will result in corresponding fluctuations in
the
relative U.S. dollar value of the Company’s revenues and
expenses. The impact of these currency exchange rate changes, where
significant, is discussed below.
The
Company measures the performance of its business segments using key operating
statistics such as segment operating profit and return on fixed capital
investment, and return on net assets. The Company’s operating results
can vary significantly due to changes in unpredictable factors such as
fluctuations in energy prices, weather conditions, crop plantings, global
government farm programs and policies, changes in global demand resulting
from
population growth and changes in standards of living, and global production
of
similar and competitive crops. Due to these unpredictable factors,
the Company does not provide forward-looking information in “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
2007
Compared to 2006
As
an
agricultural-based commodity business, the Company is subject to a variety
of
market factors which affect the Company’s operating results. Strong
biodiesel demand in Europe continued to create increased vegetable oil demand
and positively impacted rapeseed crushing margins in Europe. Abundant
oilseed supplies, improved vegetable oil values, and strong protein meal
demand
have positively impacted oilseed crushing margins in North
America. Increased ethanol contracted selling prices, continuing
strong ethanol demand, and solid demand for sweetener and starch products
improved corn processing results. These increases in corn processing
results were partially offset by higher net corn costs. Global grain
merchandising opportunities resulting from regional production imbalances
also
improved operating results. North American river transportation
operations were favorably impacted by strong demand for river transportation
services which increased barge freight rates. Increasing commodity
price levels negatively affected LIFO inventory valuations partially offsetting
the improvements in operating results.
Net
earnings increased principally due to improved operating results in all of
the
Company’s operating segments. Earnings before income taxes for 2007
include a gain of $440 million related to the exchange of the Company’s
interests in certain Asian joint ventures for shares of Wilmar International
Limited (the Wilmar Gain), a $357 million realized securities gain from sales
of
the Company’s equity securities of Tyson Foods, Inc. and Overseas Shipholding
Group, Inc., a gain of $153 million from the sale of the Company’s interest in
Agricore United and a $53 million gain from the sale of the Company’s Arkady
food ingredient business. Earnings before income taxes for 2007 also
include charges of $206 million from the effect of changing commodity prices
on
LIFO inventory valuations, $46 million related to the repurchase of $400
million
of the Company’s outstanding debentures, and $21 million related to abandonment
and write-down of long-lived assets. Net earnings for 2006 include a
$36 million reduction in income tax expense related to the recognition of
federal and state income tax credits and adjustments resulting from the
reconciliation of filed tax returns to the previously estimated tax
provision. Earnings before income taxes for 2006 include charges of
$15 million resulting from the Company’s adoption of Financial Accounting
Standards Board Interpretation Number 47, Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement No. 143 (FIN
47), $71 million related to abandonment and write-down of long-lived assets,
$9
million representing the Company’s share of a charge for abandonment and
write-down of long-lived assets reported by an unconsolidated affiliate of
the
Company, and $22 million associated with the closure of a citric acid plant
and
exiting the European animal feed business. Earnings before income
taxes for 2006 also include credits of $12 million from the effect of changing
commodity prices on LIFO inventory valuations, $17 million from the sale
of
long-lived assets, $46 million related to Brazilian transactional tax credits,
and $40 million related to realized securities gains.
|
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Analysis
of Statements of Earnings
Net
sales
and other operating income increased 20% to $44.0 billion due primarily to
increased selling prices of agricultural commodities, oilseed and corn
processing products and, to a lesser extent, increased sales volumes of
agricultural commodities and oilseed processing products. In
addition, net sales and other operating income increased $916 million, or
3%,
due to currency exchange rate fluctuations.
Net
sales
and other operating income by segment are as follows:
|
2007
|
2006
|
Change
|
||||||||||
|
(In
millions)
|
||||||||||||
|
Oilseeds
Processing
|
$ |
13,937
|
$ |
11,867
|
$ |
2,070
|
||||||
|
Corn
Processing
|
||||||||||||
|
Sweeteners
and Starches
|
2,378
|
2,133
|
245
|
|||||||||
|
Bioproducts
|
3,064
|
2,727
|
337
|
|||||||||
|
Total
Corn Processing
|
5,442
|
4,860
|
582
|
|||||||||
|
Agricultural
Services
|
19,706
|
15,440
|
4,266
|
|||||||||
|
Other
|
||||||||||||
|
Food,
Feed, and Industrial
|
4,840
|
4,354
|
486
|
|||||||||
|
Financial
|
93
|
75
|
18
|
|||||||||
|
Total
Other
|
4,933
|
4,429
|
504
|
|||||||||
|
Total
|
$ |
44,018
|
$ |
36,596
|
$ |
7,422
|
||||||
Oilseeds
Processing sales increased 17% to $13.9 billion due principally to increased
average selling prices of vegetable oil and increased sales volumes of vegetable
oil and biodiesel. Vegetable oil selling prices and volumes improved
as the markets anticipate new demand from the developing United States biodiesel
industry. Biodiesel sales volumes increased due to additional
production capacity. Corn Processing sales increased 12% to $5.4
billion principally due to increased sales of Bioproducts and, to a lesser
extent, increased sales of Sweeteners and Starches. Bioproducts sales
increased primarily due to higher average selling prices of ethanol, partially
offset by lower sales volumes. Ethanol average selling prices
increased principally due to higher gasoline prices. Ethanol sales
volumes decreased as 2006 sales volumes exceeded production due to the release
of inventories built up in anticipation of refiners replacing MTBE with
ethanol. Sweeteners and Starches sales increased primarily due to
higher average selling prices resulting from good demand for sweetener and
starch products. Agricultural Services sales increased 28% to $19.7
billion principally due to increased agricultural commodity prices and increased
sales volumes. The increase in commodity prices is primarily due to
higher average market prices of corn in North America which have increased
60%
from the prior year. Increased sales volumes of global grain
merchandising activities also contributed to the increase in Agricultural
Services sales. Other sales increased 11% to $4.9 billion primarily
due to higher average selling prices of wheat flour products and, to a lesser
extent, increased sales volumes and higher average selling prices of cocoa
products.
Cost
of
products sold increased 21% to $40.8 billion primarily due to higher average
prices of agricultural commodities and increased sales
volumes. Manufacturing costs for 2007 and 2006 include a $21 million
and $62 million charge, respectively, for abandonment and write-down of
long-lived assets. In addition, cost of products sold increased $874
million, or 3%, due to currency exchange rate fluctuations.
|
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Selling,
general, and administrative expenses of $1.2 billion were comparable to 2006
and
include $25 million of currency exchange rate increases. Excluding
the impact of currency exchange rate increases, selling, general and
administrative expenses decreased $23 million principally due to 2006 selling,
general and administrative expenses including $20 million of severance costs
associated with the closure of a citric acid plant. During 2007 and
2006, the Company issued option grants and restricted stock awards to officers
and key employees pursuant to the Company’s Long-term Management Incentive
Program. Certain officers and key employees of the Company receiving
option grants and restricted stock awards are eligible for
retirement. Compensation expense related to option grants and
restricted stock awards issued to these retirement-eligible employees is
recognized in earnings on the date of grant. Selling, general, and
administrative expense for 2007 and 2006 includes compensation expense related
to option grants and restricted stock awards granted to retirement-eligible
employees of $30 million and $31 million, respectively.
