UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2011
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
incorporation or organization)
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(I. R. S. Employer
Identification No.)
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4666 Faries Parkway Box 1470
Decatur, Illinois
(Address of principal executive offices)
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62525
(Zip Code)
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(217) 424-5200
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(Registrant's telephone number, including area code)
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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 ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x Accelerated Filer o
Non-accelerated Filer o Smaller reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common Stock, no par value – 637,880,202 shares
(April 29, 2011)
PART I - FINANCIAL INFORMATION
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ITEM 1.
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FINANCIAL STATEMENTS
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Archer-Daniels-Midland Company
Consolidated Statements of Earnings
(Unaudited)
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Three Months Ended
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||||||||
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March 31,
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||||||||
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2011
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2010
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|||||||
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(In millions, except
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||||||||
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per share amounts)
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||||||||
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Net sales and other operating income
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$ | 20,077 | $ | 15,145 | ||||
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Cost of products sold
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18,917 | 14,254 | ||||||
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Gross Profit
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1,160 | 891 | ||||||
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Selling, general and administrative expenses
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395 | 355 | ||||||
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Other (income) expense – net
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(26 | ) | 2 | |||||
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Earnings Before Income Taxes
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791 | 534 | ||||||
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Income taxes
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223 | 118 | ||||||
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Net Earnings Including Noncontrolling Interests
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568 | 416 | ||||||
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Less: Net earnings (losses) attributable to noncontrolling interests
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(10 | ) | (5 | ) | ||||
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Net Earnings Attributable to Controlling Interests
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$ | 578 | $ | 421 | ||||
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Average number of shares outstanding – basic
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638 | 643 | ||||||
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Average number of shares outstanding – diluted
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684 | 645 | ||||||
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Basic earnings per common share
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$ | 0.91 | $ | 0.65 | ||||
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Diluted earnings per common share
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$ | 0.86 | $ | 0.65 | ||||
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Dividends per common share
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$ | 0.16 | $ | 0.15 | ||||
See notes to consolidated financial statements.
Archer-Daniels-Midland Company
Consolidated Statements of Earnings
(Unaudited)
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Nine Months Ended
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||||||||
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March 31,
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||||||||
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2011
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2010
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|||||||
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(In millions, except
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||||||||
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per share amounts)
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||||||||
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Net sales and other operating income
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$ | 57,806 | $ | 45,979 | ||||
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Cost of products sold
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54,604 | 43,062 | ||||||
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Gross Profit
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3,202 | 2,917 | ||||||
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Selling, general and administrative expenses
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1,188 | 1,067 | ||||||
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Other (income) expense – net
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(237 | ) | (185 | ) | ||||
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Earnings Before Income Taxes
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2,251 | 2,035 | ||||||
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Income taxes
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612 | 561 | ||||||
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Net Earnings Including Noncontrolling Interests
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1,639 | 1,474 | ||||||
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Less: Net earnings (losses) attributable to noncontrolling interests
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(16 | ) | (10 | ) | ||||
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Net Earnings Attributable to Controlling Interests
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$ | 1,655 | $ | 1,484 | ||||
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Average number of shares outstanding – basic
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639 | 643 | ||||||
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Average number of shares outstanding – diluted
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655 | 644 | ||||||
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Basic earnings per common share
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$ | 2.59 | $ | 2.31 | ||||
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Diluted earnings per common share
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$ | 2.55 | $ | 2.30 | ||||
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Dividends per common share
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$ | 0.46 | $ | 0.43 | ||||
See notes to consolidated financial statements.
Archer-Daniels-Midland Company
Consolidated Balance Sheets
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(Unaudited)
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||||||||
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March 31,
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June 30,
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|||||||
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2011
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2010
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|||||||
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(In millions)
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||||||||
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Assets
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||||||||
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Current Assets
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||||||||
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Cash and cash equivalents
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$ | 858 | $ | 1,046 | ||||
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Short-term marketable securities
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765 | 394 | ||||||
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Segregated cash and investments
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3,051 | 2,337 | ||||||
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Receivables
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10,428 | 6,122 | ||||||
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Inventories
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13,409 | 7,611 | ||||||
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Other assets
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741 | 624 | ||||||
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Total Current Assets
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29,252 | 18,134 | ||||||
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Investments and Other Assets
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||||||||
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Investments in and advances to affiliates
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3,062 | 2,799 | ||||||
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Long-term marketable securities
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847 | 678 | ||||||
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Goodwill
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594 | 523 | ||||||
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Other assets
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693 | 702 | ||||||
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Total Investments and Other Assets
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5,196 | 4,702 | ||||||
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Property, Plant, and Equipment
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||||||||
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Land
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302 | 277 | ||||||
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Buildings
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4,371 | 4,008 | ||||||
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Machinery and equipment
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16,046 | 15,107 | ||||||
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Construction in progress
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630 | 612 | ||||||
| 21,349 | 20,004 | |||||||
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Accumulated depreciation
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(12,034 | ) | (11,292 | ) | ||||
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Net Property, Plant, and Equipment
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9,315 | 8,712 | ||||||
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Total Assets
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$ | 43,763 | $ | 31,548 | ||||
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Liabilities and Shareholders’ Equity
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||||||||
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Current Liabilities
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||||||||
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Short-term debt
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$ | 5,732 | $ | 374 | ||||
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Accounts payable
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7,703 | 5,538 | ||||||
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Accrued expenses
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3,252 | 2,317 | ||||||
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Current maturities of long-term debt
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176 | 344 | ||||||
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Total Current Liabilities
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16,863 | 8,573 | ||||||
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Long-Term Liabilities
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||||||||
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Long-term debt
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8,350 | 6,830 | ||||||
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Deferred income taxes
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517 | 439 | ||||||
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Other
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1,353 | 1,075 | ||||||
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Total Long-Term Liabilities
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10,220 | 8,344 | ||||||
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Shareholders’ Equity
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||||||||
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Common stock
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5,086 | 5,151 | ||||||
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Reinvested earnings
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11,718 | 10,357 | ||||||
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Accumulated other comprehensive income (loss)
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(152 | ) | (899 | ) | ||||
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Noncontrolling interests
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28 | 22 | ||||||
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Total Shareholders’ Equity
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16,680 | 14,631 | ||||||
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Total Liabilities and Shareholders’ Equity
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$ | 43,763 | $ | 31,548 | ||||
See notes to consolidated financial statements.
