Document

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, 2016
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 – 581,763,197 shares
(July 29, 2016)





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,
 
2016
 
2015
 
2016
 
2015
 
(In millions, except per share amounts)
 
 
 
 
 
 
 
 
Revenues
$
15,629

 
$
17,186

 
$
30,013

 
$
34,692

Cost of products sold
14,872

 
16,222

 
28,460

 
32,626

Gross Profit
757

 
964

 
1,553

 
2,066

 
 
 
 
 
 
 
 
Selling, general, and administrative expenses
520

 
525

 
1,014

 
1,031

Asset impairment, exit, and restructuring costs
12

 
31

 
25

 
31

Interest expense
65

 
85

 
135

 
166

Equity in earnings of unconsolidated affiliates
(90
)
 
(87
)
 
(155
)
 
(226
)
Interest income
(23
)
 
(21
)
 
(45
)
 
(39
)
Other (income) expense – net
(134
)
 
(95
)
 
(134
)
 
(113
)
Earnings Before Income Taxes
407

 
526

 
713

 
1,216

 
 
 
 
 
 
 
 
Income taxes
119

 
143

 
195

 
340

Net Earnings Including Noncontrolling Interests
288

 
383

 
518

 
876

 
 
 
 
 
 
 
 
Less: Net earnings (losses) attributable to noncontrolling interests
4

 
(3
)
 
4

 
(3
)
 
 
 
 
 
 
 
 
Net Earnings Attributable to Controlling Interests
$
284

 
$
386

 
$
514

 
$
879

 
 
 
 
 
 
 
 
Average number of shares outstanding – basic
591

 
624

 
593

 
630

 
 
 
 
 
 
 
 
Average number of shares outstanding – diluted
594

 
627

 
595

 
633

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.48

 
$
0.62

 
$
0.87

 
$
1.40

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
0.48

 
$
0.62

 
$
0.87

 
$
1.39

 
 
 
 
 
 
 
 
Dividends per common share
$
0.30

 
$
0.28

 
$
0.60

 
$
0.56


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,
 
2016
 
2015
 
2016
 
2015
 
(In millions)
 
 
 
 
 
 
 
 
Net earnings including noncontrolling interests
$
288

 
$
383

 
$
518

 
$
876

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(218
)
 
177

 
(16
)
 
(525
)
Tax effect
(10
)
 
(6
)
 
13

 
26

Net of tax amount
(228
)
 
171

 
(3
)
 
(499
)
 
 
 
 
 
 
 
 
Pension and other postretirement benefit liabilities adjustment
15

 
(4
)
 
16

 
38

Tax effect
(3
)
 
—

 
(3
)
 
(19
)
Net of tax amount
12

 
(4
)
 
13

 
19

 
 
 
 
 
 
 
 
Deferred gain (loss) on hedging activities
(21
)
 
38

 
(11
)
 
(18
)
Tax effect
2

 
(9
)
 
—

 
12

Net of tax amount
(19
)
 
29

 
(11
)
 
(6
)
 
 
 
 
 
 
 
 
Unrealized gain (loss) on investments
45

 
(20
)
 
12

 
23

Tax effect
(1
)
 
(2
)
 
(3
)
 
(2
)
Net of tax amount
44

 
(22
)
 
9

 
21

Other comprehensive income (loss)
(191
)
 
174

 
8

 
(465
)
Comprehensive income (loss) including noncontrolling interests
97

 
557

 
526

 
411

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

 
(3
)
 
4

 
(4
)
 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to controlling interests
$
93

 
$
560

 
$
522

 
$
415


See notes to consolidated financial statements.





3



Archer-Daniels-Midland Company

Consolidated Balance Sheets
(In millions)
June 30, 2016
 
December 31, 2015
 
(Unaudited)
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
334

 
$
910

Short-term marketable securities
396

 
438

Segregated cash and investments
5,540

 
5,214

Trade receivables
2,257

 
1,738

Inventories
8,000

 
8,243

Other current assets
4,340

 
5,286

Total Current Assets
20,867

 
21,829

 
 
 
 
Investments and Other Assets
 

 
 

Investments in and advances to affiliates
4,429

 
3,901

Long-term marketable securities
487

 
439

Goodwill and other intangible assets
3,865

 
3,688

Other assets
648

 
447

Total Investments and Other Assets
9,429

 
8,475

 
 
