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Archer-Daniels-Midland Co - Quarter Report: 2016 June (Form 10-Q)


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
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
(73
)
 
—

 
(73
)
 
—

 
Other income/expense
 
 
—

 
—

 
—

 
—

 
Tax
 
 
(73
)
 
—

 
(73
)
 
—

 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Deferred loss (gain) on hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
$
5

 
$
17

 
$
24

 
$
17

 
Cost of products sold
 
 
8

 
(4
)
 
22

 
(21
)
 
Other income/expense
 
 
6

 
2

 
5

 
(45
)
 
Revenues
 
 
19

 
15

 
51

 
(49
)
 
Total before tax
 
 
(8
)
 
(6
)
 
(19
)
 
18

 
Tax
 
 
$
11

 
$
9

 
$
32

 
$
(31
)
 
Net of tax
 
 
 
 
 
 
 
 
 
 
 
Pension liability adjustment
 
 
 
 
 
 
 
 
 
 
Amortization of defined benefit pension items:
 
 
 
 
 
 
 
 
 
 
Prior service credit
 
$
(3
)
 
$
(11
)
 
$
(7
)
 
$
(13
)
 
 
Actuarial losses
 
15

 
15

 
29

 
42

 
 
 
 
12

 
4

 
22

 
29

 
Total before tax
 
 
(2
)
 
—

 
(3
)
 
(17
)
 
Tax
 
 
$
10

 
$
4

 
$
19

 
$
12

 
Net of tax

Note 13.
Other (Income) Expense - Net

The following tables set forth the items in other (income) expense:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
(In millions)
Gains on sales of assets/revaluations
$
(121
)
 
$
(101
)
 
$
(124
)
 
$
(104
)
Other – net
(13
)
 
6

 
(10
)
 
(9
)
Other (Income) Expense - Net
$
(134
)
 
$
(95
)
 
$
(134
)
 
$
(113
)





26
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 13.     Other (Income) Expense - Net (Continued)


Gains on sales of assets/revaluations for the three and six months ended June 30, 2016 include realized additional consideration related to the sale of the Company’s equity investment in Gruma S.A.B de C.V. in December 2012 of $48 million, recovery of loss provisions and gain related to the sale of the Company’s Brazilian sugar ethanol facilities of $63 million, gain related to the revaluation of the remaining interest to settlement value in conjunction with the acquisition of the remaining interest in Amazon Flavors of $12 million, and a loss on sale of assets of $5 million. Gains on sales of assets/revaluations for the three and six months ended June 30, 2015 include gain on the revaluation of the Company’s previously held investments in North Star Shipping and Minmetal in conjunction with the acquisition of the remaining interest of $27 million, gain on the sale of a 50% interest in the Barcarena export terminal facility in Brazil to Glencore plc of $68 million, and gain on the sale of the lactic business of $6 million.

Other - net for the three and six months ended June 30, 2016 includes foreign exchange gains and other income partially offset by losses from foreign exchange derivative contracts. Other - net for the three months ended June 30, 2015 includes foreign exchange losses partially offset by gains from foreign exchange derivative contracts and other income. Other - net for the six months ended June 30, 2015 includes gains from foreign exchange derivative contracts and other income partially offset by foreign exchange losses.

Note 14.     Segment Information

The Company is principally engaged in procuring, transporting, storing, processing, and merchandising agricultural commodities and products. The Company’s operations are organized, managed, and classified into four reportable business segments: Agricultural Services, Corn Processing, Oilseeds Processing, and Wild Flavors and Specialty Ingredients. Each of these segments is organized based upon the nature of products and services offered. The Company’s remaining operations are not reportable segments, as defined by the applicable accounting standard, and are classified as Other.

The Agricultural Services segment utilizes its extensive global grain elevator and transportation networks, and port operations to buy, store, clean, and transport agricultural commodities, such as oilseeds, corn, wheat, milo, oats, rice, and barley, and resells these commodities primarily as food and feed ingredients and as raw materials for the agricultural processing industry. The Agricultural Services segment includes international agricultural commodities merchandising and handling activities managed through a global trade desk based in Rolle, Switzerland. Agricultural Services’ grain sourcing, handling, and transportation network provides reliable and efficient services to the Company’s customers and agricultural processing operations. Agricultural Services’ transportation network capabilities include barge, ocean-going vessel, truck, and rail freight services. The Agricultural Services segment also includes the activities related to structured trade finance and the processing of wheat into wheat flour. This segment also includes the Company’s 32.2% share of the results of its Pacificor (formerly Kalama Export Company LLC) joint venture and returns associated with the Company’s 19.8% investment in GrainCorp. In April 2016, the Company acquired a 50% interest in Cairo-based Medsofts Group, a consolidated joint venture that owns and manages merchandising and supply chain operations.

The Company’s Corn Processing segment is engaged in corn wet milling and dry milling activities, utilizing its asset base primarily located in the central part of the United States with additional facilities in China, Bulgaria, and Turkey. The Corn Processing segment converts corn into sweeteners, starches, and bioproducts. Its products include ingredients used in the food and beverage industry including sweeteners, starch, syrup, glucose, and dextrose. Dextrose and starch are used by the Corn Processing segment as feedstocks for its bioproducts operations. Through the fermentation of dextrose, the Corn Processing segment produces alcohol, amino acids, and other food and animal feed ingredients. Ethyl alcohol is produced by the Company for industrial use as ethanol or as beverage grade. Ethanol, in gasoline, increases octane and is used as an extender and oxygenate. Bioproducts also include essential amino acids such as lysine and threonine used in swine and poultry diets to optimize performance. Corn gluten feed and meal, as well as distillers’ grains, are produced for use as animal feed ingredients. Corn germ, a by-product of the wet milling process, is further processed into vegetable oil and protein meal. The Corn Processing segment also includes activities related to the processing and distribution of formula feeds and animal health and nutrition products. Other Corn Processing products include citric acids and glycols, which are used in various food and industrial products. Additionally, the Corn Processing segment includes the activities of the Company’s Brazilian sugarcane ethanol plant and related operations. This segment also includes the Company’s share of the results of its equity investments in Almidones Mexicanos S.A. and Red Star Yeast Company LLC. The Company completed the sale of its sugarcane ethanol operations in Limeira do Oeste in the Brazilian state of Minas Gerais in May 2016 and acquired a Casablanca, Morocco-based corn wet mill that produces glucose and native starch from Tate & Lyle in June 2016.




27
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 14.
Segment Information (Continued)

The Oilseeds Processing segment includes global activities related to the origination, merchandising, crushing, and further processing of oilseeds such as soybeans and soft seeds (cottonseed, sunflower seed, canola, rapeseed, and flaxseed) into vegetable oils and protein meals. Oilseeds products produced and marketed by the Company include ingredients for the food, feed, energy, and industrial products industries. Crude vegetable oils produced by the segment’s crushing activities are sold “as is” or are further processed by refining, blending, bleaching, and deodorizing into salad oils. Salad oils are sold “as is” or are further processed by hydrogenating and/or interesterifying into margarine, shortening, and other food products. Partially refined oils are used to produce biodiesel or are sold to other manufacturers for use in chemicals, paints, and other industrial products. Oilseed protein meals are principally sold to third parties to be used as ingredients in commercial livestock and poultry feeds. In Europe and South America, the Oilseeds Processing segment includes origination and merchandising activities as adjuncts to its oilseeds processing assets. These activities include a network of grain elevators, port facilities, and transportation assets used to buy, store, clean, and transport grains and oilseeds. The Oilseeds Processing segment is a major supplier of peanuts, tree nuts, and peanut-derived ingredients to both the U.S. and export markets. In North America, cottonseed flour is produced and sold primarily to the pharmaceutical industry and cotton cellulose pulp is manufactured and sold to the chemical, paper, and filter markets. The Oilseeds Processing segment also included activities related to its global chocolate and cocoa businesses until the sale of these businesses in July 2015 and October 2015, respectively. The Oilseeds Processing segment also includes the Company’s share of the results of its equity investment in Wilmar International Limited (Wilmar) and its share of the results of its Stratas Foods LLC and Edible Oils Limited joint ventures. The Company acquired additional shares in Wilmar increasing its ownership interest from 19% to 20% in March 2016 and from 20% to 22% in June 2016.

The Wild Flavors and Specialty Ingredients segment engages in the manufacturing, sales, and distribution of specialty products including natural flavor ingredients, flavor systems, natural colors, proteins, emulsifiers, soluble fiber, polyols, hydrocolloids, natural health and nutrition products, and other specialty food and feed ingredients. The Wild Flavors and Specialty Ingredients segment also includes the activities related to the procurement, processing, and distribution of edible beans. The Company acquired a 90% controlling stake in Harvest Innovations, an industry leader in minimally processed, expeller-pressed soy proteins, oils, and gluten-free ingredients in February 2016 and the remaining 60% interest in Amazon Flavors, a leading Brazilian manufacturer of natural extracts, emulsions and compounds, in May 2016.

Other includes the Company’s remaining operations, primarily its financial business units, related to futures commission and insurance activities.

Intersegment sales have been recorded at amounts approximating market. Operating profit for each segment is based on net sales less identifiable operating expenses. Also included in segment operating profit is equity in earnings of affiliates based on the equity method of accounting. Certain Corporate items are not allocated to the Company’s reportable business segments. Corporate results principally include the impact of LIFO-related adjustments, unallocated corporate expenses, interest cost net of investment income, and the Company’s share of the results of an equity investment.