Other
income increased $1.0 billion primarily due to the $440 million Wilmar Gain,
a
$357 million gain on the sale of the Company’s equity securities of Tyson Foods,
Inc. and Overseas Shipholding Group, Inc., a $153 million gain on the sale
of
the Company’s interest in Agricore United, and a $53 million gain on the sale of
the Company’s Arkady food ingredient business. Other income also
includes a $46 million charge related to the repurchase of $400 million of
the
Company’s outstanding debentures. Excluding these items, other income
increased $73 million primarily due to a $120 million increase in equity
in
earnings of unconsolidated affiliates, and a $53 million increase in investment
income, partially offset by a $69 million increase in interest expense and
a $27
million reduction in gains on sales of long-lived assets. The
increase in equity in earnings of unconsolidated affiliates is primarily
due to
higher valuations of the Company’s private equity fund investments and improved
operating results of the Company’s Asian oilseed crushing
ventures. Interest expense and investment income increased primarily
due to increased average borrowing and investment levels.
Operating
profit by segment is as follows:
|
2007
|
2006
|
Change
|
||||||||||
|
(In
millions)
|
||||||||||||
|
Oilseeds
Processing
|
$ |
1,117
|
$ |
599
|
$ |
518
|
||||||
|
Corn
Processing
|
||||||||||||
|
Sweeteners
and Starches
|
485
|
432
|
53
|
|||||||||
|
Bioproducts
|
634
|
445
|
189
|
|||||||||
|
Total
Corn Processing
|
1,119
|
877
|
242
|
|||||||||
|
Agricultural
Services
|
516
|
275
|
241
|
|||||||||
|
Other
|
||||||||||||
|
Food,
Feed, and Industrial
|
214
|
159
|
55
|
|||||||||
|
Financial
|
195
|
151
|
44
|
|||||||||
|
Total
Other
|
409
|
310
|
99
|
|||||||||
|
Total
Segment Operating Profit
|
3,161
|
2,061
|
1,100
|
|||||||||
|
Corporate
|
(7 | ) | (206 | ) |
199
|
|||||||
|
Earnings
Before Income Taxes
|
$ |
3,154
|
$ |
1,855
|
$ |
1,299
|
||||||
|
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Oilseeds
Processing operating profits increased $518 million to $1.1 billion due to
the
$440 million Wilmar Gain and improved market conditions in all geographic
regions. North American processing results improved principally due
to abundant oilseed supplies in the United States and good demand for vegetable
oil and soybean meal. Vegetable oil values improved as the markets
anticipate new demand from the developing United States biodiesel
industry. North American processing results were also favorably
impacted by lower plant operating costs resulting from improved capacity
utilization. Asian joint venture results improved due to improved
palm processing operating results partially offset by decreased soy crushing
operating results. European processing results improved principally
due to abundant oilseed supplies in Europe and strong demand for vegetable
oil. The strong demand for vegetable oil is the result of strong
biodiesel demand. These increases were partially offset by decreased
biodiesel operating profits resulting from higher vegetable oil prices,
increased market production capacity, and lower diesel fuel
prices. South American processing results declined principally due to
last year’s $27 million credit for Brazilian transactional
taxes. Excluding the impact of last year’s credit for Brazilian
transactional taxes, South American processing results improved principally
due
to increased fertilizer margins. The improvement in fertilizer
margins was primarily due to higher average sales prices due to improved
fertilizer demand combined with stable raw material costs. Operating
profits for 2007 include a $5 million charge for abandonment and write-down
of
long-lived assets. Operating profits for 2006 include a $14 million
charge for abandonment and write-down of long-lived assets and a $6 million
charge related to the adoption of FIN 47.
Corn
Processing operating profits increased $242 million to $1.1 billion principally
due to higher average selling prices and lower energy costs, partially offset
by
lower ethanol sales volumes and higher net corn costs. Net corn costs
have increased approximately 60% during 2007 due to significant demand increases
for corn resulting primarily from the increase in corn-derived ethanol industry
capacity. Agricultural commodity market concerns regarding the
expected decline in the ending 2006 corn crop carryover has also contributed
to
the increase in corn costs. Sweeteners and Starches operating profits
increased $53 million due primarily to higher average sales prices and lower
energy costs. Sales prices have increased principally due to good
demand for sweetener and starch products. These increases were
partially offset by increased net corn costs. Sweeteners and Starches
operating profits for 2006 include a $5 million charge related to the adoption
of FIN 47. Bioproducts operating profits increased $189 million
primarily due to higher ethanol average selling prices and lower energy costs,
partially offset by increased net corn costs and lower ethanol sales
volumes. Ethanol average sales prices increased principally due to
strong demand from gasoline refiners and higher gasoline
prices. Ethanol sales volumes decreased as 2006 sales volumes
exceeded production due to the release of inventories built up in anticipation
of refiners replacing MTBE with ethanol. Bioproducts operating
results for 2007 include a $1 million charge for abandonment and write-down
of
long-lived assets. Bioproducts operating results for 2006 include a
$6 million charge for abandonment and write-down of long-lived assets, a
$2
million charge related to the adoption of FIN 47, and $6 million of costs
related to the closure of a citric acid plant.
Agricultural
Services operating profits increased $241 million to $516 million principally
due to a $153 million gain from the sale of the Company’s interest in Agricore
United, a Canadian business which specialized in crop input, crop protection
services, and grain marketing and merchandising. Excluding the
Agricore United gain, Agricultural Services operating profits increased $88
million to $363 million principally due to improved global grain merchandising
operating results and, to a lesser extent, improved transportation and North
American origination operating results. Global grain merchandising
results improved as regional production imbalances allowed the Company to
capitalize on merchandising opportunities. North American river
transportation operating results increased primarily due to increased barge
freight rates created by strong demand for barge capacity. North
American origination operating results improved due to good export demand
for
agricultural commodities and higher ocean freight rates. Agricultural
Services operating profits for 2007 include a $12 million trade disruption
insurance recovery related to Hurricane Katrina.
|
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Other
operating profits increased $99 million to $409 million. Other –
Food, Feed, and Industrial operating profits increased $55 million and include
a
$53 million gain on the sale of the Company’s Arkady food ingredient business
and a $15 million charge for abandonment and write-down of long-lived
assets. Other – Food, Feed, and Industrial operating results for 2006
include a $51 million charge for abandonment and write-down of long-lived
assets, a $2 million charge related to the adoption of FIN 47, a $9 million
charge representing the Company’s share of a charge for abandonment and
write-down of long-lived assets reported by an unconsolidated affiliate of
the
Company, a $17 million gain from the sale of long-lived assets, and a $16
million charge related to exiting the European animal feed
business. Excluding the effect of these 2007 and 2006 items, Other –
Food, Feed, and Industrial operating profits declined $44 million due primarily
to cocoa processing operating results declining from prior year levels and
costs
related to the start-up of the Company’s natural plastics production
operations. Cocoa processing operating results declined primarily due
to increased industry production capacity which caused downward pressure
on
cocoa processing margins. These increases were partially offset by
improved operating results of the Company’s wheat flour processing and protein
specialty operations. Other – Financial operating profits increased
$44 million principally due to increased valuations of the Company’s private
equity fund investments and higher operating results of the Company’s futures
commission merchant business, partially offset by lower operating results
of the
Company’s captive insurance operations. The results of the Company’s
captive insurance operations for 2007 include a $12 million charge related
to a
Hurricane Katrina trade disruption insurance settlement.
Corporate
expense decreased $199 million to $7 million principally due to a $345 million
increase in realized securities gains principally resulting from sales of
the
Company’s equity securities of Tyson Foods, Inc. and Overseas Shipholding Group,
Inc. and a $103 million reduction in unallocated interest expense due
principally to higher levels of invested funds and higher interest
rates. These decreases were partially offset by a $206 million
charge, compared to a $12 million credit in the prior year, related to the
effect of changing commodity prices on LIFO inventory valuations and a $46
million charge related to the repurchase of $400 million of the Company’s
outstanding debentures.