 
 
Property, Plant, and Equipment
 

 
 

Land
457

 
454

Buildings
4,736

 
4,715

Machinery and equipment
17,315

 
17,159

Construction in progress
972

 
946

 
23,480

 
23,274

Accumulated depreciation
(13,678
)
 
(13,421
)
Net Property, Plant, and Equipment
9,802

 
9,853

 
 
 
 
Total Assets
$
40,098

 
$
40,157

 
 
 
 
Liabilities, Temporary Equity, and Shareholders’ Equity
 

 
 

Current Liabilities
 

 
 

Short-term debt
$
1,554

 
$
86

Trade payables
2,770

 
3,474

Payables to brokerage customers
5,640

 
5,820

Accrued expenses and other payables
3,543

 
4,113

Current maturities of long-term debt
271

 
12

Total Current Liabilities
13,778

 
13,505

 
 
 
 
Long-Term Liabilities
 

 
 

Long-term debt
5,561

 
5,779

Deferred income taxes
1,685

 
1,563

Other
1,364

 
1,395

Total Long-Term Liabilities
8,610

 
8,737

 
 
 
 
Temporary Equity - Redeemable noncontrolling interest
41

 
—

 
 
 
 
Shareholders’ Equity
 

 
 

Common stock
2,714

 
3,180

Reinvested earnings
17,079

 
16,865

Accumulated other comprehensive income (loss)
(2,138
)
 
(2,146
)
Noncontrolling interests
14

 
16

Total Shareholders’ Equity
17,669

 
17,915

Total Liabilities, Temporary Equity, and Shareholders’ Equity
$
40,098

 
$
40,157

 
 
 
 
See notes to consolidated financial statements.

4



Archer-Daniels-Midland Company

Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
(In millions)
 
 
 
 
Operating Activities
 
 
 
Net earnings including noncontrolling interests
$
518

 
$
876

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

 
 

Depreciation and amortization
452

 
441

Asset impairment charges
20

 
31

Deferred income taxes
86

 
29

Equity in earnings of affiliates, net of dividends
(30
)
 
(69
)
Stock compensation expense
45

 
42

Pension and postretirement accruals (contributions), net
27

 
16

Deferred cash flow hedges
44

 
(18
)
Gains on sales of assets/revaluations
(121
)
 
(104
)
Other – net
(3
)
 
(50
)
Changes in operating assets and liabilities
 

 
 

Segregated cash and investments
(405
)
 
146

Trade receivables
(477
)
 
423

Inventories
283

 
1,334

Other current assets
(15
)
 
735

Trade payables
(710
)
 
(1,226
)
Payables to brokerage customers
500

 
(534
)
Accrued expenses and other payables
(580
)
 
(1,665
)
Total Operating Activities
(366
)
 
407

 
 
 
 
Investing Activities
 

 
 

Purchases of property, plant, and equipment
(396
)
 
(540
)
Proceeds from sales of business and assets
96

 
135

Net assets of businesses acquired
(120
)
 
(69
)
Purchases of marketable securities
(802
)
 
(545
)
Proceeds from sales of marketable securities
865

 
735

Investments in and advances to affiliates
(464
)
 
(125
)
Distributions from affiliates
11

 
1

Other – net
(3
)
 
1

Total Investing Activities
(813
)
 
(407
)
 
 
 
 
Financing Activities
 

 
 

Long-term debt borrowings
—

 
1,244

Long-term debt payments
(8
)
 
(28
)
Net borrowings (payments) under lines of credit agreements
1,454

 
50

Purchases of treasury stock
(487
)
 
(1,164
)
Cash dividends
(353
)
 
(350
)
Other – net
(3
)
 
16

Total Financing Activities
603

 
(232
)
 
 
 
 
Increase (decrease) in cash and cash equivalents
(576
)
 
(232
)
Cash and cash equivalents beginning of period
910

 
1,099

 
 
 
 
Cash and cash equivalents end of period
$
334

 
$
867

 
 
 
 
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, 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
 
 
 

 
514

 
 

 
4

 
 

   Other comprehensive
     income (loss)
 

 
 

 
 

 
8

 
—

 
 

      Total comprehensive
       income
 

 
 

 
 

 
 

 
 

 
526

Cash dividends paid- $0.60 per share
 

 
 

 
(353
)
 
 

 
 

 
(353
)
Treasury stock purchases
(13
)
 
(487
)
 
 
 
 
 
 
 
(487
)
Stock compensation expense
1

 
45

 
 

 
 

 
 

 
45

Other
—

 
29

 
—

 
—

 
(6
)
 
23

Balance, June 30, 2016
583

 
$
2,714

 
$
17,079

 
$
(2,138
)
 
$
14

 
$
17,669


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 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 and six-month period ended June 30, 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.

