Edgar Filing: ARCHER DANIELS MIDLAND CO

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 March 31, 2018


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, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 – 559,184,185 shares

(April 30, 2018)

PART I - FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

Archer-Daniels-Midland Company

Consolidated Statements of Earnings

(Unaudited)



	Three Months Ended March 31,
	2018			2017
	(In millions, except per share amounts)

Revenues	$	15,526		$	14,988
Cost of products sold	14,637			14,116
Gross Profit	889			872

Selling, general, and administrative expenses	513			516
Asset impairment, exit, and restructuring costs	16			10
Interest expense	91			81
Equity in (earnings) losses of unconsolidated affiliates	(147		)	(172		)
Interest income	(33		)	(23		)
Other (income) expense – net	(15		)	2
Earnings Before Income Taxes	464			458

Income taxes	68			118
Net Earnings Including Noncontrolling Interests	396			340

Less: Net earnings attributable to noncontrolling interests	3			1

Net Earnings Attributable to Controlling Interests	$	393		$	339

Average number of shares outstanding – basic	563			576

Average number of shares outstanding – diluted	565			579

Basic earnings per common share	$	0.70		$	0.59

Diluted earnings per common share	$	0.70		$	0.59

Dividends per common share	$	0.335		$	0.320

See notes to consolidated financial statements.

Archer-Daniels-Midland Company

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)



	Three Months Ended March 31,
	2018			2017
	(In millions)

Net earnings including noncontrolling interests	$	396		$	340
Other comprehensive income (loss):
Foreign currency translation adjustment	211			21
Tax effect	(3		)	3
Net of tax amount	208			24

Pension and other postretirement benefit liabilities adjustment	2			12
Tax effect	(3		)	(6		)
Net of tax amount	(1		)	6

Deferred gain (loss) on hedging activities	(25		)	3
Tax effect	6			(3		)
Net of tax amount	(19		)	—

Unrealized gain (loss) on investments	(2		)	(6		)
Tax effect	—			—
Net of tax amount	(2		)	(6		)
Other comprehensive income (loss)	186			24
Comprehensive income (loss) including noncontrolling interests	582			364

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

Comprehensive income (loss) attributable to controlling interests	$	579		$	363

See notes to consolidated financial statements.

Archer-Daniels-Midland Company

Consolidated Balance Sheets



(In millions)	March 31, 2018			December 31, 2017
	(Unaudited)
Assets
Current Assets
Cash and cash equivalents	$	797		$	804
Segregated cash and investments	4,408			4,826
Trade receivables	2,147			1,947
Inventories	9,820			9,173
Other current assets	3,734			3,175
Total Current Assets	20,906			19,925

Investments and Other Assets
Investments in and advances to affiliates	5,151			5,088
Long-term marketable securities	91			92
Goodwill and other intangible assets	3,970			3,918
Other assets	859			802
Total Investments and Other Assets	10,071			9,900

Property, Plant, and Equipment
Land	473			470
Buildings	5,098			5,043
Machinery and equipment	18,193			18,056
Construction in progress	1,216			1,224
	24,980			24,793
Accumulated depreciation	(14,857		)	(14,655		)
Net Property, Plant, and Equipment	10,123			10,138
Total Assets	$	41,100		$	39,963

Liabilities, Temporary Equity, and Shareholders’ Equity
Current Liabilities
Short-term debt	$	2,330		$	857
Trade payables	3,340			3,894
Payables to brokerage customers	4,567			4,973
Accrued expenses and other payables	3,035			2,833
Current maturities of long-term debt	13			13
Total Current Liabilities	13,285			12,570

Long-Term Liabilities
Long-term debt	6,657			6,623
Deferred income taxes	1,037			1,053
Other	1,325			1,342
Total Long-Term Liabilities	9,019			9,018

Temporary Equity - Redeemable noncontrolling interest	59			53

Shareholders’ Equity
Common stock	2,428			2,398
Reinvested earnings	17,755			17,552
Accumulated other comprehensive income (loss)	(1,451		)	(1,637		)
Noncontrolling interests	5			9
Total Shareholders’ Equity	18,737			18,322
Total Liabilities, Temporary Equity, and Shareholders’ Equity	$	41,100		$	39,963

See notes to consolidated financial statements.

Archer-Daniels-Midland Company

Consolidated Statements of Cash Flows

(Unaudited)



(In millions)	Three Months Ended March 31,
	2018			2017
Operating Activities
Net earnings including noncontrolling interests	$	396		$	340
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities
Depreciation and amortization	235			225
Asset impairment charges	12			1
Deferred income taxes	(21		)	1
Equity in earnings of affiliates, net of dividends	(105		)	(140		)
Stock compensation expense	29			32
Pension and postretirement accruals (contributions), net	(26		)	11
Deferred cash flow hedges	(25		)	3
Gains on sales of assets and businesses/revaluation	(6		)	(16		)
Other – net	64			51
Changes in operating assets and liabilities
Segregated investments	308			101
Trade receivables	(185		)	169
Inventories	(600		)	222
Deferred consideration in securitized receivables	(2,450		)	(2,185		)
Other current assets	(432		)	143
Trade payables	(567		)	(209		)
Payables to brokerage customers	(432		)	303
Accrued expenses and other payables	231			(541		)
Total Operating Activities	(3,574		)	(1,489		)

Investing Activities
Purchases of property, plant, and equipment	(196		)	(200		)
Proceeds from sales of business and assets	14			25
Net assets of businesses acquired	—			(90		)
Purchases of marketable securities	—			(148		)
Proceeds from sales of marketable securities	—			220
Investments in and advances to affiliates	—			(185		)
Investments in retained interest in securitized receivables	(1,298		)	(881		)
Proceeds from retained interest in securitized receivables	3,656			3,310
Other – net	4			(3		)
Total Investing Activities	2,180			2,048