Income
taxes increased due principally to higher pretax earnings and the absence
of
last year’s $36 million income tax credit related to the recognition of federal
and state income tax credits and adjustments resulting from the reconciliation
of filed tax returns to the previously estimated tax provision. The
Company’s effective tax rate during 2007 was 31.5% and, after excluding the
effect of last year’s $36 million tax credit, was 31.2% for the prior
year. The increase in the Company’s effective tax rate is primarily
due to changes in the geographic mix of pretax earnings.
2006
Compared to 2005
As
an
agricultural-based commodity business, the Company is subject to a variety
of
market factors which affect the Company’s operating results. Strong
biodiesel demand in Europe continued to create increased vegetable oil demand
and has positively impacted rapeseed crushing margins in
Europe. Abundant oilseed supplies and strong protein meal demand have
positively impacted oilseed crushing margins in North America. A good
corn supply resulting in lower price levels for corn favorably impacted corn
processing operations, while ethanol experienced good demand due to gasoline
refiners replacing MTBE with ethanol. Solid demand for sweetener and
starch products has also improved corn processing results. During the
first half of 2006, hurricanes in the gulf coast region of the United States
disrupted North American grain origination and agricultural commodity export
operations, negatively impacting export sales volumes. The gulf coast
hurricanes also disrupted river transportation, resulting in increased barge
demand and barge freight rates.
|
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Net
earnings increased principally due to improved operating results of Oilseeds
Processing and Corn Processing. In addition, net earnings also
increased due to a $36 million reduction in income tax expense related to
the
recognition of federal and state income tax credits and adjustments resulting
from the reconciliation of filed tax returns to the previously estimated
tax
provision. Earnings before income taxes for 2006 include charges of
$31 million resulting from the Company’s adoption of Statement of Financial
Accounting Standards (SFAS) Number 123(R), Share Based Payment, $15
million resulting from the Company’s adoption of FIN 47, $71 million related to
abandonment and write-down of long-lived assets, $9 million representing
the
Company’s share of a charge for abandonment and write-down of long-lived assets
reported by an unconsolidated affiliate of the Company, and $22 million
associated with the closure of a citric acid plant and exiting the European
animal feed business. Earnings before income taxes for 2006 also
include credits of $12 million from the effect of changing commodity prices
on
LIFO inventory valuations, $17 million from the sale of long-lived assets,
$46
million related to Brazilian transactional tax credits, and $40 million related
to realized securities gains. Earnings before income taxes for 2005
included credits of $114 million from the effect of changing commodity prices
on
LIFO inventory valuations, $114 million of realized securities gain from
the
sale of Tate & Lyle PLC shares, and $45 million representing the Company’s
equity share of the gain reported by the Company’s unconsolidated affiliate,
Compagnie Industrielle et Financiere des Produits Amylaces SA (CIP), upon
the
sale of its interest in Tate & Lyle PLC (the CIP Gain). Earnings
before income taxes for 2005 also include a $42 million charge for abandonment
and write-down of long-lived assets.
Analysis
of Statements of Earnings
Net
sales
and other operating income increased 2% to $36.6 billion due primarily to
higher
average selling prices of agricultural commodities and increased sales volumes
and selling prices of corn processing products, partially offset by decreased
average selling prices of cocoa products and currency exchange rate decreases
of
$415 million.
Net
sales
and other operating income by segment are as follows:
|
2006
|
2005
|
Change
|
||||||||||
|
(In
millions)
|
||||||||||||
|
Oilseeds
Processing
|
$ |
11,867
|
$ |
11,803
|
$ |
64
|
||||||
|
Corn
Processing
|
||||||||||||
|
Sweeteners
and Starches
|
2,133
|
1,905
|
228
|
|||||||||
|
Bioproducts
|
2,727
|
2,459
|
268
|
|||||||||
|
Total
Corn Processing
|
4,860
|
4,364
|
496
|
|||||||||
|
Agricultural
Services
|
15,440
|
15,198
|
242
|
|||||||||
|
Other
|
||||||||||||
|
Food,
Feed, and Industrial
|
4,354
|
4,506
|
(152 | ) | ||||||||
|
Financial
|
75
|
72
|
3
|
|||||||||
|
Total
Other
|
4,429
|
4,578
|
(149 | ) | ||||||||
|
Total
|
$ |
36,596
|
$ |
35,943
|
653
|
|||||||
|
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Oilseeds
Processing sales increased $64 million to $11.9 billion principally due to
higher average selling prices of South American oilseed exports and of vegetable
oil. These increases were partially offset by lower average selling
prices of protein meal. Corn Processing sales increased 11% to $4.9
billion due to sales increases in both Sweeteners and Starches and
Bioproducts. Sweeteners and Starches sales increased due to higher
average selling prices and sales volumes. Sales volumes and prices
have increased primarily due to solid demand for sweetener and starch
products. Bioproducts sales increased primarily due to increased
sales volumes and average selling prices of ethanol, partially offset by
lower
average selling prices of lysine. The increases in ethanol sales
volumes and sales prices were principally due to increased demand from gasoline
refiners as refiners used ethanol to replace MTBE as a gasoline additive
and to
increased gasoline prices. Agricultural Services sales increased 2%
to $15.4 billion primarily due to increased commodity prices in North America
and, to a lesser extent, increased barge freight rates as the gulf coast
hurricanes reduced barge capacities and created strong demand for North American
river transportation. These increases were partially offset by
decreased commodity sales volumes in North America. The decreased
sales volumes were primarily due to disruptions in North American grain
origination and export activities caused by the hurricanes in the gulf coast
region. Other sales decreased 3% to $4.4 billion primarily due to
decreased average selling prices of cocoa products and lower sales volumes
of
formula feed products. These decreases were partially offset by
increased average selling prices of wheat flour products due to higher commodity
prices.
Cost
of
products sold increased $118 million to $33.6 billion due primarily to higher
average prices of agricultural commodities and increased manufacturing costs,
partially offset by currency exchange rate decreases of $389
million. Manufacturing costs increased $399 million primarily due to
increased energy costs, an $86 million charge for abandonment and write-down
of
long-lived assets, and increased employee-related costs.
Selling,
general, and administrative expenses increased $112 million to $1.2 billion
principally due to increased employee-related costs, including a $31 million
charge related to the adoption of SFAS 123(R), $20 million of severance costs
associated with the closure of a citric acid plant, and increased provisions
for
doubtful accounts.
Other
income decreased $84 million due primarily to a $73 million decrease in realized
securities gains, a $55 million decrease in equity in earnings of affiliates,
and a $39 million increase in interest expense, partially offset by a $69
million increase in investment income. The decrease in realized
securities gains is primarily due to the $114 million realized securities
gain
in 2005 from the sale of Tate & Lyle PLC shares, partially offset by $40
million of realized securities gains during 2006. The decrease in
equity in earnings of affiliates is primarily due to the CIP Gain in 2005
and
lower valuations of the Company’s private equity fund investments in 2006,
partially offset by improved earnings of the Company’s Asian oilseed crushing
ventures. Interest expense increased primarily due to higher average
borrowing levels and interest rates. Investment income increased
primarily due to the reversal of $19 million of Brazilian transactional taxes
previously assessed on investment income upon positive resolution in the
Brazilian Supreme Court, higher levels of invested funds, and higher interest
rates.