Following the sale of the cocoa business in October 2015, the remaining results of Cocoa and Other were combined with the results of Refining, Packaging, Biodiesel, and Other within the Oilseeds Processing segment effective January 1, 2016. Prior period results were reclassified to conform to the current presentation.
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(In millions)
2016
 
2015
 
2016
 
2015
Gross revenues
 
 
 
 
 
 
 
Agricultural Services
$
7,001

 
$
7,833

 
$
13,864

 
$
16,911

Corn Processing
2,364

 
2,592

 
4,584

 
5,080

Oilseeds Processing
7,316

 
8,239

 
13,408

 
15,135

Wild Flavors and Specialty Ingredients
686

 
687

 
1,282

 
1,294

Other
155

 
158

 
313

 
317

Intersegment elimination
(1,893
)
 
(2,323
)
 
(3,438
)
 
(4,045
)
Total gross revenues
$
15,629

 
$
17,186

 
$
30,013

 
$
34,692

 
 
 
 
 
 
 
 

28
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 14.
Segment Information (Continued)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(In millions)
2016
 
2015
 
2016
 
2015
Intersegment sales
 

 
 

 
 

 
 

Agricultural Services
$
614

 
$
828

 
$
997

 
$
1,861

Corn Processing
12

 
13

 
25

 
35

Oilseeds Processing
1,217

 
1,417

 
2,312

 
2,020

Wild Flavors and Specialty Ingredients
6

 
5

 
10

 
6

Other
44

 
60

 
94

 
123

Total intersegment sales
$
1,893

 
$
2,323

 
$
3,438

 
$
4,045

 
 
 
 
 
 
 
 
Revenues from external customers
 

 
 

 
 

 
 

Agricultural Services
 
 
 
 
 
 
 
Merchandising and Handling
$
5,506

 
$
6,074

 
$
11,185

 
$
13,101

Milling and Other
825

 
874

 
1,571

 
1,838

Transportation
56

 
57

 
111

 
111

Total Agricultural Services
6,387

 
7,005

 
12,867

 
15,050

Corn Processing
 
 
 
 
 
 
 
Sweeteners and Starches
1,037

 
956

 
2,004

 
1,831

Bioproducts
1,315

 
1,623

 
2,555

 
3,214

Total Corn Processing
2,352

 
2,579

 
4,559

 
5,045

Oilseeds Processing
 
 
 
 
 
 
 
Crushing and Origination
4,033

 
4,217

 
7,139

 
7,992

Refining, Packaging, Biodiesel, and Other
2,041

 
2,533

 
3,810

 
4,974

Asia
25

 
72

 
147

 
149

Total Oilseeds Processing
6,099

 
6,822

 
11,096

 
13,115

 
 
 
 
 
 
 
 
Wild Flavors and Specialty Ingredients
680

 
682

 
1,272

 
1,288

Total Wild Flavors and Specialty Ingredients
680

 
682

 
1,272

 
1,288

 
 
 
 
 
 
 
 
Other - Financial
111

 
98

 
219

 
194

Total Other
111

 
98

 
219

 
194

Total revenues from external customers
$
15,629

 
$
17,186

 
$
30,013

 
$
34,692

 
 
 
 
 
 
 
 
Segment operating profit
 
 
 
 
 
 
 
Agricultural Services
$
97

 
$
152

 
172

 
346

Corn Processing
219

 
204

 
350

 
317

Oilseeds Processing
234

 
344

 
494

 
813

Wild Flavors and Specialty Ingredients
106

 
104

 
176

 
172

Other
24

 
4

 
61

 
15

Total segment operating profit
680

 
808

 
1,253

 
1,663

Corporate
(273
)
 
(282
)
 
(540
)
 
(447
)
Earnings before income taxes
$
407

 
$
526

 
$
713

 
$
1,216

 
 
 
 
 
 
 
 

29

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 15.     Asset Impairment, Exit, and Restructuring Costs

Asset impairment, exit, and restructuring costs in the quarter ended June 30, 2016 consisted of $5 million of fixed asset impairments in the Corn Processing segment and $7 million of other individually insignificant fixed asset impairments and restructuring charges. Asset impairment, exit, and restructuring charges in the six months ended June 30, 2016 consisted of $11 million of software impairment in Corporate, $5 million of fixed asset impairments in the Corn Processing segment, and $9 million of other individually insignificant fixed asset impairments and restructuring charges.

Asset impairment, exit, and restructuring costs recognized in the quarter and six months ended June 30, 2015 of $31 million consisted primarily of long-lived asset and goodwill impairments related to certain international Oilseeds Processing facilities of $28 million and fixed asset impairments in the Corn Processing and Agricultural Services segments of $3 million.
 
Note 16.     Sale of Accounts Receivable

Since March 2012, the Company has had an accounts receivable securitization program (the “Program”) with certain commercial paper conduit purchasers and committed purchasers (collectively, the “Purchasers”). Under the Program, certain U.S.-originated trade accounts receivable are sold to a wholly-owned bankruptcy-remote entity, ADM Receivables, LLC (“ADM Receivables”). ADM Receivables in turn transfers such purchased accounts receivable in their entirety to the Purchasers pursuant to a receivables purchase agreement. In exchange for the transfer of the accounts receivable, ADM Receivables receives a cash payment of up to $1.2 billion, as amended in June 2016 from $1.3 billion, and an additional amount upon the collection of the accounts receivable (deferred consideration). The Program terminates on June 23, 2017, unless extended.

In March 2014, the Company entered into a second accounts receivable securitization program (the “Second Program”) with certain commercial paper conduit purchasers and committed purchasers (collectively, the “Second Purchasers”). Under the Second Program, certain non-U.S.-originated trade accounts receivable are sold to a wholly-owned bankruptcy-remote entity, ADM Ireland Receivables Company (“ADM Ireland Receivables”). ADM Ireland Receivables in turn transfers such purchased accounts receivable in their entirety to the Second Purchasers pursuant to a receivables purchase agreement. In exchange for the transfer of the accounts receivable, ADM Ireland Receivables receives a cash payment of up to $0.3 billion and an additional amount upon the collection of the accounts receivable (deferred consideration). The Second Program terminates on March 17, 2017, unless extended.

Under the Program and Second Program (collectively, the “Programs”), ADM Receivables and ADM Ireland Receivables use the cash proceeds from the transfer of receivables to the Purchasers and Second Purchasers and other consideration to finance the purchase of receivables from the Company and the ADM subsidiaries originating the receivables.

The Company accounts for these transfers as sales. The Company has no retained interests in the transferred receivables, other than collection and administrative responsibilities and its right to the deferred consideration. At June 30, 2016 and December 31, 2015, the Company did not record a servicing asset or liability related to its retained responsibility, based on its assessment of the servicing fee, market values for similar transactions and its cost of servicing the receivables sold.

As of June 30, 2016 and December 31, 2015, the fair value of trade receivables transferred to the Purchasers and Second Purchasers under the Programs and derecognized from the Company’s consolidated balance sheet was $1.5 billion, and $1.7 billion, respectively. In exchange for the transfer as of June 30, 2016 and December 31, 2015, the Company received cash of $1.1 billion and $1.2 billion, respectively, and recorded a receivable for deferred consideration included in other current assets of $0.4 billion and $0.5 billion, respectively. Cash collections from customers on receivables sold were $16.1 billion and $20.8 billion for the six months ended June 30, 2016 and 2015, respectively. Of this amount, $16.0 billion and $20.6 billion pertain to cash collections on the deferred consideration for the six months ended June 30, 2016 and 2015, respectively. Deferred consideration is paid to the Company in cash on behalf of the Purchasers and Second Purchasers as receivables are collected; however, as these are revolving facilities, cash collected from the Company’s customers is reinvested by the Purchasers and Second Purchasers daily in new receivable purchases under the Programs.





30
Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 16.     Sale of Accounts Receivable (Continued)

The Company’s risk of loss following the transfer of accounts receivable under the Programs is limited to the deferred consideration outstanding. The Company carries the deferred consideration at fair value determined by calculating the expected amount of cash to be received and is principally based on observable inputs (a Level 2 measurement under the applicable accounting standards) consisting mainly of the face amount of the receivables adjusted for anticipated credit losses and discounted at the appropriate market rate. Payment of deferred consideration is not subject to significant risks other than delinquencies and credit losses on accounts receivable transferred under the Programs which have historically been insignificant.

Transfers of receivables under the Programs resulted in an expense for the loss on sale of $1 million during the three months ended June 30, 2016 and 2015 and $2 million for the six months ended June 30, 2016 and 2015 classified as selling, general, and administrative expenses in the consolidated statements of earnings.
  
The Company reflects all cash flows related to the Programs as operating activities in its consolidated statement of cash flows for the six months ended June 30, 2016 and 2015 because the cash received from the Purchasers and Second Purchasers upon both the sale and collection of the receivables is not subject to significantly different risks given the short-term nature of the Company’s trade receivables.

Note 17.     Subsequent Event

On July 19, 2016, Wilmar announced that it expects to report net losses of approximately $230 million based on a preliminary review of its unaudited financial results for the quarter ended June 30, 2016. The Company records its share of Wilmar’s results one quarter in arrears so it expects to recognize approximately $50 million of equity losses in its September 30, 2016 financial results.



31

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Company Overview

This MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements.

The Company is principally engaged in procuring, transporting, storing, processing, and merchandising agricultural commodities and products. The Company uses its significant global asset base to originate and transport agricultural commodities, connecting to markets in 165 countries. The Company also processes corn, oilseeds, and wheat into products for food, animal feed, chemical and energy uses. The Company uses its global asset network, business acumen, and its relationships with suppliers and customers to efficiently connect the harvest to the home thereby generating returns for its shareholders, principally from margins earned on these activities.

