ADM-2015.6.30-10Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.  20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-44
ARCHER-DANIELS-MIDLAND COMPANY
(Exact name of registrant as specified in its charter)
Delaware
41-0129150
(State or other jurisdiction of
incorporation or organization)
(I. R. S. Employer
Identification No.)
 
 
77 West Wacker Drive, Suite 4600
Chicago, Illinois
(Address of principal executive offices)
 
60601
(Zip Code)
 
 
(312) 634-8100
(Registrant’s telephone number, including area code)
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 – 608,939,506 shares
(July 31, 2015)





PART I - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Archer-Daniels-Midland Company

Consolidated Statements of Earnings
(Unaudited)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions, except per share amounts)
 
 
 
 
 
 
 
 
Revenues
$
17,186

 
$
21,494

 
$
34,692

 
$
42,190

Cost of products sold
16,222

 
20,322

 
32,626

 
40,343

Gross Profit
964

 
1,172

 
2,066

 
1,847

 
 
 
 
 
 
 
 
Selling, general, and administrative expenses
519

 
426

 
1,017

 
819

Asset impairment, exit, and restructuring costs
31

 
31

 
31

 
31

Interest expense
85

 
79

 
166

 
172

Equity in earnings of unconsolidated affiliates
(87
)
 
(78
)
 
(226
)
 
(210
)
Interest income
(21
)
 
(24
)
 
(39
)
 
(46
)
Other (income) expense – net
(89
)
 
3

 
(99
)
 
(20
)
Earnings Before Income Taxes
526

 
735

 
1,216

 
1,101

 
 
 
 
 
 
 
 
Income taxes
143

 
203

 
340

 
301

Net Earnings Including Noncontrolling Interests
383

 
532

 
876

 
800

 
 
 
 
 
 
 
 
Less: Net earnings (losses) attributable to noncontrolling interests
(3
)
 
(1
)
 
(3
)
 
—

 
 
 
 
 
 
 
 
Net Earnings Attributable to Controlling Interests
$
386

 
$
533

 
$
879

 
$
800

 
 
 
 
 
 
 
 
Average number of shares outstanding – basic
624

 
656

 
630

 
658

 
 
 
 
 
 
 
 
Average number of shares outstanding – diluted
627

 
659

 
633

 
661

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.62

 
$
0.81

 
$
1.40

 
$
1.22

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
0.62

 
$
0.81

 
$
1.39

 
$
1.21

 
 
 
 
 
 
 
 
Dividends per common share
$
0.28

 
$
0.24

 
$
0.56

 
$
0.48


See notes to consolidated financial statements.




2



Archer-Daniels-Midland Company

Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
 
 
 
 
 
 
 
 
Net earnings including noncontrolling interests
$
383

 
$
532

 
$
876

 
$
800

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
177

 
35

 
(525
)
 
—

Tax effect
(6
)
 
—

 
26

 
1

Net of tax amount
171

 
35

 
(499
)
 
1

 
 
 
 
 
 
 
 
Pension and other postretirement benefit liabilities adjustment
(4
)
 
4

 
38

 
10

Tax effect
—

 
(1
)
 
(19
)
 
(3
)
Net of tax amount
(4
)
 
3

 
19

 
7

 
 
 
 
 
 
 
 
Deferred gain (loss) on hedging activities
38

 
70

 
(18
)
 
(27
)
Tax effect
(9
)
 
(23
)
 
12

 
10

Net of tax amount
29

 
47

 
(6
)
 
(17
)
 
 
 
 
 
 
 
 
Unrealized gain (loss) on investments
(20
)
 
3

 
23

 
(7
)
Tax effect
(2
)
 
—

 
(2
)
 
3

Net of tax amount
(22
)
 
3

 
21

 
(4
)
Other comprehensive income (loss)
174

 
88

 
(465
)
 
(13
)
Comprehensive income (loss) including noncontrolling interests
557

 
620

 
411

 
787

 
 
 
 
 
 
 
 
Less: Comprehensive income (loss) attributable to noncontrolling interests
(3
)
 
(1
)
 
(4
)
 
—

 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to controlling interests
$
560

 
$
621

 
$
415

 
$
787


See notes to consolidated financial statements.





3



Archer-Daniels-Midland Company

Consolidated Balance Sheets
(In millions)
June 30, 2015
 
December 31, 2014
 
(Unaudited)
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
867

 
$
1,099

Short-term marketable securities
309

 
515

Segregated cash and investments
4,732

 
4,877

Trade receivables
2,224

 
2,704

Inventories
7,845

 
9,374

Current assets held for sale
1,444

 
1,403

Other current assets
5,167

 
6,056

Total Current Assets
22,588

 
26,028

 
 
 
 
Investments and Other Assets
 

 
 

Investments in and advances to affiliates
3,930

 
3,892

Long-term marketable securities
492

 
485

Goodwill and other intangible assets
3,256

 
3,283

Other assets
405

 
349

Total Investments and Other Assets
8,083

 
8,009

 
 
 
 
Property, Plant, and Equipment
 

 
 

Land
437

 
441

Buildings
4,664

 
4,668

Machinery and equipment
17,035

 
17,044

Construction in progress
908

 
819

 
23,044

 
22,972

Accumulated depreciation
(13,147
)
 
(13,012
)
Net Property, Plant, and Equipment
9,897

 
9,960

 
 
 
 
Total Assets
$
40,568

 
$
43,997

 
 
 
 
Liabilities and Shareholders’ Equity
 

 
 

Current Liabilities
 

 
 

Short-term debt
$
157

 
$
108

Trade payables
3,017

 
4,326

Payables to brokerage customers
5,363

 
5,874

Accrued expenses and other payables
3,306

 
5,040

Current maturities of long-term debt
801

 
24

Current liabilities held for sale
215

 
230

Total Current Liabilities
12,859

 
15,602

 
 
 
 
Long-Term Liabilities
 

 
 

Long-term debt
5,965

 
5,528

Deferred income taxes
1,618

 
1,662

Other
1,568

 
1,575

Total Long-Term Liabilities
9,151

 
8,765

 
 
 
 
Shareholders’ Equity
 

 
 

Common stock
4,017

 
5,115

Reinvested earnings
16,232

 
15,701

Accumulated other comprehensive income (loss)
(1,705
)
 
(1,241
)
Noncontrolling interests
14

 
55

Total Shareholders’ Equity
18,558

 
19,630

Total Liabilities and Shareholders’ Equity
$
40,568

 
$
43,997

 
 
 
 
See notes to consolidated financial statements.