Archer-Daniels-Midland Company
Consolidated Statements of Cash Flows
(Unaudited)
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Nine Months Ended
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||||||||
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March 31,
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||||||||
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2011
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2010
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|||||||
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(In millions)
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||||||||
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Operating Activities
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||||||||
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Net earnings including noncontrolling interests
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$ | 1,639 | $ | 1,474 | ||||
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Adjustments to reconcile net earnings to net cash provided by
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||||||||
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(used in) operating activities
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||||||||
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Depreciation and amortization
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665 | 673 | ||||||
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Deferred income taxes
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185 | 90 | ||||||
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Equity in (earnings) losses of affiliates, net of dividends
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(222 | ) | (232 | ) | ||||
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Gain on Golden Peanut revaluation
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(71 | ) | – | |||||
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Stock compensation expense
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41 | 41 | ||||||
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Pension and postretirement accruals (contributions), net
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69 | (133 | ) | |||||
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Charges on early extinguishment of debt
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– | 75 | ||||||
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Deferred cash flow hedges
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(13 | ) | 17 | |||||
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Other – net
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(72 | ) | 13 | |||||
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Changes in operating assets and liabilities
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||||||||
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Segregated cash and investments
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(691 | ) | (88 | ) | ||||
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Receivables
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(3,590 | ) | 1,228 | |||||
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Inventories
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(5,121 | ) | (551 | ) | ||||
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Other assets
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(200 | ) | (190 | ) | ||||
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Accounts payable and accrued expenses
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2,632 | 358 | ||||||
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Total Operating Activities
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(4,749 | ) | 2,775 | |||||
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Investing Activities
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||||||||
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Purchases of property, plant, and equipment
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(913 | ) | (1,230 | ) | ||||
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Proceeds from sales of property, plant, and equipment
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52 | 25 | ||||||
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Net assets of businesses acquired
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(206 | ) | (59 | ) | ||||
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Purchases of marketable securities
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(1,874 | ) | (1,012 | ) | ||||
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Proceeds from sales of marketable securities
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1,370 | 1,086 | ||||||
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Other – net
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(16 | ) | (23 | ) | ||||
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Total Investing Activities
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(1,587 | ) | (1,213 | ) | ||||
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Financing Activities
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||||||||
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Long-term debt borrowings
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1,563 | 14 | ||||||
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Long-term debt payments
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(306 | ) | (546 | ) | ||||
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Debt purchase premium and costs
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– | (71 | ) | |||||
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Net borrowings (payments) under lines of credit agreements
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5,259 | (89 | ) | |||||
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Purchases of treasury stock
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(94 | ) | – | |||||
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Cash dividends
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(293 | ) | (276 | ) | ||||
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Other – net
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19 | 10 | ||||||
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Total Financing Activities
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6,148 | (958 | ) | |||||
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Increase (decrease) in cash and cash equivalents
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(188 | ) | 604 | |||||
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Cash and cash equivalents beginning of period
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1,046 | 1,055 | ||||||
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Cash and cash equivalents end of period
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$ | 858 | $ | 1,659 | ||||
See notes to consolidated financial statements.
Archer-Daniels-Midland-Company
Consolidated Statement of Shareholders’ Equity
(Unaudited)
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Accumulated
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||||||||||||||||||||||||
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Other
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Total
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|||||||||||||||||||||||
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Common Stock
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Reinvested
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Comprehensive
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Noncontrolling
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Shareholders’
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||||||||||||||||||||
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Shares
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Amount
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Earnings
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Income (Loss)
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Interests
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Equity
|
|||||||||||||||||||
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(In millions)
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||||||||||||||||||||||||
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Balance June 30, 2010
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639 | $ | 5,151 | $ | 10,357 | $ | (899 | ) | $ | 22 | $ | 14,631 | ||||||||||||
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Comprehensive income
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||||||||||||||||||||||||
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Net earnings
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1,655 | (16 | ) | |||||||||||||||||||||
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Other comprehensive
income
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747 | |||||||||||||||||||||||
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Total comprehensive
income
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2,386 | |||||||||||||||||||||||
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Cash dividends paid-$.46
per share
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(293 | ) | (293 | ) | ||||||||||||||||||||
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Treasury stock purchases
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(3 | ) | (94 | ) | (94 | ) | ||||||||||||||||||
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Stock compensation
expense
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41 | 41 | ||||||||||||||||||||||
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Other
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2 | (12 | ) | (1 | ) | 22 | 9 | |||||||||||||||||
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Balance March 31, 2011
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638 | $ | 5,086 | $ | 11,718 | $ | (152 | ) | $ | 28 | $ | 16,680 | ||||||||||||
See notes to consolidated financial statements.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements
(Unaudited)
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Note 1.
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Basis of Presentation
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The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and nine months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending June 30, 2011. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 2010.
Principles of Consolidation
Effective in the second quarter of fiscal year 2011, one of the Company’s majority-owned subsidiaries changed its accounting period to align with the Company’s reporting period resulting in the elimination of a one-month lag in the reporting of the consolidated subsidiary’s financial results. The effect of this change on after-tax earnings for the nine months ended March 31, 2011 was immaterial.
Adoption of New Accounting Standards
Effective July 1, 2010, the Company adopted the amended guidance in Accounting Standards Codification (ASC) Topic 810, Consolidations, which changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting or similar rights (known as variable interest entities or VIEs) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance and the other entity’s purpose and design. The VIEs in which the Company holds variable interests are not individually considered material to the Company’s consolidated results. As a result of the adoption of this guidance, the Company deconsolidated one VIE with no material effect on the Company’s consolidated financial statements.
Effective October 1, 2010, the Company adopted the amended guidance in ASC Topic 310, Receivables, which requires more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables (excluding trade receivables), and its allowances for credit losses. The new disclosures require additional information for nonaccrual and past due accounts, the allowance for credit losses, impaired loans, credit quality, and account notifications. A financing receivable is defined as a contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the entity’s statement of financial position.
The Company has seasonal financing arrangements with farmers in certain countries around the world. Typically, advances occur during the planting season and are repaid at harvest. As of March 31, 2011, $319 million of receivables under these financing arrangements were outstanding, the majority of which was secured by various forms of collateral. Receivables are placed on non-accrual status when the accounts are in legal dispute. Interest income and losses on these inventory financing arrangements are not material.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 1.
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Basis of Presentation (Continued)
|
The Company also has loans receivable through its wholly-owned subsidiary, Hickory Point Bank and Trust. As of March 31, 2011, $274 million of loans were outstanding. The accrual of interest on loans is discontinued when the loan is 90 days past due unless the credit is well-secured and in the process of collection. Interest income and losses on bank loans are not material.
Other than as discussed above, the Company’s financing receivables as of March 31, 2011 were immaterial.
Change in Estimate
During the second quarter of fiscal year 2011, the Company updated its estimates for service lives of certain of its machinery and equipment assets in order to better match the Company’s depreciation expense with the periods these assets are expected to generate revenue based on planned and historical service periods. The new estimated service lives were established based on manufacturing engineering data, external benchmark data and on new information obtained as a result of the Company’s recent major construction projects. These new estimated service lives are also supported by biofuels legislation and mandates in many countries that are driving requirements over time for greater future usage and higher blend rates of biofuels.
The Company accounted for this service life update as a change in accounting estimate as of October 1, 2010 in accordance with the guidance of ASC Topic 250, Accounting Changes and Error Corrections, thereby impacting the quarter in which the change occurred and future quarters. The effect of this change on after-tax earnings and diluted earnings per share was an increase of $31 million and $0.05, respectively for the quarter ended March 31, 2011 and $55 million and $0.08, respectively for the nine months ended March 31, 2011.