The Company’s operations are organized, managed and classified into four reportable business segments: Agricultural Services, Corn Processing, Oilseeds Processing, and Wild Flavors and Specialty Ingredients. Each of these segments is organized based upon the nature of products and services offered. The Company’s remaining operations are not reportable segments, as defined by the applicable accounting standard, and are classified as Other. See Note 14 of “Notes to Consolidated Financial Statements” included in Item 1 herein, “Financial Statements” for more information about the Company’s business segments.

The Company’s recent significant portfolio actions and announcements include:

•
the purchase in February 2016 of a controlling stake in Harvest Innovations, an industry leader in minimally processed, expeller-pressed soy proteins, oils, and gluten-free ingredients;
•
the purchase in April 2016 of a 50% interest in Cairo-based Medsofts Group, a consolidated joint venture that will own and manage merchandising and supply chain operations;
•
the sale in May 2016 of the sugarcane ethanol operations in Limeira do Oeste in the Brazilian state of Minas Gerais;
•
the purchase in May 2016 of the remaining 60% interest in Amazon Flavors, a leading Brazilian manufacturer of natural extracts, emulsions and compounds;
•
the acquisition in June 2016 of a Casablanca, Morocco-based corn wet mill that produces glucose and native starch from Tate & Lyle; and
•
the pending expansion of Olenex, a joint venture with Wilmar for the sale and marketing of refined vegetable oils and fats in Europe, which is expected to close in 2016 subject to regulatory approvals.

As part of the evolution of the Company’s strategic plan, the Company is currently undertaking a fresh look at the capital intensity of its operations and portfolio, seeking ways to reduce and redeploy capital in its efforts to drive long-term returns.

Operating Performance Indicators

The Company is exposed to certain risks inherent to an agricultural-based commodity business. These risks are further described in Item 1A, “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

The Company’s agricultural services and oilseeds processing operations are principally agricultural commodity-based businesses where changes in selling prices move in relationship to changes in prices of the commodity-based agricultural raw materials. Therefore, changes in agricultural commodity prices have relatively equal impacts on both revenues and cost of products sold. Thus, changes in revenues of these businesses do not necessarily correspond to the changes in margins or gross profit.

The Company’s corn processing operations and Wild Flavors and Specialty Ingredients businesses also utilize agricultural commodities (or products derived from agricultural commodities) as raw materials. However, in these operations, agricultural commodity market price changes do not necessarily equal changes in cost of products sold. Thus, changes in revenues of these businesses may correspond to changes in margins or gross profit.

The Company has consolidated subsidiaries in 82 countries. For the majority of the Company’s subsidiaries located outside the United States, the local currency is the functional currency. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars at the weighted average exchange rates for the applicable periods. For the majority of the Company’s business activities in Brazil, the functional currency is the U.S. dollar; however, certain transactions, including taxes, occur in local currency and require conversion to the functional currency. Changes in revenues are expected to be correlated to changes in expenses reported by the Company caused by fluctuations in the exchange rates of foreign currencies, primarily the Euro, British pound, Canadian dollar, and Brazilian real, as compared to the U.S. dollar.

32


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The Company measures its performance using key financial metrics including net earnings, segment operating profit, return on invested capital, EBITDA, economic value added, manufacturing expenses, and selling, general, and administrative expenses. The Company’s financial results can vary significantly due to changes in factors such as fluctuations in energy prices, weather conditions, crop plantings, government programs and policies, changes in global demand, general global economic conditions, changes in standards of living, and global production of similar and competitive crops. Due to these unpredictable factors, the Company undertakes no responsibility for updating any forward-looking information.

Market Factors Influencing Operations or Results in the Three Months Ended June 30, 2016

As an agricultural commodity-based business, the Company is subject to a variety of market factors which affect the Company's operating results. Agricultural Services was negatively impacted by weak U.S. grain export competitiveness, margin pressure across the U.S. grain network, and decreased global merchandising opportunities. In Corn Processing, U.S. demand for sweeteners and starches and exports, principally to Mexico, remained solid. Corn-based ethanol remains a very competitive transportation fuel.  Domestic demand for ethanol has been strong as U.S. gasoline demand is up over 2015. U.S. ethanol continues to be the cheapest octane in the world, driving strong export volumes through the first half of 2016. Production levels remain high, but slowed from the rate in the first quarter, improving spot replacement margins this quarter. In Oilseeds Processing, global demand for protein was stronger than expected, although North American exports of meal decreased from unprecedented demand in the prior year. Softseed prices remain high relative to products, resulting in weak margins causing a shift to crush more soybeans. Vegetable oils continue to maintain a steady demand from the food industry. Oil demand for fuels is strong and sales of biodiesel have benefited from the biodiesel blending credit that has been established for calendar 2016 in North America. The Wild Flavors and Specialty Ingredients business continued to focus on cost synergies and new revenue opportunities. Customers’ interest in developing innovative, healthy, and nutritious food products in response to macro trends in diet and demographics remained strong and continued to grow.

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

Net earnings attributable to controlling interests was $284 million in the second quarter of 2016 compared to $386 million in the second quarter of 2015. Segment operating profit decreased $128 million to $680 million, due to lower U.S. export volumes, weaker origination margins, reduced U.S. ethanol results, and weaker global crush margins. Included in this quarter’s segment operating profit was approximately $1 million of mark-to-market losses related to hedge timing effects while segment operating profit in the prior year’s quarter included approximately $14 million of mark-to-market gains related to hedge timing effects. Corporate results were a charge of $273 million this quarter compared to $282 million in last year’s quarter. Corporate results this quarter include a charge of $88 million from the effect of increasing agricultural commodity prices on LIFO inventory valuation reserves, compared to $61 million in the second quarter of 2015.

Income taxes decreased $24 million due to lower earnings before income taxes partially offset by a higher effective tax rate. The Company’s effective tax rate for the quarter ended June 30, 2016 increased to 29.2% compared to 27.2% for the quarter ended June 30, 2015. The rate for the current quarter was negatively impacted by $20 million in unfavorable discrete items.

Analysis of Statements of Earnings

Processed volumes by product for the quarter are as follows (in metric tons):
 
Three Months Ended
 
 
June 30,
 
 
(In thousands)
2016
 
2015
 
Change
Oilseeds
8,468

 
8,438

 
30

Corn
5,087

 
5,709

 
(622
)
   Total
13,555

 
14,147

 
(592
)

The Company generally operates its production facilities, on an overall basis, at or near capacity, adjusting facilities individually, as needed, to react to the current margin environment and seasonal local supply and demand conditions.


33


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Following the sale of the cocoa business in October 2015, the remaining results of Cocoa and Other were combined with the results of Refining, Packaging, Biodiesel, and Other within the Oilseeds Processing segment effective January 1, 2016. Prior period results were reclassified to conform to the current presentation.

Revenues by segment for the quarter are as follows:
 
Three Months Ended
 
 
 
June 30,
 
 
 
2016
 
2015
 
Change
 
(In millions)
Agricultural Services
 
 
 
 
 
Merchandising and Handling
$
5,506

 
$
6,074

 
$
(568
)
Milling and Other
825

 
874

 
(49
)
Transportation
56

 
57

 
(1
)
Total Agricultural Services
6,387

 
7,005

 
(618
)
 
 
 
 
 
 
Corn Processing
 

 
 

 
 

Sweeteners and Starches
1,037

 
956

 
81

Bioproducts
1,315

 
1,623

 
(308
)
Total Corn Processing
2,352

 
2,579

 
(227
)
 
 
 
 
 
 
Oilseeds Processing
 

 
 

 
 

Crushing and Origination
4,033

 
4,217

 
(184
)
Refining, Packaging, Biodiesel, and Other
2,041

 
2,533

 
(492
)
Asia
25

 
72

 
(47
)
Total Oilseeds Processing
6,099

 
6,822

 
(723
)
 
 
 
 
 
 
Wild Flavors and Specialty Ingredients
680

 
682

 
(2
)
Total Wild Flavors and Specialty Ingredients
680

 
682

 
(2
)
 
 
 
 
 
 
Other - Financial
111

 
98

 
13

Total Other
111

 
98

 
13

Total
$
15,629

 
$
17,186

 
$
(1,557
)

Revenues and cost of products sold in a commodity merchandising and processing business are affected by the underlying commodity prices and volumes. In periods of significant changes in commodity prices, the underlying performance of the Company is better evaluated by looking at margins since both revenues and cost of products sold, particularly in Oilseeds Processing and Agricultural Services, generally have a relatively equal impact from commodity price changes which generally result in an insignificant impact to gross profit.
 
Revenues decreased $1.6 billion, or 9%, to $15.6 billion due to lower sales prices ($0.7 billion), including $0.1 billion in foreign currency translation impacts, and lower overall sales volumes ($0.9 billion). The decrease in sales prices was due principally to a decrease in underlying commodity prices. The decrease in sales volumes was due principally to the sale of the cocoa business. Agricultural Services revenues decreased 9% to $6.4 billion due to lower average sales prices ($0.4 billion) and lower sales volumes ($0.2 billion). Corn Processing revenues decreased 9% to $2.4 billion due to lower average sales prices ($0.1 billion) and lower sales volumes ($0.2 billion). Oilseeds Processing revenues decreased 11% to $6.1 billion due to lower average sales prices ($0.2 billion) and lower sales volumes ($0.5 billion).
  


34


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Cost of products sold decreased $1.4 billion to $14.9 billion due principally to lower sales volumes and lower average commodity prices, including $0.1 billion from foreign currency translation impacts, and lower manufacturing costs. Included in cost of products sold is a charge of $88 million from the effect of increasing agricultural commodity prices during this quarter on LIFO inventory valuation reserves compared to $61 million in the prior year’s quarter. Manufacturing expenses decreased $0.1 billion to $1.2 billion primarily due to the sale of the cocoa business and lower fuel usage and prices.