4



Archer-Daniels-Midland Company

Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
(In millions)
Operating Activities
 
 
 
Net earnings including noncontrolling interests
$
876

 
$
800

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities
 

 
 

Depreciation and amortization
441

 
432

Asset impairment charges
31

 
—

Deferred income taxes
29

 
(32
)
Equity in earnings of affiliates, net of dividends
(69
)
 
(127
)
Stock compensation expense
42

 
33

Pension and postretirement accruals (contributions), net
16

 
3

Deferred cash flow hedges
(18
)
 
(27
)
Gains on sales of assets and revaluation
(104
)
 
(34
)
Other – net
(50
)
 
4

Changes in operating assets and liabilities
 

 
 

Segregated cash and investments
146

 
(389
)
Trade receivables
423

 
(896
)
Inventories
1,334

 
2,401

Other current assets
735

 
1,356

Trade payables
(1,226
)
 
(1,602
)
Payables to brokerage customers
(534
)
 
476

Accrued expenses and other payables
(1,665
)
 
(1,415
)
Total Operating Activities
407

 
983

 
 
 
 
Investing Activities
 

 
 

Purchases of property, plant, and equipment
(540
)
 
(398
)
Proceeds from sales of assets and business
135

 
19

Net assets of businesses acquired
(69
)
 
—

Purchases of marketable securities
(545
)
 
(641
)
Proceeds from sales of marketable securities
735

 
691

Investments in and advances to affiliates
(125
)
 
(31
)
Distributions from affiliates
1

 
81

Other – net
1

 
22

Total Investing Activities
(407
)
 
(257
)
 
 
 
 
Financing Activities
 

 
 

Long-term debt borrowings
1,244

 
1

Long-term debt payments
(28
)
 
(1,162
)
Net borrowings (payments) under lines of credit agreements
50

 
(129
)
Purchases of treasury stock
(1,164
)
 
(493
)
Cash dividends
(350
)
 
(315
)
Acquisition of noncontrolling interest
—

 
(157
)
Other – net
16

 
38

Total Financing Activities
(232
)
 
(2,217
)
 
 
 
 
Increase (decrease) in cash and cash equivalents
(232
)
 
(1,491
)
Cash and cash equivalents beginning of period
1,099

 
3,121

 
 
 
 
Cash and cash equivalents end of period
$
867

 
$
1,630

 
 
 
 
See notes to consolidated financial statements.

5



Archer-Daniels-Midland-Company

Consolidated Statement of Shareholders’ Equity
(Unaudited)
 
Common Stock
 
Reinvested
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Total
Shareholders’
Equity
 
Shares
 
Amount
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2014
637

 
$
5,115

 
$
15,701

 
$
(1,241
)
 
$
55

 
$
19,630

Comprehensive income
 

 
 

 
 

 
 

 
 

 
 

Net earnings
 
 
 

 
879

 
 

 
(3
)
 
 

   Other comprehensive
     income (loss)
 

 
 

 
 

 
(464
)
 
(1
)
 
 

      Total comprehensive
       income
 

 
 

 
 

 
 

 
 

 
411

Cash dividends paid- $0.56 per share
 

 
 

 
(350
)
 
 

 
 

 
(350
)
Treasury stock purchases
(24
)
 
(1,164
)
 
 
 
 
 
 
 
(1,164
)
Stock compensation expense
 

 
42

 
 

 
 

 
 

 
42

Other
1

 
24

 
2

 
—

 
(37
)
 
(11
)
Balance June 30, 2015
614

 
$
4,017

 
$
16,232

 
$
(1,705
)
 
$
14

 
$
18,558


See notes to consolidated financial statements.

6



Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements
(Unaudited)
Note 1.
Basis of Presentation

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 six-month period ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.  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 December 31, 2014.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated.  The Company consolidates all entities, including variable interest entities (VIEs), in which it has a controlling financial interest. For VIEs, the Company assesses whether it is the primary beneficiary as defined under the applicable accounting standard. Investments in affiliates, including VIEs through which the Company exercises significant influence but does not control the investee and is not the primary beneficiary of the investee’s activities, are carried at cost plus equity in undistributed earnings since acquisition and are adjusted, where appropriate, for basis differences between the investment balance and the underlying net assets of the investee.  The Company’s portion of the results of certain affiliates and results of certain VIEs are included using the most recent available financial statements.  In each case, the financial statements are within 93 days of the Company’s reporting date and are consistent from period to period.

Reclassifications

Effective January 1, 2015, the Company formed a fourth reportable business segment, Wild Flavors and Specialty Ingredients. Results of Wild Flavors Gmbh (Wild Flavors) and Specialty Commodities, Inc. (SCI), which were acquired during the fourth quarter of fiscal 2014, are reported in this segment in addition to results of certain product lines previously reported in the Oilseeds Processing, Corn Processing, and Agricultural Services business segments. Throughout this quarterly report on Form 10-Q, prior period results of the product lines previously reported in the other reportable business segments have been reclassified to conform to the current period presentation.