|
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Operating
profit by segment is as follows:
|
2006
|
2005
|
Change
|
||||||||||
|
(In
millions)
|
||||||||||||
|
Oilseeds
Processing
|
$ |
599
|
$ |
345
|
$ |
254
|
||||||
|
Corn
Processing
|
||||||||||||
|
Sweeteners
and Starches
|
431
|
271
|
160
|
|||||||||
|
Bioproducts
|
446
|
259
|
187
|
|||||||||
|
Total
Corn Processing
|
877
|
530
|
347
|
|||||||||
|
Agricultural
Services
|
275
|
262
|
13
|
|||||||||
|
Other
|
||||||||||||
|
Food,
Feed, and Industrial
|
159
|
263
|
(104 | ) | ||||||||
|
Financial
|
151
|
151
|
–
|
|||||||||
|
Total
Other
|
310
|
414
|
(104 | ) | ||||||||
|
Total
Segment Operating Profit
|
2,061
|
1,551
|
510
|
|||||||||
|
Corporate
|
(206 | ) | (35 | ) | (171 | ) | ||||||
|
Earnings
Before Income Taxes
|
$ |
1,855
|
$ |
1,516
|
$ |
339
|
||||||
Oilseeds
Processing operating profits increased $254 million to $599 million primarily
due to improved market conditions in all geographic regions. European
processing results improved principally due to strong demand for biodiesel
and
abundant rapeseed supplies in Europe. This strong demand for
biodiesel in Europe increased European vegetable oil demand and resulted
in
improved oilseeds processing results. Abundant rapeseed supplies in
Europe resulted in lower rapeseed price levels. North American
processing results improved principally due to abundant oilseed supplies
in the
United States and good demand for soybean meal. Vegetable oil values
were solid as the markets anticipate new demand from the developing United
States biodiesel industry. South American operating results increased
primarily due to improved origination activities and a $27 million credit
for
Brazilian transactional taxes. Operating results in Asia increased
due to improved soy crushing margins and improved palm
operations. Operating profits include a $14 million charge for
abandonment and write-down of long-lived assets and a $6 million charge related
to the adoption of FIN 47. Operating profits for 2005 include a
charge of $13 million for abandonment and write-down of long-lived
assets.
Corn
Processing operating profits increased $347 million to $877 million primarily
due to higher average selling prices, increased sales volumes, and lower
net
corn costs, partially offset by increased energy costs. Sweeteners
and Starches operating profits increased $160 million due primarily to decreased
net corn costs and higher average sales prices and sales
volumes. Sales volumes and prices have increased primarily due to
good demand for sweetener and starch products. These increases were
partially offset by increased energy costs. Sweeteners and Starches
operating profits include a $5 million charge related to the adoption of
FIN
47. Bioproducts operating profits increased $187 million primarily
due to higher ethanol sales volumes and average selling prices and decreased
net
corn costs, partially offset by increased energy costs and lower lysine average
selling prices. The increases in ethanol sales volumes and average
sales prices were principally due to increased demand from gasoline refiners
as
refiners used ethanol to replace MTBE as a gasoline additive and from increased
gasoline prices. Bioproducts operating profits include a $6 million
charge for abandonment and write-down of long-lived assets, a $2 million
charge
related to the adoption of FIN 47, and $6 million of costs related to the
closure of a citric acid plant. Bioproducts operating profits for
2005 include a $16 million charge for abandonment and write-down of long-lived
assets.
|
Item
7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Agricultural
Services operating profits increased $13 million to $275 million as improved
results from transportation operations were partially offset by a decline
in
global grain merchandising and North American origination operating
results. North American river transportation operating results
increased primarily due to increased barge freight rates created by strong
demand for barge capacity. This increase was partially offset by
increased fuel costs. The gulf coast hurricanes negatively impacted
North American origination and export activities during the first half of
2006.
Other
operating profits decreased $104 million to $310 million. Other –
Food, Feed, and Industrial operating results decreased $104 million due
primarily to a $51 million charge for abandonment and write-down of long-lived
assets, a $2 million charge related to the adoption of FIN 47, and a $9 million
charge representing the Company’s share of a charge for abandonment and
write-down of long-lived assets reported by an unconsolidated affiliate of
the
Company. In addition, cocoa processing, natural health and nutrition,
and formula feed operating results declined from prior year
levels. Cocoa processing operating results declined primarily due to
increased industry capacity which caused downward pressure on cocoa finished
product prices. Formula feed operating results declined due to costs
associated with exiting the European animal feed business. Other –
Food, Feed, and Industrial operating profits include a $17 million gain from
the
sale of long-lived assets. Other – Food, Feed, and Industrial
operating results for 2005 include a $13 million charge for abandonment and
write-down of long-lived assets. Other – Financial operating profits
are comparable to prior year levels as improvements in the Company’s captive
insurance operations and futures commission merchant business offset lower
valuations of the Company’s private equity fund investments.
Corporate
decreased $171 million due primarily to a $102 million decrease in income
from
the effect of changing commodity prices on LIFO inventory valuations, the
$114
million realized securities gain in 2005 from the sale of Tate & Lyle PLC
shares, the CIP Gain in 2005, and a $22 million charge in 2006 upon the adoption
of SFAS 123(R), partially offset by the aforementioned $19 million reversal
of
Brazilian transactional taxes and a $97 million reduction in unallocated
interest expense. The reduction in unallocated interest expense is
due principally to higher levels of invested funds and higher interest
rates.
Income
taxes increased due principally to higher pretax earnings. This
increase was partially offset by a $36 million reduction in income tax expense
related to the recognition of federal and state income tax credits and
adjustments resulting from the reconciliation of filed tax returns to the
previously estimated tax provision. The Company’s effective tax rate
for 2006 was 29.3% as compared to 31.1% for 2005. Excluding the
effect of the $36 million tax credit, the Company’s effective tax rate was 31.2%
for 2006 and, after excluding the effect of the CIP Gain, was 32.1% for
2005. No tax was provided on the CIP Gain in 2005, as CIP is a
corporate joint venture of the Company and the proceeds from the sale are
permanently reinvested. Excluding the effect of the $36 million tax
credit in 2006 and the CIP Gain in 2005, the decrease in the Company’s effective
tax rate is primarily due to changes in the geographic mix of pretax
earnings.
Liquidity
and Capital Resources
The
Company’s objective is to have sufficient liquidity, balance sheet strength, and
financial flexibility to fund the operating and capital requirements of a
capital intensive agricultural-based commodity business.
|
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
At
June
30, 2007, the Company continued to show substantial liquidity with working
capital of $7.3 billion and a current ratio, defined as current assets divided
by current liabilities, of 1.9 to 1. Included in working capital is
$875 million of cash, cash equivalents, and short-term marketable securities
as
well as $4.4 billion of readily marketable commodity
inventories. Cash generated from operating activities totaled $303
million for the year compared to $1.4 billion last year. This
decrease was primarily due to an increase in working capital requirements
principally related to increased prices and quantities of agricultural commodity
inventories and increased receivables, partially offset by increased cash
earnings. Despite increased investment in property, plant, and
equipment, cash used in investing activities decreased $714 million for the
year
to $355 million due primarily to increased sales of marketable securities
and
proceeds from sales of businesses including the sale of the Company’s equity
interests in Tyson Foods, Inc., Overseas Shipholding Group, Inc. and Agricore
United. Cash used in financing activities was $398 million compared
to cash generated by financing activities of $284 million last
year. Net long-term borrowings increased primarily as a result of the
issuance of $1.2 billion of convertible senior notes in February 2007 (described
in detail below), compared to $600 million of 30-year debentures issued in
September 2005. This increase was partially offset by $283 million of
increased payments on long-term debt principally related to the Company retiring
$400 million of debentures in 2007.