Gross profit decreased $0.2 billion, or 21%, to $0.8 billion. The decrease in gross profit consists principally of reduced merchandising results ($60 million) primarily due to compressed U.S. grain handling margins, lower volumes and freight rates in barge operations ($7 million), lower ethanol margins ($23 million), lower biodiesel results ($37 million) primarily due to timing effects, and lower canola and soy crush margins ($58 million). These factors are explained in the segment operating profit discussion on pages 36 and 37. The effects of increasing commodity price during the second quarter of 2016 on LIFO inventory valuations had a $88 million negative impact on gross profit compared to $61 million during the same period in 2015. The decrease in underlying commodity prices from the prior year quarter did not result in a significant decrease in margins or gross profit as lower underlying commodity prices had a relatively equal impact on revenues and cost of products sold.

Selling, general, and administrative expenses decreased $5 million to $520 million due principally to decreased expenses related to the sale of the cocoa business partially offset by expenses from the recently acquired Eaststarch C.V.

Asset impairment, exit, and restructuring charges decreased $19 million to $12 million. Prior period charges include long-lived asset and goodwill impairments related to certain international Oilseeds Processing facilities of $28 million and fixed asset impairments in the Corn Processing and Agricultural Services segments of $3 million. Current period charges include $5 million of fixed asset impairments in the Corn Processing segment and $7 million of other individually insignificant fixed asset impairments and restructuring charges.

Interest expense declined $20 million to $65 million primarily due to lower interest rates and the effect of the revaluation of the mandatorily redeemable 10% interest in Harvest Innovations.

Equity in earnings of unconsolidated affiliates increased $3 million to $90 million due to earnings from the new corn processing joint venture, Hungrana, and higher earnings from the Company’s investment in Wilmar and other investees partially offset by a decrease in equity earnings from Eaststarch C.V. which is now fully consolidated following the acquisition of the remaining interest in November 2015.

Other income increased $39 million to $134 million. Current period income includes $48 million of realized additional consideration related to the sale of the Company’s equity investment in Gruma S.A.B. de C.V. in December 2012, $63 million of recovery of loss provisions and gain related to the sale of the Company’s Brazilian sugar ethanol facilities, and a $12 million gain related to the revaluation of the remaining interest to settlement value in conjunction with the acquisition of the remaining interest in Amazon Flavors, partially offset by a loss on sale of assets in the current period of $5 million. Prior period income includes a gain on the revaluation of the Company’s previously held investments in North Star Shipping and Minmetal in conjunction with the acquisition of the remaining interest of $27 million, a gain on the sale of a 50% interest in the Barcarena export terminal facility in Brazil to Glencore plc of $68 million, and a gain on the sale of the lactic business of $6 million.


35


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Operating profit by segment and earnings before income taxes for the quarter are as follows:

 
Three Months Ended
 
 
 
June 30,
 
 
 
2016
 
2015
 
Change
 
(In millions)
Agricultural Services
 
 
 
 
 
Merchandising and Handling
$
(15
)
 
$
65

 
$
(80
)
Milling and Other
104

 
67

 
37

Transportation
8

 
20

 
(12
)
Total Agricultural Services
97

 
152

 
(55
)
 
 
 
 
 
 
Corn Processing
 

 
 

 
 

Sweeteners and Starches
180

 
158

 
22

Bioproducts
39

 
46

 
(7
)
Total Corn Processing
219

 
204

 
15

 
 
 
 
 
 
Oilseeds Processing
 

 
 

 
 

Crushing and Origination
135

 
262

 
(127
)
Refining, Packaging, Biodiesel, and Other
52

 
67

 
(15
)
Asia
47

 
15

 
32

Total Oilseeds Processing
234

 
344

 
(110
)
 
 
 
 
 
 
Wild Flavors and Specialty Ingredients
106

 
104

 
2

Total Wild Flavors and Specialty Ingredients
106

 
104

 
2

 
 
 
 
 
 
Other - Financial
24

 
4

 
20

Total Other
24

 
4

 
20

Total Segment Operating Profit
680

 
808

 
(128
)
Corporate
(273
)
 
(282
)
 
9

Earnings Before Income Taxes
$
407

 
$
526

 
$
(119
)

Agricultural Services operating profit decreased $55 million to $97 million. Merchandising and Handling operating results declined $80 million to a loss of $15 million primarily due to compressed U.S. grain handling margins. International merchandising results were flat but remained weak overall. Strong origination results in Argentina and the addition of destination marketing in Egypt through the Company’s Medsofts joint venture were partially offset by the absence of a gain on the revaluation of the Company’s previously held investments in North Star Shipping and Minmetal in conjunction with the acquisition of the remaining interest. Milling and other increased $37 million to $104 million. Current quarter results include realized additional consideration related to the sale of the Company’s equity investment in Gruma S.A.B. de C.V. in December 2012 of $48 million. Transportation results declined $12 million due to weak barge demand and lower freight rates.








36


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Corn Processing operating profit increased $15 million to $219 million. Included in the current quarter operating profit is $1 million of mark-to-market losses related to corn hedge timing effects compared to mark-to-market gains of $11 million in the prior year quarter. Excluding corn hedge timing effects, Sweeteners and Starches operating profit increased $31 million as the business continued to perform well with higher volumes and pricing and improved margins from optimizing flex grind in the Company’s corn wet mills. The integration of the recent Eaststarch C.V. and Morocco acquisitions has gone better than planned, contributing to the Company’s global sweeteners and starches portfolio and results. Excluding corn hedge timing effects, Bioproducts profit in the quarter decreased by $4 million. Continued weak ethanol margins due to high industry inventory levels were partially offset by the recovery of loss provisions and gain related to the sale of the Company’s Brazilian sugar ethanol facilities of $63 million.

Oilseeds Processing operating profit decreased $110 million to $234 million. Crushing and Origination operating profit declined $127 million to $135 million driven primarily by continued weak canola margins as well as lower soy crush margins, which were historically high last year. The Company achieved record soy crush volumes in North America and Europe through increased utilization of new flex capacity. Throughout the quarter, the Company effectively managed through unprecedented crush margin volatility. Refining, Packaging, Biodiesel, and Other operating profit decreased $15 million to $52 million mainly due to biodiesel timing effects despite strong results in specialty fats and oils and Golden Peanut. Asia results improved $32 million to $47 million, due primarily to higher equity earnings from the Company’s investment in Wilmar International Limited and the absence of long-lived asset and goodwill impairments taken in the prior year.

Wild Flavors and Specialty Ingredients (WFSI) operating profit increased $2 million to $106 million. Current quarter results included $12 million of gain related to the revaluation of the remaining interest to settlement value in conjunction with the acquisition of the remaining interest in Amazon Flavors and approximately $4 million of operational start-up costs primarily related to the Tianjin fibersol facility in China and the Campo Grande specialty protein complex in Brazil. WFSI saw strong growth in flavors and systems offset by weaker sales of functional specialty proteins and fibers.

Other - Financial operating profit increased on higher volumes from the Company’s futures commission brokerage business and improved results from its captive insurance operations.

Corporate results for the quarter are as follows:

 
Three Months Ended
 
 
 
June 30,
 
 
 
2016
 
2015
 
Change
 
(In millions)
LIFO credit (charge)
$
(88
)
 
$
(61
)
 
$
(27
)
Interest expense - net
(63
)
 
(80
)
 
17

Unallocated corporate costs
(114
)
 
(128
)
 
14

Other charges (income)
(2
)
 
—

 
(2
)
Minority interest and other
(6
)
 
(13
)
 
7

Total Corporate
$
(273
)
 
$
(282
)
 
$
9


Corporate results were a net charge of $273 million this quarter compared to $282 million in last year’s quarter. The effects of changing commodity prices on LIFO inventory valuations resulted in a charge of $88 million this quarter compared to $61 million in the prior year quarter. Interest expense - net declined $17 million due principally to lower interest rates and the effect of the revaluation of the mandatorily redeemable 10% interest in Harvest Innovations. Unallocated corporate costs declined $14 million due primarily to the timing of spending on the Company’s ERP program and lower spending on various strategic business improvement projects.


37


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Non-GAAP Financial Measures

The Company uses adjusted earnings per share (EPS) and adjusted earnings before taxes, interest, and depreciation and amortization (EBITDA), which are non-GAAP financial measures as defined by the Securities Exchange Commission, to evaluate the Company’s financial performance. These performance measures are not defined by accounting principles generally accepted in the United States and should be considered in addition to, and not in lieu of, GAAP financial measures.

Adjusted EPS is defined as diluted EPS adjusted for the effects on reported diluted EPS of certain specified items. Adjusted EBITDA is defined as earnings before taxes, interest, and depreciation and amortization, adjusted for specified items. The Company calculates adjusted EBITDA by removing the impact of specified items and adding back the amounts of interest expense and depreciation and amortization to earnings before income taxes.

Management believes that adjusted EPS, adjusted EBITDA, and adjusted EBITDA by segment are useful measures of the Company’s profitability because they provide investors additional information about the Company’s operations allowing better evaluation of underlying business performance and better period-to-period comparability. Adjusted EPS and adjusted EBITDA are not intended to replace or be an alternative to diluted EPS and earnings before income taxes, respectively, the most directly comparable amounts reported under GAAP.

The reconciliation of diluted EPS to adjusted EPS for the three months ended June 30, 2016 and 2015, are provided in the following table.
 