Reclassifications
Certain items in prior years’ consolidated statements of cash flows have been reclassified to conform to the current year’s presentation with no impact to total cash provided by (used in) operating, investing, or financing activities.
Last-in, First-out (LIFO) Inventories
Interim period LIFO calculations are based on interim period costs and management’s estimates of year-end inventory levels. Because the availability and price of agricultural commodity-based LIFO inventories are unpredictable due to factors such as weather, government farm programs and policies, and changes in global demand, quantities of LIFO-based inventories at interim periods may vary significantly from management’s estimates of year-end inventory levels.
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Note 2.
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New Accounting Standards
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Effective July 1, 2011, the Company will be required to adopt the second phase of the amended guidance in ASC Topic 820, Fair Value Measurements and Disclosures, which requires the Company to disclose information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances, and settlements on a gross basis, separately for assets and liabilities. The adoption of this amended guidance will require expanded disclosures in the notes to the Company’s consolidated financial statements but will not impact financial results.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 3.
|
Acquisitions
|
During the nine months ended March 31, 2011, the Company made three acquisitions for a total cost of $206 million and recorded a preliminary allocation of the purchase price related to these acquisitions. The acquisition of Alimenta (USA), Inc., the Company’s former 50 percent partner in Golden Peanut Company LLC (“Golden Peanut”), was the only significant acquisition during the nine months ended March 31, 2011. This transaction resulted in the Company obtaining the control of the remaining outstanding shares of Golden Peanut, the largest U.S. handler, processor and exporter of peanuts. This business fits well with the Company’s existing U.S. oilseed and export operations in its global oilseed business. A pre-tax gain of $71 million was recognized in the second quarter as a result of revaluing the Company’s previously held investment in Golden Peanut in conjunction with the acquisition of the remaining 50 percent interest based on the guidance of ASC Topic 805, Business Combinations.
The net cash purchase price for these three acquisitions of $206 million plus the acquisition-date fair value of the equity interest the Company previously held in Golden Peanut was preliminarily allocated to working capital, property, plant and equipment, goodwill, other long-term assets, and liabilities for $109 million, $189 million, $60 million, $46 million, and $30 million, respectively.
|
Note 4.
|
Fair Value Measurements
|
The Company determines the fair market value of certain of its inventories of agricultural commodities, derivative contracts, and marketable securities based on the fair value definition and hierarchy levels established in the guidance of ASC Topic 820, Fair Value Measurements and Disclosures. Three levels are established within the hierarchy that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 1 assets and liabilities include exchange-traded derivative contracts, U.S. treasury securities, and certain publicly traded equity securities.
Level 2: Observable inputs, including Level 1 prices that have been adjusted; quoted prices for similar assets or liabilities; quoted prices in markets that are less active than traded exchanges; and other inputs that are observable or can be substantially corroborated by observable market data.
Level 3: Unobservable inputs that are supported by little or no market activity and that are a significant component of the fair value of the assets or liabilities. In evaluating the significance of fair value inputs, the Company generally classifies assets or liabilities as Level 3 when their fair value is determined using unobservable inputs that individually or when aggregated with other unobservable inputs, represent more than 10% of the fair value of the assets or liabilities. Judgment is required in evaluating both quantitative and qualitative factors in the determination of significance for purposes of fair value level classification. Level 3 amounts can include assets and liabilities whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as assets and liabilities for which the determination of fair value requires significant management judgment or estimation.
In many cases, a valuation technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy. The lowest level of input that is a significant component of the fair value measurement determines the placement of the entire fair value measurement in the hierarchy. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the classification of fair value assets and liabilities within the fair value hierarchy levels.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 4. Fair Value Measurements (Continued)
|
The Company’s policy regarding the timing of transfers between levels, including both transfers into and transfers out of Level 3, is to measure and record the transfers at the end of the reporting period. For the quarter and nine months ended March 31, 2011, the Company had no transfers between Levels 1 and 2.
The following tables set forth, by level, the Company’s assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2011 and June 30, 2010.
|
Fair Value Measurements at March 31, 2011
|
||||||||||||||||
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Total
|
|||||||||||||
|
(In millions)
|
||||||||||||||||
|
Assets:
|
||||||||||||||||
|
Inventories carried at market
|
$ | – | $ | 6,336 | $ | 735 | $ | 7,071 | ||||||||
|
Unrealized derivative gains:
|
||||||||||||||||
|
Commodity contracts
|
1,140 | 2,072 | 115 | 3,327 | ||||||||||||
|
Foreign exchange contracts
|
– | 277 | – | 277 | ||||||||||||
|
Interest rate contracts
|
– | 13 | – | 13 | ||||||||||||
|
Marketable securities
|
1,640 | 576 | – | 2,216 | ||||||||||||
|
Total Assets
|
$ | 2,780 | $ | 9,274 | $ | 850 | $ | 12,904 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Unrealized derivative losses:
|
||||||||||||||||
|
Commodity contracts
|
$ | 1,338 | $ | 1,330 | $ | 20 | $ | 2,688 | ||||||||
|
Foreign exchange contracts
|
– | 179 | – | 179 | ||||||||||||
|
Interest rate contracts
|
– | 11 | – | 11 | ||||||||||||
|
Inventory-related payables
|
– | 482 | 97 | 579 | ||||||||||||
|
Total Liabilities
|
$ | 1,338 | $ | 2,002 | $ | 117 | $ | 3,457 | ||||||||
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 4.
|
Fair Value Measurements (Continued)
|
|
Fair Value Measurements at June 30, 2010
|
||||||||||||||||
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Total
|
|||||||||||||
|
(In millions)
|
||||||||||||||||
|
Assets:
|
||||||||||||||||
|
Inventories carried at market
|
$ | – | $ | 3,774 | $ | 458 | $ | 4,232 | ||||||||
|
Unrealized derivative gains:
|
||||||||||||||||
|
Commodity contracts
|
777 | 1,883 | 69 | 2,729 | ||||||||||||
|
Foreign exchange contracts
|
162 | 38 | – | 200 | ||||||||||||
|
Marketable securities
|
1,067 | 543 | – | 1,610 | ||||||||||||
|
Total Assets
|
$ | 2,006 | $ | 6,238 | $ | 527 | $ | 8,771 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Unrealized derivative losses:
|
||||||||||||||||
|
Commodity contracts
|
$ | 937 | $ | 2,161 | $ | 56 | $ | 3,154 | ||||||||
|
Foreign exchange contracts
|
184 | 82 | – | 266 | ||||||||||||
|
Interest rate contracts
|
– | 26 | – | 26 | ||||||||||||
|
Inventory-related payables
|
– | 207 | 31 | 238 | ||||||||||||
|
Total Liabilities
|
$ | 1,121 | $ | 2,476 | $ | 87 | $ | 3,684 | ||||||||
The Company uses the market approach valuation technique to measure the majority of its assets and liabilities carried at fair value. Estimated fair market values for inventories carried at market are based on exchange-quoted prices, adjusted for differences in local markets, broker or dealer quotations or market transactions in either listed or over-the-counter (OTC) markets. In such cases, the inventory is classified in Level 2. Certain inventories may require management judgment or estimation for a significant component of the fair value amount. In such cases, the inventory is classified as Level 3. Changes in the fair market value of inventories are recognized in the consolidated statements of earnings as a component of cost of products sold.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 4.