Effective April 1, 2015, the Company early adopted the amended guidance of ASC Subtopic 835-30, Interest - Imputation of Interest, which addresses the balance sheet presentation requirements for debt issuance costs and debt discounts and premiums (see Note 2 for more information).

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.

Note 2.
New Accounting Standards

Effective April 1, 2015, the Company early adopted the amended guidance of ASC Subtopic 835-30, Interest - Imputation of Interest, which addresses the balance sheet presentation requirements for debt issuance costs and debt discounts and premiums. The amended guidance aligns more closely with International Financial Reporting Standards which require that transaction costs be deducted from the carrying value of the financial liability and not recorded as separate assets. The Company reclassified $30 million of debt issuance costs from other assets to long-term debt in its December 31, 2014 consolidated balance sheet to conform to the current presentation. At June 30, 2015, the long-term debt balance is net of $32 million of debt issuance costs.

7

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 3.
Pending Accounting Standards

Effective January 1, 2016, the Company will be required to adopt the amended guidance of Accounting Standards Codification (ASC) Topic 718, Compensation - Stock Compensation, which seeks to resolve the diversity in practice that exists when accounting for share-based payments. The amended guidance requires a performance target that affects vesting and that could be achieved after the requisite service period to be treated as a performance condition. The Company will be required to adopt the amended guidance either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The Company does not expect the adoption of this amended guidance to impact financial results.

Effective January 1, 2016, the Company will be required to adopt the amended guidance of ASC Topic 810, Consolidation (Topic 810), which seeks to improve targeted areas of the consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures. The amended guidance changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The changes include, among others, modification of the evaluation whether limited partnerships and similar legal entities are variable interest entities or voting interest entities and elimination of the presumption that a general partner should consolidate a limited partnership. The Company will be required to adopt Topic 810 either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application. The Company has not yet completed its assessment of the impact of the amended guidance on its consolidated financial statements but does not expect the adoption of this amended guidance to have a significant impact on financial results.

Effective January 1, 2016, the Company will be required to adopt the amended guidance of ASC Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, which eliminates the concept of extraordinary items from Generally Accepted Accounting Principles in the U.S. The amended guidance aligns more closely with International Accounting Standards 1, Presentation of Financial Statements, which prohibits the presentation and disclosure of extraordinary items. The Company does not expect the adoption of this amended guidance to impact financial results.

Effective January 1, 2018, the Company will be required to adopt the new guidance of ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which will supersede the revenue recognition requirements in ASC Topic 605, Revenue Recognition. Topic 606 requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The Company will be required to adopt Topic 606 either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application. If the Company elects the modified retrospective approach, it will be required to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes. The Company has not yet completed its assessment of the impact of the new guidance on its consolidated financial statements.

8

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Acquisitions

During the quarter and six months ended June 30, 2015, the Company acquired the remaining interest in North Star Shipping and Minmetal for a total cost of $76 million in cash and recorded a preliminary allocation of the purchase price related to these acquisitions. The net cash purchase price for these acquisitions of $69 million plus the acquisition-date fair value of the equity interest the Company previously held in North Star Shipping and Minmetal of $63 million were preliminarily allocated to property, plant, and equipment, other intangible assets, other long-term assets, and other long-term liabilities for $43 million, $122 million, $1 million, and $34 million, respectively. This acquisition of port facilities in Romania enhances the Company’s European origination and transportation network allowing the Company to reach more customers around the globe. A pre-tax gain of $27 million was recognized in the quarter ended June 30, 2015 representing the difference between carrying value and the acquisition-date fair value of the equity interest previously held in North Star Shipping and Minmetal.

Note 5.
Fair Value Measurements

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 June 30, 2015 and December 31, 2014.
 
 
Fair Value Measurements at June 30, 2015
 

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
$
—

 
$
3,028

 
$
1,026

 
$
4,054

Unrealized derivative gains:
 
 
 
 
 
 
 
Commodity contracts
—

 
713

 
154

 
867

Foreign exchange contracts
—

 
108

 
—

 
108

Interest rate contracts
—

 
20

 
—

 
20

Cash equivalents
177

 
—

 
—

 
177

Marketable securities
715

 
80

 
—

 
795

Segregated investments
2,087

 
—

 
—

 
2,087

Deferred receivables consideration
—

 
703

 
—

 
703

Total Assets
$
2,979

 
$
4,652

 
$
1,180

 
$
8,811

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Unrealized derivative losses:
 
 
 
 
 
 
 
Commodity contracts
$
—

 
$
571

 
$
363

 
$
934

Foreign exchange contracts
7

 
143

 
—

 
150

Inventory-related payables
—

 
345

 
13

 
358

Total Liabilities
$
7

 
$
1,059

 
$
376

 
$
1,442




9
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

 
Fair Value Measurements at December 31, 2014
 
 
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
$
—

 
$
3,208

 
$
1,491

 
$
4,699

Unrealized derivative gains:
 
 
 
 
 
 
 
Commodity contracts
—

 
487

 
203

 
690

Foreign exchange contracts
—

 
186

 
—

 
186

Interest rate contracts
—

 
21

 
—

 
21

Cash equivalents
491

 
—

 
—

 
491

Marketable securities
860

 
80

 
—

 
940

Segregated investments
2,158

 
—

 
—

 
2,158

Deferred receivables consideration
—

 
511

 
—

 
511

Total Assets
$
3,509

 
$
4,493

 
$
1,694

 
$
9,696

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Unrealized derivative losses:
 
 
 
 
 
 
 
Commodity contracts
$
—

 
$
564

 
$
212

 
$
776

Foreign exchange contracts
—

 
150

 
—

 
150

Inventory-related payables
—

 
612

 
40

 
652

Total Liabilities
$
—

 
$
1,326

 
$
252

 
$
1,578


Estimated fair 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.  Market valuations for the Company’s inventories are adjusted for location and quality because the exchange-quoted prices represent contracts that have standardized terms for commodity, quantity, future delivery period, delivery location, and commodity quality or grade. When unobservable inputs have a significant impact on the measurement of fair value, the inventory is classified as Level 3. Changes in the fair value of inventories are recognized in the consolidated statements 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 materially. Additionally, as market conditions change subsequent to the reporting period, amounts reported in future periods as inventories and cost of products sold are expected to change.