Financing Activities
Long-term debt payments	(1		)	(2		)
Net borrowings (payments) under lines of credit agreements	1,474			263
Share repurchases	—			(248		)
Cash dividends	(190		)	(183		)
Other – net	(6		)	(10		)
Total Financing Activities	1,277			(180		)

Increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents	(117		)	379
Cash, cash equivalents, restricted cash, and restricted cash equivalents - beginning of period	1,858			1,561
Cash, cash equivalents, restricted cash, and restricted cash equivalents - end of period	$	1,741		$	1,940

Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the consolidated balance sheets

Cash and cash equivalents	$	797		$	476
Restricted cash and restricted cash equivalents included in segregated cash and investments	944			1,464
Total cash, cash equivalents, restricted cash, and restricted cash equivalents	$	1,741		$	1,940

Supplemental Disclosure of Noncash Investing Activity:
Retained interest in securitized receivables	$	2,368		$	2,114

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		Reinvested Earnings			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests			Total Shareholders’ Equity
	(In millions)

Balance, December 31, 2017	557	$	2,398	$	17,552		$	(1,637	)	$	9		$	18,322
Comprehensive income
Net earnings				393						3
Other comprehensive income (loss)							186			—
Total comprehensive income													582
Dividends paid - $0.335 per share				(190		)							(190		)
Stock compensation expense	2	29											29
Other	—	1		—			—			(7		)	(6		)
Balance, March 31, 2018	559	$	2,428	$	17,755		$	(1,451	)	$	5		$	18,737

See notes to consolidated financial statements.

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 three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. 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, 2017.

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.

Reclassifications

Starting with the second quarter of 2017, the Company began presenting certain specified items separately from the individual business segments, as further described in Note 13. Prior period amounts have been reclassified to separately identify specified items to conform to the current presentation.

In line with the futures brokerage industry practice, the Company classified $0.9 billion of segregated cash and cash equivalents as restricted cash and cash equivalents in its statement of cash flows for the three months ended March 31, 2018. Prior period amounts have been restated to conform to the current presentation which resulted in an increase of $531 million in total cash provided by operating activities for the three months ended March 31, 2017 and an increase of $1.4 billion in the ending balance of restricted cash and restricted cash equivalents as of March 31, 2017.

The Company classified $2.4 billion of cash inflows from net consideration received for beneficial interest obtained for selling trade receivables as investing instead of operating activities for the three months ended March 31, 2018. Prior period amounts have been restated to conform to the current presentation, which resulted in a decrease of $2.4 billion in total cash provided by operating activities and a corresponding increase in cash provided by investing activities for the three months ended March 31, 2017. See Note 2 for more information about the adoption of Accounting Standards Codification (ASC) Topic 230, Statement of Cash Flows.

The Company classified income of $3 million of other components of net benefit cost as other (income) expense - net in its consolidated statement of earnings for the quarter ended March 31, 2018 as a result of the adoption of the amended guidance of ASC Topic 715, Compensation - Retirement Benefits (see Note 2 for more information). Prior period amounts of $4 million and $5 million previously reported with the service cost component of net benefit cost in cost of products sold and selling, general, and administrative expenses, respectively, have been reclassified to other (income) expense - net for the quarter ended March 31, 2017 to conform to the current presentation.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)


Note 1.	Basis of Presentation (Continued)

Effective January 1, 2018, the Company changed its segment reporting to reflect changes in its operating structure: Origination (formerly Agricultural Services), Oilseeds (formerly Oilseeds Processing), Carbohydrate Solutions (formerly Corn Processing) and Nutrition (formerly Wild Flavors and Specialty Ingredients). The European origination business previously reported in Oilseeds is now managed by leaders in Origination to better coordinate continental trading activities. Carbohydrate Solutions now includes the results of ADM Milling which were previously reported in Origination. Nutrition now includes the results of Animal Nutrition and certain product lines previously reported in Carbohydrate Solutions, as well as certain product lines previously reported in Oilseeds. Throughout this quarterly report on Form 10-Q, prior period results of the product lines and businesses previously reported in the other reportable business segments have been reclassified to conform to the current period presentation.

Segregated Cash and Investments

The Company segregates certain cash, cash equivalents, and investment balances in accordance with regulatory requirements, commodity exchange requirements, and insurance arrangements. These balances represent deposits received from customers of the Company’s registered futures commission merchant and commodity brokerage services, cash margins and securities pledged to commodity exchange clearinghouses, and cash pledged as security under certain insurance arrangements. Segregated cash and investments also include restricted cash collateral for the various insurance programs of the Company’s captive insurance business. To the degree these segregated balances are comprised of cash and cash equivalents, they are considered restricted cash and cash equivalents on the statement of cash flows.

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, 2018, the Company adopted 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 simplifies the impairment assessment of equity investments without readily determinable fair values by using a qualitative assessment to identify impairment. The adoption of this amended guidance did not have a significant impact on the Company’s financial results.

Effective January 1, 2018, the Company adopted the new guidance of ASC Topic 606, Revenue from Contracts with Customers (Topic 606), for all contracts that had not been completed as of the adoption date (the modified retrospective approach). 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. Many of the Company’s forward commodity sales contracts are considered physically settled derivatives under ASC Topic 815, Derivatives and Hedging (Topic 815), and are therefore excluded from the scope of Topic 606. Comparative balance sheet and income statement information has not been restated and continues to be reported under the guidance of ASC 605, Revenue Recognition (Topic 605), that was in effect as of December 31, 2017 and in the quarter ended March 31, 2017. The cumulative effect of initially applying the guidance as an adjustment to the opening reinvested earnings balance at January 1, 2018 was less than $1 million. For more information about the adoption of Topic 606, see Note 4.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)


Note 2.	New Accounting Standards (Continued)

Effective January 1, 2018, the Company adopted the amended guidance of ASC 230, Statement of Cash Flows (Topic 230), which provides guidance on the application of the predominance principle and the presentation and classification of specific cash flow issues including a requirement to classify consideration received for beneficial interest obtained for selling trade receivables as investing instead of operating activities. The adoption of the amended guidance on the Company’s accounts receivable securitization programs resulted in expanded disclosures and a reclassification of cash inflows from operating activities to investing activities (see Note 1 for reclassification amounts). The adoption of amendments related to the other cash flow issues did not have a significant impact on the Company's consolidated statement of cash flows.