|
Fair Value Measurements (Continued)
|
The Company’s derivative contracts that are measured at fair value include forward commodity purchase and sale contracts, exchange-traded commodity futures and option contracts, and OTC instruments related primarily to agricultural commodities, ocean freight, energy, interest rates, and foreign currencies. Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified in Level 1. The majority of the Company’s exchange-traded futures and options contracts are cash- settled on a daily basis and, therefore, are not included in this table. Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets. These differences are generally determined using inputs from broker or dealer quotations or market transactions in either the listed or OTC markets. When observable inputs are available for substantially the full term of the contract, it is classified in Level 2. When unobservable inputs have a significant impact on the measurement of fair value, the contract is classified in Level 3. Based on historical experience with the Company’s suppliers and customers, the Company’s own credit risk and knowledge of current market conditions, the Company does not view nonperformance risk to be a significant input to fair value for the majority of its forward commodity purchase and sale contracts. However, in certain cases, if the Company believes the nonperformance risk to be a significant input, the Company records estimated fair value adjustments, and classifies the contract in Level 3. Except for certain derivatives designated as cash flow hedges, changes in the fair market value of commodity-related derivatives are recognized in the consolidated statements of earnings as a component of cost of products sold. Changes in the fair market value of foreign currency-related derivatives are recognized in the consolidated statements of earnings as a component of net sales and other operating income, cost of products sold, and other (income) expense – net. The effective portions of changes in the fair market value of derivatives designated as cash flow hedges are recognized in the consolidated balance sheets as a component of accumulated other comprehensive income (loss) until the hedged items are recorded in earnings or it is probable the hedged transaction will no longer occur.
The Company’s marketable securities are comprised of U.S. Treasury securities, obligations of U.S. government agencies, corporate and municipal debt securities, and equity investments. U.S. Treasury securities and certain publicly traded equity investments are valued using quoted market prices and are classified in Level 1. U.S. government agency obligations, corporate and municipal debt securities and certain equity investments are valued using third-party pricing services and substantially all are classified in Level 2. Security values that are determined using pricing models are classified in Level 3. Unrealized changes in the fair market value of available-for-sale marketable securities are recognized in the consolidated balance sheets as a component of accumulated other comprehensive income (loss) unless a decline in value is deemed to be other-than-temporary at which point the decline is recorded in earnings.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 4.
|
Fair Value Measurements (Continued)
|
The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2011 and 2010.
|
Level 3 Fair Value Measurements at
March 31, 2011
|
||||||||||||
|
Inventories
Carried at
Market, Net
|
Derivative
Contracts,
Net
|
Total
|
||||||||||
|
(In millions)
|
||||||||||||
|
Balance, December 31, 2010
|
$ | 306 | $ | 92 | $ | 398 | ||||||
|
Total gains (losses), realized or
unrealized, included in earnings
before income taxes*
|
236 | 4 | 240 | |||||||||
|
Purchases, issuances and settlements
|
(46 | ) | (4 | ) | (50 | ) | ||||||
|
Transfers into Level 3
|
142 | 13 | 155 | |||||||||
|
Transfers out of Level 3
|
– | (10 | ) | (10 | ) | |||||||
|
Ending balance, March 31, 2011
|
$ | 638 | $ | 95 | $ | 733 | ||||||
* Includes gains of $79 million that are attributable to the change in unrealized gains or losses relating to Level 3 assets and liabilities still held at March 31, 2011.
|
Level 3 Fair Value Measurements at
March 31, 2010
|
||||||||||||
|
Inventories
Carried at
Market, Net
|
Derivative
Contracts,
Net
|
Total
|
||||||||||
|
(In millions)
|
||||||||||||
|
Balance, December 31, 2009
|
$ | 600 | $ | 77 | $ | 677 | ||||||
|
Total gains (losses), realized or
unrealized, included in earnings
before income taxes*
|
72 | (62 | ) | 10 | ||||||||
|
Purchases, issuances and settlements
|
(99 | ) | (6 | ) | (105 | ) | ||||||
|
Transfers into Level 3
|
– | (5 | ) | (5 | ) | |||||||
|
Transfers out of Level 3
|
(168 | ) | (35 | ) | (203 | ) | ||||||
|
Ending balance, March 31, 2010
|
$ | 405 | $ | (31 | ) | $ | 374 | |||||
*Includes losses of $99 million that are attributable to the change in unrealized gains or losses relating to Level 3 assets and liabilities still held at March 31, 2010.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 4.
|
Fair Value Measurements (Continued)
|
The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended March 31, 2011 and 2010.
|
Level 3 Fair Value Measurements at
March 31, 2011
|
||||||||||||
|
Inventories
Carried at
Market, Net
|
Derivative
Contracts,
Net
|
Total
|
||||||||||
|
(In millions)
|
||||||||||||
|
Balance, June 30, 2010
|
$ | 427 | $ | 13 | $ | 440 | ||||||
|
Total gains (losses), realized or
unrealized, included in earnings
before income taxes*
|
240 | 102 | 342 | |||||||||
|
Purchases, issuances and settlements
|
68 | (1 | ) | 67 | ||||||||
|
Transfers into Level 3
|
150 | 13 | 163 | |||||||||
|
Transfers out of Level 3
|
(247 | ) | (32 | ) | (279 | ) | ||||||
|
Ending balance, March 31, 2011
|
$ | 638 | $ | 95 | $ | 733 | ||||||
* Includes gains of $248 million that are attributable to the change in unrealized gains or losses relating to Level 3 assets and liabilities still held at March 31, 2011.
|
Level 3 Fair Value Measurements at
March 31, 2010
|
||||||||||||
|
Inventories
Carried at
Market, Net
|
Derivative
Contracts,
Net
|
Total
|
||||||||||
|
(In millions)
|
||||||||||||
|
Balance, June 30, 2009
|
$ | 468 | $ | (2 | ) | $ | 466 | |||||
|
Total gains (losses), realized or
unrealized, included in earnings
before income taxes*
|
30 | (18 | ) | 12 | ||||||||
|
Purchases, issuances and settlements
|
(127 | ) | (23 | ) | (150 | ) | ||||||
|
Transfers in and/or out of Level 3
|
34 | 12 | 46 | |||||||||
|
Ending balance, March 31, 2010
|
$ | 405 | $ | (31 | ) | $ | 374 | |||||
*Includes losses of $4 million that are attributable to the change in unrealized gains or losses relating to Level 3 assets and liabilities still held at March 31, 2010.