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. 


10
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

Derivative contracts include exchange-traded commodity futures and options contracts, forward commodity purchase and sale contracts, and OTC instruments related primarily to agricultural commodities, 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 the fair value tables.  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. The Company generally assesses the reasonableness of unobservable inputs through the best information available including comparable internal purchase and sale contracts entered into near the period end. Except for certain derivatives designated as cash flow hedges, changes in the fair 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 value of foreign currency-related derivatives are recognized in the consolidated statements of earnings as a component of revenues, cost of products sold, and other (income) expense – net. The effective portions of changes in the fair value of derivatives designated as cash flow hedges are recognized in the consolidated balance sheets as a component of accumulated other comprehensive income (loss) (AOCI) until the hedged items are recorded in earnings or it is probable the hedged transaction will no longer occur.

The Company’s cash equivalents are comprised of money market funds valued using quoted market prices and are classified as Level 1.

The Company’s marketable securities are comprised of equity investments, U.S. Treasury securities, corporate debt securities, and other debt securities.  Publicly traded equity investments, U.S. Treasury securities, and certain other debt securities are valued using quoted market prices and are classified in Level 1.  Corporate debt and certain other debt securities are valued using third-party pricing services and substantially all are classified in Level 2. Unrealized changes in the fair value of available-for-sale marketable securities are recognized in the consolidated balance sheets as a component of AOCI unless a decline in value is deemed to be other-than-temporary at which point the decline is recorded in earnings.

The Company’s segregated investments are comprised of U.S. Treasury securities. U.S. Treasury securities are valued using quoted market prices and are classified in Level 1.

The Company has deferred consideration under its accounts receivable securitization programs (the “Programs”) which represents notes receivable from the purchasers under the Programs (see Note 17). This amount is reflected in other current assets on the consolidated balance sheet (see Note 8). The Company carries the deferred consideration at fair value determined by calculating the expected amount of cash to be received. The fair value is principally based on observable inputs (a Level 2 measurement) consisting mainly of the face amount of the receivables adjusted for anticipated credit losses and discounted at the appropriate market rate. Payment of deferred consideration is not subject to significant risks other than delinquencies and credit losses on accounts receivable transferred under the Programs which have historically been insignificant.


11
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended June 30, 2015.

 
Level 3 Fair Value Asset Measurements at
 
June 30, 2015
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, March 31, 2015
$
1,039

 
$
178

 
$
1,217

Total increase (decrease) in realized/unrealized gains included in cost of products sold*
17

 
40

 
57

Purchases
2,851

 
—

 
2,851

Sales
(2,890
)
 
—

 
(2,890
)
Settlements
—

 
(117
)
 
(117
)
Transfers into Level 3
74

 
58

 
132

Transfers out of Level 3
(65
)
 
(5
)
 
(70
)
Ending balance, June 30, 2015
$
1,026

 
$
154

 
$
1,180


* Includes increase in unrealized gains of $180 million relating to Level 3 assets still held at June 30, 2015.

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended June 30, 2015.

 
Level 3 Fair Value Liability Measurements at
 
June 30, 2015
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, March 31, 2015
$
20

 
$
218

 
$
238

Total increase (decrease) in realized/unrealized losses included in cost of products sold*
(6
)
 
215

 
209

Purchases
6

 
—

 
6

Sales
(6
)
 
—

 
(6
)
Settlements
—

 
(114
)
 
(114
)
Transfers into Level 3
—

 
54

 
54

Transfers out of Level 3
(1
)
 
(10
)
 
(11
)
Ending balance, June 30, 2015
$
13

 
$
363

 
$
376


* Includes increase in unrealized losses of $215 million relating to Level 3 liabilities still held at June 30, 2015.


12
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended June 30, 2014.

 
Level 3 Fair Value Asset Measurements at
 
June 30, 2014
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, March 31, 2014
$
1,871

 
$
252

 
$
2,123

Total increase (decrease) in realized/unrealized gains included in cost of products sold*
(32
)
 
124

 
92

Purchases
3,845

 
—

 
3,845

Sales
(4,465
)
 
—

 
(4,465
)
Settlements
—

 
(183
)
 
(183
)
Transfers into Level 3
56

 
59

 
115

Transfers out of Level 3
(136
)
 
(13
)
 
(149
)
Ending balance, June 30, 2014
$
1,139

 
$
239

 
$
1,378


* Includes increase in unrealized gains of $149 million relating to Level 3 assets still held at June 30, 2014.

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended June 30, 2014.

 
Level 3 Fair Value Liability Measurements at
 
June 30, 2014
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, March 31, 2014
$
27

 
$
320

 
$
347

Total increase (decrease) in realized/unrealized losses included in cost of products sold*
3

 
49

 
52

Purchases
2

 
—

 
2

Sales
(13
)
 
—

 
(13
)
Settlements
—

 
(238
)
 
(238
)
Transfers into Level 3
—

 
41

 
41

Transfers out of Level 3
—

 
(10
)
 
(10
)
Ending balance, June 30, 2014
$
19

 
$
162

 
$
181


* Includes increase in unrealized losses of $58 million relating to Level 3 liabilities still held at June 30, 2014.




13
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2015.
 