Reclassification

The Company classified $17 million and $36 million of intangible amortization in selling, general, and administrative expenses in the quarter and six months ended June 30, 2016, respectively. Prior period amounts of $6 million and $14 million in the quarter and six months ended June 30, 2015, respectively, have been reclassified from other (income) expense - net to conform to the current presentation.

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 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.





7
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 2.
New Accounting Standards (Continued)

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. Upon adoption, 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.

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. 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, 2017, the Company will be required to adopt the amended guidance of ASC Topic 323, Investments - Equity Method and Joint Ventures, which simplifies the transition to the equity method of accounting. The amended guidance eliminates the requirement of an investor to adjust the investment, results of operations, and retained earnings retroactively when an investment qualifies for equity method accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments require that the investor add the cost of acquiring the additional interest in the investee to the current basis of the investors’ previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. 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. The Company expects to adopt Topic 606 on a modified retrospective basis and 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 adoption of this new guidance will require expanded disclosures in the Company’s consolidated financial statements, but is not expected to have a significant impact on its financial results.

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.



8
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 3.
Pending Accounting Standards (Continued)


Effective January 1, 2020, the Company will be required to adopt the amended guidance of Topic 326, Financial Instruments - Credit Losses, which is intended to improve financial reporting by requiring more timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The amended guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Early adoption will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company does not expect the adoption of this amended guidance to have a significant impact on the Company’s financial results.
  
Note 4.
Acquisitions

During the six months ended June 30, 2016, the Company acquired a 90% interest in Harvest Innovations, an industry leader in minimally processed, expeller-pressed soy proteins, oils, and gluten-free ingredients, a 50% interest in Cairo-based Medsofts Group, a joint venture that owns and manages merchandising and supply chain operations, and a Casablanca, Morocco-based corn wet mill that produces glucose and native starch for an aggregate cost of $128 million in cash and recorded preliminary allocations of purchase prices related to the acquisitions. The aggregate purchase price, net of cash acquired of $8 million, was preliminarily allocated to working capital, property, plant, and equipment, goodwill, other intangible assets, other long-term assets, other long-term liabilities, and redeemable noncontrolling interest for $10 million, $17 million, $64 million, $41 million, $42 million, $16 million, and $38 million, respectively.

The remaining 10% interest in Harvest Innovations is recorded in other long-term liabilities and accounted for as a mandatorily redeemable interest which the Company has agreed to acquire following two years of operation.

The Company has an option to acquire the remaining 50% interest in Medsofts Group at a fixed multiple of earnings before taxes, interest, and depreciation and amortization for the last twelve months at the end of three years. If the Company does not elect to exercise its option, the noncontrolling interest holder has the option to put the 50% interest to the Company on similar, though discounted, terms. The Company records the 50% remaining interest in temporary equity - redeemable noncontrolling interest.


9

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

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, 2016 and December 31, 2015.
 
 
Fair Value Measurements at June 30, 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
$
—

 
$
3,072

 
$
1,099

 
$
4,171

Unrealized derivative gains:
 
 
 
 
 
 
 
Commodity contracts
—

 
967

 
153

 
1,120

Foreign exchange contracts
—

 
109

 
—

 
109

Interest rate contracts
—

 
41

 
—

 
41

Cash equivalents
40

 
—

 
—

 
40

Marketable securities
810

 
72

 
—

 
882

Segregated investments
1,633

 
—

 
—

 
1,633

Deferred receivables consideration
—

 
403

 
—

 
403

Total Assets
$
2,483

 
$
4,664

 
$
1,252

 
$
8,399

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Unrealized derivative losses:
 
 
 
 
 
 
 
Commodity contracts
$
—

 
$
690

 
$
500

 
$
1,190

Foreign exchange contracts
7

 
240

 
—

 
247

Inventory-related payables
—

 
245

 
12

 
257

Total Liabilities
$
7

 
$
1,175

 
$
512

 
$
1,694




10
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.


