10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2016
OR
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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.) |
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77 West Wacker Drive, Suite 4600 Chicago, Illinois (Address of principal executive offices) | 60601 (Zip Code) |
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(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.
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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 – 587,582,116 shares
(April 29, 2016)
PART I - FINANCIAL INFORMATION
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ITEM 1. | FINANCIAL STATEMENTS |
Archer-Daniels-Midland Company
Consolidated Statements of Earnings
(Unaudited)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2016 | | 2015 |
| (In millions, except per share amounts) |
| | | |
Revenues | $ | 14,384 |
| | $ | 17,506 |
|
Cost of products sold | 13,588 |
| | 16,404 |
|
Gross Profit | 796 |
| | 1,102 |
|
| | | |
Selling, general, and administrative expenses | 475 |
| | 498 |
|
Asset impairment, exit, and restructuring costs | 13 |
| | — |
|
Interest expense | 70 |
| | 81 |
|
Equity in earnings of unconsolidated affiliates | (65 | ) | | (139 | ) |
Interest income | (22 | ) | | (18 | ) |
Other (income) expense – net | 19 |
| | (10 | ) |
Earnings Before Income Taxes | 306 |
| | 690 |
|
| | | |
Income taxes | 76 |
| | 197 |
|
Net Earnings Including Noncontrolling Interests | 230 |
| | 493 |
|
| | | |
Less: Net earnings (losses) attributable to noncontrolling interests | — |
| | — |
|
| | | |
Net Earnings Attributable to Controlling Interests | $ | 230 |
| | $ | 493 |
|
| | | |
Average number of shares outstanding – basic | 595 |
| | 636 |
|
| | | |
Average number of shares outstanding – diluted | 597 |
| | 639 |
|
| | | |
Basic earnings per common share | $ | 0.39 |
| | $ | 0.78 |
|
| | | |
Diluted earnings per common share | $ | 0.39 |
| | $ | 0.77 |
|
| | | |
Dividends per common share | $ | 0.30 |
| | $ | 0.28 |
|
See notes to consolidated financial statements.
Archer-Daniels-Midland Company
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2016 | | 2015 |
| (In millions) |
| | | |
Net earnings including noncontrolling interests | $ | 230 |
| | $ | 493 |
|
Other comprehensive income (loss): | | | |
Foreign currency translation adjustment | 202 |
| | (702 | ) |
Tax effect | 23 |
| | 32 |
|
Net of tax amount | 225 |
| | (670 | ) |
| | | |
Pension and other postretirement benefit liabilities adjustment | 1 |
| | 42 |
|
Tax effect | — |
| | (19 | ) |
Net of tax amount | 1 |
| | 23 |
|
| | | |
Deferred gain (loss) on hedging activities | 10 |
| | (56 | ) |
Tax effect | (2 | ) | | 21 |
|
Net of tax amount | 8 |
| | (35 | ) |
| | | |
Unrealized gain (loss) on investments | (33 | ) | | 43 |
|
Tax effect | (2 | ) | | — |
|
Net of tax amount | (35 | ) | | 43 |
|
Other comprehensive income (loss) | 199 |
| | (639 | ) |
Comprehensive income (loss) including noncontrolling interests | 429 |
| | (146 | ) |
| | | |
Less: Comprehensive income (loss) attributable to noncontrolling interests | — |
| | (1 | ) |
| | | |
Comprehensive income (loss) attributable to controlling interests | $ | 429 |
| | $ | (145 | ) |
See notes to consolidated financial statements.
Archer-Daniels-Midland Company
Consolidated Balance Sheets |
| | | | | | | |
(In millions) | March 31, 2016 | | December 31, 2015 |
| (Unaudited) | | |
Assets | | | |
Current Assets | | | |
Cash and cash equivalents | $ | 706 |
| | $ | 910 |
|
Short-term marketable securities | 525 |
| | 438 |
|
Segregated cash and investments | 5,271 |
| | 5,214 |
|
Trade receivables | 1,965 |
| | 1,738 |
|
Inventories | 7,914 |
| | 8,243 |
|
Other current assets | 4,589 |
| | 5,286 |
|
Total Current Assets | 20,970 |
| | 21,829 |
|
| | | |
Investments and Other Assets | |
| | |
|
Investments in and advances to affiliates | 4,089 |
| | 3,901 |
|
Long-term marketable securities | 441 |
| | 439 |
|
Goodwill and other intangible assets | 3,889 |
| | 3,688 |
|
Other assets | 401 |
| | 447 |
|
Total Investments and Other Assets | 8,820 |
| | 8,475 |
|
| | | |
Property, Plant, and Equipment | |
| | |
|
Land | 465 |
| | 454 |
|
Buildings | 4,768 |
| | 4,715 |
|
Machinery and equipment | 17,378 |
| | 17,159 |
|
Construction in progress | 970 |
| | 946 |
|
| 23,581 |
| | 23,274 |
|
Accumulated depreciation | (13,690 | ) | | (13,421 | ) |
Net Property, Plant, and Equipment | 9,891 |
| | 9,853 |
|
| | | |
Total Assets | $ | 39,681 |
| | $ | 40,157 |
|
| | | |
Liabilities and Shareholders’ Equity | |
| | |
|
Current Liabilities | |
| | |
|
Short-term debt | $ | 783 |
| | $ | 86 |
|
Trade payables | 2,969 |
| | 3,474 |
|
Payables to brokerage customers | 5,425 |
| | 5,820 |
|
Accrued expenses and other payables | 3,678 |
| | 4,113 |
|
Current maturities of long-term debt | 12 |
| | 12 |
|
Total Current Liabilities | 12,867 |
| | 13,505 |
|
| | | |
Long-Term Liabilities | |
| | |
|
Long-term debt | 5,851 |
| | 5,779 |
|
Deferred income taxes | 1,621 |
| | 1,563 |
|
Other | 1,429 |
| | 1,395 |
|
Total Long-Term Liabilities | 8,901 |
| | 8,737 |
|
| | | |
Shareholders’ Equity | |
| | |
|
Common stock | 2,875 |
| | 3,180 |
|
Reinvested earnings | 16,971 |
| | 16,865 |
|
Accumulated other comprehensive income (loss) | (1,947 | ) | | (2,146 | ) |
Noncontrolling interests | 14 |
| | 16 |
|
Total Shareholders’ Equity | 17,913 |
| | 17,915 |
|
Total Liabilities and Shareholders’ Equity | $ | 39,681 |
| | $ | 40,157 |
|
| | | |
See notes to consolidated financial statements.