Level 3 Fair Value Asset Measurements at
 
June 30, 2015
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2014
$
1,491

 
$
203

 
$
1,694

Total increase (decrease) in realized/unrealized gains included in cost of products sold*
(275
)
 
109

 
(166
)
Purchases
5,668

 
—

 
5,668

Sales
(5,693
)
 
—

 
(5,693
)
Settlements
—

 
(261
)
 
(261
)
Transfers into Level 3
73

 
113

 
186

Transfers out of Level 3
(238
)
 
(10
)
 
(248
)
Ending balance, June 30, 2015
$
1,026

 
$
154

 
$
1,180


* Includes increase in unrealized gains of $205 million relating to Level 3 assets still held at June 30, 2015.

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2015.

 
Level 3 Fair Value Liability Measurements at
 
June 30, 2015
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2014
$
40

 
$
212

 
$
252

Total increase (decrease) in realized/unrealized losses included in cost of products sold*
(11
)
 
279

 
268

Purchases
12

 
—

 
12

Sales
(28
)
 
—

 
(28
)
Settlements
—

 
(249
)
 
(249
)
Transfers into Level 3
—

 
136

 
136

Transfers out of Level 3
—

 
(15
)
 
(15
)
Ending balance, June 30, 2015
$
13

 
$
363

 
$
376


* Includes increase in unrealized losses of $270 million relating to Level 3 liabilities still held at June 30, 2015.

14
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2014.
 
Level 3 Fair Value Asset Measurements at
 
June 30, 2014
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2013
$
1,812

 
$
279

 
$
2,091

Total increase (decrease) in realized/unrealized gains included in cost of products sold*
(207
)
 
222

 
15

Purchases
7,948

 
—

 
7,948

Sales
(8,359
)
 
—

 
(8,359
)
Settlements
—

 
(363
)
 
(363
)
Transfers into Level 3
56

 
121

 
177

Transfers out of Level 3
(111
)
 
(20
)
 
(131
)
Ending balance, June 30, 2014
$
1,139

 
$
239

 
$
1,378


* Includes increase in unrealized gains of $371 million relating to Level 3 assets still held at June 30, 2014.

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2014.

 
Level 3 Fair Value Liability Measurements at
 
June 30, 2014
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2013
$
34

 
$
261

 
$
295

Total increase (decrease) in realized/unrealized losses included in cost of products sold*
10

 
274

 
284

Purchases
6

 
—

 
6

Sales
(31
)
 
—

 
(31
)
Settlements
—

 
(450
)
 
(450
)
Transfers into Level 3
—

 
107

 
107

Transfers out of Level 3
—

 
(30
)
 
(30
)
Ending balance, June 30, 2014
$
19

 
$
162

 
$
181


* Includes increase in unrealized losses of $286 million relating to Level 3 liabilities still held at June 30, 2014.


15
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

For all periods presented, the Company had no transfers between Level 1 and 2. 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.

In some cases, the price components that result in differences between the exchange-traded prices and the local prices are observable based upon available quotations for these pricing components, and in some cases, the differences are unobservable. These price components primarily include transportation costs and other adjustments required due to location, quality, or other contract terms. In the table below, these other adjustments are referred to as Basis. The changes in unobservable price components are determined by specific local supply and demand characteristics at each facility and the overall market. Factors such as substitute products, weather, fuel costs, contract terms, and futures prices also impact the movement of these unobservable price components, and are used by the Company to determine daily commodity pricing.

The following table sets forth the weighted average percentage of the unobservable price components included in the Company’s Level 3 valuations as of June 30, 2015 and December 31, 2014. The Company’s Level 3 measurements may include Basis only, transportation cost only, or both price components. As an example, for Level 3 inventories with Basis, the unobservable component as of June 30, 2015 is a weighted average 14.6% of the total price for assets and 33.4% of the total price for liabilities.
 
Weighted Average % of Total Price
 
June 30, 2015
 
December 31, 2014
Component Type
Assets
 
Liabilities
 
Assets
 
Liabilities
Inventories and Related Payables
 
 
 
 
 
 
 
Basis
14.6
%
 
33.4
%
 
23.4
%
 
43.4
%
Transportation cost
4.0
%
 
0.0
%
 
4.9
%
 
15.2
%
 
 
 
 
 
 
 
 
Commodity Derivative Contracts
 
 
 
 
 
 
 
Basis
22.1
%
 
14.4
%
 
13.5
%
 
13.6
%
Transportation cost
8.8
%
 
31.3
%
 
10.2
%
 
19.5
%

In certain of the Company’s principal markets, the Company relies on price quotes from third parties to value its inventories and physical commodity purchase and sale contracts. These price quotes are generally not further adjusted by the Company in determining the applicable market price. In some cases, availability of third-party quotes is limited to only one or two independent sources. In these situations, the Company considers these price quotes as 100 percent unobservable and, therefore, the fair value of these items is reported in Level 3.


16

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Derivative Instruments and Hedging Activities

Derivatives Not Designated as Hedging Instruments

The majority of the Company’s derivative instruments have not been designated as hedging instruments. The Company uses exchange-traded futures and exchange-traded and OTC options contracts to manage 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 correlation between the value of exchange-traded commodities futures contracts and the value of the underlying commodities, counterparty contract defaults, and volatility of freight markets. Derivatives, including exchange-traded contracts and physical purchase or sale contracts, are stated at market value and 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 fair values of and changes in fair values of inventories are not included in the tables below.
  
The following table sets forth the fair value of derivatives not designated as hedging instruments as of June 30, 2015 and December 31, 2014.

 
June 30, 2015
 
December 31, 2014
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(In millions)
 
(In millions)
 
 
 
 
 
 
 
 
FX Contracts
$
108

 
$
150

 
$
186

 
$
150

Commodity Contracts
867

 
934

 
690

 
776

Total
$
975

 
$
1,084

 
$
876

 
$
926


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 three and six months ended June 30, 2015 and 2014.