Transfers into Level 3 of assets and liabilities previously classified in Level 2 were due to the relative value of unobservable inputs to the total fair value measurement of certain products and derivative contracts rising above the 10% threshold. Transfers out of Level 3 were primarily due to the relative value of unobservable inputs to the total fair value measurement of certain products and derivative contracts falling below the 10% threshold and thus permitting reclassification to Level 2.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 5.
|
Derivative Instruments and Hedging Activities
|
The Company recognizes all of its derivative instruments as either assets or liabilities at fair value in its consolidated balance sheets. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. The majority of the Company’s derivatives have not been designated as hedging instruments. For those derivative instruments that are designated and qualify as hedging instruments, a reporting entity must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, a cash flow hedge, or a hedge of a net investment in a foreign operation. As of March 31, 2011, the Company has certain derivatives designated as cash flow hedges. Within the Note 5 tables, zeros represent minimal amounts.
Derivatives Not Designated as Hedging Instruments
The Company generally follows a policy of using exchange-traded futures and exchange-traded and OTC options contracts to minimize its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts to reduce price risk caused by market fluctuations in agricultural commodities and foreign currencies. The Company also uses exchange-traded futures and exchange-traded and OTC 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 contract defaults, and volatility of freight markets. Exchange-traded futures, exchange-traded and OTC options contracts, and forward cash purchase and sales contracts of certain merchandisable agricultural commodities accounted for as derivatives are stated at fair value. Inventories of certain merchandisable agricultural commodities, which include amounts acquired under deferred pricing contracts, are stated at market value. Inventory is not a derivative and therefore is not included in the tables below. Changes in the market value of inventories of certain merchandisable agricultural commodities, forward cash purchase and sales contracts, exchange-traded futures, and exchange-traded and OTC options contracts are recognized in earnings immediately. Unrealized gains and unrealized losses on forward cash purchase contracts, forward foreign currency exchange (FX) contracts, forward cash sales contracts, and exchange-traded and OTC options contracts represent the fair value of such instruments and are classified on the Company’s consolidated balance sheets as receivables and accrued expenses, respectively.
At March 31, 2010, the Company de-designated and discontinued hedge accounting treatment for certain interest rate swaps. At the date of de-designation of these hedges, $21 million of after-tax gains was deferred in accumulated other comprehensive income (AOCI). These gains will remain in AOCI and will be amortized over the life of the hedged transaction. The Company recognized in earnings $6 million and $30 million of pre-tax gains from these interest rate swaps during the quarter and nine months ended March 31, 2011, respectively.
The following table sets forth the fair value of derivatives not designated as hedging instruments as of March 31, 2011 and June 30, 2010.
|
March 31, 2011
|
June 30, 2010
|
|||||||||||||||
|
Assets
|
Liabilities
|
Assets
|
Liabilities
|
|||||||||||||
|
(In millions)
|
(In millions)
|
|||||||||||||||
|
FX Contracts
|
$ | 277 | $ | 179 | $ | 200 | $ | 266 | ||||||||
|
Interest Contracts
|
10 | 3 | – | 26 | ||||||||||||
|
Commodity Contracts
|
3,326 | 2,687 | 2,727 | 3,152 | ||||||||||||
|
Total
|
$ | 3,613 | $ | 2,869 | $ | 2,927 | $ | 3,444 | ||||||||
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 5.
|
Derivative Instruments and Hedging Activities (Continued)
|
The following tables set forth the pre-tax gains (losses) on derivatives not designated as hedging instruments that have been included in the consolidated statements of earnings for the quarter and nine months ended March 31, 2011 and 2010.
|
Three months ended March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
(In Millions)
|
||||||||
|
Interest Contracts
|
||||||||
|
Other income/expense – net
|
$ | 6 | $ | 0 | ||||
|
FX Contracts
|
||||||||
|
Net sales and other operating income
|
$ | (11 | ) | $ | 19 | |||
|
Cost of products sold
|
41 | 21 | ||||||
|
Other income/expense – net
|
35 | (9 | ) | |||||
|
Commodity Contracts
|
||||||||
|
Cost of products sold
|
$ | (104 | ) | $ | 553 | |||
|
Total gain (loss) recognized in earnings
|
$ | (33 | ) | $ | 584 | |||
|
Nine months ended March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
(In Millions)
|
||||||||
|
Interest Contracts
|
||||||||
|
Other income/expense – net
|
$ | 30 | $ | 2 | ||||
|
FX Contracts
|
||||||||
|
Net sales and other operating income
|
$ | (18 | ) | $ | (1 | ) | ||
|
Cost of products sold
|
105 | 46 | ||||||
|
Other income/expense – net
|
67 | 19 | ||||||
|
Commodity Contracts
|
||||||||
|
Cost of products sold
|
$ | (1,911 | ) | $ | 144 | |||
|
Total gain (loss) recognized in earnings
|
$ | (1,727 | ) | $ | 210 | |||
Derivatives Designated as Cash Flow Hedging Strategies
For derivative instruments that are designated and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI and reclassified into earnings in the same line item affected by the hedged transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss of the derivative instrument that is in excess of the cumulative change in the cash flows of the hedged item, if any (i.e., the ineffective portion), hedge components excluded from the assessment of effectiveness, and gains and losses related to discontinued hedges are recognized in the consolidated statement of earnings during the current period.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 5.
|
Derivative Instruments and Hedging Activities (Continued)
|
For each of the commodity hedge programs described below, the derivatives are designated as cash flow hedges. The changes in the market value of such derivative contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of the hedged item. Once the hedged item is recognized in earnings, the gains/losses arising from the hedge will be reclassified from AOCI to either net sales and other operating income, or cost of products sold. As of March 31, 2011, the Company has $3 million of after-tax losses in AOCI related to gains and losses from commodity cash flow hedge transactions. The Company expects to recognize all of these after-tax losses in the statement of earnings during the next 12 months.
The Company, from time to time, uses futures or options contracts to fix the purchase price of anticipated volumes of corn to be purchased and processed in a future month. The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s forecasted purchases of corn. The Company’s corn processing plants currently grind approximately 75 million bushels of corn per month. During the past 12 months, the Company hedged between 14% and 100% of its monthly anticipated grind. At March 31, 2011, the Company has hedged between 1% and 100% of its anticipated monthly grind of corn over the next 9 months.
The Company, from time to time, also uses futures, options, and swaps to fix the purchase price of the Company’s anticipated natural gas requirements for certain production facilities. The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s forecasted purchases of natural gas. These production facilities use approximately 3.7 million MMbtus of natural gas per month. During the past 12 months, the Company hedged between 47% and 58% of the quantity of its anticipated monthly natural gas purchases. At March 31, 2011, the Company has hedged portions of its anticipated monthly purchases of natural gas over the next 15 months, ranging from 5% to 48% of its anticipated monthly natural gas purchases.
The Company, from time to time, also uses futures, options, and swaps to fix the sales price of certain ethanol sales contracts. The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s sales of ethanol under sales contracts that are indexed to unleaded gasoline prices. During the past 12 months, the Company hedged between 7 million to 16 million gallons of ethanol per month under this program. At March 31, 2011, the Company has hedged between 3 million to 16 million gallons of contracted ethanol sales per month over the next 9 months.