Capital
resources were strengthened as shown by the increase in the Company’s net worth
from $9.8 billion to $11.3 billion. The Company’s ratio of long-term
debt to total capital (the sum of the Company’s long-term debt and shareholders’
equity) was 30% at June 30, 2007, and 29% at June 30, 2006. This
ratio is a measure of the Company’s long-term liquidity and is an indicator of
financial flexibility. The Company currently has $3.9 billion of
commercial paper and commercial bank lines available to meet seasonal cash
requirements of which $2.6 billion are committed and $1.3
billion are uncommitted. At June 30, 2007, the Company had
$468 million of short-term debt outstanding. Standard & Poor’s,
Moody’s, and Fitch rate the Company’s commercial paper as A-1, P-1, and F1,
respectively, and rate the Company’s long-term debt as A, A2, and A+,
respectively. In addition to the cash flow generated from operations,
the Company has access to equity and debt capital through numerous alternatives
from public and private sources in domestic and international
markets.
In
February 2007, the Company issued $1.2 billion principal amount of convertible
senior notes due in 2014 (the Notes) in a private placement. The
Notes were issued at par and bear interest at a rate of 0.875% per year,
payable
semiannually. The Notes are convertible based on an initial
conversion rate of 22.8343 shares per $1,000 principal amount of Notes (which
is
equal to an initial conversion price of approximately $43.79 per
share). The Notes may be converted, subject to adjustment, only under
the following circumstances: 1) during any calendar quarter beginning after
March 31, 2007, if the closing price of the Company’s common stock for at least
20 trading days in the 30 consecutive trading days ending on the last trading
day of the immediately preceding quarter is more than 140% of the applicable
conversion price per share, which is $1,000 divided by the then applicable
conversion rate, 2) during the five consecutive business day period immediately
after any five consecutive trading day period (the note measurement period)
in
which the average of the trading price per $1,000 principal amount of Notes
was
equal to or less than 98% of the average of the product of the closing price
of
the Company’s common stock and the conversion rate at each date during the note
measurement period, 3) if the Company makes specified distributions to its
common stockholders or specified corporate transactions occur, or 4) at any
time
on or after January 15, 2014, through the business day preceding the maturity
date. Upon conversion, a holder would receive an amount in cash equal
to the lesser of 1) $1,000 and 2) the conversion value, as
defined. If the conversion value exceeds $1,000, the Company will
deliver, at the Company’s election, cash or common stock or a combination of
cash and common stock for the conversion value in excess of
$1,000. If the Notes are converted in connection with a change in
control, as defined, the Company may be required to provide a make-whole
premium
in the form of an increase
in the conversion rate, subject to a stated maximum amount. In
addition, in the event of a change in control, the holders may require the
Company to purchase all or a portion of their Notes at a purchase price equal
to
100% of the principal amount of the Notes, plus accrued and unpaid interest,
if
any.
|
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Concurrent
with the issuance of the Notes, the Company purchased call options in private
transactions at a cost of $299 million. The purchased call options
allow the Company to receive shares of its common stock and/or cash from
the
counterparties equal to the amounts of common stock and/or cash related to
the
excess of the current market price of the Company’s common stock over the
exercise price of the purchased call options. In addition, the
Company sold warrants in private transactions to acquire, subject to customary
anti-dilution adjustments, 26.3 million shares of its common stock at an
exercise price of $62.56 per share and received proceeds of $170
million. If the average price of the Company’s common stock during a
defined period ending on or about the respective settlement dates exceeds
the
exercise price of the warrants, the warrants will be settled, at the Company’s
option, in cash or shares of common stock. The purchased call options
and warrants are intended to reduce the potential dilution upon future
conversions of the Notes by effectively increasing the initial conversion
price
to $62.56 per share.
Upon
closing of the sale of the Notes, $370 million of the net proceeds from the
Note
issuance and the proceeds from the warrant transactions were used to repurchase
10.3 million shares of the Company’s common stock under the Company’s stock
repurchase program.
As
of June
30, 2007, none of the conditions permitting conversion of the Notes had been
satisfied. In addition, as of June 30, 2007, the market price of the
Company’s common stock was not greater than the exercise price of the purchased
call options or warrants.
Contractual
Obligations and Off-Balance Sheet Arrangements
In
the
normal course of business, the Company enters into contracts and commitments
which obligate the Company to make payments in the future. The
following table sets forth the Company’s significant future obligations by time
period. Purchases include commodity-based contracts entered into in
the normal course of business, which are further described in Item 7A,
“Quantitative and Qualitative Disclosures About Market Risk,” energy-related
purchase contracts entered into in the normal course of business, and other
purchase obligations related to the Company’s normal business
activities. Where applicable, information included in the Company’s
consolidated financial statements and notes is cross-referenced in this
table.
|
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
|
Payments
Due by Period
|
|||||||||||||||||||||
|
Contractual
|
Note
|
Less
than
|
2
– 3
|
4
– 5
|
Over
|
||||||||||||||||
|
Obligations
|
Reference
|
Total
|
1
Year
|
Years
|
Years
|
5
Years
|
|||||||||||||||
|
(In
millions)
|
|||||||||||||||||||||
|
Purchases
|
|||||||||||||||||||||
|
Inventories
|
$ |
11,113
|
$ |
10,312
|
$ |
535
|
$ |
159
|
$ |
107
|
|||||||||||
|
Energy
|
429
|
269
|
152
|
7
|
1
|
||||||||||||||||
|
Other
|
217
|
67
|
94
|
43
|
13
|
||||||||||||||||
|
Total
purchases
|
11,759
|
10,648
|
781
|
209
|
121
|
||||||||||||||||
|
Short-term
debt
|
Note
7
|
468
|
468
|
-
|
-
|
-
|
|||||||||||||||
|
Long-term
debt
|
Note
7
|
4,897
|
65
|
92
|
425
|
4,315
|
|||||||||||||||
|
Estimated
interest payments
|
5,752
|
290
|
509
|
474
|
4,479
|
||||||||||||||||
|
Operating
leases
|
Note
12
|
900
|
318
|
241
|
132
|
209
|
|||||||||||||||
|
Estimated
pension and other
postretirement
plan
contributions
|
Note
13
|
1,045
|
79
|
173
|
195
|
598
|
|||||||||||||||
|
Total
|
$ |
24,821
|
$ |
11,868
|
$ |
1,796
|
$ |
1,435
|
$ |
9,722
|
|||||||||||
At
June
30, 2007, the Company estimates it will spend approximately $3.0 billion
over
the next four years to complete approved capital projects and
acquisitions. The Company is a limited partner in various private
equity funds which invest primarily in emerging markets. At June 30,
2007, the Company’s carrying value of these limited partnership investments was
$165 million. The Company has future capital commitments related to
these partnerships of $138 million and expects the majority of these additional
capital commitments, if called for, to be funded by cash flows generated
by the
partnerships. The Company also has outstanding letters of credit and
surety bonds of $339 million at June 30, 2007.
In
addition, the Company has entered into agreements, primarily debt guarantee
agreements related to equity-method investees, which could obligate the Company
to make future payments. The Company’s liability under these
agreements arises only if the primary entity fails to perform its contractual
obligation. The Company has collateral for a portion of these
contingent obligations. At June 30, 2007, these contingent
obligations totaled approximately $98 million. Amounts outstanding
for the primary entity under these contingent obligations were $51 million
at
June 30, 2007.