Effective January 1, 2018, the Company adopted the amended guidance of ASC Topic 715, Compensation - Retirement Benefits, which requires that an employer report the service cost component in the same line or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The adoption of this amended guidance requires expanded disclosures and the reclassification of the other components of net benefit cost from cost of products sold and selling, general, and administrative expenses to other (income) expense - net in the Company’s consolidated statements of earnings but did not impact financial results (see Note 1 for reclassification amounts).


Note 3.	Pending Accounting Standards

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. The Company expects 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 adoption of this new guidance will require expanded disclosures in the Company’s consolidated financial statements. The Company has established a cross-functional implementation team consisting of representatives from accounting, legal, procurement, and operations. The Company utilized surveys to centrally gather more information about its existing leases and lease processes and to gather lease contracts. To ensure completeness of the population of lease contracts, the results of the survey will be cross-referenced against other available lease information (i.e., year-end disclosures and general ledger). The Company is also working with a vendor to implement a lease accounting system which will assist in delivering the required accounting changes and disclosures. The next phase of the implementation plan is the abstraction of the relevant lease contract data points which is expected to be completed by the end of the second quarter of 2018. The impact of the new standard will be a significant increase to right of use assets and lease liabilities on the Company’s consolidated balance sheet, primarily as a result of operating leases currently not recognized on the balance sheet. The Company expects to complete its assessment of the impact of the new guidance on its financial results in the third quarter of 2018.

Effective January 1, 2019, the Company will be required to adopt the amended guidance of ASC Topic 220, Income Statement - Reporting Comprehensive Income (Topic 220), which allows a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (TCJA), eliminating the stranded tax effects resulting from the TCJA and improving the usefulness of information reported to financial statement users. In addition, the Company will be required to disclose (1) a description of its accounting policy for releasing income tax effects from accumulated other comprehensive income; (2) whether it elects to reclassify the stranded income tax effects from the TCJA; and (3) information about other income tax effects related to the application of the TCJA that are reclassified from AOCI to retained earnings, if any. Early adoption is permitted in any interim period for which financial statements have not been issued. The Company has not yet decided whether it will elect to reclassify the stranded tax effects resulting from the TCJA.

Effective January 1, 2020, the Company will be required to adopt the amended guidance of ASC 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.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)


Note 4.	Revenues

Revenue Recognition

The Company principally generates revenue from merchandising and transporting agricultural commodities and manufactured products used as ingredients in food, feed, energy, and industrial products. Revenue is measured based on the consideration specified in the contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company follows a policy of recognizing revenue at a single point in time when it satisfies its performance obligation by transferring control over a product or service to a customer. For transportation service contracts, the Company recognizes revenue over time as the barge, ocean-going vessel, truck, rail, or container freight moves towards its destination in accordance with the transfer of control guidance of Topic 606. For physically settled derivative sales contracts that are outside the scope of Topic 606, the Company recognizes revenue when control of the inventory is transferred within the meaning of Topic 606 as required by ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610-20).

Shipping and Handling Costs

Shipping and handling costs related to contracts with customers for sale of goods are accounted for as a fulfillment activity and are included in cost of products sold. Accordingly, amounts billed to customers for such costs are included as a component of revenues.

Taxes Collected from Customers and Remitted to Governmental Authorities

The Company does not include taxes assessed by governmental authorities that are (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers from the measurement of transactions prices, as a component of revenues and cost of products sold.

Contract Costs

The Company capitalizes commission fees paid to intermediaries as a result of obtaining certain contracts. Capitalized commission fees are included in other current assets and are amortized based on the transfer of goods or services to which the assets relate and are included in selling, general, and administrative expenses. Applying the practical expedient in paragraph 40-25-4 of ASC 340, Other Assets and Deferred Costs, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. The amounts of capitalized incremental commission fees and related amortization as of and for the quarter ended March 31, 2018 were immaterial.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)


Note 4.	Revenues (Continued)

Disaggregation of Revenues

The following table presents revenue disaggregated by timing of recognition and major product lines for the quarter ended March 31, 2018.



	Topic 606 Revenue						Topic 815⁽¹⁾		Total
	Point in Time		Over Time		Total		Revenue		Revenues
Origination
Merchandising and Handling	$	619	$	62	$	681	$	5,479	$	6,160
Transportation	—		55		55		—		55
Total Origination	619		117		736		5,479		6,215
Oilseeds
Crushing and Origination	186		—		186		3,424		3,610
Refining, Packaging, Biodiesel, and Other	558		—		558		1,465		2,023
Total Oilseeds	744		—		744		4,889		5,633
Carbohydrate Solutions
Starches and Sweeteners	1,638		—		1,638		—		1,638
Bioproducts	984		—		984		—		984
Total Carbohydrate Solutions	2,622		—		2,622		—		2,622
Nutrition
Wild Flavors and Specialty Ingredients	636		—		636		—		636
Animal Nutrition	314		—		314		—		314
Total Nutrition	950		—		950		—		950

Other	106		—		106		—		106
Total Revenues	$	5,041	$	117	$	5,158	$	10,368	$	15,526

⁽¹⁾Topic 815 revenue relates to the physical delivery or the settlement of the Company’s sales contracts that are accounted for as derivatives and are outside the scope of Topic 606.