Archer-Daniels-Midland Company
Consolidated Statements of Cash Flows
(Unaudited)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2016 | | 2015 |
| (In millions) |
| | | |
Operating Activities | | | |
Net earnings including noncontrolling interests | $ | 230 |
| | $ | 493 |
|
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities | |
| | |
|
Depreciation and amortization | 231 |
| | 216 |
|
Asset impairment charges | 11 |
| | — |
|
Deferred income taxes | 50 |
| | 4 |
|
Equity in earnings of affiliates, net of dividends | (44 | ) | | (67 | ) |
Stock compensation expense | 28 |
| | 26 |
|
Pension and postretirement accruals (contributions), net | 15 |
| | (4 | ) |
Deferred cash flow hedges | 10 |
| | (56 | ) |
Gain on sale of assets | (3 | ) | | (3 | ) |
Other – net | 29 |
| | (32 | ) |
Changes in operating assets and liabilities | |
| | |
|
Segregated cash and investments | (117 | ) | | 131 |
|
Trade receivables | (172 | ) | | 550 |
|
Inventories | 406 |
| | 739 |
|
Other current assets | 128 |
| | (184 | ) |
Trade payables | (527 | ) | | (1,071 | ) |
Payables to brokerage customers | 217 |
| | 73 |
|
Accrued expenses and other payables | (469 | ) | | (770 | ) |
Total Operating Activities | 23 |
| | 45 |
|
| | | |
Investing Activities | |
| | |
|
Purchases of property, plant, and equipment | (180 | ) | | (244 | ) |
Proceeds from sales of property, plant, and equipment | 11 |
| | 6 |
|
Net assets of businesses acquired | (84 | ) | | — |
|
Purchases of marketable securities | (426 | ) | | (246 | ) |
Proceeds from sales of marketable securities | 376 |
| | 346 |
|
Distributions from affiliates | 7 |
| | 1 |
|
Other – net | (152 | ) | | (124 | ) |
Total Investing Activities | (448 | ) | | (261 | ) |
| | | |
Financing Activities | |
| | |
|
Long-term debt borrowings | — |
| | 8 |
|
Long-term debt payments | (4 | ) | | (7 | ) |
Net borrowings (payments) under lines of credit agreements | 697 |
| | 742 |
|
Purchases of treasury stock | (296 | ) | | (566 | ) |
Cash dividends | (177 | ) | | (177 | ) |
Other – net | 1 |
| | 7 |
|
Total Financing Activities | 221 |
| | 7 |
|
| | | |
Increase (decrease) in cash and cash equivalents | (204 | ) | | (209 | ) |
Cash and cash equivalents beginning of period | 910 |
| | 1,099 |
|
| | | |
Cash and cash equivalents end of period | $ | 706 |
| | $ | 890 |
|
| | | |
See notes to consolidated financial statements.
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, 2015 | 595 |
| | $ | 3,180 |
| | $ | 16,865 |
| | $ | (2,146 | ) | | $ | 16 |
| | $ | 17,915 |
|
Reclassification impact of ASU 2016-09 (see Note 2) | | | (53 | ) | | 53 |
| | | | | | — |
|
Balance, January 1, 2016 | 595 |
| | 3,127 |
| | 16,918 |
| | (2,146 | ) | | 16 |
| | 17,915 |
|
Comprehensive income | |
| | |
| | |
| | |
| | |
| | |
|
Net earnings | | | |
| | 230 |
| | |
| | — |
| | |
|
Other comprehensive income (loss) | |
| | |
| | |
| | 199 |
| | — |
| | |
|
Total comprehensive income | |
| | |
| | |
| | |
| | |
| | 429 |
|
Cash dividends paid- $0.30 per share | |
| | |
| | (177 | ) | | |
| | |
| | (177 | ) |
Treasury stock purchases | (9 | ) | | (296 | ) | | | | | | | | (296 | ) |
Stock compensation expense | 1 |
| | 28 |
| | |
| | |
| | |
| | 28 |
|
Other | — |
| | 16 |
| | — |
| | — |
| | (2 | ) | | 14 |
|
Balance, March 31, 2016 | 587 |
| | $ | 2,875 |
| | $ | 16,971 |
| | $ | (1,947 | ) | | $ | 14 |
| | $ | 17,913 |
|
See notes to consolidated financial statements.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements
(Unaudited)
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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 audited 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 ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
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 year end and are consistent from period to period.
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. | New Accounting Standards |
Effective January 1, 2016, the Company adopted the amended guidance of Accounting Standards Codification (ASC) Topic 805, Business Combinations, which simplifies the accounting for adjustments made to provisional amounts recognized in a business combination. The amended guidance requires an acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amounts are determined. The effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date, shall be recorded in the same period’s financial statements. The amended guidance also requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The adoption of this amended guidance did not have a significant impact on the Company’s financial results.
Effective January 1, 2016, the Company adopted Accounting Standards Update 2016-09 which amended the guidance of ASC Topic 718, Compensation - Stock Compensation, to simplify the accounting for share-based payment award transactions. The areas of simplification include the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company recorded a $53 million increase in beginning retained earnings for the cumulative effect of excess tax benefits previously recognized as additional paid-in capital in its consolidated statement of shareholders’ equity. The effects of the adoption of the other provisions of this amended guidance were immaterial.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
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Note 3. | Pending Accounting Standards |
Effective January 1, 2017, the Company will be required to adopt the amended guidance of ASC Topic 330, Inventory, which simplifies the measurement of inventory. The amended guidance requires an entity to measure its cost-based inventory at the lower of cost or net realizable value, where net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using the last-in, first-out method. The Company does not expect the adoption of this amended guidance to have a significant impact on the Company’s 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 expects to complete its assessment of the impact of the new guidance on its consolidated financial statements later in 2016.
Effective January 1, 2018, the Company will be required to adopt the amended guidance of ASC Subtopic 825-10, Financial Instruments - Overall, which is intended to improve the recognition and measurement of financial instruments. The amended guidance requires an entity to measure equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, at fair value with changes in fair value recognized in net income and simplify the impairment assessment of equity investments without readily determinable fair values by using a qualitative assessment to identify impairment. The Company does not expect the adoption of this amended guidance to have a significant impact on the Company’s financial results.
Effective January 1, 2019, the Company will be required to adopt the new guidance of ASC Topic 842, Leases (Topic 842), which will supersede ASC Topic 840, Leases. Topic 842 requires lessees to recognize assets and liabilities for all leases with lease terms of more than 12 months. The Company is expected to adopt Topic 842 using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company has not yet assessed the impact of the new guidance on its consolidated financial statements.
During the three months ended March 31, 2016, the Company acquired 90% of Harvest Innovations, an industry leader in minimally processed, expeller-pressed soy proteins, oils, and gluten-free ingredients, for a total cost of $84 million in cash and recorded a preliminary allocation of the purchase price related to the acquisition. The purchase price for this acquisition was preliminarily allocated to working capital, property, plant, and equipment, goodwill, other intangible assets, and other long-term liabilities for $7 million, $11 million, $40 million, $46 million, and $20 million, respectively. The Company has agreed to acquire the remaining 10% interest following two years of operation. The acquisition complements the Company’s existing ingredient businesses and offers customers a full-service, one-stop shop for their ingredient needs.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
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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 March 31, 2016 and December 31, 2015.