 
Three months ended June 30,
 
2015
 
2014
 
(In millions)
 
 
 
 
FX Contracts
 

 
 

Revenues
$
(12
)
 
$
(2
)
Cost of products sold
6

 
44

Other income (expense) – net
31

 
(15
)
 
 
 
 
Commodity Contracts
 

 
 

Cost of products sold
$
(251
)
 
$
405

Total gain (loss) recognized in earnings
$
(226
)
 
$
432


17
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Derivative Instruments and Hedging Activities (Continued)

 
Six months ended June 30,
 
2015
 
2014
 
(In millions)
FX Contracts
 

 
 

Revenues
$
8

 
$
(8
)
Cost of products sold
(63
)
 
88

Other income (expense) – net
8

 
(24
)
 
 
 
 
Commodity Contracts
 

 
 

Cost of products sold
$
(13
)
 
$
(507
)
Total gain (loss) recognized in earnings
$
(60
)
 
$
(451
)

Inventories of certain merchandisable agricultural commodities, which include amounts acquired under deferred pricing contracts, are stated at market value. 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.

Derivatives Designated as Cash Flow or Fair Value Hedging Strategies

As of June 30, 2015 and December 31, 2014, the Company has certain derivatives designated as cash flow and fair value hedges.

The Company uses interest rate swaps designated as fair value hedges to protect the fair value of fixed-rate debt due to changes in interest rates. The changes in the fair value of the interest rate swaps and the underlying fixed-rate debt are recorded in other (income) expense - net. The terms of the interest rate swaps match the terms of the underlying debt resulting in no ineffectiveness. At June 30, 2015, the Company has $20 million in other current assets representing the fair value of the interest rate swaps and a corresponding increase in the underlying debt for the same amount with no impact to earnings.
For each of the commodity hedge programs described below, the derivatives are designated as cash flow hedges.  Assuming normal market conditions, 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 are reclassified from AOCI to either revenues or cost of products sold, as applicable.  As of June 30, 2015, the Company has $22 million of after-tax gains in AOCI related to gains and losses from commodity cash flow hedge transactions.  The Company expects to recognize $21 million of these after-tax gains in its consolidated 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 76 million bushels of corn per month.  During the past 12 months, the Company hedged between 17% and 60% of its monthly anticipated grind.  At June 30, 2015, the Company has designated hedges representing between 1% and 69% of its anticipated monthly grind of corn for the next 12 months.

The Company, from time to time, also uses futures, options, and swaps to fix the sales price of certain ethanol sales contracts.  The Company has established hedging programs for ethanol sales contracts that are indexed to unleaded gasoline prices and to various exchange-traded ethanol contracts. The objective of these hedging programs is to reduce the variability of cash flows associated with the Company’s sales of ethanol.  During the past 12 months, the Company hedged between 6 million and 95 million gallons of ethanol sales per month under these programs.  For the next 12 months, the Company has designated hedges representing between 0 and 78 million gallons of ethanol sales per month.


18
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Derivative Instruments and Hedging Activities (Continued)

The following table sets forth the fair value of derivatives designated as hedging instruments as of June 30, 2015 and December 31, 2014.

 
June 30, 2015
 
December 31, 2014
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(In millions)
 
(In millions)
Interest Contracts
$
20

 
$
—

 
$
21

 
$
—

Total
$
20

 
$
—

 
$
21

 
$
—


The following tables set forth the pre-tax gains (losses) on derivatives designated as hedging instruments that have been included in the consolidated statements of earnings for the three and six months ended June 30, 2015 and 2014.
 
 
 
 
Three months ended
 
Consolidated Statement of
Earnings Locations
 
June 30,
 
 
2015
 
2014
 
 
 
(In millions)
Effective amounts recognized in earnings
 
 
 
 
 
FX Contracts
Other income/expense – net
 
$
5

 
$
—

Commodity Contracts
Cost of products sold
 
(18
)
 
11

 
Revenues
 
(2
)
 
(58
)
Ineffective amount recognized in earnings
 
 
 
 
 
Commodity Contracts
Revenues
 
—

 
(1
)

Cost of products sold
 
9

 
(27
)
Interest Contracts
Other income/expense - net
 
1

 
—

Total amount recognized in earnings
 
 
$
(5
)
 
$
(75
)

 
 
 
Six months ended
 
Consolidated Statement of
Earnings Locations
 
June 30,
 
 
2015
 
2014
 
 
 
(In millions)
Effective amounts recognized in earnings
 
 
 
 
 
FX Contracts
Other income/expense – net
 
$
22

 
$
—

Commodity Contracts
Cost of products sold
 
(18
)
 
7

 
Revenues
 
45

 
(85
)
Ineffective amount recognized in earnings
 
 
 
 
 
Commodity Contracts
Revenues
 
7

 
(24
)

Cost of products sold
 
(4
)
 
(7
)
Interest Contracts
Other income/expense - net
 
1

 
—

Total amount recognized in earnings
 
 
$
53

 
$
(109
)






19
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Derivative Instruments and Hedging Activities (Continued)

Hedge ineffectiveness for commodity contracts results when the change in the price of the underlying commodity in a specific cash market differs from the change in the price of the derivative financial instrument used to establish the hedging relationship.  As an example, if the change in the price of a corn futures contract is strongly correlated to the change in cash price paid for corn, the gain or loss on the derivative instrument is deferred and recognized at the time the corn purchase affects earnings.  If the change in price of the derivative does not strongly correlate to the change in the cash price of corn, in the same example, some portion or all of the derivative gains or losses may be required to be recognized in earnings prior to the corn purchase.