Critical
Accounting Policies
The
process of preparing financial statements requires management to make estimates
and judgments that affect the carrying values of the Company’s assets and
liabilities as well as the recognition of revenues and
expenses. These estimates and judgments are based on the Company’s
historical experience and management’s knowledge and understanding of current
facts and circumstances. Certain of the Company’s accounting policies
are considered critical, as these policies are important to the depiction
of the
Company’s financial statements and require significant or complex judgment by
management. Management has discussed with the Company’s Audit
Committee the development, selection, disclosure, and application of these
critical accounting policies. Following are the accounting policies
management considers critical to the Company’s financial statements.
|
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Inventories
and Derivatives
Certain
of
the Company’s merchandisable agricultural commodity inventories, forward
fixed-price purchase and sale contracts, and exchange-traded futures and
options
contracts are valued at estimated market values. These merchandisable
agricultural commodities are freely traded, have quoted market prices, and
may
be sold without significant additional processing. Management
estimates market value based on exchange-quoted prices, adjusted for differences
in local markets. Changes in the market values of these inventories
and contracts are recognized in the statement of earnings as a component
of cost
of products sold. If management used different methods or factors to
estimate market value, amounts reported as inventories and cost of products
sold
could differ. Additionally, if market conditions change subsequent to
year-end, amounts reported in future periods as inventories and cost of products
sold could differ.
The
Company, from time to time, uses derivative contracts to fix the purchase
price
of anticipated volumes of commodities to be purchased and processed in a
future
month, to fix the purchase price of the Company’s anticipated natural gas
requirements for certain production facilities, and to fix the sales price
of
anticipated volumes of ethanol. These derivative contracts are
designated as cash flow hedges. The change in the market value of
such derivative contracts has historically been, and is expected to continue
to
be, highly effective at offsetting changes in price movements of the hedged
item. Gains and losses arising from open and closed hedging
transactions are deferred in other comprehensive income, net of applicable
income taxes, and recognized as a component of cost of products sold in the
statement of earnings when the hedged item is recognized. If it is
determined that the derivative instruments used are no longer effective at
offsetting changes in the price of the hedged item, then the changes in the
market value of these exchange-traded futures contracts would be recorded
in the
statement of earnings as a component of cost of products sold.
Employee
Benefit Plans
The
Company provides substantially all domestic employees and employees at certain
international subsidiaries with pension benefits. The Company also
provides substantially all domestic salaried employees with postretirement
health care and life insurance benefits. In order to measure the
expense and funded status of these employee benefit plans, management makes
several estimates and assumptions, including interest rates used to discount
certain liabilities, rates of return on assets set aside to fund these plans,
rates of compensation increases, employee turnover rates, anticipated mortality
rates, and anticipated future health care costs. These estimates and assumptions
are based on the Company’s historical experience combined with management’s
knowledge and understanding of current facts and
circumstances. Management also uses third-party specialists to assist
in measuring the expense and funded status of these employee benefit
plans. If management used different estimates and assumptions
regarding these plans, the funded status of the plans could vary significantly,
and the Company could recognize different amounts of expense over future
periods.
Income
Taxes
The
Company frequently faces challenges from domestic and foreign tax authorities
regarding the amount of taxes due. These challenges include questions
regarding the timing and amount of deductions and the allocation of income
among
various tax jurisdictions. In evaluating the exposure associated with
various tax filing positions, the Company records reserves for probable
exposures. Deferred tax assets represent items to be used as tax
deductions or credits in future tax returns, and the related tax benefit
has
already been recognized in the Company’s income
statement. Realization of certain deferred tax assets reflects the
Company’s tax planning strategies. Valuation allowances related to
these deferred tax assets have been established to the extent the realization
of
the tax benefit is not probable. Based on management’s evaluation of
the Company’s tax position, it is believed the amounts related to these tax
exposures are appropriately accrued. To the extent the Company were
to favorably resolve matters for which accruals have been established or
be
required to pay amounts in excess of the aforementioned reserves, the Company’s
effective tax rate in a given financial statement period may be
impacted.
|
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Undistributed
earnings of the Company’s foreign subsidiaries and affiliated corporate joint
ventures accounted for on the equity method are considered to be permanently
reinvested, and accordingly, no provision for U.S. income taxes has been
provided thereon. If the Company were to receive distributions from
any of these foreign subsidiaries or affiliates or determine the undistributed
earnings of these foreign subsidiaries or affiliates to not be permanently
reinvested, the Company could be subject to U.S. tax liabilities which have
not
been provided for in the consolidated financial statements.
Asset
Abandonments and Write-Downs
The
Company is principally engaged in the business of procuring, transporting,
storing, processing, and merchandising agricultural commodities and
products. This business is global in nature and is highly
capital-intensive. Both the availability of the Company’s raw
materials and the demand for the Company’s finished products are driven by
unpredictable factors such as weather, plantings, government (domestic and
foreign) farm programs and policies, changes in population growth, changes
in
standards of living, and production of similar and competitive
crops. These aforementioned unpredictable factors, therefore, may
cause a shift in the supply/demand dynamics for the Company’s raw materials and
finished products. Any such shift will cause management to evaluate
the efficiency and profitability of the Company’s fixed asset base in terms of
geographic location, size, and age of its factories. The Company,
from time to time, will also invest in equipment and technology related to
new,
value-added products produced from agricultural commodities and
products. These new products are not always successful from either a
commercial production or marketing perspective. Management evaluates the
Company’s property, plant, and equipment for impairment whenever indicators of
impairment exist. Assets are abandoned after consideration of the
ability to utilize the assets for their intended purpose or to employ the
assets
in alternative uses or sell the assets to recover the carrying
value. If management used different estimates and assumptions in its
evaluation of this fixed asset base, then the Company could recognize different
amounts of expense over future periods.
Valuation
of Marketable Securities and Investments in Affiliates
The
Company classifies the majority of its marketable securities as
available-for-sale and carries these securities at fair
value. Investments in affiliates are carried at cost plus equity in
undistributed earnings. For publicly traded securities, the fair
value of the Company’s investments is readily available based on quoted market
prices. For non-publicly traded securities, management’s assessment
of fair value is based on valuation methodologies including discounted cash
flows and estimates of sales proceeds. In the event of a decline in
fair value of an investment below carrying value, management may be required
to
determine if the decline in fair value is other than temporary. In
evaluating the nature of a decline in the fair value of an investment,
management considers the market conditions, trends of earnings, discounted
cash
flows, trading volumes, and other key measures of the investment as well
as the
Company’s ability and intent to hold the investment. When such a
decline in value is deemed to be other than temporary, an impairment loss
is
recognized in the current period operating results to the extent of the decline.
See Notes 3 and 5 to the Company’s consolidated financial statements for
information regarding the Company’s marketable securities and investments in
affiliates. If management used different estimates and assumptions in its
evaluation of these marketable securities, then the Company could recognize
different amounts of expense over future periods.
|
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
The
Company is a limited partner in various private equity funds which invest
primarily in emerging markets. The Company accounts for these limited
partnerships using the equity method of accounting. Therefore, the
Company is recording in the consolidated statement of earnings its proportional
share of the limited partnerships’ net income or loss. The limited
partnerships value their investments at fair value. Thus, unrealized
gains and losses related to the change in fair value of these investments
are
recorded in the limited partnerships’ statements of earnings. The
valuation of these investments, as determined by the general partner, can
be
subjective, and the values may vary significantly. Some of the
factors causing the subjectivity and volatility of these valuations include
the
illiquidity and minority positions of these investments, currency exchange
rate
fluctuations, less-regulated securities exchanges, and the inherent business
risks and limitations present in the emerging market countries. The
Company records the results of these limited partnerships based on the
information provided to the Company by the general partner. Due to the
subjectivity and volatility in valuing these investments, the fair value
of
these investments, and thus the Company’s results, could vary significantly over
future periods.
|
Item
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The
market
risk inherent in the Company’s market risk sensitive instruments and positions
is the potential loss arising from adverse changes in commodities futures
prices, marketable equity security prices, market prices of limited
partnerships’ investments, foreign currency exchange rates, and interest rates
as described below.