11
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 16). 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.


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, 2016.

 
Level 3 Fair Value Asset Measurements at
 
June 30, 2016
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, March 31, 2016
$
969

 
$
218

 
$
1,187

Total increase (decrease) in net realized/unrealized gains included in cost of products sold*
(105
)
 
32

 
(73
)
Purchases
2,686

 
—

 
2,686

Sales
(2,506
)
 
—

 
(2,506
)
Settlements
—

 
(120
)
 
(120
)
Transfers into Level 3
79

 
34

 
113

Transfers out of Level 3
(24
)
 
(11
)
 
(35
)
Ending balance, June 30, 2016
$
1,099

 
$
153

 
$
1,252


* Includes decrease in unrealized gains of $3 million relating to Level 3 assets still held at June 30, 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 June 30, 2016.

 
Level 3 Fair Value Liability Measurements at
 
June 30, 2016
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, March 31, 2016
$
23

 
$
111

 
$
134

Total increase (decrease) in net realized/unrealized losses included in cost of products sold*
(11
)
 
417

 
406

Purchases
1

 
—

 
1

Sales
(1
)
 
—

 
(1
)
Settlements
—

 
(73
)
 
(73
)
Transfers into Level 3
—

 
67

 
67

Transfers out of Level 3
—

 
(22
)
 
(22
)
Ending balance, June 30, 2016
$
12

 
$
500

 
$
512


* Includes increase in unrealized losses of $419 million relating to Level 3 liabilities still held at June 30, 2016.


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 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 net 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 net 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.


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, 2016.

 
Level 3 Fair Value Asset Measurements at
 
June 30, 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*
(155
)
 
94

 
(61
)
Purchases
5,042

 
—

 
5,042

Sales
(4,743
)
 
—

 
(4,743
)
Settlements
—

 
(217
)
 
(217
)
Transfers into Level 3
79

 
66

 
145

Transfers out of Level 3
(128
)
 
(33
)
 
(161
)
Ending balance, June 30, 2016
$
1,099

 
$
153

 
$
1,252


* Includes increase in unrealized gains of $14 million relating to Level 3 assets still held at June 30, 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 six months ended June 30, 2016.

 
Level 3 Fair Value Liability Measurements at
 
June 30, 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*
2

 
496

 
498

Purchases
2

 
—

 
2

Sales
(8
)
 
—

 
(8
)
Settlements
—

 
(146
)
 
(146
)
Transfers into Level 3
—

 
83

 
83

Transfers out of Level 3
—

 
(46
)
 
(46
)
Ending balance, June 30, 2016
$
12

 
$
500

 
$
512


* Includes increase in unrealized losses of $498 million relating to Level 3 liabilities still held at June 30, 2016.




15
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 net 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 net 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
.


16
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 exchange-traded prices and local prices for 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 June 30, 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 June 30, 2016 is a weighted average 15.9% of the total price for assets and 80.4% of the total price for liabilities.

 
Weighted Average % of Total Price
 
June 30, 2016
 
December 31, 2015
Component Type
Assets
 
Liabilities
 
Assets
 
Liabilities
Inventories and Related Payables
 
 
 
 
 
 
 
Basis
15.9
%
 
80.4
%
 
10.0
%
 
53.5
%
Transportation cost
2.5
%
 
1.9
%
 
1.8
%
 
—

 
 
 
 
 
 
 
 
Commodity Derivative Contracts
 
 
 
 
 
 
 
Basis
18.0
%
 
15.1
%
 
17.7
%
 
17.9
%
Transportation cost
5.1
%
 
4.3
%
 
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.


17

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, 2016 and December 31, 2015.

 
June 30, 2016
 
December 31, 2015
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(In millions)
 
 
 
 
 
 
 
 
FX Contracts
$
109

 
$
247

 
$
93

 
$
186

Interest Contracts
2

 
—

 
—

 
—

Commodity Contracts
1,120

 
1,190

 
646

 
419

Total
$
1,231

 
$
1,437

 
$
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 and six months ended June 30, 2016 and 2015.