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at March 31, 2016 |
|
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 | $ | — |
| | $ | 3,087 |
| | $ | 969 |
| | $ | 4,056 |
|
Unrealized derivative gains: | | | | | | | |
Commodity contracts | — |
| | 486 |
| | 218 |
| | 704 |
|
Foreign exchange contracts | — |
| | 134 |
| | — |
| | 134 |
|
Interest rate contracts | — |
| | 33 |
| | — |
| | 33 |
|
Cash equivalents | 190 |
| | — |
| | — |
| | 190 |
|
Marketable securities | 879 |
| | 89 |
| | — |
| | 968 |
|
Segregated investments | 2,184 |
| | — |
| | — |
| | 2,184 |
|
Deferred receivables consideration | — |
| | 292 |
| | — |
| | 292 |
|
Total Assets | $ | 3,253 |
| | $ | 4,121 |
| | $ | 1,187 |
| | $ | 8,561 |
|
| | | | | | | |
Liabilities: | | | | | | | |
Unrealized derivative losses: | | | | | | | |
Commodity contracts | $ | — |
| | $ | 359 |
| | $ | 111 |
| | $ | 470 |
|
Foreign exchange contracts | — |
| | 206 |
| | — |
| | 206 |
|
Inventory-related payables | — |
| | 450 |
| | 23 |
| | 473 |
|
Total Liabilities | $ | — |
| | $ | 1,015 |
| | $ | 134 |
| | $ | 1,149 |
|
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 5. | Fair Value Measurements (Continued) |
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 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 | $ | — |
| | $ | 3,062 |
| | $ | 1,004 |
| | $ | 4,066 |
|
Unrealized derivative gains: | | | | | | | |
Commodity contracts | — |
| | 403 |
| | 243 |
| | 646 |
|
Foreign exchange contracts | 1 |
| | 92 |
| | — |
| | 93 |
|
Interest rate contracts | — |
| | 19 |
| | — |
| | 19 |
|
Cash equivalents | 328 |
| | — |
| | — |
| | 328 |
|
Marketable securities | 698 |
| | 175 |
| | — |
| | 873 |
|
Segregated investments | 1,938 |
| | — |
| | — |
| | 1,938 |
|
Deferred receivables consideration | — |
| | 513 |
| | — |
| | 513 |
|
Total Assets | $ | 2,965 |
| | $ | 4,264 |
| | $ | 1,247 |
| | $ | 8,476 |
|
| | | | | | | |
Liabilities: | | | | | | | |
Unrealized derivative losses: | | | | | | | |
Commodity contracts | $ | — |
| | $ | 306 |
| | $ | 113 |
| | $ | 419 |
|
Foreign exchange contracts | — |
| | 186 |
| | — |
| | 186 |
|
Inventory-related payables | — |
| | 705 |
| | 16 |
| | 721 |
|
Total Liabilities | $ | — |
| | $ | 1,197 |
| | $ | 129 |
| | $ | 1,326 |
|
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 in 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.
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 these 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. 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, or other (income) expense – net depending upon the purpose of the contract. 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 and U.S. Treasury securities are valued using quoted market prices and are classified in Level 1. Corporate debt and 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 15). 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.
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 March 31, 2016.
|
| | | | | | | | | | | |
| Level 3 Fair Value Asset Measurements at |
| March 31, 2016 |
| Inventories Carried at Market | | Commodity Derivative Contracts Gains | | Total Assets |
| (In millions) |
| | | | | |
Balance, December 31, 2015 | $ | 1,004 |
| | $ | 243 |
| | $ | 1,247 |
|
Total increase (decrease) in net realized/unrealized gains included in cost of products sold* | (114 | ) | | 63 |
| | (51 | ) |
Purchases | 2,356 |
| | — |
| | 2,356 |
|
Sales | (2,237 | ) | | — |
| | (2,237 | ) |
Settlements | — |
| | (97 | ) | | (97 | ) |
Transfers into Level 3 | 88 |
| | 32 |
| | 120 |
|
Transfers out of Level 3 | (128 | ) | | (23 | ) | | (151 | ) |
Ending balance, March 31, 2016 | $ | 969 |
| | $ | 218 |
| | $ | 1,187 |
|
* Includes increase in unrealized gains of $18 million relating to Level 3 assets still held at March 31, 2016.
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 March 31, 2016.
|
| | | | | | | | | | | |
| Level 3 Fair Value Liability Measurements at |
| March 31, 2016 |
| Inventory- related Payables | | Commodity Derivative Contracts Losses | | Total Liabilities |
| (In millions) |
| | | | | |
Balance, December 31, 2015 | $ | 16 |
| | $ | 113 |
| | $ | 129 |
|
Total increase (decrease) in net realized/unrealized losses included in cost of products sold* | 13 |
| | 79 |
| | 92 |
|
Purchases | 1 |
| | — |
| | 1 |
|
Sales | (7 | ) | | — |
| | (7 | ) |
Settlements | — |
| | (72 | ) | | (72 | ) |
Transfers into Level 3 | — |
| | 15 |
| | 15 |
|
Transfers out of Level 3 | — |
| | (24 | ) | | (24 | ) |
Ending balance, March 31, 2016 | $ | 23 |
| | $ | 111 |
| | $ | 134 |
|
* Includes increase in unrealized losses of $79 million relating to Level 3 liabilities still held at March 31, 2016.
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 March 31, 2015.
|
| | | | | | | | | | | |
| Level 3 Fair Value Asset Measurements at |
| March 31, 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 net realized/unrealized gains included in cost of products sold* | (331 | ) | | 69 |
| | (262 | ) |
Purchases | 2,817 |
| | — |
| | 2,817 |
|
Sales | (2,803 | ) | | — |
| | (2,803 | ) |
Settlements | — |
| | (144 | ) | | (144 | ) |
Transfers into Level 3 | 103 |
| | 55 |
| | 158 |
|
Transfers out of Level 3 | (238 | ) | | (5 | ) | | (243 | ) |
Ending balance, March 31, 2015 | $ | 1,039 |
| | $ | 178 |
| | $ | 1,217 |
|
* Includes increase in unrealized gains of $25 million relating to Level 3 assets still held at March 31, 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 March 31, 2015.
|
| | | | | | | | | | | |
| Level 3 Fair Value Liability Measurements at |
| March 31, 2015 |
| Inventory- related Payables | | Commodity Derivative Contracts Losses | | Total Liabilities |
| (In millions) |
| | | | | |
Balance, December 31, 2014 | $ | 40 |
| | $ | 212 |
| | $ | 252 |
|
Total increase (decrease) in net realized/unrealized losses included in cost of products sold* | (5 | ) | | 64 |
| | 59 |
|
Purchases | 6 |
| | — |
| | 6 |
|
Sales | (22 | ) | | — |
| | (22 | ) |
Settlements | — |
| | (135 | ) | | (135 | ) |
Transfers into Level 3 | 1 |
| | 82 |
| | 83 |
|
Transfers out of Level 3 | — |
| | (5 | ) | | (5 | ) |
Ending balance, March 31, 2015 | $ | 20 |
| | $ | 218 |
| | $ | 238 |
|
* Includes increase in unrealized losses of $55 million relating to Level 3 liabilities still held at March 31, 2015.
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 of inventories and commodity purchase and sale contracts 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.
The following table sets forth the weighted average percentage of the unobservable price components included in the Company’s Level 3 valuations as of March 31, 2016 and December 31, 2015. 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 March 31, 2016 is a weighted average 21.8% of the total price for assets and 61.8% of the total price for liabilities.
|
| | | | | | | | | | | |
| Weighted Average % of Total Price |
| March 31, 2016 | | December 31, 2015 |
Component Type | Assets | | Liabilities | | Assets | | Liabilities |
Inventories and Related Payables | | | | | | | |
Basis | 21.8 | % | | 61.8 | % | | 10.0 | % | | 53.5 | % |
Transportation cost | 2.2 | % | | 2.4 | % | | 1.8 | % | | — |
|
| | | | | | | |
Commodity Derivative Contracts | | | | | | | |
Basis | 20.2 | % | | 20.7 | % | | 17.7 | % | | 17.9 | % |
Transportation cost | 4.7 | % | | 9.7 | % | | 6.6 | % | | 10.4 | % |
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, absent other corroborating evidence, the Company considers these price quotes as 100% unobservable and, therefore, the fair value of these items is reported in Level 3.