Commodities
The
availability and price of agricultural commodities are subject to wide
fluctuations due to unpredictable factors such as weather, plantings, government
(domestic and foreign) farm programs and policies, changes in global demand
resulting from population growth and changes in standards of living, and
global
production of similar and competitive crops. To reduce price risk caused
by
market fluctuations, the Company generally follows a policy of using
exchange-traded futures and options contracts to minimize its net position
of
merchandisable agricultural commodity inventories and forward cash purchase
and
sales contracts. The Company will also use exchange-traded futures and options
contracts as components of merchandising strategies designed to enhance
margins. The results of these strategies can be significantly
impacted by factors such as the volatility of the relationship between the
value
of exchange-traded commodities futures contracts and the cash prices of the
underlying commodities, counterparty contracts defaults, and volatility of
freight markets. In addition, the Company from time-to-time enters into
derivative contracts which are designated as hedges of specific volumes of
commodities that will be purchased and processed, or sold, in a future month.
The changes in the market value of such futures contracts have historically
been, and are expected to continue to be, highly effective at offsetting
changes
in price movements of the hedged item. Gains and losses arising from open
and
closed hedging transactions are deferred in other comprehensive income, net
of
applicable taxes, and recognized as a component of cost of products sold
in the
statement of earnings when the hedged item is recognized.
|
Item
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
|
A
sensitivity analysis has been prepared to estimate the Company’s exposure to
market risk of its daily net commodity position. The Company’s daily net
commodity position consists of inventories, related purchase and sale contracts,
and exchange-traded futures contracts, including those contracts used to
hedge
portions of production requirements. The fair value of such daily net commodity
position is a summation of the fair values calculated for each commodity
by
valuing each net position at quoted futures prices. Market risk is estimated
as
the potential loss in fair value resulting from a hypothetical 10% adverse
change in such prices. Actual results may differ.
|
2007
|
2006
|
|||||||||||||||
|
Fair
Value
|
Market
Risk
|
Fair
Value
|
Market
Risk
|
|||||||||||||
|
(In
millions)
|
||||||||||||||||
|
Highest
long position
|
$ |
703
|
$ |
70
|
$ |
510
|
$ |
51
|
||||||||
|
Highest
short position
|
565
|
57
|
574
|
57
|
||||||||||||
|
Average
position long (short)
|
180
|
18
|
(203 | ) | (20 | ) | ||||||||||
The
change
in fair value of the average position for 2007 compared to 2006 was principally
a result of changes in the daily net commodity position and commodity
prices.
Marketable
Equity Securities
Marketable
equity securities, which are recorded at fair value, have exposure to price
risk. The fair value of marketable equity securities is based on quoted market
prices. Risk is estimated as the potential loss in fair value resulting from
a
hypothetical 10% adverse change in quoted market prices. Actual results may
differ.
|
2007
|
2006
|
|||||||
|
(In
millions)
|
||||||||
|
Fair
value
|
$ |
227
|
$ |
640
|
||||
|
Market
risk
|
23
|
64
|
||||||
The
decrease in fair value for 2007 compared to 2006 resulted primarily from
disposals of securities partially offset by increases in fair market value
of
certain securities.
Limited
Partnerships
The
Company is a limited partner in various private equity funds which invest
primarily in emerging markets. The Company accounts for these limited
partnerships using the equity method of accounting. Therefore, the
Company is recording in the consolidated statement of earnings its proportional
share of the limited partnerships’ net income or loss. The limited
partnerships value their investments at fair value. Risk is estimated
as the potential loss in fair value resulting from a hypothetical 10% adverse
change in market prices of the limited partnerships’
investments. Actual results may differ.
|
2007
|
2006
|
|||||||
|
(In
millions)
|
||||||||
|
Fair
value of partnerships’ investments
|
$ |
188
|
$ |
210
|
||||
|
Market
risk
|
19
|
21
|
||||||
The
decrease in fair value for 2007 compared to 2006 resulted primarily from
returns
of capital.
|
Item
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
|
Currencies
In
order
to reduce the risk of foreign currency exchange rate fluctuations, except
for
amounts permanently invested as described below, the Company follows a policy
of
entering into currency exchange forward contracts to mitigate its foreign
currency risk related to transactions denominated in a currency other than
the
functional currencies applicable to each of its various entities. The
instruments used are readily marketable exchange-traded futures contracts
and
forward contracts with banks. The changes in market value of such contracts
have
a high correlation to the price changes in the currency of the related
transactions. The potential loss in fair value for such net currency position
resulting from a hypothetical 10% adverse change in foreign currency exchange
rates is not material.
The
amount
the Company considers permanently invested in foreign subsidiaries and
affiliates and translated into dollars using the year-end exchange rates
is $5.4
billion at June 30, 2007, and $4.5 billion at June 30, 2006. This
increase is due to an increase in retained earnings of the foreign subsidiaries
and affiliates and appreciation of foreign currency exchange
rates. The potential loss in fair value resulting from a hypothetical
10% adverse change in quoted foreign currency exchange rates is $543 million
and
$454 million for 2007 and 2006, respectively. Actual results may
differ.
Interest
The
fair
value of the Company’s long-term debt is estimated using quoted market prices,
where available, and discounted future cash flows based on the Company’s current
incremental borrowing rates for similar types of borrowing arrangements.
Such
fair value exceeded the long-term debt carrying value. Market risk is estimated
as the potential increase in fair value resulting from a hypothetical .5
%
decrease in interest rates. Actual results may differ.
|
2007
|
2006
|
|||||||
|
(In
millions)
|
||||||||
|
Fair
value of long-term debt
|
$ |
4,927
|
$ |
4,387
|
||||
|
Excess
of fair value over carrying value
|
110
|
257
|
||||||
|
Market
risk
|
204
|
218
|
||||||
The
increase in fair value of long-term debt in 2007 resulted principally from
the
Company’s issuance of $1.2 billion convertible senior notes partially offset by
repayment of $400 million of debentures and other principal payments of
long-term debt.
|
Item
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
|
|
Financial
Statements
|
|
|
Consolidated
Statements of Earnings
|
39
|
|
Consolidated
Balance Sheets
|
40
|
|
Consolidated
Statements of Cash Flows
|
41
|
|
Consolidated
Statements of Shareholders’ Equity
|
42
|
|
Notes
to Consolidated Financial Statements
|
43
|
|
Reports
of Independent Registered Public Accounting Firm
|
73
|
Consolidated
Statements of Earnings
|
Year
Ended June 30
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
millions, except per share amounts)
|
||||||||||||
|
Net
sales and other operating income
|
$ |
44,018
|
$ |
36,596
|
$ |
35,943
|
||||||
|
Cost
of products sold
|
40,781
|
33,630
|
33,512
|
|||||||||
|
Gross Profit
|
3,237
|
2,966
|
2,431
|
|||||||||
|
Selling,
general and administrative expenses
|
1,195
|
1,193
|
1,081
|
|||||||||
|
Other
income - net
|
(1,112 | ) | (82 | ) | (166 | ) | ||||||
|
Earnings Before Income Taxes
|
3,154
|
1,855
|
1,516
|
|||||||||
|
Income
taxes
|
992
|
543
|
472
|
|||||||||
|
Net Earnings
|
$ |
2,162
|
$ |
1,312
|
$ |
1,044
|
||||||
|
Average
number of shares outstanding – basic
|
651
|
654
|
654
|
|||||||||
|
Average
number of shares outstanding – diluted
|
656
|
656
|
656
|
|||||||||
|
Basic
earnings per common share
|
$ |
3.32
|
$ |
2.01
|
$ |
1.60
|
||||||
|
Diluted
earnings per common share
|
$ |
3.30
|
$ |
2.00
|
$ |
1.59
|
||||||
See notes to consolidated financial statements.