 
Three months ended June 30,
 
2016
 
2015
 
(In millions)
FX Contracts
 

 
 

Revenues
$
(13
)
 
$
(12
)
Cost of products sold
155

 
6

Other income (expense) – net
(104
)
 
31

 
 
 
 
Commodity Contracts
 

 
 

Cost of products sold
$
(625
)
 
$
(251
)
Total gain (loss) recognized in earnings
$
(587
)
 
$
(226
)

18
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Derivative Instruments and Hedging Activities (Continued)

 
Six months ended June 30,
 
2016
 
2015
 
(In millions)
FX Contracts
 

 
 

Revenues
$
(13
)
 
$
8

Cost of products sold
262

 
(63
)
Other income (expense) – net
(105
)
 
8

 
 
 
 
Commodity Contracts
 

 
 

Cost of products sold
$
(635
)
 
$
(13
)
Total gain (loss) recognized in earnings
$
(491
)
 
$
(60
)

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, 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 June 30, 2016, the Company has $39 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, 2016, the Company has $34 million of after-tax losses in AOCI related to gains and losses from commodity cash flow hedge transactions.  The Company expects to recognize $27 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 June 30, 2016, the Company has designated hedges representing between 5% and 29% 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 June 30, 2016, the Company has designated hedges representing between 0 and 1 million gallons of ethanol sales per month over the next 12 months.


19
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, 2016 and December 31, 2015.

 
June 30, 2016
 
December 31, 2015
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(In millions)
Interest Contracts
$
39

 
$
—

 
$
19

 
$
—

Total
$
39

 
$
—

 
$
19

 
$
—


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, 2016 and 2015.
 
 
 
 
Three months ended
 
Consolidated Statement of
Earnings Locations
 
June 30,
 
 
2016
 
2015
 
 
 
(In millions)
Effective amounts recognized in earnings
 
 
 
 
 
FX Contracts
Other income/expense – net
 
$
(8
)
 
$
5

Commodity Contracts
Cost of products sold
 
(5
)
 
(18
)
 
Revenues
 
(6
)
 
(2
)
Ineffective amount recognized in earnings
 
 
 
 
 
Commodity Contracts
Cost of products sold
 
2

 
9

 
Other income/expense – net
 
(1
)
 
1

Total amount recognized in earnings
 
 
$
(18
)
 
$
(5
)
 
 
 
Six months ended
 
Consolidated Statement of
Earnings Locations
 
June 30,
 
 
2016
 
2015
 
 
 
(In millions)
Effective amounts recognized in earnings
 
 
 
 
 
FX Contracts
Other income/expense – net
 
$
(22
)
 
$
22

Commodity Contracts
Cost of products sold
 
(24
)
 
(18
)
 
Revenues
 
(5
)
 
45

Ineffective amount recognized in earnings
 
 
 
 
 
Commodity Contracts
Revenues
 
1

 
7


Cost of products sold
 
4

 
(4
)
 
Other income/expense – net
 
—

 
1

Total amount recognized in earnings
 
 
$
(46
)
 
$
53


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.


20
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Derivative Instruments and Hedging Activities (Continued)

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 June 30, 2016, the Company has $4 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.

Note 7.
Marketable Securities

 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(In millions)
 
 
 
 
 
 
 
 
June 30, 2016
 
 
 
 
 
 
 
United States government obligations
 
 
 
 
 
 
 
Maturity less than 1 year
$
356

 
$
—

 
$
—

 
$
356

Maturity 1 to 5 years
115

 
1

 
—

 
116

Corporate debt securities
 

 
 

 
 

 
 

Maturity less than 1 year
1

 
—

 
—

 
1

Maturity 1 to 5 years
69

 
2

 
—

 
71

Other debt securities
 

 
 

 
 

 
 

Maturity less than 1 year
39

 
—

 
—

 
39

Equity securities
 
 
 

 
 

 
 

Available-for-sale
300

 
4

 
(4
)
 
300

 
$
880

 
$
7

 
$
(4
)
 
$
883


 
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



21
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 7.
Marketable Securities (Continued)

Of the $4 million in unrealized losses at June 30, 2016, $1 million arose within the last 12 months and is related to the Company’s investment in one available-for-sale equity security with a fair value of $4 million.  The market value of the investment that has been in an unrealized loss position for 12 months or longer is $4 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 June 30, 2016.