Origination

The Origination segment generates revenue from the sale of commodities and from the service fees for the transportation of goods. Revenue is measured based on the consideration specified in the contract and excludes any sales incentives and amounts collected on behalf of third parties. Revenue is recognized when a performance obligation is satisfied by transferring control over a product or service to a customer. For transportation service contracts in Transportation, the Company recognizes revenue over time as the barge, ocean-going vessel, truck, rail, or container freight moves towards its destination in accordance with the transfer of control guidance of Topic 606. For fixed and provisionally-priced derivative sales contracts that are outside the scope of Topic 606, the Company recognizes revenue when control of the inventory is transferred within the meaning of Topic 606 as required by Topic 610-20.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)


Note 4.	Revenues (Continued)

Oilseeds

The Oilseeds segment generates revenue primarily from the sale of products manufactured in its global processing facilities. The segment also generates revenue from the sale of raw commodities in its South American grain origination business and from the sale of peanuts, tree nuts, and peanut-derived ingredients. Revenue is recognized when a performance obligation is satisfied by transferring control over a product. The amount of revenue recognized follows the contractually specified price which may include freight or other contractually specified cost components. For fixed and provisionally-priced derivative sales contracts that are outside the scope of Topic 606, the Company recognizes revenue when control of the inventory is transferred within the meaning of Topic 606 as required by Topic 610-20.

Carbohydrate Solutions

The Carbohydrate Solutions segment generates revenue from the sale of products manufactured at the Company’s global corn and milling facilities around the world. Revenue is recognized when control over products is transferred to the customer. Products are shipped to the customers from the Company’s various facilities and from its network of storage terminals. The amount of revenue recognized is based on the consideration specified in the contract which could include freight and other costs depending on the specific shipping terms of each contract.

Nutrition

The Nutrition segment sells specialty products including natural flavor ingredients, flavor systems, natural colors, animal nutrition products, other specialty food and feed ingredients. Revenue is recognized when control over products is transferred to the customer. The amount of revenue recognized follows the contracted price or the mutually-agreed price of the product. Freight and shipping are recognized as a component of revenue at the same time control transfers to the customer.

Other

Other includes the Company’s futures commission business whose primary sources of revenue are commissions and brokerage income generated from executing orders and clearing futures contracts and options on futures contracts on behalf of its customers. Commissions and brokerage revenue are recognized on the date the transaction is executed. Other also includes the Company’s captive insurance business which generates third party revenue through its proportionate share of premiums from third-party reinsurance pools. Reinsurance premiums are recognized on a straight-line basis over the period underlying the policy.

Contract Assets and Contract Liabilities

Contract assets relate to unbilled amounts resulting from goods already transferred to the customer where revenue recognized exceeds the amount billed to the customer and right to payment is not subject to the passage of time. Contract assets are recorded in other current assets in the consolidated balance sheet and were immaterial as of March 31, 2018 and the January 1, 2018 transition date.

Contract liabilities relate to advance payments from customers for goods and services that the Company has yet to provide. Contract liabilities of $194 million and $185 million as of March 31, 2018 and January 1, 2018, respectively, are recorded in accrued expenses and other payables in the consolidated balance sheet. For the quarter ended March 31, 2018, the Company recognized revenues of $124 million from the contract liabilities included at January 1, 2018.

Transaction Price Allocated to Remaining Performance Obligations

The Company generally recognizes revenue at a point in time with the exception of revenue from transportation services which is recognized over time. The majority of the Company’s contracts with customers have one performance obligation and a contract duration of one year or less. The Company applies the practical expedient in paragraph 10-50-14 of Topic 606 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)


Note 4.	Revenues (Continued)

Impacts on Financial Statements

The following tables summarize the impacts of Topic 606 adoption on the various lines of the Company’s consolidated financial statements.

Consolidated Balance Sheet (excerpt) as of March 31, 2018 and January 1, 2018



	January 1, 2018		March 31, 2018
	After Adoption		As		Under		Effect of
	of Topic 606		Reported		Topic 605		Change
	(In millions)
Assets
Trade receivables	$	2,343	$	2,147	$	1,752	$	395
Inventories	8,770		9,820		10,212		(392		)
Total Current Assets	19,918		20,906		20,903		3
Total Assets	$	39,956	$	41,100	$	41,097	$	3
Liabilities, Temporary Equity, and Shareholders’ Equity
Accrued expenses and other payables	$	2,826	$	3,035	$	3,035	$	—
Total Current Liabilities	12,563		13,285		13,285		—
Reinvested earnings	17,552		17,755		17,752		3
Total Shareholders’ Equity	18,322		18,737		18,734		3
Total Liabilities, Temporary Equity, and Shareholders’ Equity	$	39,956	$	41,100	$	41,097	$	3

Consolidated Statement of Earnings (excerpt) for the quarter ended March 31, 2018



			Without
	As		Adoption of		Effect of
	Reported		Topic 606		Change
	(In millions)
Revenues	$	15,526	$	15,536	$	(10	)
Cost of products sold	14,637		14,652		(15		)
Gross profit	889		884		5
Earnings before income taxes	464		459		5
Income taxes	68		66		2
Net earnings including noncontrolling interests	396		393		3
Net earnings attributable to controlling interests	$	393	$	390	$	3

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 March 31, 2018 and December 31, 2017.