Net Investment Hedging Strategies

In May 2015, the Company designated €1 billion of forward foreign exchange contracts as a hedge of its net investment in a foreign subsidiary. The forward foreign exchange contracts matured when the Euro-denominated Floating Rate Notes and 1.75% Notes (collectively, the “Notes”) was issued on June 24, 2015 (see Note 10 for more information about the Notes). Concurrent with the issuance of the Notes, the Company designated €981 million of the Notes as a hedge of its net investment in a foreign subsidiary. As of June 30, 2015, the Company has $1 million of gains in AOCI related to gains and losses from the net investment hedge transactions. The amount is deferred in AOCI until the underlying investment is divested.

The following tables set forth the changes in AOCI related to derivatives gains (losses) for the three and six months ended June 30, 2015 and 2014.
 
Three months ended
 
June 30,
 
2015
 
2014
 
(In millions)
Balance at March 31, 2015 and 2014
$
12

 
$
(59
)
Unrealized gains (losses)
23

 
23

Losses (gains) reclassified to earnings
15

 
47

Tax effect
(9
)
 
(23
)
Balance at June 30, 2015 and 2014
$
41

 
$
(12
)

 
Six months ended
 
June 30,
 
2015
 
2014
 
(In millions)
 
 
 
 
Balance at December 31, 2014 and 2013
$
47

 
$
5

Unrealized gains (losses)
31

 
(105
)
Losses (gains) reclassified to earnings
(49
)
 
78

Tax effect
12

 
10

Balance at June 30, 2015 and 2014
$
41

 
$
(12
)


20

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 7.
Marketable Securities

 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(In millions)
 
 
 
 
 
 
 
 
June 30, 2015
 
 
 
 
 
 
 
United States government obligations
 
 
 
 
 
 
 
Maturity less than 1 year
$
262

 
$
—

 
$
—

 
$
262

Maturity 1 to 5 years
107

 
—

 
—

 
107

Corporate debt securities
 

 
 

 
 

 
 

Maturity 1 to 5 years
70

 
—

 
—

 
70

Other debt securities
 

 
 

 
 

 
 

Maturity less than 1 year
47

 
—

 
—

 
47

Maturity 1 to 5 years
3

 
—

 
—

 
3

Equity securities
 
 
 

 
 

 
 

Available-for-sale
309

 
4

 
(1
)
 
312

 
$
798

 
$
4

 
$
(1
)
 
$
801


 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(In millions)
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
United States government obligations
 
 
 
 
 
 
 
Maturity less than 1 year
$
385

 
$
—

 
$
—

 
$
385

Maturity 1 to 5 years
93

 
—

 
—

 
93

Corporate debt securities
 

 
 

 
 

 
 

Maturity 1 to 5 years
72

 
—

 
—

 
72

Other debt securities
 

 
 

 
 

 
 

Maturity less than 1 year
130

 
—

 
—

 
130

Maturity 1 to 5 years
3

 
—

 
—

 
3

Equity securities
 

 
 

 
 

 
 

Available-for-sale
328

 
1

 
(12
)
 
317

 
$
1,011

 
$
1

 
$
(12
)
 
$
1,000


The $1 million in unrealized losses at June 30, 2015 is related to the Company’s investment in one available-for-sale equity security that has been in an unrealized loss position for 12 months or longer with a fair value of $5 million. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment.  Based on that evaluation and the Company’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2015.


21

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 8.     Other Current Assets

The following table sets forth the items in other current assets:

 
June 30,
 
December 31,
 
2015
 
2014
 
(In millions)
 
 
 
 
Unrealized gains on derivative contracts
$
995

 
$
897

Deferred receivables consideration
703

 
511

Customer omnibus receivable
1,106

 
1,532

Financing receivables - net (1)
630

 
402

Other current assets
1,733

 
2,714

 
$
5,167

 
$
6,056


(1) The Company provides financing to certain suppliers, primarily Brazilian farmers, to finance a portion of the suppliers’ production costs. The amounts are reported net of allowances of $6 million and $11 million at June 30, 2015 and December 31, 2014, respectively. Interest earned on financing receivables of $5 million and $12 million for the quarter and six months ended June 30, 2015, respectively, and $4 million and $12 million for the quarter and six months ended June 30, 2014, respectively, is included in interest income in the consolidated statements of earnings.

Note 9.
Accrued Expenses and Other Payables

The following table sets forth the items in accrued expenses and other payables:

 
June 30,
 
December 31,
 
2015
 
2014
 
(In millions)
 
 
 
 
Unrealized losses on derivative contracts
$
1,084

 
$
926

Accrued expenses and other payables
2,222

 
4,114

 
$
3,306

 
$
5,040



22

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 10.
Debt and Financing Arrangements

On June 24, 2015, the Company issued €500 million aggregate principal amount of Floating Rate Notes due in 2019 and €600 million aggregate principal amount of 1.75% Notes due in 2023. Proceeds before expenses were €499 million and €594 million from the Floating Rate Notes and the 1.75% Notes, respectively. Concurrent with the issuance of the Notes, the Company designated €981 million of the Notes as a hedge of its net investment in a foreign subsidiary.

At June 30, 2015, the fair value of the Company’s long-term debt exceeded the carrying value by $1.2 billion, as estimated using quoted market prices (a Level 2 measurement under applicable accounting standards).

At June 30, 2015, the Company had lines of credit totaling $5.8 billion, of which $5.6 billion was unused.  Of the Company’s total lines of credit, $4.0 billion support a commercial paper borrowing facility, against which there was no commercial paper outstanding at June 30, 2015.

The Company has accounts receivable securitization programs (the “Programs”). The Programs provide the Company with up to $1.6 billion in funding resulting from the sale of accounts receivable. As of June 30, 2015, the Company utilized $1.3 billion of its facility under the Programs (see Note 17 for more information on the Programs).