To protect against fluctuations in cash flows due to foreign currency exchange rates, the Company from time to time uses forward foreign exchange contracts as cash flow hedges. Certain production facilities have manufacturing expenses and some sales contracts denominated in non-functional currency. To reduce the risk of fluctuations in cash flows due to changes in the exchange rate between functional versus non-functional currency, the Company will hedge some portion of the forecasted foreign currency expenditures and/or receipts. At March 31, 2011, the amount in AOCI related to foreign exchange contracts designated as cash flow hedging instruments was immaterial.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 5.
|
Derivative Instruments and Hedging Activities (Continued)
|
The Company, from time to time, uses treasury-lock agreements and interest rate swaps in order to lock in the Company’s interest rate prior to the issuance or remarketing of its debentures. Both the treasury-lock agreements and interest rate swaps were designated as cash flow hedges of the risk of changes in the future interest payments attributable to changes in the benchmark interest rate. The objective of the treasury-lock agreements and interest rate swaps was to protect the Company from changes in the benchmark rate from the date the Company decided to issue the debt to the date when the debt will actually be issued. At March 31, 2011, AOCI included $23 million of after-tax gains related to treasury-lock agreements and interest rate swaps, of which $21 million relates to the interest rate swaps that were de-designated at March 31, 2010 as discussed earlier in Note 5. The Company will recognize the $23 million of gains in its consolidated statement of earnings over the terms of the hedged items which range from 10 to 30 years or when it is probable the hedged transactions will not occur.
The following table sets forth the fair value of derivatives designated as hedging instruments as of March 31, 2011 and June 30, 2010.
|
March 31, 2011
|
June 30, 2010
|
|||||||||||||||
|
Assets
|
Liabilities
|
Assets
|
Liabilities
|
|||||||||||||
|
(In millions)
|
(In millions)
|
|||||||||||||||
|
Interest Contracts
|
$ | 3 | $ | 8 | $ | – | $ | – | ||||||||
|
Commodity Contracts
|
1 | 1 | 2 | 2 | ||||||||||||
|
Total
|
$ | 4 | $ | 9 | $ | 2 | $ | 2 | ||||||||
The following tables set forth the pre-tax gains (losses) on derivatives designated as hedging instruments that have been included in the consolidated statement of earnings for the quarter and nine months ended March 31, 2011 and 2010.
|
Consolidated
|
Three months ended
|
||||||||
|
Statement of
|
March 31,
|
||||||||
|
Earnings Location
|
2011
|
2010
|
|||||||
|
(In millions)
|
|||||||||
|
Effective amounts recognized in earnings
|
|||||||||
|
FX Contracts
|
Other income/expense – net
|
$ | 0 | $ | 0 | ||||
|
Interest Contracts
|
Other income expense – net
|
0 | 0 | ||||||
|
Commodity Contracts
|
Cost of products sold
|
112 | (18 | ) | |||||
|
Net sales and other operating income
|
(12 | ) | 0 | ||||||
|
Ineffective amount recognized in earnings
|
|||||||||
|
Interest Contracts
|
Other income/expense – net
|
1 | – | ||||||
|
Commodity Contracts
|
Cost of products sold
|
8 | (82 | ) | |||||
|
Total amount recognized in earnings
|
$ | 109 | $ | (100 | ) | ||||
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 5.
|
Derivative Instruments and Hedging Activities (Continued)
|
|
Consolidated
|
Nine months ended
|
||||||||
|
Statement of
|
March 31,
|
||||||||
|
Earnings Location
|
2011
|
2010
|
|||||||
|
(In millions)
|
|||||||||
|
Effective amounts recognized in earnings
|
|||||||||
|
FX Contracts
|
Other income/expense – net
|
$ | 0 | $ | (1 | ) | |||
|
Interest Contracts
|
Other income/expense – net
|
0 | 0 | ||||||
|
Commodity Contracts
|
Cost of products sold
|
333 | (68 | ) | |||||
|
Net sales and other operating income
|
(8 | ) | 0 | ||||||
|
Ineffective amount recognized in earnings
|
|||||||||
|
Interest Contracts
|
Other income/expense – net
|
1 | – | ||||||
|
Commodity Contracts
|
Cost of products sold
|
41 | (60 | ) | |||||
|
Total amount recognized in earnings
|
$ | 367 | $ | (129 | ) | ||||
The following tables set forth the changes in AOCI related to derivatives gains (losses) for the quarter and nine months ended March 31, 2011 and 2010.
|
Three months ended
|
||||||||
|
March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
(In millions)
|
||||||||
|
Balance at December 31
|
$ | 43 | $ | 54 | ||||
|
Unrealized gains (losses)
|
61 | (94 | ) | |||||
|
Losses (gains) reclassified to earnings
|
(101 | ) | 19 | |||||
|
Tax effect
|
16 | 28 | ||||||
|
Balance at March 31
|
$ | 19 | $ | 7 | ||||
|
Nine months ended
|
||||||||
|
March 31,
|
||||||||
|
2011
|
2010
|
|||||||
|
(In millions)
|
||||||||
|
Balance at June 30
|
$ | 30 | $ | (13 | ) | |||
|
Unrealized gains (losses)
|
308 | (36 | ) | |||||
|
Losses (gains) reclassified to earnings
|
(326 | ) | 70 | |||||
|
Tax effect
|
7 | (14 | ) | |||||
|
Balance at March 31
|
$ | 19 | $ | 7 | ||||
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 6.
|
Marketable Securities and Cash Equivalents
|
|
Unrealized
|
Unrealized
|
Fair
|
||||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
|
(In millions)
|
||||||||||||||||
|
March 31, 2011
|
||||||||||||||||
|
United States government obligations
|
||||||||||||||||
|
Maturity less than 1 year
|
$ | 714 | $ | – | $ | – | $ | 714 | ||||||||
|
Maturity 1 to 5 years
|
71 | 1 | – | 72 | ||||||||||||
|
Government–sponsored enterprise
obligations
|
||||||||||||||||
|
Maturity 1 to 5 years
|
130 | 2 | – | 132 | ||||||||||||
|
Maturity 5 to 10 years
|
62 | 2 | – | 64 | ||||||||||||
|
Maturity greater than 10 years
|
273 | 6 | (1 | ) | 278 | |||||||||||
|
Corporate debt securities
|
||||||||||||||||
|
Maturity 1 to 5 years
|
35 | – | – | 35 | ||||||||||||
|
Other debt securities
|
||||||||||||||||
|
Maturity less than 1 year
|
431 | – | – | 431 | ||||||||||||
|
Maturity 1 to 5 years
|
3 | – | – | 3 | ||||||||||||
|
Maturity 5 to 10 years
|
7 | – | – | 7 | ||||||||||||
|
Equity securities
|
||||||||||||||||
|
Available-for-sale
|
159 | 83 | (9 | ) | 233 | |||||||||||
|
Trading
|
23 | – | – | 23 | ||||||||||||
| $ | 1,908 | $ | 94 | $ | (10 | ) | $ | 1,992 | ||||||||
|
Unrealized
|
Unrealized
|
Fair
|
||||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
|
(In millions)
|
||||||||||||||||
|
June 30, 2010
|
||||||||||||||||
|
United States government obligations
|
||||||||||||||||
|
Maturity less than 1 year
|
$ | 395 | $ | – | $ | – | $ | 395 | ||||||||
|
Maturity 1 to 5 years
|
33 | 1 | – | 34 | ||||||||||||
|
Government–sponsored enterprise
obligations
|
||||||||||||||||
|
Maturity 1 to 5 years
|
111 | 3 | – | 114 | ||||||||||||
|
Maturity 5 to 10 years
|
122 | 4 | – | 126 | ||||||||||||
|
Maturity greater than 10 years
|
232 | 9 | – | 241 | ||||||||||||
|
Corporate debt securities
|
||||||||||||||||
|
Maturity less than 1 year
|
10 | – | – | 10 | ||||||||||||
|
Maturity 1 to 5 years
|
46 | 2 | – | 48 | ||||||||||||
|
Other debt securities
|
||||||||||||||||
|
Maturity less than 1 year
|
659 | – | – | 659 | ||||||||||||
|
Maturity 1 to 5 years
|
2 | – | – | 2 | ||||||||||||
|
Maturity 5 to 10 years
|
6 | – | – | 6 | ||||||||||||
|
Equity securities
|
||||||||||||||||
|
Available-for-sale
|
54 | 48 | (15 | ) | 87 | |||||||||||
|
Trading
|
20 | – | – | 20 | ||||||||||||
| $ | 1,690 | $ | 67 | $ | (15 | ) | $ | 1,742 | ||||||||
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 6.