	Fair Value Measurements at March 31, 2018
	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	$	—	$	3,563	$	1,829	$	5,392
Unrealized derivative gains:
Commodity contracts	—		471		116		587
Foreign currency contracts	—		47		—		47
Cash equivalents	443		—		—		443
Marketable securities	89		1		—		90
Segregated investments	2,077		—		—		2,077
Deferred receivables consideration	—		399		—		399
Total Assets	$	2,609	$	4,481	$	1,945	$	9,035

Liabilities:
Unrealized derivative losses:
Commodity contracts	$	—	$	449	$	291	$	740
Foreign currency contracts	—		106		—		106
Interest rate contracts	—		1		—		1
Inventory-related payables	—		1,102		75		1,177
Total Liabilities	$	—	$	1,658	$	366	$	2,024

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)


Note 5.	Fair Value Measurements (Continued)



	Fair Value Measurements at December 31, 2017
	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	$	—	$	3,400	$	1,486	$	4,886
Unrealized derivative gains:
Commodity contracts	—		275		111		386
Foreign currency contracts	—		63		—		63
Cash equivalents	352		—		—		352
Marketable securities	91		1		—		92
Segregated investments	1,733		—		—		1,733
Deferred receivables consideration	—		307		—		307
Total Assets	$	2,176	$	4,046	$	1,597	$	7,819

Liabilities:
Unrealized derivative losses:
Commodity contracts	$	—	$	268	$	103	$	371
Foreign currency contracts	—		92		—		92
Interest rate contracts	—		1		—		1
Inventory-related payables	—		680		39		719
Total Liabilities	$	—	$	1,041	$	142	$	1,183

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 (more than 10%) 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 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 U.S. Treasury securities and corporate debt securities. U.S. Treasury securities are valued using quoted market prices and are classified in Level 1. Corporate 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 debt 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 7). 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 rollforward of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2018.



	Level 3 Fair Value Asset Measurements at
	March 31, 2018
	Inventories Carried at Market			Commodity Derivative Contracts Gains			Total Assets
	(In millions)

Balance, December 31, 2017	$	1,486		$	111		$	1,597
Total increase (decrease) in net realized/unrealized gains included in cost of products sold*	173			47			220
Purchases	2,239			—			2,239
Sales	(2,150		)	—			(2,150		)
Settlements	—			(66		)	(66		)
Transfers into Level 3	187			28			215
Transfers out of Level 3	(106		)	(4		)	(110		)
Ending balance, March 31, 2018	$	1,829		$	116		$	1,945

* Includes increase in unrealized gains of $174 million relating to Level 3 assets still held at March 31, 2018.

The following table presents a rollforward of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2018.



	Level 3 Fair Value Liability Measurements at
	March 31, 2018
	Inventory- related Payables			Commodity Derivative Contracts Losses			Total Liabilities
	(In millions)

Balance, December 31, 2017	$	39		$	103		$	142
Total increase (decrease) in net realized/unrealized losses included in cost of products sold*	17			198			215
Purchases	21			—			21
Sales	(2		)	—			(2		)
Settlements	—			(57		)	(57		)
Transfers into Level 3	—			65			65
Transfers out of Level 3	—			(18		)	(18		)
Ending balance, March 31, 2018	$	75		$	291		$	366

* Includes increase in unrealized losses of $198 million relating to Level 3 liabilities still held at March 31, 2018.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)


Note 5.	Fair Value Measurements (Continued)

The following table presents a rollforward of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2017.



	Level 3 Fair Value Asset Measurements at
	March 31, 2017
	Inventories Carried at Market			Commodity Derivative Contracts Gains			Total Assets
	(In millions)

Balance, December 31, 2016	$	1,322		$	140		$	1,462
Total increase (decrease) in net realized/unrealized gains included in cost of products sold*	(228		)	69			(159		)
Purchases	3,248			—			3,248
Sales	(3,194		)	—			(3,194		)
Settlements	—			(69		)	(69		)
Transfers into Level 3	34			47			81
Transfers out of Level 3	(53		)	(14		)	(67		)
Ending balance, March 31, 2017	$	1,129		$	173		$	1,302

* Includes decrease in unrealized gains of $182 million relating to Level 3 assets still held at March 31, 2017.

The following table presents a rollforward of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2017.



	Level 3 Fair Value Liability Measurements at
	March 31, 2017
	Inventory- related Payables			Commodity Derivative Contracts Losses			Total Liabilities
	(In millions)

Balance, December 31, 2016	$	30		$	142		$	172
Total increase (decrease) in net realized/unrealized losses included in cost of products sold*	14			39			53
Purchases	2			—			2
Sales	(18		)	—			(18		)
Settlements	—			(68		)	(68		)
Transfers into Level 3	—			23			23
Transfers out of Level 3	—			(13		)	(13		)
Ending balance, March 31, 2017	$	28		$	123		$	151

* Includes increase in unrealized losses of $39 million relating to Level 3 liabilities still held at March 31, 2017.

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 March 31, 2018 and December 31, 2017. 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, 2018 is a weighted average 20.3% of the total price for assets and 177.8% of the total price for liabilities.



	Weighted Average % of Total Price
	March 31, 2018				December 31, 2017
Component Type	Assets		Liabilities		Assets		Liabilities
Inventories and Related Payables
Basis	20.3	%	177.8	%	12.8	%	99.9	%
Transportation cost	14.3	%	—	%	19.2	%	—

Commodity Derivative Contracts
Basis	19.0	%	21.6	%	24.2	%	23.0	%
Transportation cost	9.3	%	7.3	%	12.5	%	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, 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, 2018 and December 31, 2017.



	March 31, 2018				December 31, 2017
	Assets		Liabilities		Assets		Liabilities
	(In millions)

Foreign Currency Contracts	$	47	$	106	$	63	$	92
Commodity Contracts	587		740		386		371
Total	$	634	$	846	$	449	$	463

The following table sets 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, 2018 and 2017.