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 March 31, 2016 and December 31, 2015.
|
| | | | | | | | | | | | | | | |
| March 31, 2016 | | December 31, 2015 |
| Assets | | Liabilities | | Assets | | Liabilities |
| (In millions) | | (In millions) |
| | | | | | | |
FX Contracts | $ | 134 |
| | $ | 206 |
| | $ | 93 |
| | $ | 186 |
|
Commodity Contracts | 704 |
| | 470 |
| | 646 |
| | 419 |
|
Total | $ | 838 |
| | $ | 676 |
| | $ | 739 |
| | $ | 605 |
|
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 months ended March 31, 2016 and 2015.
|
| | | | | | | |
| Three months ended March 31, |
| 2016 | | 2015 |
| (In millions) |
FX Contracts | |
| | |
|
Revenues | $ | — |
| | $ | 20 |
|
Cost of products sold | 107 |
| | (69 | ) |
Other income (expense) – net | (1 | ) | | (23 | ) |
| | | |
Commodity Contracts | |
| | |
|
Cost of products sold | $ | (10 | ) | | $ | 238 |
|
Total gain (loss) recognized in earnings | $ | 96 |
| | $ | 166 |
|
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.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 6. | Derivative Instruments and Hedging Activities (Continued) |
Derivatives Designated as Cash Flow or Fair Value Hedging Strategies
As of March 31, 2016 and December 31, 2015, 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 March 31, 2016, the Company has $33 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 March 31, 2016, the Company has $28 million of after-tax losses in AOCI related to gains and losses from commodity cash flow hedge transactions. The Company expects to recognize $26 million of these after-tax losses in its consolidated statement of earnings during the next 12 months.
The Company 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 16% and 69% of its monthly anticipated grind. At March 31, 2016, the Company has designated hedges representing between 1% and 46% 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 0 and 105 million gallons of ethanol sales per month under these programs. At March 31, 2016, the Company has designated hedges representing between 0 and 48 million gallons of ethanol sales per month over the next 3 months.
The following table sets forth the fair value of derivatives designated as hedging instruments as of March 31, 2016 and December 31, 2015.
|
| | | | | | | | | | | | | | | |
| March 31, 2016 | | December 31, 2015 |
| Assets | | Liabilities | | Assets | | Liabilities |
| (In millions) | | (In millions) |
Interest Contracts | $ | 33 |
| | $ | — |
| | $ | 19 |
| | $ | — |
|
Total | $ | 33 |
| | $ | — |
| | $ | 19 |
| | $ | — |
|
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 6. | Derivative Instruments and Hedging Activities (Continued) |
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 months ended March 31, 2016 and 2015.
|
| | | | | | | | | |
| | | Three months ended |
| Consolidated Statement of Earnings Locations | | March 31, |
| | 2016 | | 2015 |
| | | (In millions) |
Effective amounts recognized in earnings | | | | | |
FX Contracts | Other income/expense – net | | $ | (14 | ) | | $ | 17 |
|
Commodity Contracts | Cost of products sold | | (19 | ) | | — |
|
| Revenues | | 1 |
| | 47 |
|
Ineffective amount recognized in earnings | | | | | |
Commodity Contracts | Revenues | | 2 |
| | 7 |
|
| Cost of products sold | | 2 |
| | (13 | ) |
Total amount recognized in earnings | | | $ | (28 | ) | | $ | 58 |
|
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 grind occurs. 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 when the corn grind occurs.
Net Investment Hedging Strategies
On June 24, 2015, the Company issued €500 million aggregate principal amount of Floating Rate Notes and €600 million aggregate principal amount of 1.75% Notes (collectively, the “Notes”). The Company has designated €1.1 billion of the Notes as a hedge of its net investment in a foreign subsidiary. As of March 31, 2016, the Company has $28 million of losses in AOCI related to gains and losses from the net investment hedge transaction. The amount is deferred in AOCI until the underlying investment is divested.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 7. | Marketable Securities |
|
| | | | | | | | | | | | | | | |
| Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| (In millions) |
| | | | | | | |
March 31, 2016 | | | | | | | |
United States government obligations | | | | | | | |
Maturity less than 1 year | $ | 297 |
| | $ | — |
| | $ | — |
| | $ | 297 |
|
Maturity 1 to 5 years | 99 |
| | 1 |
| | — |
| | 100 |
|
Corporate debt securities | |
| | |
| | |
| | |
|
Maturity 1 to 5 years | 69 |
| | 1 |
| | — |
| | 70 |
|
Other debt securities | |
| | |
| | |
| | |
|
Maturity less than 1 year | 228 |
| | — |
| | — |
| | 228 |
|
Maturity 1 to 5 years | — |
| | — |
| | — |
| | — |
|
Equity securities | | | |
| | |
| | |
|
Available-for-sale | 309 |
| | — |
| | (38 | ) | | 271 |
|
| $ | 1,002 |
| | $ | 2 |
| | $ | (38 | ) | | $ | 966 |
|
|
| | | | | | | | | | | | | | | |
| Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| (In millions) |
| | | | | | | |
December 31, 2015 | | | | | | | |
United States government obligations | | | | | | | |
Maturity less than 1 year | $ | 256 |
| | $ | — |
| | $ | — |
| | $ | 256 |
|
Maturity 1 to 5 years | 116 |
| | — |
| | — |
| | 116 |
|
Corporate debt securities | |
| | |
| | |
| | |
|
Maturity 1 to 5 years | 26 |
| | — |
| | — |
| | 26 |
|
Other debt securities | |
| | |
| | |
| | |
|
Maturity less than 1 year | 182 |
| | — |
| | — |
| | 182 |
|
Maturity 1 to 5 years | 3 |
| | — |
| | — |
| | 3 |
|
Equity securities | |
| | |
| | |
| | |
|
Available-for-sale | 296 |
| | 4 |
| | (6 | ) | | 294 |
|
| $ | 879 |
| | $ | 4 |
| | $ | (6 | ) | | $ | 877 |
|
Of the $38 million in unrealized losses at March 31, 2016, $35 million arose within the last 12 months and is related to the Company’s investment in two available-for-sale equity securities with a fair value of $267 million. The market value of the Company’s investment that has been in an unrealized loss position for 12 months or longer is $3 million and is related to one available-for-sale equity security. 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 March 31, 2016.
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:
|
| | | | | | | |
| March 31, | | December 31, |
| 2016 | | 2015 |
| (In millions) |
| | | |
Unrealized gains on derivative contracts | $ | 871 |
| | $ | 758 |
|
Deferred receivables consideration | 292 |
| | 513 |
|
Customer omnibus receivable | 574 |
| | 1,148 |
|
Financing receivables - net (1) | 303 |
| | 352 |
|
Insurance premiums receivable | 573 |
| | 584 |
|
Prepaid expenses | 457 |
| | 406 |
|
Non-trade receivables (2) | 915 |
| | 838 |
|
Other current assets | 604 |
| | 687 |
|
| $ | 4,589 |
| | $ | 5,286 |
|
(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 $8 million at March 31, 2016 and December 31, 2015. Interest earned on financing receivables of $8 million for the three months ended March 31, 2016, and $7 million for the three months ended March 31, 2015, is included in interest income in the consolidated statements of earnings.
(2) Non-trade receivables include $321 million and $272 million of reinsurance recoverables as of March 31, 2016 and December 31, 2015, respectively.
| |
Note 9. | Accrued Expenses and Other Payables |
The following table sets forth the items in accrued expenses and other payables:
|
| | | | | | | |
| March 31, | | December 31, |
| 2016 | | 2015 |
| (In millions) |
| | | |
Unrealized losses on derivative contracts | $ | 676 |
| | $ | 605 |
|
Reinsurance premiums payable | 424 |
| | 425 |
|
Insurance claims payables | 534 |
| | 459 |
|
Deferred income | 781 |
| | 1,152 |
|
Other accruals and payable | 1,263 |
| | 1,472 |
|
| $ | 3,678 |
| | $ | 4,113 |
|
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 10. | Debt and Financing Arrangements |
At March 31, 2016, the fair value of the Company’s long-term debt exceeded the carrying value by $1.1 billion, as estimated using quoted market prices (a Level 2 measurement under applicable accounting standards).