|
Marketable Securities and Cash Equivalents (Continued)
|
Of the $10 million in unrealized losses at March 31, 2011, $1 million arose within the last 12 months. The market value of the investments that have been in an unrealized loss position for less than 12 months and for 12 months and longer is $77 million and $25 million, respectively. The market value of government-sponsored enterprise obligations with unrealized losses as of March 31, 2011 is $77 million. The $1 million in unrealized losses associated with government-sponsored enterprise obligations are not considered to be other-than-temporary because the present value of expected cash flows to be collected is equivalent to or exceeds the amortized cost basis of the securities. The market value of available-for-sale equity securities with unrealized losses as of March 31, 2011 is $25 million. The $9 million in unrealized losses associated with available-for-sale equity securities is related to the Company’s investment in one security. The Company does not intend to sell this equity security, and, based upon its evaluation, the Company does not believe it is likely that the Company will be required to sell the investment before recovery of its cost.
|
Note 7.
|
Debt and Financing Arrangements
|
The Company has outstanding $1.15 billion principal amount of convertible senior notes (the Notes) due in 2014. As of March 31, 2011, none of the conditions permitting conversion of the Notes had been satisfied. Therefore, no share amounts related to the conversion of the Notes or exercise of the warrants sold in connection with the issuance of the Notes were included in diluted average shares outstanding.
The Company also has outstanding $1.75 billion principal amount of Equity Units (the Units). The Units are a combination of (a) debt and (b) forward purchase contracts for the holder to purchase the Company’s common stock. The forward purchase contracts issued in connection with the Units will be settled for the Company’s common stock on June 1, 2011. Until settlement of the forward purchase contracts, the shares of stock underlying each forward purchase contract are not outstanding. On March 30, 2011, the Company initiated a remarketing of the $1.75 billion 4.7% debentures underlying the Units into two tranches: $0.75 billion principal amount of 4.479% notes due in 2021 and $1.0 billion principal amount of 5.765% debentures due in 2041. As a result of the remarketing, the Company is required to use the “if-converted” method of calculating diluted earnings per share with respect to the forward contracts for the quarter ended March 31, 2011 (see Note 8).
For further information on the Notes and Units, refer to Note 8 “Debt and Financing Arrangements” in the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended June 30, 2010.
On February 11, 2011, the Company issued $1.5 billion in aggregate principal amount of floating rate notes due on August 13, 2012. Interest on the notes will accrue at a floating rate of three-month LIBOR reset quarterly plus 0.16% and will be paid quarterly beginning on May 13, 2011.
At March 31, 2011, the fair value of the Company’s long-term debt exceeded the carrying value by $774 million, as estimated using quoted market prices or discounted future cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
At March 31, 2011, the Company had lines of credit totaling $8.5 billion, of which $4.1 billion was unused. Of the Company’s total lines of credit, $6.5 billion support a commercial paper borrowing facility, against which there was $3.5 billion of commercial paper outstanding at March 31, 2011. At June 30, 2010, the Company had lines of credit totaling $6.0 billion, of which $4.2 billion supported a commercial paper borrowing facility. The Company expanded its overall commercial paper borrowing capacity with a $2.3 billion increase in short-term credit facilities in the quarter ended December 31, 2010.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 8.
|
Earnings Per Share
|
The computation of basic and diluted earnings per share is as follows:
|
Three months ended
|
Nine months ended
|
|||||||||||||||
|
March 31,
|
March 31,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
(In millions, except per share amounts)
|
||||||||||||||||
|
Net earnings attributable to controlling interests
|
$ | 578 | $ | 421 | $ | 1,655 | $ | 1,484 | ||||||||
|
Average shares outstanding
|
638 | 643 | 639 | 643 | ||||||||||||
|
|
||||||||||||||||
|
Basic earnings per share
|
$ | 0.91 | $ | 0.65 | $ | 2.59 | $ | 2.31 | ||||||||
|
Net earnings attributable to controlling interests
|
$ | 578 | $ | 421 | $ | 1,655 | $ | 1,484 | ||||||||
|
Plus: After-tax interest on 4.7% debentures
related to $1.75 billion equity units
|
13 | – | 13 | – | ||||||||||||
|
Adjusted net earnings attributable to
controlling interests
|
$ | 591 | $ | 421 | $ | 1,668 | $ | 1,484 | ||||||||
|
Average shares outstanding
|
638 | 643 | 639 | 643 | ||||||||||||
|
Plus: Incremental shares
|
||||||||||||||||
|
Share-based compensation awards
|
2 | 2 | 2 | 1 | ||||||||||||
|
Shares assumed issued related to $1.75
billion equity units
|
44 | – | 14 | – | ||||||||||||
|
Adjusted average shares outstanding
|
684 | 645 | 655 | 644 | ||||||||||||
|
Diluted earnings per share
|
$ | 0.86 | $ | 0.65 | $ | 2.55 | $ | 2.30 |
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 9.
|
Income Taxes
|
The Company’s effective tax rate for the quarter and nine months ended March 31, 2011, was 28.2% and 27.2%, respectively compared to 22.1% and 27.6% for the quarter and nine months ended March 31, 2010, respectively. The Company’s effective tax rate is higher in the current quarter compared to the quarter ended March 31, 2010 as the prior year quarter rate was favorably impacted by updated estimates, including the geographic mix of pre-tax earnings, to bring the cumulative effective tax rate in line with a lower 2010 fiscal year forecast.