Note 11.
Income Taxes

The Company’s effective tax rate for the quarter and six months ended June 30, 2015 was 27.2% and 28.0%, respectively, compared to 27.6% and 27.3% for the quarter and six months ended June 30, 2014, respectively, due primarily to changes in the forecast of the geographic mix of pretax earnings.

The Company is subject to routine examination by domestic and foreign tax authorities and frequently faces challenges regarding the amount of taxes due.  These challenges include positions taken by the Company related to 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 the applicable accounting standard.  However, the Company cannot predict or provide assurance as to the ultimate outcome of these ongoing or future examinations.

The Company’s wholly-owned subsidiary, ADM do Brasil Ltda. (ADM do Brasil), has received three separate tax assessments from the Brazilian Federal Revenue Service (BFRS) challenging the tax deductibility of commodity hedging losses and related expenses for the tax years 2004, 2006, and 2007. As of June 30, 2015, these assessments, updated for estimated penalties, interest, and variation in currency exchange rates, totaled approximately $436 million. ADM do Brasil’s tax return for 2005 was also audited and no assessment was received. The statutes of limitation for 2005 and 2008 have expired. If the BFRS were to challenge commodity hedging deductions in tax years after 2008, the Company estimates it could receive additional tax assessments of approximately $50 million (based on currency exchange rates as of June 30, 2015).

ADM do Brasil enters into commodity hedging transactions that 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 Brazil. 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.







23
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 11.     Income Taxes (Continued)

ADM do Brasil filed an administrative appeal for each of the assessments. The appeal panel found in favor of the BFRS on these assessments and ADM do Brasil filed a second level administrative appeal. The second administrative appeal panel continues to conduct customary procedural activities, including ongoing dialogue with the BFRS auditor. If ADM do Brasil continues to be unsuccessful in the administrative appellate process, the Company intends to file appeals in the Brazilian federal courts. While the Company believes 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 intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2008.

The Company’s subsidiaries in Argentina have received tax assessments challenging transfer prices used to price grain exports totaling $92 million (inclusive of interest and adjusted for variation in currency exchange rates) for the tax years 2004 through 2007. The Argentine tax authorities have been conducting a review of income and other taxes paid by large exporters and processors of cereals and other agricultural commodities resulting in allegations of income tax evasion. While the Company believes that it has complied with all Argentine tax laws, it cannot rule out receiving additional assessments challenging transfer prices used to price grain exports for years subsequent to 2007, and estimates that these potential assessments would be approximately $284 million for the remaining open years (as of June 30, 2015 and subject to variation in currency exchange rates). The Company believes that it has appropriately evaluated the transactions underlying these assessments, and has concluded, based on Argentine tax law, that its tax position would be sustained, and accordingly, has not recorded a tax liability for these assessments. 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.
  
In accordance with the accounting requirements for uncertain tax positions, the Company has not recorded an uncertain tax liability for these assessments because it has concluded that it is more likely than not to prevail on the Brazil and Argentina matters based upon their technical merits and because the taxing jurisdictions’ processes do not provide a mechanism for settling at less than the full amount of the assessment. The Company’s consideration of these tax assessments requires judgments about the application of income tax regulations to specific facts and circumstances. The final outcome of these matters cannot reliably be predicted, may take many years to resolve, and could result in financial impacts of up to the entire amount of these assessments.


24

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 12.     Accumulated Other Comprehensive Income (AOCI)

The following tables set forth the changes in AOCI by component for the quarter and six months ended June 30, 2015 and the reclassifications out of AOCI for the quarter and six months ended June 30, 2015 and 2014:
 
Three months ended June 30, 2015
(In millions)
Foreign Currency Translation Adjustment
 
Deferred Gain (Loss) on Hedging Activities
 
Pension Liability Adjustment
 
Unrealized Gain (Loss) on Investments
 
Total
Balance at March 31, 2015
$
(1,323
)
 
$
12

 
$
(607
)
 
$
39

 
$
(1,879
)
Other comprehensive income (loss) before reclassifications
177

 
23

 
(8
)
 
(20
)
 
172

Amounts reclassified from AOCI
—

 
15

 
4

 
—

 
19

Tax effect
(6
)
 
(9
)
 
—

 
(2
)
 
(17
)
Net current period other comprehensive income
171

 
29

 
(4
)
 
(22
)
 
174

Balance at June 30, 2015
$
(1,152
)
 
$
41

 
$
(611
)
 
$
17

 
$
(1,705
)
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2015
(In millions)
Foreign Currency Translation Adjustment
 
Deferred Gain (Loss) on Hedging Activities
 
Pension Liability Adjustment
 
Unrealized Gain (Loss) on Investments
 
Total
Balance at December 31, 2014
$
(654
)
 
$
47

 
$
(630
)
 
$
(4
)
 
$
(1,241
)
Other comprehensive income before reclassifications
(524
)
 
31

 
9

 
23

 
(461
)
Amounts reclassified from AOCI
—

 
(49
)
 
29

 
—

 
(20
)
Tax effect
26

 
12

 
(19
)
 
(2
)
 
17

Net current period other comprehensive income
(498
)
 
(6
)
 
19

 
21

 
(464
)
Balance at June 30, 2015
$
(1,152
)
 
$
41

 
$
(611
)
 
$
17

 
$
(1,705
)

The six-month period change in foreign currency translation adjustment is primarily due to U.S. dollar appreciation, mainly impacting the Euro-denominated equity of the Company’s foreign subsidiaries.

25
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 12.     Accumulated Other Comprehensive Income (AOCI) (Continued)

 
 
Amount reclassified from AOCI
 
 
 
 
Three months ended
 
Six months ended
 
 
Details about AOCI components
 
June 30,
2015
 
June 30,
2014
 
Jun 30
2015
 
Jun 30
2014
 
Affected line item in the consolidated statement of earnings
 
 
(In millions)
 
 
Deferred loss (gain) on hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
$
2