Archer
Daniels Midland Company
Consolidated
Balance Sheets
|
June
30
|
||||||||
|
2007
|
2006
|
|||||||
|
(In
millions)
|
||||||||
|
Assets
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ |
663
|
$ |
1,113
|
||||
|
Segregated
cash and investments
|
1,424
|
1,221
|
||||||
|
Receivables
|
6,404
|
4,471
|
||||||
|
Inventories
|
6,060
|
4,677
|
||||||
|
Other
assets
|
571
|
344
|
||||||
|
Total
Current Assets
|
15,122
|
11,826
|
||||||
|
Investments
and Other Assets
|
||||||||
|
Investments
in and advances to affiliates
|
2,498
|
1,986
|
||||||
|
Long-term
marketable securities
|
657
|
1,110
|
||||||
|
Goodwill
|
317
|
322
|
||||||
|
Other
assets
|
514
|
732
|
||||||
|
3,986
|
4,150
|
|||||||
|
Property,
Plant, and Equipment
|
||||||||
|
Land
|
227
|
214
|
||||||
|
Buildings
|
3,002
|
2,774
|
||||||
|
Machinery
and equipment
|
11,822
|
11,132
|
||||||
|
Construction
in progress
|
884
|
431
|
||||||
|
15,935
|
14,551
|
|||||||
|
Accumulated
depreciation
|
(9,925 | ) | (9,258 | ) | ||||
|
6,010
|
5,293
|
|||||||
| $ |
25,118
|
$ |
21,269
|
|||||
|
Liabilities
and Shareholders’ Equity
|
||||||||
|
Current
Liabilities
|
||||||||
|
Short-term
debt
|
$ |
468
|
$ |
550
|
||||
|
Accounts
payable
|
4,919
|
4,014
|
||||||
|
Accrued
expenses
|
2,416
|
1,521
|
||||||
|
Current
maturities of long-term debt
|
65
|
80
|
||||||
|
Total
Current Liabilities
|
7,868
|
6,165
|
||||||
|
Long-Term
Liabilities
|
|
|||||||
|
Long-term debt
|
4,752
|
4,050
|
||||||
|
Deferred income taxes
|
532
|
757
|
||||||
|
Other
|
713
|
490
|
||||||
|
5,997
|
5,297
|
|||||||
|
Shareholders'
Equity
|
||||||||
|
Common
stock
|
5,090
|
5,511
|
||||||
|
Reinvested
earnings
|
5,982
|
4,082
|
||||||
|
Accumulated
other comprehensive income
|
181
|
214
|
||||||
|
11,253
|
9,807
|
|||||||
| $ |
25,118
|
$ |
21,269
|
|||||
See
notes
to consolidated financial statements.
Archer
Daniels Midland Company
Consolidated
Statements of Cash Flows
|
Year
Ended June 30
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(In
millions)
|
||||||||||||
|
Operating
Activities
|
||||||||||||
|
Net
earnings
|
$ |
2,162
|
$ |
1,312
|
$ |
1,044
|
||||||
|
Adjustments
to reconcile net earnings to net cash provided by
operating activities
|
||||||||||||
|
Depreciation
|
701
|
657
|
665
|
|||||||||
|
Asset
abandonments
|
21
|
71
|
41
|
|||||||||
|
Deferred
income taxes
|
109
|
(106 | ) |
242
|
||||||||
|
Gain
on marketable securities transactions
|
(393 | ) | (40 | ) | (113 | ) | ||||||
|
Gain
on exchange of unconsolidated affiliates
|
(440 | ) |
–
|
–
|
||||||||
|
Gain
on sale of businesses
|
(209 | ) |
–
|
–
|
||||||||
|
Equity
in earnings of affiliates, net of dividends
|
(193 | ) | (69 | ) | (91 | ) | ||||||
|
Stock
contributed to employee benefit plans
|
27
|
25
|
24
|
|||||||||
|
Pension
and postretirement accruals (contributions), net
|
61
|
(164 | ) |
1
|
||||||||
|
Other
– net
|
99
|
91
|
42
|
|||||||||
|
Changes
in operating assets and liabilities
|
||||||||||||
|
Segregated
cash and investments
|
(191 | ) | (240 | ) | (38 | ) | ||||||
|
Receivables
|
(953 | ) | (177 | ) | (217 | ) | ||||||
|
Inventories
|
(1,215 | ) | (601 | ) |
825
|
|||||||
|
Other
assets
|
(66 | ) | (28 | ) | (35 | ) | ||||||
|
Accounts
payable and accrued expenses
|
783
|
645
|
(264 | ) | ||||||||
|
Total
Operating Activities
|
303
|
1,376
|
2,126
|
|||||||||
|
Investing
Activities
|
||||||||||||
|
Purchases
of property, plant, and equipment
|
(1,198 | ) | (762 | ) | (624 | ) | ||||||
|
Proceeds
from sales of property, plant, and equipment
|
45
|
54
|
44
|
|||||||||
|
Proceeds
from sale of businesses
|
385
|
–
|
–
|
|||||||||
|
Net
assets of businesses acquired
|
(103 | ) | (182 | ) | (24 | ) | ||||||
|
Investments
in and advances to affiliates
|
(53 | ) | (126 | ) | (112 | ) | ||||||
|
Distributions
from affiliates, excluding dividends
|
97
|
58
|
158
|
|||||||||
|
Purchases
of marketable securities
|
(892 | ) | (685 | ) | (1,433 | ) | ||||||
|
Proceeds
from sales of marketable securities
|
1,367
|
581
|
1,674
|
|||||||||
|
Other
– net
|
(3 | ) | (7 | ) |
16
|
|||||||
|
Total
Investing Activities
|
(355 | ) | (1,069 | ) | (301 | ) | ||||||
|
Financing
Activities
|
||||||||||||
|
Long-term
debt borrowings
|
1,166
|
644
|
19
|
|||||||||
|
Long-term
debt payments
|
(549 | ) | (266 | ) | (186 | ) | ||||||
|
Net
borrowings (payments) under line of credit agreements
|
(110 | ) |
105
|
(1,358 | ) | |||||||
|
Purchases
of treasury stock
|
(533 | ) | (2 | ) | (139 | ) | ||||||
|
Sale
of stock warrants related to convertible note issuance
|
170
|
–
|
–
|
|||||||||
|
Purchase
of call options related to convertible note issuance
|
(299 | ) |
–
|
–
|
||||||||
|
Cash
dividends
|
(281 | ) | (242 | ) | (209 | ) | ||||||
|
Other
– net
|
38
|
45
|
30
|
|||||||||
|
Total
Financing Activities
|
(398 | ) |
284
|
(1,843 | ) | |||||||
|
Increase
(decrease) in cash and cash equivalents
|
(450 | ) |
591
|
(18 | ) | |||||||
|
Cash
and cash equivalents – beginning of year
|
1,113
|
522
|
540
|
|||||||||
|
Cash
and cash equivalents – end of year
|
$ |
663
|
$ |
1,113
|
$ |
522
|
||||||
See notes to consolidated financial statements.
Archer
Daniels Midland Company
Consolidated
Statements of Shareholders' Equity
|
Accumulated
|
||||||||||||||||||||
|
Other
|
Total
|
|||||||||||||||||||
|
Common
Stock
|
Reinvested
|
Comprehensive
|
Shareholders'
|
|||||||||||||||||
|
Shares
|
Amount
|
Earnings
|
Income
|
Equity
|
||||||||||||||||
|
(In
millions)
|
||||||||||||||||||||
|
Balance
June 30, 2004
|
651
|
$ |
5,432
|
$ |
2,185
|
$ |
83
|
$ |
7,700
|
|||||||||||