				Cost of products sold			Other expense - net
(In millions)	Revenues			Cost of products sold			Other expense - net
Three Months Ended March 31, 2018
Consolidated Statement of Earnings	$	15,526		$	14,637		$	(15	)

Pre-tax gains (losses) on:
Foreign Currency Contracts	$	(3	)	$	(15	)	$	64
Commodity Contracts	—			(313		)	—
Total gain (loss) recognized in earnings	$	(3	)	$	(328	)	$	64		$	(267	)

Three Months Ended March 31, 2017
Consolidated Statement of Earnings	$	14,988		$	14,116		$	2

Pre-tax gains (losses) on:
Foreign Currency Contracts	$	(11	)	$	60		$	1
Commodity Contracts	—			259			—
Total gain (loss) recognized in earnings	$	(11	)	$	319		$	1		$	309

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)


Note 6.	Derivative Instruments and Hedging Activities (Continued)

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 as a component of cost of products sold.

Derivatives Designated as Cash Flow or Fair Value Hedging Strategies

As of March 31, 2018 and December 31, 2017, the Company had 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. At March 31, 2018, the Company has $1 million in other current liabilities representing the fair value of the interest rate swaps and a corresponding decrease in the underlying debt for the same amount with no net 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, 2018, the Company had $33 million of after-tax losses in AOCI related to gains and losses from commodity cash flow hedge transactions. The Company expects to recognize $33 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 hedge 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 72 million bushels of corn per month. During the past 12 months, the Company hedged between 22% and 86% of its monthly anticipated grind. At March 31, 2018, the Company had designated hedges representing between 1% and 90% 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 hedge 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 1 million and 135 million gallons of ethanol sales per month under these programs. At March 31, 2018, the Company had designated hedges representing between 0 and 116 million gallons of ethanol sales per month over the next 12 months.

The Company uses futures and options contracts to hedge the purchase price of anticipated volumes of soybeans to be purchased and processed in a future month. The Company also uses futures or options contracts to hedge the sales prices of anticipated soybean meal and soybean oil sales proportionate to the soybean crushing process. The Company has designated hedges representing between 0% and 100% of the anticipated monthly soybean crush for soybean purchases and soybean meal and oil sales over the next 12 months.

The following table sets forth the fair value of derivatives designated as hedging instruments as of March 31, 2018 and December 31, 2017.



	March 31, 2018				December 31, 2017
	Assets		Liabilities		Assets		Liabilities
	(In millions)
Interest Rate Contracts	$	—	$	1	$	—	$	1
Total	$	—	$	1	$	—	$	1

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 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, 2018 and 2017.



				Cost of products sold		Other expense - net
(In millions)	Revenues			Cost of products sold		Other expense - net
Three Months Ended March 31, 2018
Consolidated Statement of Earnings	$	15,526		$	14,637	$	(15	)

Effective amounts recognized in earnings
Pre-tax gains (losses) on:
Commodity Contracts	$	2		$	6	$	—
Total gain (loss) recognized in earnings	$	2		$	6	$	—		$	8

Three Months Ended March 31, 2017
Consolidated Statement of Earnings	$	14,988		$	14,116	$	2

Effective amounts recognized in earnings
Pre-tax gains (losses) on:
Foreign Currency Contracts	$	—		$	—	$	(2	)
Commodity Contracts	(1		)	1		$	—
Ineffective amount recognized in earnings
Commodity Contracts	4			5		$	—
Total gain (loss) recognized in earnings	$	3		$	6	$	(2	)	$	7

On October 1, 2017, the Company adopted the amended guidance of Topic 815. As a result, hedge ineffectiveness related to effective relationships is now deferred in AOCI until the hedged item impacts earnings. Prior to October 1, 2017, gains or losses on the derivative instrument in excess of the cumulative change in the cash flows of the hedged item, if any (i.e., the ineffective portion) were recognized in the consolidated statement of earnings during the current period.

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, 2018 and December 31, 2017, the Company had $99 million of after-tax gains and $59 million of after-tax losses, respectively, 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. Other Current Assets

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



	March 31,		December 31,
	2018		2017
	(In millions)

Unrealized gains on derivative contracts	$	634	$	449
Deferred receivables consideration	399		307
Customer omnibus receivable	496		477
Financing receivables - net ⁽¹⁾	487		413
Insurance premiums receivable	132		129
Prepaid expenses	259		232
Tax receivables	585		425
Non-trade receivables ⁽²⁾	430		371
Other current assets	312		372
	$	3,734	$	3,175

⁽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 $6 million at March 31, 2018 and December 31, 2017, respectively. Interest earned on financing receivables of $7 million for the three months ended March 31, 2018 and 2017 is included in interest income in the consolidated statements of earnings.

⁽²⁾Non-trade receivables included $114 million and $91 million of reinsurance recoverables as of March 31, 2018 and December 31, 2017, respectively.

Note 8. Accrued Expenses and Other Payables

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



	March 31,		December 31,
	2018		2017
	(In millions)

Unrealized losses on derivative contracts	$	847	$	464
Accrued compensation	209		235
Income tax payable	183		140
Other taxes payable	98		99
Reinsurance premiums payable	95		111
Insurance claims payable	297		268
Contract liability	194		185
Other accruals and payables	1,112		1,331
	$	3,035	$	2,833

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)


Note 9.	Debt and Financing Arrangements

At March 31, 2018, the fair value of the Company’s long-term debt exceeded the carrying value by $0.8 billion, as estimated using quoted market prices (a Level 2 measurement under applicable accounting standards).

At March 31, 2018, the Company had lines of credit, including the accounts receivable securitization programs described below, totaling $8.1 billion, of which $5.1 billion was unused. Of the Company’s total lines of credit, $5.0 billion support a commercial paper borrowing facility, against which there was $1.4 billion of commercial paper outstanding at March 31, 2018.

The Company has accounts receivable securitization programs (the “Programs”). The Programs provide the Company with up to $1.7 billion, as amended, in funding resulting from the sale of accounts receivable, of which $0.3 billion was unused as of March 31, 2018 (see Note 15 for more information about the Programs).