At March 31, 2016, the Company had lines of credit totaling $6.1 billion, of which $5.4 billion was unused. Of the Company’s total lines of credit, $4.0 billion support a commercial paper borrowing facility, against which there was $0.7 billion of commercial paper outstanding at March 31, 2016.
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 March 31, 2016, the Company utilized $1.1 billion of its facility under the Programs (see Note 15 for more information on the Programs).
The Company’s effective tax rate for the three months ended March 31, 2016 was 24.8% compared to 28.6% for the three months ended March 31, 2015 due primarily to changes in the forecasted 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 March 31, 2016, these assessments, updated for estimated penalties, interest, and variation in currency exchange rates, totaled approximately $401 million. The statute of limitations for 2005 and 2008 to 2010 has expired. The Company does not expect to receive any additional tax assessments.
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.
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 2010.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 11. Income Taxes (Continued)
The Company’s subsidiaries in Argentina have received tax assessments challenging transfer prices used to price grain exports totaling $112 million (inclusive of interest and adjusted for variation in currency exchange rates) for the tax years 2004 through 2008. 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 2008, and estimates that these potential assessments would be approximately $152 million (as of March 31, 2016 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 2008.
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.
Note 12. Accumulated Other Comprehensive Income (AOCI)
The following tables set forth the changes in AOCI by component for the three months ended March 31, 2016 and the reclassifications out of AOCI for the three months ended March 31, 2016 and 2015:
|
| | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2016 |
| Foreign Currency Translation Adjustment | | Deferred Gain (Loss) on Hedging Activities | | Pension Liability Adjustment | | Unrealized Gain (Loss) on Investments | | Total |
| (In millions) |
| | | | | | | | | |
Balance at December 31, 2015 | $ | (1,626 | ) | | $ | (15 | ) | | $ | (523 | ) | | $ | 18 |
| | $ | (2,146 | ) |
Other comprehensive income (loss) before reclassifications | 202 |
| | (22 | ) | | (9 | ) | | (33 | ) | | 138 |
|
Amounts reclassified from AOCI | — |
| | 32 |
| | 10 |
| | — |
| | 42 |
|
Tax effect | 23 |
| | (2 | ) | | — |
| | (2 | ) | | 19 |
|
Net current period other comprehensive income | 225 |
| | 8 |
| | 1 |
| | (35 | ) | | 199 |
|
Balance at March 31, 2016 | $ | (1,401 | ) | | $ | (7 | ) | | $ | (522 | ) | | $ | (17 | ) | | $ | (1,947 | ) |
The current period change in foreign currency translation adjustment is primarily due to U.S. dollar depreciation, mainly impacting the Euro-denominated equity of the Company’s foreign subsidiaries.
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 | | |
Details about AOCI components | | March 31, 2016 | | March 31, 2015 | | Affected line item in the consolidated statement of earnings |
| | (In millions) | | |
Deferred loss (gain) on hedging activities | | | | | | |
| | $ | 19 |
| | $ | — |
| | Cost of products sold |
| | 14 |
| | (17 | ) | | Other income/expense |
| | (1 | ) | | (47 | ) | | Revenues |
| | 32 |
| | (64 | ) | | Total before tax |
| | (11 | ) | | 24 |
| | Tax |
| | $ | 21 |
| | $ | (40 | ) | | Net of tax |
| | | | | | |
Pension liability adjustment | | | | | | |
Amortization of defined benefit pension items: | | | | | | |
Prior service credit | | $ | (4 | ) | | $ | (2 | ) | | |
Actuarial losses | | 14 |
| | 27 |
| | |
| | 10 |
| | 25 |
| | Total before tax |
| | (1 | ) | | (17 | ) | | Tax |
| | $ | 9 |
| | $ | 8 |
| | Net of tax |
| | | | | | |
| |
Note 13. | Other (Income) Expense - Net |
The following tables set forth the items in other (income) expense:
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2016 | | 2015 |
| (In millions) |
| | | |
Gain on sale of assets | $ | (3 | ) | | $ | (3 | ) |
Other – net | 22 |
| | (7 | ) |
Other (Income) Expense - Net | $ | 19 |
| | $ | (10 | ) |
Gain on sale of assets for the quarter ended March 31, 2016 and 2015 includes gains on disposals of individually insignificant assets in the ordinary course of business. Other - net for the quarter ended March 31, 2016 includes foreign exchange losses partially offset by other income. Other - net for the quarter ended March 31, 2015 includes foreign exchange gains partially offset by amortization of intangibles.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 14. Segment Information
The Company is principally engaged in procuring, transporting, storing, processing, and merchandising agricultural commodities and products. The Company’s operations are organized, managed and classified into four reportable business segments: Agricultural Services, Corn Processing, Oilseeds Processing, and Wild Flavors and Specialty Ingredients. Each of these segments is organized based upon the nature of products and services offered. The Company’s remaining operations are not reportable segments, as defined by the applicable accounting standard, and are classified as Other.
The Agricultural Services segment utilizes its extensive global grain elevator and transportation networks, and port operations to buy, store, clean, and transport agricultural commodities, such as oilseeds, corn, wheat, milo, oats, rice, and barley, and resells these commodities primarily as food and feed ingredients and as raw materials for the agricultural processing industry. The Agricultural Services segment includes international agricultural commodities merchandising and handling activities managed through a global trade desk based in Rolle, Switzerland. Agricultural Services’ grain sourcing, handling, and transportation network provides reliable and efficient services to the Company’s customers and agricultural processing operations. Agricultural Services’ transportation network capabilities include barge, ocean-going vessel, truck, and rail freight services. The Agricultural Services segment also includes the activities related to structured trade finance and the processing of wheat into wheat flour. This segment also includes the Company’s 32.2% share of the results of its Pacificor (formerly Kalama Export Company LLC) joint venture and returns associated with the Company’s 19.8% investment in GrainCorp.
The Company’s Corn Processing segment is engaged in corn wet milling and dry milling activities, utilizing its asset base primarily located in the central part of the United States with additional facilities in China, Bulgaria, and Turkey. The Corn Processing segment converts corn into sweeteners, starches, and bioproducts. Its products include ingredients used in the food and beverage industry including sweeteners, starch, syrup, glucose, and dextrose. Dextrose and starch are used by the Corn Processing segment as feedstocks for its bioproducts operations. Through the fermentation of dextrose, the Corn Processing segment produces alcohol, amino acids, and other food and animal feed ingredients. Ethyl alcohol is produced by the Company for industrial use as ethanol or as beverage grade. Ethanol, in gasoline, increases octane and is used as an extender and oxygenate. Bioproducts also include essential amino acids such as lysine and threonine used in swine and poultry diets to optimize performance. Corn gluten feed and meal, as well as distillers’ grains, are produced for use as animal feed ingredients. Corn germ, a by-product of the wet milling process, is further processed into vegetable oil and protein meal. The Corn Processing segment also includes activities related to the processing and distribution of formula feeds and animal health and nutrition products. Other Corn Processing products include citric acids and glycols, which are used in various food and industrial products. Additionally, the Corn Processing segment includes the activities of the Company’s Brazilian sugarcane ethanol plant and related operations. This segment also includes the Company’s share of the results of its equity investments in Almidones Mexicanos S.A., and Red Star Yeast Company LLC.