Note 8.     Other Current Assets

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

 
June 30,
 
December 31,
 
2016
 
2015
 
(In millions)
 
 
 
 
Unrealized gains on derivative contracts
$
1,270

 
$
758

Deferred receivables consideration
403

 
513

Customer omnibus receivable
582

 
1,148

Financing receivables - net (1)
329

 
352

Insurance premiums receivable
275

 
584

Prepaid expenses
211

 
406

Tax receivables
658

 
550

Non-trade receivables (2)
427

 
288

Other current assets
185

 
687

 
$
4,340

 
$
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 $7 million and $8 million at June 30, 2016 and December 31, 2015, respectively. Interest earned on financing receivables of $4 million and $12 million for the three and six months ended June 30, 2016, respectively, and $5 million and $12 million for the three and six months ended June 30, 2015, respectively, is included in interest income in the consolidated statements of earnings.

(2) Non-trade receivables include $143 million and $272 million of reinsurance recoverables as of June 30, 2016 and December 31, 2015, respectively.

22

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 9.     Accrued Expenses and Other Payables

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

 
June 30,
 
December 31,
 
2016
 
2015
 
(In millions)
 
 
 
 
Unrealized losses on derivative contracts
$
1,437

 
$
605

Reinsurance premiums payable
135

 
425

Insurance claims payables
315

 
459

Deferred income
369

 
1,152

Other accruals and payable
1,287

 
1,472

 
$
3,543

 
$
4,113


Note 10.
Debt and Financing Arrangements

At June 30, 2016, the fair value of the Company’s long-term debt exceeded the carrying value by $1.4 billion, as estimated using quoted market prices (a Level 2 measurement under applicable accounting standards).

At June 30, 2016, the Company had lines of credit, including the accounts receivable securitization programs, totaling $7.5 billion, of which $4.9 billion was unused.  Of the Company’s total lines of credit, $4.0 billion support a commercial paper borrowing facility, against which there was $1.4 billion of commercial paper outstanding at June 30, 2016.

The Company has accounts receivable securitization programs (the “Programs”). The Programs provide the Company with up to $1.5 billion in funding resulting from the sale of accounts receivable. As of June 30, 2016, the Company utilized $1.1 billion of its facility under the Programs (see Note 16 for more information on the Programs).

Note 11.
Income Taxes

The Company’s effective tax rate for the three and six months ended June 30, 2016 was 29.2% and 27.3%, respectively, compared to 27.2% and 28.0% for the three and six months ended June 30, 2015, respectively. The rate for the current quarter was negatively impacted by unfavorable discrete items.

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, 2016, these assessments, updated for estimated penalties, interest, and variation in currency exchange rates, totaled approximately $452 million. The statute of limitations for 2005 and 2008 to 2010 has expired. The Company does not expect to receive any additional tax assessments.



23
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 11.     Income Taxes (Continued)

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.

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 $155 million (as of June 30, 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.


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 three and six months ended June 30, 2016 and the reclassifications out of AOCI for the three and six months ended June 30, 2016 and 2015:
 
Three months ended June 30, 2016
 
Foreign Currency Translation Adjustment
 
Deferred Gain (Loss) on Hedging Activities
 
Pension Liability Adjustment
 
Unrealized Gain (Loss) on Investments
 
Total
 
(In millions)
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2016
$
(1,401
)
 
$
(7
)
 
$
(522
)
 
$
(17
)
 
$
(1,947
)
Other comprehensive income (loss) before reclassifications
(145
)
 
(40
)
 
3

 
45

 
(137
)
Amounts reclassified from AOCI
(73
)
 
19

 
12

 
—

 
(42
)
Tax effect
(10
)
 
2

 
(3
)
 
(1
)
 
(12
)
Net current period other comprehensive income
(228
)
 
(19
)
 
12

 
44

 
(191
)
Balance at June 30, 2016
$
(1,629
)
 
$
(26
)
 
$
(510
)
 
$
27

 
$
(2,138
)
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 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 before reclassifications
57

 
(62
)
 
(6
)
 
12

 
1

Amounts reclassified from AOCI
(73
)
 
51

 
22

 
—

 
—

Tax effect
13

 
—

 
(3
)
 
(3
)
 
7

Net current period other comprehensive income
(3
)
 
(11
)
 
13

 
9

 
8

Balance at June 30, 2016
$
(1,629
)
 
$
(26
)
 
$
(510
)
 
$
27

 
$
(2,138
)

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.

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,
2016
 
June 30,
2015
 
June 30
2016
 
June 30
2015
 
Affected line item in the consolidated statement of earnings