Note 10.	Income Taxes

The Company’s effective tax rate for the three months ended March 31, 2018 was 14.7% compared to 25.8% for the three months ended March 31, 2017. The lower rate for the quarter was primarily due to the Tax Cuts and Jobs Act (the “Act”) which was enacted on December 22, 2017, favorable changes in the forecasted mix of pre-tax earnings, the 2017 biodiesel tax credit, and certain tax discrete items.

The Act includes numerous significant tax law changes and modifications with varying effective dates, such as reducing the U.S. federal corporate income tax rate from 35% to 21%, creating a territorial tax system (with a one-time transition tax on previously deferred foreign earnings), broadening the tax base, and allowing for immediate capital expensing of certain qualified property. As of March 31, 2018, the Company has not yet completed the accounting for the tax effects of the Act; however, the Company has recorded a $14 million reduction to the 2017 provisional transition tax based on interpretive guidance issued during the quarter on how to allocate taxes in the earnings and profits calculation. The Company has one year from the date of enactment to adjust the 2017 provisional tax.

The Act also contains new provisions related to Global Intangible Low Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) which are effective for fiscal 2018. The Company has estimated GILTI and FDII impacts and will update the estimates each quarter as needed. The Company has made an accounting policy election to treat GILTI as a period cost.

It is likely that additional guidance will be issued providing further clarification on the application of the Act. It is also reasonable to expect that global taxing authorities will be reviewing their current legislation for potential modifications in reaction to the implementation of the Act. This additional guidance, along with the potential for additional global tax legislation changes, may affect significant deductions and income inclusions and could have a material adverse effect on the Company's net income or cash flow.

The Company is subject to income taxation and routine examinations in many jurisdictions around the world 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. In its routine evaluations of the exposure associated with various tax filing positions, the Company recognizes a liability, when necessary, for estimated potential tax owed by the Company in accordance with applicable accounting standards. Resolution of the related tax positions, through negotiations 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 and the Company cannot predict or provide assurance as to the ultimate outcome of these ongoing or future examinations. However, the Company does not anticipate that the total amount of unrecognized tax benefits will increase or decrease significantly in the next twelve months. Given the long periods of time involved in resolving tax positions, the Company does not expect that the recognition of unrecognized tax benefits will have a material impact on the Company’s effective income tax rate in any given period.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 10. Income Taxes (Continued)

In December 2009 and June 2010, the Company’s wholly-owned subsidiary, ADM do Brasil Ltda. (ADM do Brasil), 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, 2018, these assessments totaled approximately $127 million in tax and $348 million in interest and penalties (adjusted for variation in currency exchange rates). The statute of limitations for tax years 2005 and 2008 to 2011 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 calculation 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 2011.

During the quarter ended March 31, 2012, the Company’s subsidiaries in Argentina, ADM Argentina and Alfred Toepfer Argentina, received tax assessments challenging transfer prices used to price grain exports for the tax years 2004 through 2010. As of March 31, 2018, these assessments totaled $30 million in tax and $92 million in interest and penalties (adjusted for variation in currency exchange rates). The Argentine tax authorities conducted 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. The Company strongly believes that it has complied with all Argentine tax laws. To date, the Company has not received assessments for tax years 2011 to 2017. However, it cannot not rule out receiving additional assessments challenging transfer prices used to price grain exports for these years, and estimates that these potential assessments could be approximately $95 million in tax and $79 million in interest (adjusted for variation in currency exchange rates as of March 31, 2018). 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 2010.

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.

During the quarter ended September 30, 2016, the Company’s wholly-owned subsidiary in the Netherlands, ADM Europe B.V., received a tax assessment from the Netherlands tax authority challenging the transfer pricing aspects of a 2009 business reorganization which involved two of its subsidiary companies in the Netherlands. As of March 31, 2018, this assessment was $100 million in tax and $30 million in interest (adjusted for variation in currency exchange rates). The Company has appealed the assessment and carefully evaluated the underlying transactions and has concluded that the amount of the gain recognized on the reorganization for tax purposes was appropriate. While the Company plans to vigorously defend its position against the assessment, it has accrued an amount it believes would be the likely outcome of the litigation. The Company’s defense of the judicial appeal may take an extended period of time, and could result in additional financial impacts of up to the entire amount of this assessment.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

Note 11. Accumulated Other Comprehensive Income (AOCI)

The following tables set forth the changes in AOCI by component for the three months ended March 31, 2018 and the reclassifications out of AOCI for the three months ended March 31, 2018 and 2017:



	Three months ended March 31, 2018
	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, 2017	$	(1,353	)	$	17		$	(321	)	$	20		$	(1,637	)
Other comprehensive income (loss) before reclassifications	211			(17		)	(6		)	(2		)	186
Amounts reclassified from AOCI	—			(8		)	8			—			—
Tax effect	(3		)	6			(3		)	—			—
Net of tax amount	208			(19		)	(1		)	(2		)	186
Balance at March 31, 2018	$	(1,145	)	$	(2	)	$	(322	)	$	18		$	(1,451	)



	Amount reclassified from AOCI
	Three months ended
Details about AOCI components	Mar 31 2018			Mar 31 2017			Affected line item in the consolidated statement of earnings
	(In millions)
Deferred loss (gain) on hedging activities
	$	(6	)	$	(1	)	Cost of products sold
	—			2			Interest expense
	(2		)	1			Revenues
	(8		)	2			Total before tax
	2			(1		)	Tax
	$	(6	)	$	1		Net of tax

Pension liability adjustment
Amortization of defined benefit pension items:
Prior service credit	$	(8	)	$	(3	)	Other (income) expense - net
Actuarial losses	16			18			Other (income) expense - net
	8			15			Total before tax
	(4		)	(6		)	Tax
	$	4		$	9		Net of tax

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)


Note 12.	Other (Income) Expense - Net

The following table sets forth the items in other (income) expense:



	Three Months Ended
	March 31,
	2018			2017
	(In millions)

Gains on sales of assets	$	(6	)	$	(16	)
Other – net	(9		)	18
Other (Income) Expense - Net	$	(15	)	$	2

Gains on sales of assets in the three months ended March 31, 2018 and 2017 included gains on disposals of individually insignificant assets in the ordinary course of business.