The Oilseeds Processing segment includes global activities related to the origination, merchandising, crushing, and further processing of oilseeds such as soybeans and soft seeds (cottonseed, sunflower seed, canola, rapeseed, and flaxseed) into vegetable oils and protein meals. Oilseeds products produced and marketed by the Company include ingredients for the food, feed, energy, and industrial products industries. Crude vegetable oils produced by the segment’s crushing activities are sold “as is” or are further processed by refining, blending, bleaching, and deodorizing into salad oils. Salad oils are sold “as is” or are further processed by hydrogenating and/or interesterifying into margarine, shortening, and other food products. Partially refined oils are used to produce biodiesel or are sold to other manufacturers for use in chemicals, paints, and other industrial products. Oilseed protein meals are principally sold to third parties to be used as ingredients in commercial livestock and poultry feeds. In Europe and South America, the Oilseeds Processing segment includes origination and merchandising activities as adjuncts to its oilseeds processing assets. These activities include a network of grain elevators, port facilities, and transportation assets used to buy, store, clean, and transport grains and oilseeds. The Oilseeds Processing segment is a major supplier of peanuts, tree nuts, and peanut-derived ingredients to both the U.S. and export markets. In North America, cottonseed flour is produced and sold primarily to the pharmaceutical industry and cotton cellulose pulp is manufactured and sold to the chemical, paper, and filter markets. The Oilseeds Processing segment also included activities related to its global chocolate and cocoa businesses until the sale of these businesses in July 2015 and October 2015, respectively. The Oilseeds Processing segment also includes the Company’s share of the results of its equity investment in Wilmar International Limited (Wilmar) and its share of the results of its Stratas Foods LLC and Edible Oils Limited joint ventures. In March 2016, the Company acquired additional shares in Wilmar increasing its ownership interest from 19% to 20%.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 14. | Segment Information (Continued) |
The Wild Flavors and Specialty Ingredients segment engages in the manufacturing, sales, and distribution of specialty products including natural flavor ingredients, flavor systems, natural colors, proteins, emulsifiers, soluble fiber, polyols, hydrocolloids, natural health and nutrition products, and other specialty food and feed ingredients. The Wild Flavors and Specialty Ingredients segment also includes the activities related to the procurement, processing, and distribution of edible beans. In February 2016, the Company acquired a controlling stake in Harvest Innovations, an industry leader in minimally processed, expeller-pressed soy proteins, oils, and gluten-free ingredients.
Other includes the Company’s remaining operations, primarily its financial business units, related to futures commission and insurance activities.
Intersegment sales have been recorded at amounts approximating market. Operating profit for each segment is based on net sales less identifiable operating expenses. 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 principally include the impact of LIFO-related adjustments, unallocated corporate expenses, interest cost net of investment income, and the Company’s share of the results of an equity investment.
Following the sale of the cocoa business in October 2015, the remaining results of Cocoa and Other were combined with the results of Refining, Packaging, Biodiesel, and Other within the Oilseeds Processing segment effective January 1, 2016. Prior period results were reclassified to conform to the current presentation.
|
| | | | | | | |
| Three Months Ended |
| March 31, |
(In millions) | 2016 | | 2015 |
Gross revenues | | | |
Agricultural Services | $ | 6,863 |
| | $ | 9,078 |
|
Corn Processing | 2,220 |
| | 2,488 |
|
Oilseeds Processing | 6,092 |
| | 6,896 |
|
Wild Flavors and Specialty Ingredients | 596 |
| | 607 |
|
Other | 158 |
| | 159 |
|
Intersegment elimination | (1,545 | ) | | (1,722 | ) |
Total gross revenues | $ | 14,384 |
| | $ | 17,506 |
|
| | | |
Intersegment sales | |
| | |
|
Agricultural Services | $ | 383 |
| | $ | 1,033 |
|
Corn Processing | 13 |
| | 22 |
|
Oilseeds Processing | 1,095 |
| | 603 |
|
Wild Flavors and Specialty Ingredients | 4 |
| | 1 |
|
Other | 50 |
| | 63 |
|
Total intersegment sales | $ | 1,545 |
| | $ | 1,722 |
|
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
| |
Note 14. | Segment Information (Continued) |
|
| | | | | | | |
| Three Months Ended |
| March 31, |
(In millions) | 2016 | | 2015 |
Revenues from external customers | |
| | |
|
Agricultural Services | | | |
Merchandising and Handling | $ | 5,679 |
| | $ | 7,027 |
|
Milling and Other | 746 |
| | 964 |
|
Transportation | 55 |
| | 54 |
|
Total Agricultural Services | 6,480 |
| | 8,045 |
|
Corn Processing | | | |
Sweeteners and Starches | 967 |
| | 875 |
|
Bioproducts | 1,240 |
| | 1,591 |
|
Total Corn Processing | 2,207 |
| | 2,466 |
|
Oilseeds Processing | | | |
Crushing and Origination | 3,106 |
| | 3,775 |
|
Refining, Packaging, Biodiesel, and Other | 1,769 |
| | 2,441 |
|
Asia | 122 |
| | 77 |
|
Total Oilseeds Processing | 4,997 |
| | 6,293 |
|
| | | |
Wild Flavors and Specialty Ingredients | 592 |
| | 606 |
|
Total Wild Flavors and Specialty Ingredients | 592 |
| | 606 |
|
| | | |
Other - Financial | 108 |
| | 96 |
|
Total Other | 108 |
| | 96 |
|
Total revenues from external customers | $ | 14,384 |
| | $ | 17,506 |
|
| | | |
Segment operating profit | |
| | |
|
Agricultural Services | $ | 75 |
| | $ | 194 |
|
Corn Processing | 131 |
| | 113 |
|
Oilseeds Processing | 260 |
| | 469 |
|
Wild Flavors and Specialty Ingredients | 70 |
| | 68 |
|
Other | 37 |
| | 11 |
|
Total segment operating profit | 573 |
| | 855 |
|
Corporate | (267 | ) | | (165 | ) |
Earnings before income taxes | $ | 306 |
| | $ | 690 |
|
| | | |
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 15. Sale of Accounts Receivable
Since March 2012, the Company has had an accounts receivable securitization program (the “Program”) with certain commercial paper conduit purchasers and committed purchasers (collectively, the “Purchasers”). Under the Program, certain U.S.-originated trade accounts receivable are sold to a wholly-owned bankruptcy-remote entity, ADM Receivables, LLC (“ADM Receivables”). ADM Receivables in turn transfers such purchased accounts receivable in their entirety to the Purchasers pursuant to a receivables purchase agreement. In exchange for the transfer of the accounts receivable, ADM Receivables receives a cash payment of up to $1.3 billion and an additional amount upon the collection of the accounts receivable (deferred consideration). The Program terminates on June 24, 2016, unless extended.
In March 2014, the Company entered into a second accounts receivable securitization program (the “Second Program”) with certain commercial paper conduit purchasers and committed purchasers (collectively, the “Second Purchasers”). Under the Second Program, certain non-U.S.-originated trade accounts receivable are sold to a wholly-owned bankruptcy-remote entity, ADM Ireland Receivables Company (“ADM Ireland Receivables”). ADM Ireland Receivables in turn transfers such purchased accounts receivable in their entirety to the Second Purchasers pursuant to a receivables purchase agreement. In exchange for the transfer of the accounts receivable, ADM Ireland Receivables receives a cash payment of up to $0.3 billion and an additional amount upon the collection of the accounts receivable (deferred consideration). The Second Program terminates on March 17, 2017, unless extended.