Three months ended June 30,
 
2016
 
2015
 
In millions
 
Per share
 
In millions
 
Per share
Net earnings and reported EPS (fully diluted)
$
284

 
$
0.48

 
$
386

 
$
0.62

Adjustments:
 
 
 
 
 
 
 
LIFO charge (credit) - net of tax of $33 million in 2016 and $23 million in 2015 (1)
55

 
0.09

 
38

 
0.06

Gains on sales of assets/revaluations - net of tax of $17 million in 2016 and $30 million in 2015 (2)
(101
)
 
(0.17
)
 
(71
)
 
(0.11
)
Asset impairment, restructuring, and settlement charges - net of tax of $4 million in 2016 and $3 million in 2015 (2)
8

 
0.01

 
28

 
0.04

Effective tax rate true-up
—

 
—

 
(8
)
 
(0.01
)
Total adjustments
(38
)
 
(0.07
)
 
(13
)
 
(0.02
)
Adjusted net earnings and EPS
$
246

 
$
0.41

 
$
373

 
$
0.60

Average number of shares outstanding - diluted
594

 
 
 
627

 

(1) Tax effected using the Company’s U.S. effective tax rate.
(2) Tax effected using the applicable tax rates.

The reconciliation of earnings before income taxes to adjusted EBITDA and adjusted EBITDA by segment for the three months ended June 30, 2016 and 2015 are provided in the following table.
 
Three months ended June 30,
 
 
(In millions)
2016
 
2015
 
Change
Earnings before income taxes
$
407

 
$
526

 
$
(119
)
Interest expense
65

 
85

 
(20
)
Depreciation and amortization
223

 
221

 
2

LIFO
88

 
61

 
27

Gains on sales of assets/revaluations
(118
)
 
(101
)
 
(17
)
Asset impairment, restructuring, and settlement charges
12

 
31

 
(19
)
Adjusted EBITDA
$
677

 
$
823

 
$
(146
)
 
 
 
 
 
 

38


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 
Three months ended June 30,
 
 
(In millions)
2016
 
2015
 
Change
Agricultural Services
 

 
 

 
 

Earnings before income taxes
$
97

 
$
152

 
$
(55
)
Depreciation and amortization
50

 
52

 
(2
)
Gains on sales of assets/revaluations
(43
)
 
(27
)
 
(16
)
Asset impairment, restructuring, and settlement charges
3

 
2

 
1

Agricultural Services Adjusted EBITDA
107

 
179

 
(72
)
Corn Processing
 

 
 

 
 

Earnings before income taxes
219

 
204

 
15

Depreciation and amortization
85

 
84

 
1

Gains on sales of assets/revaluations
(63
)
 
(6
)
 
(57
)
Asset impairment, restructuring, and settlement charges
6

 
1

 
5

Corn Processing Adjusted EBITDA
247

 
283

 
(36
)
Oilseeds Processing
 
 
 
 
 
Earnings before income taxes
234

 
344

 
(110
)
Interest expense
1

 
1

 
—

Depreciation and amortization
49

 
48

 
1

Gains on sales of assets/revaluations
—

 
(68
)
 
68

Asset impairment, restructuring, and settlement charges
1

 
28

 
(27
)
Oilseeds Processing Adjusted EBITDA
285

 
353

 
(68
)
Wild Flavors and Specialty Ingredients
 
 
 
 
 
Earnings before income taxes
106

 
104

 
2

Depreciation and amortization
23

 
23

 
—

Gains on sales of assets/revaluations
(12
)
 
—

 
(12
)
Wild Flavors and Specialty Ingredients Adjusted EBITDA
117

 
127

 
(10
)
Other - Financial
 
 
 
 
 
Earnings before income taxes
24

 
4

 
20

Depreciation and amortization
2

 
2

 
—

Other - Financial Adjusted EBITDA
26

 
6

 
20

Corporate
 
 
 
 
 
Earnings (losses) before income taxes
(273
)
 
(282
)
 
9

Interest expense
64

 
84

 
(20
)
Depreciation and amortization
14

 
12

 
2

LIFO
88

 
61

 
27

Asset impairment, restructuring, and settlement charges
2

 
—

 
2

Corporate Adjusted EBITDA
(105
)
 
(125
)
 
20

Total Adjusted EBITDA
$
677

 
$
823

 
$
(146
)


39


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Market Factors Influencing Operations or Results in the Six Months Ended June 30, 2016

As an agricultural commodity-based business, the Company is subject to a variety of market factors which affect the Company's operating results. Agricultural Services was negatively impacted by weak U.S. grain export competitiveness, margin pressure across the U.S. grain network, and decreased global merchandising opportunities. In Corn Processing, U.S. demand for sweeteners and starches and exports, principally to Mexico, remained solid. Corn-based ethanol remains a very competitive transportation fuel.  Domestic demand for ethanol has been strong as U.S. gasoline demand is up over 2015. U.S. ethanol continues to be the cheapest octane in the world, driving strong export volumes through the first half of 2016. Industry production levels remain high during the period. In Oilseeds Processing, global demand for protein was stronger than expected although North American exports of meal decreased from unprecedented demand in the prior year. Softseed prices remain high relative to products, resulting in weak margins causing a shift to crush more soybeans. Vegetable oils continue to maintain a steady demand from the food industry. Oil demand for fuels is strong and sales of biodiesel have benefited from the biodiesel blending credit that has been established for calendar 2016 in North America. The Wild Flavors and Specialty Ingredients business continued to focus on cost synergies and new revenue opportunities. Customers’ interest in developing innovative, healthy, and nutritious food products in response to macro trends in diet and demographics remained strong and continued to grow.

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Net earnings attributable to controlling interests decreased $365 million to $514 million. Segment operating profit decreased $0.4 billion to $1.3 billion, due to lower U.S. export volumes, weaker origination margins, reduced U.S. ethanol results, and weaker global crush margins. Corporate results were a charge of $540 million for the six months compared to $447 million the same period last year. Corporate results for the six months include a charge of $102 million from the effect of increasing agricultural commodity prices on LIFO inventory valuation reserves, compared to $59 million the same period last year and a $50 million loss from the Company’s share in the results of an equity investee’s updated portfolio valuations in the first quarter of 2016.

Income taxes decreased $145 million due to lower earnings before income taxes and a lower effective tax rate. The Company’s effective tax rate for the six months ended June 30, 2016 decreased to 27.3% compared to 28.0% for the six months ended June 30, 2015 due primarily to changes in the forecasted geographic mix of pretax earnings.
 
Analysis of Statements of Earnings

Processed volumes by product for the six months are as follows (in metric tons):

 
Six Months Ended
 
 
June 30,
 
 
(In thousands)
2016
 
2015
 
Change
Oilseeds
16,749

 
17,287

 
(538
)
Corn
10,829

 
11,011

 
(182
)
   Total
27,578

 
28,298

 
(720
)

The Company generally operates its production facilities, on an overall basis, at or near capacity, adjusting facilities individually, as needed, to react to the current margin environment and seasonal local supply and demand conditions.

Following the sale of the cocoa business in October 2015, the remaining results of Cocoa and Other were combined with the results of Refining, Packaging, Biodiesel, and Other within the Oilseeds Processing segment effective January 1, 2016. Prior period results were reclassified to conform to the current presentation.


40


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Revenues by segment for the six months are as follows:

 
Six Months Ended
 
 
 
June 30,
 
 
 
2016
 
2015
 
Change
 
(In millions)
Agricultural Services
 

 
 

 
 

Merchandising and Handling
$
11,185

 
$
13,101

 
$
(1,916
)
Milling and Other
1,571

 
1,838

 
(267
)
Transportation
111

 
111

 
—

Total Agricultural Services
12,867

 
15,050

 
(2,183
)
 
 
 
 
 
 
Corn Processing
 

 
 

 
 

Sweeteners and Starches
2,004

 
1,831

 
173

Bioproducts
2,555

 
3,214

 
(659
)
Total Corn Processing
4,559

 
5,045

 
(486
)
 
 
 
 
 
 
Oilseeds Processing
 
 
 
 
 
Crushing and Origination
7,139

 
7,992

 
(853
)
Refining, Packaging, Biodiesel, and Other
3,810

 
4,974

 
(1,164
)
Asia
147

 
149

 
(2
)
Total Oilseeds Processing
11,096

 
13,115

 
(2,019
)
 
 
 
 
 
 
Wild Flavors and Specialty Ingredients
1,272

 
1,288

 
(16
)
Total Wild Flavors and Specialty Ingredients
1,272

 
1,288

 
(16
)
 
 
 
 
 
 
Other - Financial
219

 
194

 
25

Total Other
219

 
194

 
25

Total
$
30,013

 
$
34,692

 
$
(4,679
)

Revenues and cost of products sold in a commodity merchandising and processing business are affected by the underlying commodity prices and volumes. In periods of significant changes in commodity prices, the underlying performance of the Company is better evaluated by looking at margins since both revenues and cost of products sold, particularly in Oilseeds Processing and Agricultural Services, generally have a relatively equal impact from commodity price changes which generally result in an insignificant impact to gross profit.

Revenues decreased $4.7 billion, or 13%, to $30.0 billion due to lower average sales prices ($1.6 billion), including $0.3 billion in foreign currency translation impacts, and lower overall sales volumes ($3.1 billion). The decrease in sales prices was due principally to lower underlying agricultural commodity prices, in particular prices of corn, soybeans, and soybean-related products. The decrease in sales volumes was due principally to the sale of the cocoa business and decreased sales volumes of ethanol and grains. Agricultural Services revenues decreased 15% to $12.9 billion due to lower average sales prices ($0.3 billion) and lower sales volumes ($1.9 billion). Corn Processing revenues decreased 10% to $4.6 billion due to lower average sales prices ($0.2 billion) and lower sales volumes ($0.3 billion). Oilseeds Processing revenues decreased 15% to $11.1 billion due to lower average sales prices ($1.1 billion) and lower sales volumes ($0.9 billion).





41


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Cost of products sold decreased $4.2 billion to $28.5 billion due principally to lower average commodity costs, including $0.3 billion in foreign currency translation impacts, and lower manufacturing costs. Included in cost of products sold is a charge of $102 million from the effect of increasing agricultural commodity prices on LIFO inventory valuation reserves compared to a charge of $59 million in the prior year’s period. Manufacturing expenses decreased $0.2 billion to $2.6 billion primarily due to the sale of the cocoa business, lower fuel usage and prices, and decreased repairs and maintenance expenses.

Gross profit decreased $0.5 billion, or 25%, to $1.6 billion. The decrease in gross profit consists principally of reduced merchandising results ($139 million) primarily due to compressed U.S. grain handling margins, lower volumes and freight rates in barge operations ($35 million), lower ethanol margins ($48 million), lower biodiesel results ($21 million) primarily due to timing effects, and lower canola and soy crush margins ($240 million). These factors are explained in the segment operating profit discussion on pages 43 and 44. The effects of increasing commodity price during the six months of 2016 on LIFO inventory valuations had a $102 million negative impact on gross profit compared to $59 million during the same period in 2015. The decrease in underlying commodity prices from the prior year did not result in a significant decrease in margins or gross profit as lower underlying commodity prices had a relatively equal impact on revenues and cost of products sold.

Selling, general, and administrative expenses of $1.0 billion were comparable to the prior period. Decreased expenses related to the sale of the cocoa business were offset by increased transaction fees due to increased trading volume for the brokerage business and expenses for the recently acquired Eaststarch C.V.

Asset impairment, exit, and restructuring costs decreased $6 million to $25 million. Prior period charges include long-lived asset and goodwill impairments related to certain international Oilseeds Processing facilities of $28 million and fixed asset impairments in the Corn Processing and Agricultural Services segments of $3 million. Current period charges include $11 million of software impairment in Corporate, $5 million of fixed asset impairments in the Corn Processing segment, and $9 million of other individually insignificant fixed asset impairments and restructuring charges.

Interest expense declined $31 million to $135 million primarily due to lower interest rates and the effect of the revaluation of the mandatorily redeemable 10% interest in Harvest Innovations.

Equity in earnings of unconsolidated affiliates decreased $71 million to $155 million primarily due to a $50 million loss in the current period from the Company’s share in the results of an equity investee’s updated portfolio valuations and the decrease in equity earnings from Eaststarch C.V. which is now consolidated following the acquisition of the remaining interest in November 2015.

Other income increased $21 million to $134 million. Current period income includes $48 million of realized additional consideration related to the sale of the Company’s equity investment in Gruma S.A.B de C.V. in December 2012, $63 million of recovery of loss provisions and gain related to the sale of the Company’s Brazilian sugar ethanol facilities, and a $12 million gain related to the revaluation of the remaining interest to settlement value in conjunction with the acquisition of the remaining interest in Wild Flavors, partially offset by a loss on sale of assets in the current period of $5 million. Prior period income includes a gain on the revaluation of the Company’s previously held investments in North Star Shipping and Minmetal in conjunction with the acquisition of the remaining interest of $27 million, a gain on the sale of a 50% interest in the Barcarena export terminal facility in Brazil to Glencore plc of $68 million, and a gain on the sale of the lactic business of $6 million.








42


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Operating profit by segment and earnings before income taxes for the six months are as follows:

 
Six Months Ended
 
 
 
June 30,
 
 
 
2016
 
2015
 
Change
 
(In millions)
Agricultural Services
 

 
 

 
 

Merchandising and Handling
$
8

 
$
172

 
$
(164
)
Milling and Other
152

 
122

 
30

Transportation
12

 
52

 
(40
)
Total Agricultural Services
172

 
346

 
(174
)
 
 
 
 
 
 
Corn Processing
 

 
 

 
 

Sweeteners and Starches
323

 
236

 
87

Bioproducts
27

 
81

 
(54
)
Total Corn Processing
350

 
317

 
33

 
 
 
 
 
 
Oilseeds Processing
 
 
 
 
 
Crushing and Origination
254

 
596

 
(342
)
Refining, Packaging, Biodiesel, and Other
131

 
134

 
(3
)
Asia
109

 
83

 
26

Total Oilseeds Processing
494

 
813

 
(319
)
 
 
 
 
 
 
Wild Flavors and Specialty Ingredients
176

 
172

 
4

Total Wild Flavors and Specialty Ingredients
176

 
172

 
4

 
 

 
 

 
 

Other - Financial
61

 
15

 
46

Total Other
61

 
15

 
46

Total Segment Operating Profit
1,253

 
1,663

 
(410
)
Corporate
(540
)
 
(447
)
 
(93
)
Earnings Before Income Taxes
$
713

 
$
1,216

 
$
(503
)

Agricultural Services operating profits decreased $174 million to $172 million. Merchandising and Handling operating results declined $164 million to $8 million primarily due to compressed U.S. grain handling margins. International merchandising results were flat but remained weak overall. Strong origination results in Argentina and the addition of destination marketing in Egypt through the Company’s Medsofts joint venture were partially offset by the absence of a gain on the revaluation of the Company’s previously held investments in North Star Shipping and Minmetal in conjunction with the acquisition of the remaining interest. Milling and Other results increased $30 million to $152 million. Current quarter results include realized additional consideration related to the sale of the Company’s equity investment in Gruma S.A.B de C.V. in December 2012 of $48 million. Transportation operating profit declined $40 million to $12 million due to weak barge demand and lower freight rates.









43


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Corn Processing operating profit increased $33 million to $350 million. Included in the current period operating profit is a gain of $1 million for corn hedge timing effects, while the prior period included a charge of $3 million for corn hedge time effects. Excluding corn hedge timing effects, Sweeteners and Starches operating profit increased $87 million as the business continued to perform well with higher volumes and pricing and improved margins from optimizing flex grind in the Company’s corn wet mills. The integration of the recent Eaststarch C.V. and Morocco acquisitions has gone better than planned, contributing to the Company’s global sweeteners and starches portfolio and results. Excluding corn hedge timing effects, Bioproducts profit in the period declined $58 million. Continued weak ethanol margins due to high industry inventory levels were partially offset by the recovery of loss provisions and gain related to the sale of the Company’s Brazilian sugar ethanol facilities of $63 million.

Oilseeds Processing operating profit decreased $319 million to $494 million. Crushing and Origination operating profit declined $342 million to $254 million driven primarily by continued weak canola margins as well as lower soy crush margins which were historically high last year and lower South American grain origination results caused by year-over-year slower farmer-selling partially offset by strong soybean and softseed volumes and margins in North America and South America. Refining, Packaging, Biodiesel, and Other results declined $3 million to $131 million due to biodiesel timing effects and the sale of the cocoa business in October 2015 which decreased results by $6 million, partially offset by good demand and improved margins for refined and packaged oils and improved European biodiesel results. Asia results improved $26 million to $109 million, due primarily to the absence of long-lived asset and goodwill impairments taken in the prior year.

Wild Flavors and Specialty Ingredients operating profit increased $4 million to $176 million. Current period results included $12 million of gain related to the revaluation of the remaining interest to settlement value in conjunction with the acquisition of the remaining interest in Wild Flavors and approximately $7 million of operational start-up costs primarily related to the Tianjin fibersol facility in China and the Campo Grande specialty protein complex in Brazil.

Other - Financial operating profit increased on higher volumes from the Company’s futures commission brokerage business and improved results from its captive insurance operations.

Corporate results for the six months are as follows:
 
Six Months Ended
 
 
 
June 30,
 
 
 
2016
 
2015
 
Change
 
(In millions)
LIFO credit (charge)
$
(102
)
 
$
(59
)
 
$
(43
)
Interest expense - net
(131
)
 
(158
)
 
27

Unallocated corporate costs
(219
)
 
(231
)
 
12

Other charges
(13
)
 
—

 
(13
)
Minority interest and other
(75
)
 
1

 
(76
)
Total Corporate
$
(540
)
 
$
(447
)
 
$
(93
)

Corporate results were a net charge of $540 million in the current period compared to a net charge of $447 million in the prior period. The effects of increasing commodity prices on LIFO inventory valuations resulted in a charge of $102 million in the current period compared to $59 million in the prior period. Interest expense - net declined $27 million due principally to lower interest rates and the effect of the revaluation of the mandatorily redeemable 10% interest in Harvest Innovations. Unallocated corporate costs decreased $12 million primarily due to lower vacation accruals. Other charges in the current period related primarily to software impairment. Minority interest and other expense in the current period included a $50 million loss from the Company’s share in the results of an equity investee’s updated portfolio valuations.


44


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Non-GAAP Financial Measures

The Company uses adjusted earnings per share (EPS) and adjusted earnings before taxes, interest, and depreciation and amortization (EBITDA), which are non-GAAP financial measures as defined by the Securities Exchange Commission, to evaluate the Company’s financial performance. These performance measures are not defined by accounting principles generally accepted in the United States and should be considered in addition to, and not in lieu of, GAAP financial measures.

Adjusted EPS is defined as diluted EPS adjusted for the effects on reported diluted EPS of certain specified items. Adjusted EBITDA is defined as earnings before taxes, interest, and depreciation and amortization, adjusted for specified items. The Company calculates adjusted EBITDA by removing the impact of specified items and adding back the amounts of interest expense and depreciation and amortization to earnings before income taxes.

Management believes that adjusted EPS, adjusted EBITDA, and adjusted EBITDA by segment are useful measures of the Company’s profitability because they provide investors additional information about the Company’s operations allowing better evaluation of underlying business performance and better period-to-period comparability. Adjusted EPS and adjusted EBITDA are not intended to replace or be an alternative to diluted EPS and earnings before income taxes, respectively, the most directly comparable amounts reported under GAAP.

The reconciliation of diluted EPS to adjusted EPS for the six months ended June 30, 2016 and 2015, are provided in the following table.
 
Six months ended June 30,
 
2016
 
2015
 
In millions
 
Per share
 
In millions
Per share
Net earnings and reported EPS (fully diluted)
$
514

 
$
0.87

 
$
879

$
1.39

Adjustments:
 
 
 
 
 
 
LIFO charge (credit) - net of tax of $38 million in 2016 and $22 million in 2015 (1)
64

 
0.11

 
37

0.06

Gains on sales of assets/revaluations - net of tax of $17 million in 2016 and $30 million in 2015 (2)
(101
)
 
(0.17
)
 
(71
)
(0.11
)
Asset impairment, restructuring, and settlement charges - net of tax of $9 million in 2016 and $3 million in 2015 (2)
16

 
0.02

 
28

0.04

Total adjustments
(21
)
 
(0.04
)
 
(6
)
(0.01
)
Adjusted net earnings and EPS
$
493

 
$
0.83

 
$
873

$
1.38

Average number of shares outstanding - diluted
595

 
 
 
633

 
(1) Tax effected using the Company’s U.S. effective tax rate.
(2) Tax effected using the applicable tax rates.

The reconciliation of earnings before income taxes to adjusted EBITDA and adjusted EBITDA by segment for the six months ended June 30, 2016 and 2015 are provided in the following table.
 
Six months ended June 30,
 
 
(In millions)
2016
 
2015
 
Change
Earnings before income taxes
$
713

 
$
1,216

 
$
(503
)
Interest expense
135

 
166

 
(31
)
Depreciation and amortization
452

 
435

 
17

LIFO
102

 
59

 
43

Gains on sales of assets/revaluations
(118
)
 
(101
)
 
(17
)
Asset impairment, restructuring, and settlement charges
25

 
31

 
(6
)
Adjusted EBITDA
$
1,309

 
$
1,806

 
$
(497
)
 
 
 
 
 
 
 
 
 
 
 
 

45


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 
Six months ended June 30,
 
 
(In millions)
2016
 
2015
 
Change
Agricultural Services
 

 
 

 
 

Earnings before income taxes
$
172

 
$
346

 
$
(174
)
Depreciation and amortization
101

 
94

 
7

Gains on sales of assets/revaluations
(43
)
 
(27
)
 
(16
)
Asset impairment, restructuring, and settlement charges
4

 
2

 
2

Agricultural Services Adjusted EBITDA
234

 
415

 
(181
)
Corn Processing
 

 
 

 
 

Earnings before income taxes
350

 
317

 
33

Depreciation and amortization
178

 
166

 
12

Gains on sales of assets/revaluations
(63
)
 
(6
)
 
(57
)
Asset impairment, restructuring, and settlement charges
6

 
1

 
5

Corn Processing Adjusted EBITDA
471

 
478

 
(7
)
Oilseeds Processing
 
 
 
 
 
Earnings before income taxes
494

 
813

 
(319
)
Interest expense
1

 
2

 
(1
)
Depreciation and amortization
97

 
98

 
(1
)
Gains on sales of assets/revaluations
—

 
(68
)
 
68

Asset impairment, restructuring, and settlement charges
2

 
28

 
(26
)
Oilseeds Processing Adjusted EBITDA
594

 
873

 
(279
)
Wild Flavors and Specialty Ingredients
 
 
 
 
 
Earnings before income taxes
176

 
172

 
4

Interest expense
—

 
1

 
(1
)
Depreciation and amortization
45

 
49

 
(4
)
Gains on sales of assets/revaluations
(12
)
 
—

 
(12
)
Wild Flavors and Specialty Ingredients Adjusted EBITDA
209

 
222

 
(13
)
Other - Financial
 
 
 
 
 
Earnings before income taxes
61

 
15

 
46

Interest expense
1

 
—

 
1

Depreciation and amortization
3

 
4

 
(1
)
Other - Financial Adjusted EBITDA
65

 
19

 
46

Corporate
 
 
 
 
 
Earnings before income taxes
(540
)
 
(447
)
 
(93
)
Interest expense
133

 
163

 
(30
)
Depreciation and amortization
28

 
24

 
4

LIFO
102

 
59

 
43

Asset impairment, restructuring, and settlement charges
13

 
—

 
13

Corporate Adjusted EBITDA
(264
)
 
(201
)
 
(63
)
Total Adjusted EBITDA
$
1,309

 
$
1,806

 
$
(497
)



46


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Liquidity and Capital Resources

A Company objective is to have sufficient liquidity, balance sheet strength, and financial flexibility to fund the operating and capital requirements of a capital intensive agricultural commodity-based business.  The Company’s strategy involves expanding the volume and diversity of crops that it merchandises and processes, expanding the global reach of its core model, and expanding its value-added product portfolio. The Company depends on access to credit markets, which can be impacted by its credit rating and factors outside of the Company’s control, to fund its working capital needs and capital expenditures. The primary source of funds to finance the Company’s operations, capital expenditures, and advancement of its growth strategy is cash generated by operations and lines of credit, including a commercial paper borrowing facility.  In addition, the Company believes it has access to funds from public and private equity and debt capital markets in both U.S. and international markets.

At June 30, 2016, the Company had $0.7 billion of cash, cash equivalents, and short-term marketable securities and a current ratio, defined as current assets divided by current liabilities, of 1.5 to 1. Included in working capital is $5.2 billion of readily marketable commodity inventories. Cash used in operating activities was $366 million for the six months compared to cash provided of $407 million the same period last year. Working capital changes decreased cash by $1.4 billion for the six months and $0.8 billion for the same period last year. Trade receivables increased $0.5 billion due principally to lower receivables sold under the accounts receivable securitization programs. Inventories declined approximately $0.3 billion due to lower inventory quantities partially offset by higher prices. Trade payables declined approximately $0.7 billion principally reflecting seasonal cash payments for North American harvest-related grain purchases. Cash used in investing activities was $0.8 billion for the six months compared to $0.4 billion the same period last year. Sales of marketable securities, net of purchases, were $0.1 billion for the six months compared to $0.2 billion the same period last year. Capital expenditures for the six months was $0.4 billion compared to $0.5 billion for the same period last year. Other investing activities include additional investment in Wilmar of $0.5 billion for the six months compared to $0.1 billion the same period last year. Cash provided by financing activities was $0.6 billion for the six months compared to a use of $0.2 billion the same period last year. Commercial paper borrowings for the six months were $1.5 billion compared to $0.1 billion for the same period last year. Treasury stock purchases were $0.5 billion for the six months compared to $1.2 billion the same period last year.

At June 30, 2016, the Company’s capital resources included net worth of $17.7 billion and lines of credit, including the accounts receivable securitization programs, totaling $7.5 billion, of which $4.9 billion was unused. The Company’s ratio of long-term debt to total capital (the sum of the Company’s long-term debt and shareholders’ equity) was 24% at June 30, 2016 and December 31, 2015. The Company uses this ratio as a measure of the Company’s long-term indebtedness and an indicator of financial flexibility. 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.

As of June 30, 2016, the Company had cash of $0.3 billion, of which $0.2 billion was cash held by foreign subsidiaries whose undistributed earnings are considered permanently reinvested. The Company has asserted that these funds are permanently reinvested outside the U.S. due to the Company’s historical ability to generate sufficient cash flows from its U.S. operations, unused and available U.S. credit capacity of $2.9 billion, and domestic cash and cash equivalents at June 30, 2016 of $0.1 billion.

The Company has accounts receivable securitization programs (the “Programs”) with certain commercial paper conduit purchasers and committed purchasers. The Programs provide the Company with up to $1.5 billion in funding against accounts receivable transferred into the Programs and expands the Company’s access to liquidity through efficient use of its balance sheet assets (see Note 16 of “Notes to Consolidated Financial Statements” included in Item 1 herein, “Financial Statements” for more information and disclosures on the Programs). As of June 30, 2016, the Company utilized $1.1 billion of its facility under the Programs.

For the six months ended June 30, 2016, the Company spent approximately $0.4 billion in capital expenditures, $0.1 billion in acquisitions, $0.5 billion in additional Wilmar investment, $0.4 billion in dividends, and $0.5 billion in share repurchases. The Company has a stock repurchase program and has acquired approximately 13.5 million shares for the six months ended June 30, 2016. The Company has 43.2 million shares remaining that may be purchased under the program until December 31, 2019.

The Company expects capital expenditures of $1.0 billion during 2016. In 2016, the Company expects aggregate cash outlays of approximately $0.7 billion in dividends and $1.0 billion to $1.5 billion in share repurchases, subject to strategic capital requirements.



47


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Contractual Obligations and Commercial Commitments

The Company’s purchase obligations as of June 30, 2016 and December 31, 2015 were $13.7 billion and $9.7 billion, respectively.  The increase is related to obligations to purchase higher quantities of agricultural commodity inventories and higher prices. As of June 30, 2016, the Company expects to make payments related to purchase obligations of $12.9 billion within the next twelve months. There were no other material changes in the Company’s contractual obligations during the quarter ended June 30, 2016.

Off Balance Sheet Arrangements

In June 2016, the Company amended its accounts receivable securitization program (the “Program”) with certain commercial paper conduit purchasers and committed purchasers (collectively, the “Purchasers”) and decreased its facility from $1.3 billion to $1.2 billion. The Program terminates on June 23, 2017 unless extended (see Note 16 of “Notes to Consolidated Financial Statements” included in Item 1 herein, “Financial Statements” for more information and disclosures on the Program).

There were no material changes in the Company’s off balance sheet arrangements during the quarter ended June 30, 2016.

Critical Accounting Policies

There were no material changes in the Company’s critical accounting policies during the quarter ended June 30, 2016.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The market risk inherent in the Company’s market risk sensitive instruments and positions is the potential loss arising from adverse changes in: commodity market prices as they relate to the Company’s net commodity position, foreign currency exchange rates, and interest rates.  Significant changes in market risk sensitive instruments and positions for the quarter ended June 30, 2016 are described below.  There were no material changes during the period in the Company’s potential loss arising from changes in foreign currency exchange rates and interest rates.

For detailed information regarding the Company’s market risk sensitive instruments and positions, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Commodities

The availability and prices of agricultural commodities are subject to wide fluctuations due to factors such as changes in weather conditions, crop disease, plantings, government programs and policies, competition, changes in global demand, changes in customer preferences and standards of living, and global production of similar and competitive crops.

The fair value of the Company’s commodity position is a summation of the fair values calculated for each commodity by valuing all significant commodity risk positions at quoted market prices for the period, where available, or utilizing a close proxy. The Company has established metrics to monitor the amount of market risk exposure, which consist of volumetric limits and value-at-risk (VaR) limits. VaR measures the potential loss, at a 95% confidence level, that could be incurred over a one-year period. Volumetric limits are monitored daily and VaR calculations and sensitivity analysis are monitored weekly.

In addition to measuring the hypothetical loss resulting from an adverse two standard deviation move in market prices (assuming no correlations) over a one-year period using VaR, sensitivity analysis is performed measuring the potential loss in fair value resulting from a hypothetical 10% adverse change in market prices. The highest, lowest, and average weekly position together with the market risk from a hypothetical 10% adverse price change is as follows:


48



ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)


 
 
Six months ended
 
Year ended
 
 
June 30, 2016
 
December 31, 2015
Long/(Short)
 
Fair Value
 
Market Risk
 
Fair Value
 
Market Risk
 
 
(In millions)
Highest position
 
$
876

 
$
88

 
$
(49
)
 
$
(5
)
Lowest position
 
(529
)
 
(53
)
 
(1,851
)
 
(185
)
Average position
 
(74
)
 
(7
)
 
(715
)
 
(72
)

The change in fair value of the average position was principally the result of an increase in average quantities underlying the weekly commodity position.

ITEM 4.
CONTROLS AND PROCEDURES

As of June 30, 2016, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (b) accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure. There was no change in the Company’s internal controls over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.



49



PART II – OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

The Company is routinely involved in a number of actual or threatened legal actions, including those involving alleged personal injuries, employment law, product liability, intellectual property, environmental issues, alleged tax liability (see Note 11 of “Notes to Consolidated Financial Statements” included in Item 1 herein, “Financial Statements” for information on income tax matters), and class actions. The Company also routinely receives inquiries from regulators and other government authorities relating to various aspects of our business, and at any given time, the Company has matters at various stages of resolution with the applicable government authorities. The outcomes of these matters are not within our complete control and may not be known for prolonged periods of time. In some actions, claimants seek damages, as well as other relief, including injunctive relief, that could require significant expenditures or result in lost revenues. In accordance with applicable accounting standards, the Company records a liability in its consolidated financial statements for material loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a material loss contingency is reasonably possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed in the notes to the consolidated financial statements. When determining the estimated loss or range of loss, significant judgment is required to estimate the amount and timing of a loss to be recorded. Estimates of probable losses resulting from litigation and governmental proceedings involving the Company are inherently difficult to predict, particularly when the matters are in early procedural stages, with incomplete facts or legal discovery; involve unsubstantiated or indeterminate claims for damages; potentially involve penalties, fines, disgorgement, or punitive damages; or could result in a change in business practice.

Beginning in 2011, approximately 45 farmers in the U.S. have brought suit in a Missouri state court against the Company and one of its employees to recover alleged losses from a Ponzi scheme orchestrated by a third-party grain handler, Cathy Gieseker, who was convicted in 2010 of felony fraud charges and is currently serving time in federal prison. The plaintiffs allege that the Company knew or should have known of Ms. Gieseker’s Ponzi scheme but did not stop it, that Ms. Gieseker was effectively acting as the Company’s agent, and that the Company defrauded or otherwise wronged the farmers. These farmers are seeking to recover approximately $75 million in alleged economic losses, an unspecified amount for alleged mental pain and suffering, and an unspecified amount of punitive damages. Attorneys for the farmers have informed the Company that more than 100 additional farmers may attempt to bring suit in the future. The Company denies liability and is vigorously defending itself in these cases. These actions are currently in pretrial proceedings. At this time, the Company is unable to predict the final outcome of this matter with any reasonable degree of certainty, but believe it will not have a material adverse effect on its financial condition, results of operations, or cash flows.
The Company is a party to numerous lawsuits pending in various U.S. state and federal courts arising out of Syngenta Corporation’s (Syngenta) marketing and distribution of genetically modified corn products, Agrisure Viptera and Agrisure Duracade, in the U.S. First, the Company brought a state court action in Louisiana against Syngenta in 2014, alleging that Syngenta was negligent in commercializing its products before the products were approved in China. Second, the Company is a putative class member in a number of purported class actions filed beginning in 2013 by farmers and other parties against Syngenta in federal courts and consolidated for pretrial proceedings in a multidistrict litigation (MDL) proceeding in federal court in Kansas City, Kansas, again alleging that Syngenta was negligent in commercializing its products. In the fourth quarter of 2015, Syngenta filed third-party claims against the Company and other grain companies seeking contribution in the event that Syngenta is held liable in these lawsuits; the courts dismissed these third-party claims on April 4, 2016, and the Company is therefore no longer a third-party defendant in the MDL. Third, the Company and other grain companies have been named as a defendant in numerous individual and purported class action suits filed by farmers and other parties in state and federal court beginning in the fourth quarter of 2015, alleging that the Company and other grain companies were negligent in failing to screen for genetically modified corn. The Company denies liability in all of the actions in which it has been named as a third-party defendant or defendant and is vigorously defending itself in these cases. All of these actions are in pretrial proceedings. At this time, the Company is unable to predict the final outcome of this matter with any reasonable degree of certainty, but believe it will not have a material adverse effect on its financial condition, results of operations, or cash flows.

The Company is not currently a party to any legal proceeding or environmental claim that it believes would have a material adverse effect on its financial position, results of operations, or liquidity.

ITEM 1A.
RISK FACTORS

There were no significant changes in the Company’s risk factors during the quarter ended June 30, 2016. For further information about the Company’s risk factors, refer to Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

50



ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

Period
 
Total Number of Shares Purchased (1)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of a Publicly Announced Program (2)
 
Number of Shares Remaining that May be Purchased Under the Program (2)
April 1, 2016 to
 
 
 
 
 
 
 
 
April 30, 2016
 
39,544

 
$
36.602

 
270

 
47,884,823

 
 
 
 
 
 
 
 
 
May 1, 2016 to
 
 

 
 

 
 

 
 

May 31, 2016
 
2,048,206

 
38.483

 
2,048,206

 
45,836,617

 
 
 
 
 
 
 
 
 
June 1, 2016 to
 
 

 
 

 
 

 
 

June 30, 2016
 
2,657,547

 
42.492

 
2,657,547

 
43,179,070

Total
 
4,745,297

 
$
40.712

 
4,706,023

 
43,179,070


(1)
Total shares purchased represents those shares purchased in the open market as part of the Company’s publicly announced share repurchase program described below, shares received as payment for the exercise price of stock option exercises, and shares received as payment for the withholding taxes on vested restricted stock awards. During the three-month period ended June 30, 2016, there were 39,274 shares received as payments for the minimum withholding taxes on vested restricted stock awards. During the three-month period ended June 30, 2016, there were no shares received for the exercise price of stock option exercises.

(2)
On November 5, 2014, the Company’s Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to 100,000,000 shares of the Company’s common stock during the period commencing January 1, 2015 and ending December 31, 2019.
 

51



ITEM 6.
EXHIBITS
(3)(i)
 
Composite Certificate of Incorporation, as amended, filed on November 13, 2001 as Exhibit 3(i) to Form 10-Q for the quarter ended September 30, 2001 (File No. 1-44), is incorporated herein by reference.
 
 
 
(3)(ii)
 
Bylaws, as amended, filed on February 11, 2013 as Exhibit 3(ii) to Form 8-K (File No. 1-44), are incorporated herein by reference.
 
 
 
(12)
 
Calculation of Ratio of Earnings to Fixed Charges
 
 
 
(31.1)
 
Certification of Chief Executive Officer pursuant to Rule 13a–14(a) and Rule 15d–14(a) of the Securities Exchange Act, as amended.
 
 
 
(31.2)
 
Certification of Chief Financial Officer pursuant to Rule 13a–14(a) and Rule 15d–14(a) of the Securities Exchange Act, as amended.
 
 
 
(32.1)
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
(32.2)
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
(101)
 
Interactive Data File


52



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
ARCHER-DANIELS-MIDLAND COMPANY
 
 
 
 
 
 
 
/s/ R. G. Young
 
R. G. Young
 
Executive Vice President and Chief Financial Officer
 
 
 
 
 
 
 
/s/ D. C. Findlay
 
D. C. Findlay
 
Senior Vice President, General Counsel, and Secretary

Dated: August 2, 2016

53