Other - net in the three months ended March 31, 2018 included other income partially offset by foreign exchange losses. Other - net in the three months ended March 31, 2017 included foreign exchange losses partially offset by other income. Other - net also included the other components of net pension benefit cost which resulted in an income of $3 million in the three months ended March 31, 2018 compared to a net pension benefit cost of $9 million in the three months ended March 31, 2017.

Note 13. Segment Information

The Company is principally engaged in procuring, transporting, storing, processing, and merchandising agricultural commodities, products, and ingredients. The Company’s operations are organized, managed, and classified into four reportable business segments: Origination, Oilseeds, Carbohydrate Solutions, and Nutrition. 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.

Effective January 1, 2018, the Company changed its segment reporting to reflect changes in its operating structure: Origination (formerly Agricultural Services), Oilseeds (formerly Oilseeds Processing), Carbohydrate Solutions (formerly Corn Processing) and Nutrition (formerly Wild Flavors and Specialty Ingredients). The European origination business previously reported in Oilseeds is now managed by leaders in Origination to better coordinate continental trading activities. Carbohydrate Solutions now includes the results of ADM Milling which were previously reported in Origination. Nutrition now includes the results of Animal Nutrition and certain product lines previously reported in Carbohydrate Solutions as well as certain product lines previously reported in Oilseeds. Prior period results of the product lines and businesses previously reported in the other reportable business segments have been reclassified to conform to the current period presentation.

The Origination 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 Origination segment includes international agricultural commodities merchandising and handling activities managed through a global trade desk based in Rolle, Switzerland. The Origination segment’s grain sourcing, handling, and transportation network provides reliable and efficient services to the Company’s customers and agricultural processing operations. The Origination segment’s transportation network capabilities include barge, ocean-going vessel, truck, rail, and container freight services. The Origination segment also includes the activities related to structured trade finance, the import and distribution of agricultural feed products, and the Company’s share of the results of its Pacificor joint venture.

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)


Note 13.	Segment Information (Continued)

The Oilseeds 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 South America, the Oilseeds 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 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 other industrial markets. The Oilseeds 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, Edible Oils Limited, and Olenex Sarl joint ventures.

The Company’s Carbohydrate Solutions segment is engaged in corn and wheat wet and dry milling and other activities. The Carbohydrate Solutions segment converts corn and wheat into sweeteners, corn and wheat starches, wheat flour, and bioproducts. Its products include ingredients used in the food and beverage industry including sweeteners, starch, syrup, glucose, flour, and dextrose. Dextrose and starch are used by the Carbohydrate Solutions segment as feedstocks for its bioproducts operations. By fermentation of dextrose, the Carbohydrate Solutions segment produces alcohol 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. 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. Other Carbohydrate Solutions products include citric acids and glycols, all of which are used in various food and industrial products. This segment also includes the Company’s share of the results of its equity investments in Hungrana Ltd., Almidones Mexicanos S.A., and Red Star Yeast Company, LLC.

The Nutrition 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 Nutrition segment includes the activities related to the procurement, processing, and distribution of edible beans. The Nutrition segment also includes activities related to the processing and distribution of formula feeds and animal health and nutrition products and the manufacture of contract and private label pet treats and foods.

Other includes the Company’s remaining operations, primarily its financial business units, related to futures commission and insurance activities. On May 1, 2017, the Company completed the sale of its crop risk services business to Validus Holdings, a global group of insurance and reinsurance companies.

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 operating profit for each segment is equity in earnings of affiliates based on the equity method of accounting. Specified items included in total segment operating profit and certain corporate items are not allocated to the Company’s individual business segments because operating performance of each business segment is evaluated by management exclusive of these items. 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 its equity investment in Compagnie Industrialle et Financiere des Produits Amylaces SA (Luxembourg) (CIP).

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)


Note 13.	Segment Information (Continued)



	Three Months Ended
	March 31,
(In millions)	2018			2017
Gross revenues
Origination	$	7,127		$	7,352
Oilseeds	6,866			6,082
Carbohydrate Solutions	2,833			2,869
Nutrition	958			860
Other	106			94
Intersegment elimination	(2,364		)	(2,269		)
Total gross revenues	$	15,526		$	14,988

Intersegment sales
Origination	$	912		$	1,049
Oilseeds	1,233			856
Carbohydrate Solutions	211			359
Nutrition	8			5
Total intersegment sales	$	2,364		$	2,269

Revenues from external customers
Origination
Merchandising and Handling	$	6,160		$	6,253
Transportation	55			50
Total Origination	6,215			6,303
Oilseeds
Crushing and Origination	3,610			3,293
Refining, Packaging, Biodiesel, and Other	2,023			1,933
Total Oilseeds	5,633			5,226
Carbohydrate Solutions
Starches and Sweeteners	1,638			1,575
Bioproducts	984			935
Total Carbohydrate Solutions	2,622			2,510
Nutrition
Wild Flavors and Specialty Ingredients	636			574
Animal Nutrition	314			281
Total Nutrition	950			855

Other	106			94
Total revenues from external customers	$	15,526		$	14,988

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)

(Unaudited)


Note 13.	Segment Information (Continued)



	Three Months Ended
	March 31,
(In millions)	2018		2017
Segment operating profit
Origination	$	45