Under the Program and Second Program (collectively, the “Programs”), ADM Receivables and ADM Ireland Receivables use the cash proceeds from the transfer of receivables to the Purchasers and Second Purchasers and other consideration to finance the purchase of receivables from the Company and the ADM subsidiaries originating the receivables.
The Company accounts for these transfers as sales. The Company has no retained interests in the transferred receivables, other than collection and administrative responsibilities and its right to the deferred consideration. At March 31, 2016 and December 31, 2015, the Company did not record a servicing asset or liability related to its retained responsibility, based on its assessment of the servicing fee, market values for similar transactions and its cost of servicing the receivables sold.
As of March 31, 2016 and December 31, 2015, the fair value of trade receivables transferred to the Purchasers and Second Purchasers under the Programs and derecognized from the Company’s consolidated balance sheet was $1.4 billion, and $1.7 billion, respectively. In exchange for the transfer as of March 31, 2016 and December 31, 2015, the Company received cash of $1.1 billion and $1.2 billion, respectively, and recorded a receivable for deferred consideration included in other current assets of $0.3 billion and $0.5 billion, respectively. Cash collections from customers on receivables sold were $8.4 billion and $11.2 billion for the three months ended March 31, 2016 and 2015, respectively. Of this amount, $8.3 billion and $11.0 billion pertain to cash collections on the deferred consideration for the three months ended March 31, 2016 and 2015, respectively. Deferred consideration is paid to the Company in cash on behalf of the Purchasers and Second Purchasers as receivables are collected; however, as these are revolving facilities, cash collected from the Company’s customers is reinvested by the Purchasers and Second Purchasers daily in new receivable purchases under the Programs.
The Company’s risk of loss following the transfer of accounts receivable under the Programs is limited to the deferred consideration outstanding. The Company carries the deferred consideration at fair value determined by calculating the expected amount of cash to be received and is principally based on observable inputs (a Level 2 measurement under the applicable accounting standards) 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.
Transfers of receivables under the Programs resulted in an expense for the loss on sale of $1 million during the three months ended March 31, 2016 and 2015 classified as selling, general, and administrative expenses in the consolidated statements of earnings.
The Company reflects all cash flows related to the Programs as operating activities in its consolidated statement of cash flows for the three months ended March 31, 2016 and 2015 because the cash received from the Purchasers and Second Purchasers upon both the sale and collection of the receivables is not subject to significantly different risks given the short-term nature of the Company’s trade receivables.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 16. Subsequent Event
In April 2016, the Company completed the purchase of a 50% interest in Cairo-based Medsofts Group, a joint venture that will own and manage merchandising and supply chain operations. The joint venture further diversifies and expands the Company’s merchandising footprint, helps the Company grow its logistics services, and enhances its destination marketing capabilities.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Company Overview
This MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements.
The Company is principally engaged in procuring, transporting, storing, processing, and merchandising agricultural commodities and products. The Company uses its significant global asset base to originate and transport agricultural commodities, connecting to markets in 165 countries. The Company also processes corn, oilseeds, and wheat into products for food, animal feed, chemical and energy uses. The Company uses its global asset network, business acumen, and its relationships with suppliers and customers to efficiently connect the harvest to the home thereby generating returns for its shareholders, principally from margins earned on these activities.
The Company’s operations are organized, managed and classified into four reportable business segments: Agricultural Services, Corn Processing, Oilseeds Processing, and Wild Flavors and Specialty Ingredients. Each of these segments is organized based upon the nature of products and services offered. The Company’s remaining operations are not reportable segments, as defined by the applicable accounting standard, and are classified as Other. See Note 14 of “Notes to Consolidated Financial Statements” included in Item 1 herein, “Financial Statements” for more information about the Company’s business segments.
The Company’s recent significant portfolio actions and announcements include:
| |
• | the purchase in February 2016 of a controlling stake in Harvest Innovations, an industry leader in minimally processed, expeller-pressed soy proteins, oils, and gluten-free ingredients; |
| |
• | the purchase in April 2016 of a 50% interest in Cairo-based Medsofts Group, a joint venture that will own and manage merchandising and supply chain operations; |
| |
• | the pending expansion of Olenex, a joint venture with Wilmar for the sale and marketing of refined vegetable oils and fats in Europe; and |
| |
• | the pending acquisition from Tate & Lyle of a Casablanca, Morocco-based corn wet mill that produces glucose and native starch. |
The pending transactions are expected to close in 2016, subject to regulatory approvals.
As part of the evolution of the Company’s strategic plan, the Company is currently undertaking a fresh look at the capital intensity of its operations and portfolio, seeking innovative ways to reduce and redeploy capital in its efforts to drive long-term returns, including a strategic review of its U.S. corn dry mills and options for its Brazilian sugarcane ethanol business. The Company decided not to operate the Brazil sugar ethanol plant during the first quarter of 2016, and recently announced it had entered into an agreement for the potential sale of the Brazil sugar business, subject to normal closing and regulatory conditions.
Operating Performance Indicators
The Company is exposed to certain risks inherent to an agricultural-based commodity business. These risks are further described in Item 1A, “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
The Company’s agricultural services and oilseeds processing operations are principally agricultural commodity-based businesses where changes in selling prices move in relationship to changes in prices of the commodity-based agricultural raw materials. Therefore, changes in agricultural commodity prices have relatively equal impacts on both revenues and cost of products sold. Thus, changes in revenues of these businesses do not necessarily correspond to the changes in margins or gross profit.
The Company’s corn processing operations and Wild Flavors and Specialty Ingredients businesses also utilize agricultural commodities (or products derived from agricultural commodities) as raw materials. However, in these operations, agricultural commodity market price changes do not necessarily equal changes in cost of products sold. Thus, changes in revenues of these businesses may correspond to changes in margins or gross profit.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
The Company has consolidated subsidiaries in 82 countries. For the majority of the Company’s subsidiaries located outside the United States, the local currency is the functional currency. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars at the weighted average exchange rates for the applicable periods. For the majority of the Company’s business activities in Brazil, the functional currency is the U.S. dollar; however, certain transactions, including taxes, occur in local currency and require conversion to the functional currency. Changes in revenues are expected to be correlated to changes in expenses reported by the Company caused by fluctuations in the exchange rates of foreign currencies, primarily the Euro, British pound, Canadian dollar, and Brazilian real, as compared to the U.S. dollar.
The Company measures its performance using key financial metrics including net earnings, segment operating profit, return on invested capital, EBITDA, economic value added, manufacturing expenses, and selling, general, and administrative expenses. The Company’s financial results can vary significantly due to changes in factors such as fluctuations in energy prices, weather conditions, crop plantings, government programs and policies, changes in global demand, general global economic conditions, changes in standards of living, and global production of similar and competitive crops. Due to these unpredictable factors, the Company undertakes no responsibility for updating any forward-looking information.