The Company is subject to income taxation in many jurisdictions around the world. The Company is also subject to routine examination by domestic and foreign tax authorities and frequently faces challenges regarding the amount of taxes due. These challenges include questions regarding the timing, nature and amount of deductions and the allocation of income among various tax jurisdictions. Resolution of the related tax positions through negotiation with relevant tax authorities or through litigation may take years to complete. Therefore, it is difficult to predict the timing for resolution of tax positions. In its routine evaluations of the exposure associated with various tax filing positions, the Company recognizes a liability, when necessary, for estimated potential additional tax owed by the Company in accordance with ASC 740, Income Taxes. However, the Company cannot accurately predict or provide assurance as to the ultimate outcome of these ongoing or future examinations.
In December 2009, the Company’s wholly-owned subsidiary, ADM do Brasil Ltda. (“ADM do Brasil”), received a tax assessment from the Brazilian Federal Revenue Service (“BFRS”) in the amount of $521 million (subject to interest and variation in currency exchange rates) consisting of tax, penalty, and interest, challenging the tax deductibility of commodity hedging losses incurred by ADM do Brasil in 2004. Commodity hedging transactions can result in gains, which are included in ADM do Brasil’s calculations of taxable income in Brazil, and losses, which ADM do Brasil deducts from its taxable income. In June 2010, the BFRS initiated an audit related to the same matter for the tax years 2005, 2006, and 2007 resulting in an assessment for the tax years 2006 and 2007 in the amount of $110 million (subject to interest and variation in currency exchange rates). No assessment was received for tax year 2005, which included taxable net hedging gains. In addition, the statute of limitations for tax year 2005 expired on December 31, 2010. If the BFRS were to challenge commodity hedging deductions in tax years after 2007, the Company estimates it could receive additional claims of approximately $110 million (as of March 31, 2011 and subject to interest and variation in currency exchange rates).
In January 2010, ADM do Brasil filed an administrative appeal of the 2004 assessment with the BFRS. A decision in favor of the BFRS was received in November 2010 and a second-level administrative appeal has been filed. Additionally, an administrative appeal was filed in February 2011 for the assessment related to the years 2006 and 2007. If ADM do Brasil continues to be unsuccessful in the administrative appellate process, further appeals are available in the Brazilian federal courts. While the Company believes that its consolidated financial statements properly reflect the tax deductibility of these hedging losses, the ultimate resolution of this matter could result in the future recognition of additional payments of, and expense for, income tax and the associated interest and penalties.
The Company has evaluated its tax position regarding these hedging transactions and concluded, based upon advice from Brazilian legal counsel, that it was appropriate to recognize both gains and losses resulting from hedging transactions when determining its Brazilian income tax expense. Therefore, the Company has continued to recognize the tax benefit from hedging losses in its financial statements and has not recorded any tax liability for the amounts assessed by the BFRS. The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2007.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 10.
|
Comprehensive Income
|
The components of comprehensive income, net of related tax, are as follows:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
March 31,
|
March 31,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
(In millions)
|
||||||||||||||||
|
Net earnings including noncontrolling
Interests
|
$ | 568 | $ | 416 | $ | 1,639 | $ | 1,474 | ||||||||
|
Unrealized gain (loss) on investments
|
7 | 2 | 20 | 18 | ||||||||||||
|
Deferred gain (loss) on hedging
Activities
|
(24 | ) | (47 | ) | (11 | ) | 20 | |||||||||
|
Pension liability adjustment
|
(9 | ) | 10 | (11 | ) | 5 | ||||||||||
|
Foreign currency translation adjustment
|
325 | (322 | ) | 749 | (200 | ) | ||||||||||
|
Comprehensive income
|
867 | 59 | 2,386 | 1,317 | ||||||||||||
|
Less: Comprehensive income (loss)
attributable to noncontrolling interests
|
(10 | ) | (5 | ) | (16 | ) | (10 | ) | ||||||||
|
Comprehensive income attributable
to controlling interests
|
$ | 877 | $ | 64 | $ | 2,402 | $ | 1,327 | ||||||||
|
Note 11.
|
Other (Income) Expense - Net
|
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
March 31,
|
March 31,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
(In millions)
|
||||||||||||||||
|
Interest expense
|
$ | 121 | $ | 101 | $ | 353 | $ | 304 | ||||||||
|
Investment income
|
(32 | ) | (34 | ) | (97 | ) | (100 | ) | ||||||||
|
Gain on Golden Peanut revaluation
|
– | – | (71 | ) | – | |||||||||||
|
Equity in earnings of affiliates
|
(71 | ) | (137 | ) | (334 | ) | (428 | ) | ||||||||
|
Charges on early extinguishment of debt
|
– | 75 | – | 75 | ||||||||||||
|
Unrealized gains on interest rate swaps
|
(6 | ) | – | (30 | ) | – | ||||||||||
|
Other – net
|
(38 | ) | (3 | ) | (58 | ) | (36 | ) | ||||||||
|
Other (Income) Expense - Net
|
$ | (26 | ) | $ | 2 | $ | (237 | ) | $ | (185 | ) | |||||
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 12.
|
Segment Information
|
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, which include wheat processing, cocoa processing, and its financial business units, are not reportable segments, as defined by ASC Topic 280, Segment Reporting, and are classified as Other.
Intersegment sales have been recorded at amounts approximating market. Operating profit for each segment is based on net sales less identifiable operating expenses, including an interest charge related to working capital usage. Also included in segment operating profit is equity in earnings of affiliates based on the equity method of accounting. Certain Corporate items are not allocated to the Company’s reportable business segments. Corporate results include the impact of LIFO inventory adjustments, the after-tax elimination of income attributable to mandatorily redeemable interests in consolidated subsidiaries, unallocated corporate expenses, and unallocated net interest costs.
For detailed information regarding the Company’s reportable segments, see Note 15 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended June 30, 2010.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
Note 12.
|
Segment Information (Continued)
|
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
March 31,
|
March 31,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
(In millions)
|
||||||||||||||||
|
Sales to external customers
|
||||||||||||||||
|
Oilseeds Processing
|
$ | 6,642 | $ | 5,084 | $ | 19,322 | $ | 16,322 | ||||||||
|
Corn Processing
|
2,513 | 1,960 | 7,176 | 5,905 | ||||||||||||
|
Agricultural Services
|
9,340 | 6,788 | 26,631 | 19,750 | ||||||||||||
|
Other
|
1,582 | 1,313 | 4,677 | 4,002 | ||||||||||||
|
Total
|
$ | 20,077 | $ | 15,145 | $ | 57,806 | $ | 45,979 | ||||||||
|
Intersegment sales
|
||||||||||||||||
|
Oilseeds Processing
|
$ | 31 | $ | 17 | $ | 84 | $ | 54 | ||||||||
|
Corn Processing
|
9 | 9 | 26 | 26 | ||||||||||||
|
Agricultural Services
|
971 | 697 | 2,228 | 1,845 | ||||||||||||
|
Other
|
38 | 36 | 112 | 110 | ||||||||||||
|
Total
|
$ | |||||||||||||||