Market Factors Influencing Operations or Results in the Three Months Ended March 31, 2016
As an agricultural commodity-based business, the Company is subject to a variety of market factors which affect the Company's operating results. Agricultural Services was negatively impacted by weak U.S. grain export competitiveness and decreased global merchandising opportunities. In Corn Processing, demand and prices for sweeteners and starches remained solid in North America while co-product prices were stable. Ethanol continues to face a challenging pricing environment. Although ethanol demand remained strong both in North America and export markets due to favorable gasoline blending economics and ethanol's continuing status as a competitive octane enhancer, U.S. industry ethanol production remained at record-high levels limiting margins. Global oilseeds processing volumes and margins remained solid despite a decrease in U.S. soybean meal exports and slower South American grain commercialization due to low prices and a stronger local currency. The Wild Flavors and Specialty Ingredients business continued to focus on cost synergies and revenue opportunities amid continuing economic uncertainty in many emerging economies and a strong U.S. dollar. Customers’ interest to develop innovative, healthy, and nutritious food products in response to macro trends in diet and demographics remained strong and continued to grow.
Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015
Net earnings attributable to controlling interests was $230 million in the first quarter of 2016 compared to $493 million in the first quarter of 2015. Segment operating profit decreased $282 million to $573 million, due to lower U.S. export volumes, weaker margins, poor results from the global trade desk, and weaker global crush margins. Included in this quarter’s segment operating profit was approximately $2 million of mark-to-market gains related to hedge timing effects while segment operating profit in the prior year’s quarter included approximately $30 million of mark-to-market losses related to hedge timing effects. Corporate results were a charge of $267 million this quarter compared to $165 million in last year’s quarter. Corporate results this quarter include a charge of $14 million from the effect of increasing agricultural commodity prices on LIFO inventory valuation reserves, compared to a credit of $2 million in the first quarter of 2015, and a $50 million loss from the Company’s share in the results of an equity investee’s updated portfolio valuations compared to a $31 million gain in the first quarter of 2015.
Income taxes decreased $121 million due to lower earnings before income taxes and a lower effective tax rate. The Company’s effective tax rate for the quarter ended March 31, 2016 decreased to 24.8% compared to 28.6% for the quarter ended March 31, 2015, due primarily to changes in the forecasted geographic mix of pretax earnings.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Analysis of Statements of Earnings
Processed volumes by product for the quarter are as follows (in metric tons):
|
| | | | | | | | |
| Three Months Ended | |
| March 31, | | |
(In thousands) | 2016 | | 2015 | | Change |
Oilseeds | 8,281 |
| | 8,849 |
| | (568 | ) |
Corn | 5,742 |
| | 5,302 |
| | 440 |
|
Total | 14,023 |
| | 14,151 |
| | (128 | ) |
The Company generally operates its production facilities, on an overall basis, at or near capacity, adjusting facilities individually, as needed, to react to current margin environment and seasonal local supply and demand conditions.
Following the sale of the cocoa business in October 2015, the remaining results of Cocoa and Other were combined with the results of Refining, Packaging, Biodiesel, and Other within the Oilseeds Processing segment effective January 1, 2016. Prior period results were reclassified to conform to the current presentation.
Revenues by segment for the quarter are as follows:
|
| | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2016 | | 2015 | | Change |
| (In millions) |
Agricultural Services | | | | | |
Merchandising and Handling | $ | 5,679 |
| | $ | 7,027 |
| | $ | (1,348 | ) |
Milling and Other | 746 |
| | 964 |
| | (218 | ) |
Transportation | 55 |
| | 54 |
| | 1 |
|
Total Agricultural Services | 6,480 |
| | 8,045 |
| | (1,565 | ) |
| | | | | |
Corn Processing | |
| | |
| | |
|
Sweeteners and Starches | 967 |
| | 875 |
| | 92 |
|
Bioproducts | 1,240 |
| | 1,591 |
| | (351 | ) |
Total Corn Processing | 2,207 |
| | 2,466 |
| | (259 | ) |
| | | | | |
Oilseeds Processing | |
| | |
| | |
|
Crushing and Origination | 3,106 |
| | 3,775 |
| | (669 | ) |
Refining, Packaging, Biodiesel, and Other | 1,769 |
| | 2,441 |
| | (672 | ) |
Asia | 122 |
| | 77 |
| | 45 |
|
Total Oilseeds Processing | 4,997 |
| | 6,293 |
| | (1,296 | ) |
| | | | | |
Wild Flavors and Specialty Ingredients | 592 |
| | 606 |
| | (14 | ) |
Total Wild Flavors and Specialty Ingredients | 592 |
| | 606 |
| | (14 | ) |
| | | | | |
Other - Financial | 108 |
| | 96 |
| | 12 |
|
Total Other | 108 |
| | 96 |
| | 12 |
|
Total | $ | 14,384 |
| | $ | 17,506 |
| | $ | (3,122 | ) |
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Revenues and cost of products sold in a commodity merchandising and processing business are affected by the underlying commodity prices and volumes. In periods of significant changes in commodity prices, the underlying performance of the Company is better evaluated by looking at margins since both revenues and cost of products sold, particularly in Oilseeds Processing and Agricultural Services, generally have a relatively equal impact from commodity price changes which generally result in an insignificant impact to gross profit.
Revenues decreased $3.1 billion, or 18%, to $14.4 billion due principally to lower sales prices ($1.8 billion) related to a decrease in underlying commodity prices, including $0.2 billion in foreign currency translation impacts, and lower overall sales volumes ($1.3 billion). The decrease in sales prices was due principally to lower sales prices of unprocessed commodities. Agricultural Services revenues decreased 19% to $6.5 billion due principally to lower average sales volumes ($1.0 billion) and lower average sales prices ($0.6 billion). Corn Processing revenues decreased 11% to $2.2 billion due principally to lower sales prices ($0.2 billion). Oilseeds Processing revenues decreased 21% to $5.0 billion due principally to lower sales prices ($1.0 billion) and lower sales volumes ($0.3 billion).
Cost of products sold decreased $2.8 billion to $13.6 billion due principally to lower sales volumes and lower average commodity prices, including $0.2 billion from foreign currency translation impacts, and lower manufacturing costs. Included in cost of products sold is a charge of $14 million from the effect of increasing agricultural commodity prices during this quarter on LIFO inventory valuation reserves compared to a credit of $2 million in the prior year’s quarter. Manufacturing expenses decreased $0.1 billion to $1.3 billion primarily due to the sale of the cocoa business, lower fuel usage and lower natural gas and gasoline prices.
Gross profit decreased $0.3 billion, or 28%, to $0.8 billion. The decrease in gross profit consists principally of poor merchandising results ($78 million), lower volumes and higher costs in barge operations ($27 million), lower ethanol margins ($25 million), lower global crush margins ($143 million), and the sale of the cocoa business ($10 million). These factors are explained in the segment operating profit discussion on pages 32 and 33. The effects of increasing commodity price during the first quarter of 2016 on LIFO inventory valuations had a $16 million impact on gross profit. The decrease in underlying commodity prices from the prior year quarter did not result in a significant decrease in margins or gross profit as lower underlying commodity prices had a relatively equal impact on revenues and cost of products sold.
Selling, general, and administrative expenses decreased $23 million to $475 million due principally to decreased expenses related to the sale of the cocoa business.
Asset impairment, exit, and restructuring charges increased $13 million due to software impairment and restructuring charges.
Interest expense declined $11 million to $70 million primarily due to lower interest rates and the favorable effects of the debt restructuring from 2015.
Equity in earnings of unconsolidated affiliates decreased $74 million to $65 million primarily due to a $50 million loss in the current quarter from the Company’s share in the results of an equity investee’s updated portfolio valuations.
Other income decreased $29 million to an expense of $19 million primarily due to foreign exchange losses compared to foreign exchange gains in the prior period.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Operating profit by segment and earnings before income taxes for the quarter are as follows: