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
nine
months ended
September 30, 2018
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2018
. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The Company consolidates all entities, including variable interest entities (VIEs), in which it has a controlling financial interest. For VIEs, the Company assesses whether it is the primary beneficiary as defined under the applicable accounting standard. Investments in affiliates, including VIEs through which the Company exercises significant influence but does not control the investee and is not the primary beneficiary of the investee’s activities, are carried at cost plus equity in undistributed earnings since acquisition and are adjusted, where appropriate, for basis differences between the investment balance and the underlying net assets of the investee. The Company’s portion of the results of certain affiliates and results of certain VIEs are included using the most recent available financial statements. In each case, the financial statements are within 93 days of the Company’s year end and are consistent from period to period.
Reclassifications
The Company classified
$5.4 billion
of cash inflows from net consideration received for beneficial interest obtained for selling trade receivables as investing instead of operating activities for the
nine
months ended
September 30, 2018
in accordance with the adoption of Accounting Standards Codification (ASC) Topic 230,
Statement of Cash Flows
(see Note 2 for more information). Prior period amounts have been conformed to the current presentation, which resulted in a decrease of
$5.4 billion
in total cash provided by operating activities and a corresponding increase in cash provided by investing activities for the
nine
months ended
September 30, 2017
.
The Company classified
$1 million
of income and
$4 million
of other components of net benefit cost as other (income) expense - net in its consolidated statement of earnings for the quarter and
nine
months ended
September 30, 2018
, respectively, as a result of the adoption of the amended guidance of ASC Topic 715,
Compensation - Retirement Benefits
(see Note 2 for more information). Amounts previously reported with the service cost component of net benefit cost in cost of goods sold of
$9 million
and selling, general, and administrative expenses of
$11 million
for the
nine
months ended
September 30, 2017
have been reclassified to other (income) expense - net to conform to the current presentation. There were
no
amounts reported with the service cost component of net benefit cost in cost of goods sold and selling, general, and administrative expenses for the quarter ended
September 30, 2017
.
Effective January 1, 2018, the Company changed its segment reporting to reflect changes in its operating structure: Origination (formerly Agricultural Services), Oilseeds (formerly Oilseeds Processing), Carbohydrate Solutions (formerly Corn Processing) and Nutrition (formerly Wild Flavors and Specialty Ingredients). The European origination business previously reported in Oilseeds is now managed by leaders in Origination to better coordinate continental trading activities. Carbohydrate Solutions now includes the results of ADM Milling which were previously reported in Origination. In addition, the Company also moved the segment reporting of its renewable chemicals business from Carbohydrate Solutions to Oilseeds effective July 1, 2018. Nutrition now includes the results of Animal Nutrition and certain product lines previously reported in Carbohydrate Solutions, as well as certain product lines previously reported in Oilseeds.
Throughout this quarterly report on Form 10-Q, prior period results have been reclassified to conform to the current period presentation.
A
rcher-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 1.
|
Basis of Presentation (Continued)
|
Segregated Cash and Investments
The Company segregates certain cash, cash equivalents, and investment balances in accordance with regulatory requirements, commodity exchange requirements, and insurance arrangements. These balances represent deposits received from customers of the Company’s registered futures commission merchant and commodity brokerage services, cash margins and securities pledged to commodity exchange clearinghouses, and cash pledged as security under certain insurance arrangements. Segregated cash and investments also include restricted cash collateral for the various insurance programs of the Company’s captive insurance business. To the degree these segregated balances are comprised of cash and cash equivalents, they are considered restricted cash and cash equivalents on the statement of cash flows.
Last-in, First-out (LIFO) Inventories
Interim period LIFO calculations are based on interim period costs and management’s estimates of year-end inventory levels. Because the availability and price of agricultural commodity-based LIFO inventories are unpredictable due to factors such as weather, government farm programs and policies, and changes in global demand, quantities of LIFO-based inventories at interim periods may vary significantly from management’s estimates of year-end inventory levels.
|
|
Note 2.
|
New Accounting Standards
|
Effective January 1, 2018, the Company adopted the amended guidance of ASC Subtopic 825-10,
Financial Instruments - Overall
, which is intended to improve the recognition and measurement of financial instruments. The amended guidance requires an entity to measure equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, at fair value with changes in fair value recognized in net income. The amended guidance also simplifies the impairment assessment of equity investments without readily determinable fair values by using a qualitative assessment to identify impairment. The adoption of this amended guidance did not have a significant impact on the Company’s financial results.
Effective January 1, 2018, the Company adopted the new guidance of ASC Topic 606,
Revenue from Contracts with Customers
(Topic 606), for all contracts that had not been completed as of the adoption date (the modified retrospective approach). Topic 606 requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. Many of the Company’s forward commodity sales contracts are considered physically settled derivatives under ASC Topic 815,
Derivatives and Hedging
(Topic 815), and are therefore excluded from the scope of Topic 606. Comparative balance sheet and statement of earnings information has not been restated and continues to be reported under the guidance of ASC 605,
Revenue Recognition
(Topic 605), that was in effect as of December 31, 2017 and in the three and
nine months ended September 30, 2018
. The cumulative effect of initially applying the guidance as an adjustment to the opening reinvested earnings balance at January 1, 2018 was
less than
$1 million
. For more information about the adoption of Topic 606, see Note 4.
Effective January 1, 2018, the Company adopted the amended guidance of ASC 230,
Statement of Cash Flows
(Topic 230), which provides guidance on the application of the predominance principle and the presentation and classification of specific cash flow issues including a requirement to classify consideration received for beneficial interest obtained for selling trade receivables as investing instead of operating activities. The adoption of the amended guidance on the Company’s accounts receivable securitization programs resulted in expanded disclosures and a reclassification of cash inflows from operating activities to investing activities (see Note 1 for reclassification amounts). The adoption of amendments related to the other cash flow items did not have a significant impact on the Company's consolidated statements of cash flows.
Effective January 1, 2018, the Company adopted the amended guidance of ASC Topic 715,
Compensation - Retirement Benefits
, which requires that an employer report the service cost component in the same line or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The adoption of this amended guidance requires expanded disclosures and the reclassification of the other components of net benefit cost from cost of products sold and selling, general, and administrative expenses to other (income) expense - net in the Company’s consolidated statements of earnings but did not impact financial results (see Note 1 for reclassification amounts).
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 3.
|
Pending Accounting Standards
|
Effective January 1, 2019, the Company will be required to adopt the new guidance of ASC Topic 842,
Leases
(Topic 842), which will supersede ASC Topic 840,
Leases
. Topic 842 requires lessees to recognize assets and liabilities for all leases. The Company expects to adopt Topic 842 using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The adoption of this new guidance will require expanded disclosures in the Company’s consolidated financial statements. The Company has established a cross-functional implementation team consisting of representatives from accounting, legal, procurement, and operations. The Company utilized surveys to centrally gather more information about its existing leases and lease processes and to gather lease contracts. To ensure completeness of the population of lease contracts, the results of the survey will be cross-referenced against other available lease information (i.e., year-end disclosures and lease expense). The Company is also working with a vendor to implement a lease accounting system which will assist in delivering the required accounting changes and disclosures. As of September 30, 2018, the Company has completed the configuration of the lease accounting system and started testing activities. The final phase of the implementation plan will include testing and dry-run activities, updating the system with additional lease data since the initial upload, and system reconfiguration as needed. The impact of the new standard will result in a significant increase to right of use assets and lease liabilities on the Company’s consolidated balance sheet, primarily as a result of operating leases currently not recognized on the balance sheet. The Company expects to complete its assessment of the impact of the new guidance on its financial results during the final phase of the implementation, which is expected to be completed in early 2019.
Effective January 1, 2019, the Company will be required to adopt the amended guidance of ASC Topic 220,
Income Statement - Reporting Comprehensive Income
(Topic 220), which allows a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Act”), eliminating the stranded tax effects resulting from the Act and improving the usefulness of information reported to financial statement users. In addition, the Company will be required to disclose (1) a description of its accounting policy for releasing income tax effects from accumulated other comprehensive income; (2) whether it elects to reclassify the stranded income tax effects from the Act; and (3) information about other income tax effects related to the application of the Act that are reclassified from AOCI to retained earnings, if any. Early adoption is permitted in any interim period for which financial statements have not been issued. The Company expects to make a decision whether it will elect to reclassify the stranded tax effects resulting from the Act by the end of 2018.
Effective January 1, 2020, the Company will be required to adopt the amended guidance of ASC Topic 326,
Financial Instruments - Credit Losses
, which is intended to improve financial reporting by requiring more timely recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The amended guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Early adoption is 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.
Effective January 1, 2020, the Company will be required to adopt the amended guidance of ASC Topic 820,
Fair Value Measurement
, which modifies the disclosure requirements on fair value measurements. Early adoption is permitted. The adoption of this amended guidance will not impact the Company’s financial results.
Effective December 31, 2021, the Company will be required to adopt the amended guidance of ASC Subtopic 715-20,
Compensation - Retirement Benefits - Defined Benefit Plans - General
, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Early adoption is permitted. The adoption of this amended guidance will not impact the Company’s financial results.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Revenue Recognition
The Company principally generates revenue from merchandising and transporting agricultural commodities and manufactured products used as ingredients in food, feed, energy, and industrial products. Revenue is measured based on the consideration specified in the contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company follows a policy of recognizing revenue at a single point in time when it satisfies its performance obligation by transferring control over a product or service to a customer. For transportation service contracts, the Company recognizes revenue over time as the barge, ocean-going vessel, truck, rail, or container freight moves towards its destination in accordance with the transfer of control guidance of Topic 606. For physically settled derivative sales contracts that are outside the scope of Topic 606, the Company recognizes revenue when control of the inventory is transferred within the meaning of Topic 606 as required by ASC 610-20,
Gains and Losses from the Derecognition of Nonfinancial Assets
(Topic 610-20).
Shipping and Handling Costs
Shipping and handling costs related to contracts with customers for sale of goods are accounted for as a fulfillment activity and are included in cost of products sold. Accordingly, amounts billed to customers for such costs are included as a component of revenues.
Taxes Collected from Customers and Remitted to Governmental Authorities
The Company does not include taxes assessed by governmental authorities that are (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers, in the measurement of transactions prices or as a component of revenues and cost of products sold.
Transaction Price Allocated to Remaining Performance Obligations
The Company generally recognizes revenue at a point in time with the exception of revenue from transportation services which is recognized over time. The majority of the Company’s contracts with customers have one performance obligation and a contract duration of one year or less. The Company applies the practical expedient in paragraph 10-50-14 of Topic 606 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 4.
|
Revenues (Continued)
|
Disaggregation of Revenues
The following table presents revenue disaggregated by timing of recognition and major product lines for the
three months ended September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Topic 606 Revenue
|
Topic 815
(1)
|
Total
|
|
Point in Time
|
Over Time
|
Total
|
Revenue
|
Revenues
|
|
(In millions)
|
Origination
|
|
|
|
|
|
Merchandising and Handling
|
$
|
396
|
|
$
|
57
|
|
$
|
453
|
|
$
|
5,333
|
|
$
|
5,786
|
|
Transportation
|
—
|
|
64
|
|
64
|
|
—
|
|
64
|
|
Total Origination
|
396
|
|
121
|
|
517
|
|
5,333
|
|
5,850
|
|
Oilseeds
|
|
|
|
|
|
Crushing and Origination
|
330
|
|
—
|
|
330
|
|
4,109
|
|
4,439
|
|
Refining, Packaging, Biodiesel, and Other
|
593
|
|
—
|
|
593
|
|
1,378
|
|
1,971
|
|
Total Oilseeds
|
923
|
|
—
|
|
923
|
|
5,487
|
|
6,410
|
|
Carbohydrate Solutions
|
|
|
|
|
|
Starches and Sweeteners
|
1,261
|
|
—
|
|
1,261
|
|
445
|
|
1,706
|
|
Bioproducts
|
828
|
|
—
|
|
828
|
|
—
|
|
828
|
|
Total Carbohydrate Solutions
|
2,089
|
|
—
|
|
2,089
|
|
445
|
|
2,534
|
|
Nutrition
|
|
|
|
|
|
Wild Flavors and Specialty Ingredients
|
641
|
|
—
|
|
641
|
|
—
|
|
641
|
|
Animal Nutrition
|
281
|
|
—
|
|
281
|
|
—
|
|
281
|
|
Total Nutrition
|
922
|
|
—
|
|
922
|
|
—
|
|
922
|
|
|
|
|
|
|
|
Other
|
84
|
|
—
|
|
84
|
|
—
|
|
84
|
|
Total Revenues
|
$
|
4,414
|
|
$
|
121
|
|
$
|
4,535
|
|
$
|
11,265
|
|
$
|
15,800
|
|
(1)
Topic 815 revenue relates to the physical delivery or the settlement of the Company’s sales contracts that are accounted for as derivatives and are outside the scope of Topic 606.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 4.
|
Revenues (Continued)
|
The following table presents revenue disaggregated by timing of recognition and major product lines for the
nine months ended
September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Topic 606 Revenue
|
Topic 815
(1)
|
Total
|
|
Point in Time
|
Over Time
|
Total
|
Revenue
|
Revenues
|
|
(In millions)
|
Origination
|
|
|
|
|
|
Merchandising and Handling
|
$
|
1,542
|
|
$
|
179
|
|
$
|
1,721
|
|
$
|
16,768
|
|
$
|
18,489
|
|
Transportation
|
—
|
|
182
|
|
182
|
|
—
|
|
182
|
|
Total Origination
|
1,542
|
|
361
|
|
1,903
|
|
16,768
|
|
18,671
|
|
Oilseeds
|
|
|
|
|
|
Crushing and Origination
|
647
|
|
—
|
|
647
|
|
12,225
|
|
12,872
|
|
Refining, Packaging, Biodiesel, and Other
|
1,787
|
|
—
|
|
1,787
|
|
4,101
|
|
5,888
|
|
Total Oilseeds
|
2,434
|
|
—
|
|
2,434
|
|
16,326
|
|
18,760
|
|
Carbohydrate Solutions
|
|
|
|
|
|
Starches and Sweeteners
|
3,699
|
|
—
|
|
3,699
|
|
1,349
|
|
5,048
|
|
Bioproducts
|
2,734
|
|
—
|
|
2,734
|
|
—
|
|
2,734
|
|
Total Carbohydrate Solutions
|
6,433
|
|
—
|
|
6,433
|
|
1,349
|
|
7,782
|
|
Nutrition
|
|
|
|
|
|
Wild Flavors and Specialty Ingredients
|
1,970
|
|
—
|
|
1,970
|
|
—
|
|
1,970
|
|
Animal Nutrition
|
920
|
|
—
|
|
920
|
|
—
|
|
920
|
|
Total Nutrition
|
2,890
|
|
—
|
|
2,890
|
|
—
|
|
2,890
|
|
|
|
|
|
|
|
Other
|
291
|
|
—
|
|
291
|
|
—
|
|
291
|
|
Total Revenues
|
$
|
13,590
|
|
$
|
361
|
|
$
|
13,951
|
|
$
|
34,443
|
|
$
|
48,394
|
|
(1)
Topic 815 revenue relates to the physical delivery or the settlement of the Company’s sales contracts that are accounted for as derivatives and are outside the scope of Topic 606.
Origination
The Origination segment generates revenue from the sale of commodities and from service fees for the transportation of goods. Revenue is measured based on the consideration specified in the contract and excludes any sales incentives and amounts collected on behalf of third parties. Revenue is recognized when a performance obligation is satisfied by transferring control over a product or providing service to a customer. For transportation service contracts in Transportation, the Company recognizes revenue over time as the barge, ocean-going vessel, truck, rail, or container freight moves towards its destination in accordance with the transfer of control guidance of Topic 606. For physically settled derivative sales contracts that are outside the scope of Topic 606, the Company recognizes revenue when control of the inventory is transferred within the meaning of Topic 606 as required by Topic 610-20.
Oilseeds
The Oilseeds segment generates revenue primarily from the sale of products manufactured in its global processing facilities. The segment also generates revenue from the sale of raw commodities in its South American grain origination business and from the sale of peanuts, tree nuts, and peanut-derived ingredients. Revenue is recognized when a performance obligation is satisfied by transferring control over a product. The amount of revenue recognized follows the contractually specified price which may include freight or other contractually specified cost components. For physically settled derivative sales contracts that are outside the scope of Topic 606, the Company recognizes revenue when control of the inventory is transferred within the meaning of Topic 606 as required by Topic 610-20.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 4.
|
Revenues (Continued)
|
Carbohydrate Solutions
The Carbohydrate Solutions segment generates revenue from the sale of products manufactured at the Company’s global corn and milling facilities around the world. Revenue is recognized when control over products is transferred to the customer. Products are shipped to the customers from the Company’s various facilities and from its network of storage terminals. The amount of revenue recognized is based on the consideration specified in the contract which could include freight and other costs depending on the specific shipping terms of each contract. For physically settled derivative sales contracts that are outside the scope of Topic 606, the Company recognizes revenue when control of the inventory is transferred within the meaning of Topic 606 as required by Topic 610-20.
Nutrition
The Nutrition segment sells specialty products including natural flavor ingredients, flavor systems, natural colors, animal nutrition products, other specialty food and feed ingredients. Revenue is recognized when control over products is transferred to the customer. The amount of revenue recognized follows the contracted price or the mutually agreed price of the product. Freight and shipping are recognized as a component of revenue at the same time control transfers to the customer.
Other
Other includes the Company’s futures commission business whose primary sources of revenue are commissions and brokerage income generated from executing orders and clearing futures contracts and options on futures contracts on behalf of its customers. Commissions and brokerage revenue are recognized on the date the transaction is executed. Other also includes the Company’s captive insurance business which generates third party revenue through its proportionate share of premiums from third-party reinsurance pools. Reinsurance premiums are recognized on a straight-line basis over the period underlying the policy.
Contract Liabilities
Contract liabilities relate to advance payments from customers for goods and services that the Company has yet to provide. Contract liabilities of
$106 million
and
$185 million
as of
September 30, 2018
and January 1, 2018, respectively, were recorded in accrued expenses and other payables in the consolidated balance sheet. Contract liabilities recognized as revenues for the
three and nine
months ended
September 30, 2018
were
$36 million
and
$286 million
, respectively.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 4.
|
Revenues (Continued)
|
Impacts on Financial Statements
The following tables summarize the impacts of Topic 606 adoption on the various lines of the Company’s consolidated financial statements.
Consolidated Balance Sheets (excerpt)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2018
|
|
September 30, 2018
|
|
After Adoption
|
|
As
|
Under
|
Effect of
|
|
of Topic 606
|
|
Reported
|
Topic 605
|
Change
|
|
(In millions)
|
Assets
|
|
|
|
|
|
Trade receivables
|
$
|
2,343
|
|
|
$
|
1,934
|
|
$
|
1,675
|
|
$
|
259
|
|
Inventories
|
8,770
|
|
|
8,483
|
|
8,760
|
|
(277
|
)
|
Other current assets
|
3,175
|
|
|
3,707
|
|
3,713
|
|
(6
|
)
|
Total Current Assets
|
19,918
|
|
|
19,465
|
|
19,489
|
|
(24
|
)
|
Total Assets
|
$
|
39,956
|
|
|
$
|
39,664
|
|
$
|
39,688
|
|
$
|
(24
|
)
|
Liabilities, Temporary Equity, and Shareholders’ Equity
|
|
|
|
|
|
Accrued expenses and other payables
|
$
|
2,826
|
|
|
$
|
2,925
|
|
$
|
2,947
|
|
$
|
(22
|
)
|
Total Current Liabilities
|
12,563
|
|
|
11,648
|
|
11,670
|
|
(22
|
)
|
Reinvested earnings
|
17,552
|
|
|
18,478
|
|
18,480
|
|
(2
|
)
|
Total Shareholders’ Equity
|
18,322
|
|
|
19,000
|
|
19,002
|
|
(2
|
)
|
Total Liabilities, Temporary Equity, and Shareholders’ Equity
|
$
|
39,956
|
|
|
$
|
39,664
|
|
$
|
39,688
|
|
$
|
(24
|
)
|
Consolidated Statements of Earnings (excerpt)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
September 30, 2018
|
September 30, 2018
|
|
As
|
Under
|
Effect of
|
As
|
Under
|
Effect of
|
|
Reported
|
Topic 605
|
Change
|
Reported
|
Topic 605
|
Change
|
|
(In millions)
|
Revenues
|
$
|
15,800
|
|
$
|
15,785
|
|
$
|
15
|
|
$
|
48,394
|
|
$
|
48,518
|
|
$
|
(124
|
)
|
Cost of products sold
|
14,742
|
|
14,729
|
|
13
|
|
45,266
|
|
45,388
|
|
(122
|
)
|
Gross profit
|
1,058
|
|
1,056
|
|
2
|
|
3,128
|
|
3,130
|
|
(2
|
)
|
Earnings before income taxes
|
632
|
|
630
|
|
2
|
|
1,748
|
|
1,750
|
|
(2
|
)
|
Income taxes
|
96
|
|
95
|
|
1
|
|
250
|
|
250
|
|
—
|
|
Net earnings including noncontrolling interests
|
536
|
|
535
|
|
1
|
|
1,498
|
|
1,500
|
|
(2
|
)
|
Net earnings attributable to controlling interests
|
536
|
|
535
|
|
1
|
|
1,495
|
|
1,497
|
|
(2
|
)
|
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
During the
nine
months ended
September 30, 2018
, the Company acquired Probiotics International Limited (also known as Protexin) and Rodelle Inc. for an aggregate consideration of
$366 million
in cash. The aggregate consideration of these acquisitions, net of
$42 million
in cash acquired, was allocated as follows:
|
|
|
|
|
|
(In millions)
|
Working capital
|
$
|
(7
|
)
|
Property, plant, and equipment
|
39
|
|
Goodwill
|
165
|
|
Other intangible assets
|
137
|
|
Long-term liabilities
|
(1
|
)
|
Noncontrolling interest
|
(9
|
)
|
Aggregate cash consideration, net of cash acquired
|
$
|
324
|
|
Goodwill allocated in connection with the acquisitions is primarily attributable to synergies expected to arise after the Company’s acquisition of the businesses.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 6.
|
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
September 30, 2018
and
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2018
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Inventories carried at market
|
$
|
—
|
|
|
$
|
2,932
|
|
|
$
|
1,799
|
|
|
$
|
4,731
|
|
Unrealized derivative gains:
|
|
|
|
|
|
|
|
Commodity contracts
|
—
|
|
|
461
|
|
|
217
|
|
|
678
|
|
Foreign currency contracts
|
—
|
|
|
272
|
|
|
—
|
|
|
272
|
|
Cash equivalents
|
492
|
|
|
—
|
|
|
—
|
|
|
492
|
|
Marketable securities
|
25
|
|
|
1
|
|
|
—
|
|
|
26
|
|
Segregated investments
|
1,193
|
|
|
—
|
|
|
—
|
|
|
1,193
|
|
Deferred receivables consideration
|
—
|
|
|
475
|
|
|
—
|
|
|
475
|
|
Total Assets
|
$
|
1,710
|
|
|
$
|
4,141
|
|
|
$
|
2,016
|
|
|
$
|
7,867
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Unrealized derivative losses:
|
|
|
|
|
|
|
|
Commodity contracts
|
$
|
—
|
|
|
$
|
619
|
|
|
$
|
203
|
|
|
$
|
822
|
|
Foreign currency contracts
|
—
|
|
|
338
|
|
|
—
|
|
|
338
|
|
Interest rate contracts
|
—
|
|
|
13
|
|
|
—
|
|
|
13
|
|
Inventory-related payables
|
—
|
|
|
657
|
|
|
44
|
|
|
701
|
|
Total Liabilities
|
$
|
—
|
|
|
$
|
1,627
|
|
|
$
|
247
|
|
|
$
|
1,874
|
|
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 6.
|
Fair Value Measurements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2017
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Inventories carried at market
|
$
|
—
|
|
|
$
|
3,400
|
|
|
$
|
1,486
|
|
|
$
|
4,886
|
|
Unrealized derivative gains:
|
|
|
|
|
|
|
|
Commodity contracts
|
—
|
|
|
275
|
|
|
111
|
|
|
386
|
|
Foreign currency contracts
|
—
|
|
|
63
|
|
|
—
|
|
|
63
|
|
Cash equivalents
|
352
|
|
|
—
|
|
|
—
|
|
|
352
|
|
Marketable securities
|
91
|
|
|
1
|
|
|
—
|
|
|
92
|
|
Segregated investments
|
1,733
|
|
|
—
|
|
|
—
|
|
|
1,733
|
|
Deferred receivables consideration
|
—
|
|
|
307
|
|
|
—
|
|
|
307
|
|
Total Assets
|
$
|
2,176
|
|
|
$
|
4,046
|
|
|
$
|
1,597
|
|
|
$
|
7,819
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Unrealized derivative losses:
|
|
|
|
|
|
|
|
Commodity contracts
|
$
|
—
|
|
|
$
|
268
|
|
|
$
|
103
|
|
|
$
|
371
|
|
Foreign currency contracts
|
—
|
|
|
92
|
|
|
—
|
|
|
92
|
|
Interest rate contracts
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Inventory-related payables
|
—
|
|
|
680
|
|
|
39
|
|
|
719
|
|
Total Liabilities
|
$
|
—
|
|
|
$
|
1,041
|
|
|
$
|
142
|
|
|
$
|
1,183
|
|
Estimated fair values for inventories carried at market are based on exchange-quoted prices adjusted for differences in local markets, broker or dealer quotations or market transactions in either listed or over-the-counter (OTC) markets. Market valuations for the Company’s inventories are adjusted for location and quality because the exchange-quoted prices represent contracts that have standardized terms for commodity, quantity, future delivery period, delivery location, and commodity quality or grade. When unobservable inputs have a significant impact on the measurement of fair value, the inventory is classified in Level 3. Changes in the fair value of inventories are recognized in the consolidated statements of earnings as a component of cost of products sold.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 6.
|
Fair Value Measurements (Continued)
|
Derivative contracts include exchange-traded commodity futures and options contracts, forward commodity purchase and sale contracts, and OTC instruments related primarily to agricultural commodities, energy, interest rates, and foreign currencies. Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified in Level 1. The majority of the Company’s exchange-traded futures and options contracts are cash-settled on a daily basis and, therefore, are not included in these tables. Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets. These differences are generally determined using inputs from broker or dealer quotations or market transactions in either the listed or OTC markets. When observable inputs are available for substantially the full term of the contract, it is classified in Level 2. When unobservable inputs have a significant impact (more than 10%) on the measurement of fair value, the contract is classified in Level 3. Except for certain derivatives designated as cash flow hedges, changes in the fair value of commodity-related derivatives are recognized in the consolidated statements of earnings as a component of cost of products sold. Changes in the fair value of foreign currency-related derivatives are recognized in the consolidated statements of earnings as a component of revenues, cost of products sold, or other (income) expense - net depending upon the purpose of the contract. The changes in the fair value of derivatives designated as cash flow hedges are recognized in the consolidated balance sheets as a component of accumulated other comprehensive income (loss) (AOCI) until the hedged items are recorded in earnings or it is probable the hedged transaction will no longer occur.
The Company’s cash equivalents are comprised of money market funds valued using quoted market prices and are classified as Level 1.
The Company’s marketable securities are comprised of U.S. Treasury securities and corporate debt securities. U.S. Treasury securities are valued using quoted market prices and are classified in Level 1. Corporate debt securities are valued using third-party pricing services and substantially all are classified in Level 2. Unrealized changes in the fair value of available-for-sale marketable debt securities are recognized in the consolidated balance sheets as a component of AOCI unless a decline in value is deemed to be other-than-temporary at which point the decline is recorded in earnings.
The Company’s segregated investments are comprised of U.S. Treasury securities. U.S. Treasury securities are valued using quoted market prices and are classified in Level 1.
The Company has deferred consideration under its accounts receivable securitization programs (the “Programs”) which represents notes receivable from the purchasers under the Programs (see Note 16 for more information). This amount is reflected in other current assets on the consolidated balance sheet (see Note 8 for more information). The Company carries the deferred consideration at fair value determined by calculating the expected amount of cash to be received. The fair value is principally based on observable inputs (a Level 2 measurement) consisting mainly of the face amount of the receivables adjusted for anticipated credit losses and discounted at the appropriate market rate. Payment of deferred consideration is not subject to significant risks other than delinquencies and credit losses on accounts receivable transferred under the Programs, which have historically been insignificant.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 6.
|
Fair Value Measurements (Continued)
|
The following table presents a rollforward of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended
September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Asset Measurements at
|
|
September 30, 2018
|
|
Inventories
Carried at
Market
|
|
Commodity
Derivative
Contracts
Gains
|
|
Total
Assets
|
|
(In millions)
|
|
|
|
|
|
|
Balance, June 30, 2018
|
$
|
1,378
|
|
|
$
|
208
|
|
|
$
|
1,586
|
|
Total increase (decrease) in net realized/unrealized gains included in cost of products sold*
|
183
|
|
|
130
|
|
|
313
|
|
Purchases
|
3,518
|
|
|
—
|
|
|
3,518
|
|
Sales
|
(3,282
|
)
|
|
—
|
|
|
(3,282
|
)
|
Settlements
|
—
|
|
|
(150
|
)
|
|
(150
|
)
|
Transfers into Level 3
|
235
|
|
|
38
|
|
|
273
|
|
Transfers out of Level 3
|
(233
|
)
|
|
(9
|
)
|
|
(242
|
)
|
Ending balance, September 30, 2018
|
$
|
1,799
|
|
|
$
|
217
|
|
|
$
|
2,016
|
|
* Includes increase in unrealized gains of
$243 million
relating to Level 3 assets still held at
September 30, 2018
.
The following table presents a rollforward of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended
September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Liability Measurements at
|
|
September 30, 2018
|
|
Inventory-
related
Payables
|
|
Commodity
Derivative
Contracts
Losses
|
|
Total
Liabilities
|
|
(In millions)
|
|
|
|
|
|
|
Balance, June 30, 2018
|
$
|
22
|
|
|
$
|
200
|
|
|
$
|
222
|
|
Total increase (decrease) in net realized/unrealized losses included in cost of products sold*
|
4
|
|
|
114
|
|
|
118
|
|
Purchases
|
30
|
|
|
—
|
|
|
30
|
|
Sales
|
(12
|
)
|
|
—
|
|
|
(12
|
)
|
Settlements
|
—
|
|
|
(130
|
)
|
|
(130
|
)
|
Transfers into Level 3
|
—
|
|
|
30
|
|
|
30
|
|
Transfers out of Level 3
|
—
|
|
|
(11
|
)
|
|
(11
|
)
|
Ending balance, September 30, 2018
|
$
|
44
|
|
|
$
|
203
|
|
|
$
|
247
|
|
* Includes increase in unrealized losses of
$118 million
relating to Level 3 liabilities still held at
September 30, 2018
.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 6.
|
Fair Value Measurements (Continued)
|
The following table presents a rollforward of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended
September 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Asset Measurements at
|
|
September 30, 2017
|
|
Inventories
Carried at
Market
|
|
Commodity
Derivative
Contracts
Gains
|
|
Total
Assets
|
|
(In millions)
|
|
|
|
|
|
|
Balance, June 30, 2017
|
$
|
1,000
|
|
|
$
|
106
|
|
|
$
|
1,106
|
|
Total increase (decrease) in net realized/unrealized gains included in cost of products sold*
|
15
|
|
|
54
|
|
|
69
|
|
Purchases
|
2,792
|
|
|
—
|
|
|
2,792
|
|
Sales
|
(2,655
|
)
|
|
—
|
|
|
(2,655
|
)
|
Settlements
|
—
|
|
|
(82
|
)
|
|
(82
|
)
|
Transfers into Level 3
|
37
|
|
|
45
|
|
|
82
|
|
Transfers out of Level 3
|
(95
|
)
|
|
(3
|
)
|
|
(98
|
)
|
Ending balance, September 30, 2017
|
$
|
1,094
|
|
|
$
|
120
|
|
|
$
|
1,214
|
|
* Includes increase in unrealized gains of
$52 million
relating to Level 3 assets still held at
September 30, 2017
.
The following table presents a rollforward of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended
September 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Liability Measurements at
|
|
September 30, 2017
|
|
Inventory-
related
Payables
|
|
Commodity
Derivative
Contracts
Losses
|
|
Total
Liabilities
|
|
(In millions)
|
|
|
|
|
|
|
Balance, June 30, 2017
|
$
|
32
|
|
|
$
|
154
|
|
|
$
|
186
|
|
Total increase (decrease) in net realized/unrealized losses included in cost of products sold*
|
(9
|
)
|
|
82
|
|
|
73
|
|
Purchases
|
2
|
|
|
—
|
|
|
2
|
|
Sales
|
(5
|
)
|
|
—
|
|
|
(5
|
)
|
Settlements
|
—
|
|
|
(123
|
)
|
|
(123
|
)
|
Transfers into Level 3
|
—
|
|
|
35
|
|
|
35
|
|
Transfers out of Level 3
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
Ending balance, September 30, 2017
|
$
|
20
|
|
|
$
|
145
|
|
|
$
|
165
|
|
* Includes increase in unrealized losses of
$79 million
relating to Level 3 liabilities still held at
September 30, 2017
.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 6.
|
Fair Value Measurements (Continued)
|
The following table presents a rollforward of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the
nine months ended
September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Asset Measurements at
|
|
September 30, 2018
|
|
Inventories
Carried at
Market
|
|
Commodity
Derivative
Contracts
Gains
|
|
Total
Assets
|
|
(In millions)
|
|
|
|
|
|
|
Balance, December 31, 2017
|
$
|
1,486
|
|
|
$
|
111
|
|
|
$
|
1,597
|
|
Total increase (decrease) in net realized/unrealized gains included in cost of products sold*
|
559
|
|
|
302
|
|
|
861
|
|
Purchases
|
7,890
|
|
|
—
|
|
|
7,890
|
|
Sales
|
(8,264
|
)
|
|
—
|
|
|
(8,264
|
)
|
Settlements
|
—
|
|
|
(294
|
)
|
|
(294
|
)
|
Transfers into Level 3
|
235
|
|
|
123
|
|
|
358
|
|
Transfers out of Level 3
|
(107
|
)
|
|
(25
|
)
|
|
(132
|
)
|
Ending balance, September 30, 2018
|
$
|
1,799
|
|
|
$
|
217
|
|
|
$
|
2,016
|
|
* Includes increase in unrealized gains of
$523 million
relating to Level 3 assets still held at
September 30, 2018
.
The following table presents a rollforward of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the
nine months ended
September 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Liability Measurements at
|
|
September 30, 2018
|
|
Inventory-
related
Payables
|
|
Commodity
Derivative
Contracts
Losses
|
|
Total
Liabilities
|
|
(In millions)
|
|
|
|
|
|
|
Balance, December 31, 2017
|
$
|
39
|
|
|
$
|
103
|
|
|
$
|
142
|
|
Total increase (decrease) in net realized/unrealized losses included in cost of products sold*
|
12
|
|
|
360
|
|
|
372
|
|
Purchases
|
54
|
|
|
—
|
|
|
54
|
|
Sales
|
(61
|
)
|
|
—
|
|
|
(61
|
)
|
Settlements
|
—
|
|
|
(348
|
)
|
|
(348
|
)
|
Transfers into Level 3
|
—
|
|
|
136
|
|
|
136
|
|
Transfers out of Level 3
|
—
|
|
|
(48
|
)
|
|
(48
|
)
|
Ending balance, September 30, 2018
|
$
|
44
|
|
|
$
|
203
|
|
|
$
|
247
|
|
* Includes increase in unrealized losses of
$364 million
relating to Level 3 liabilities still held at
September 30, 2018
.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 6.
|
Fair Value Measurements (Continued)
|
The following table presents a rollforward of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the
nine months ended
September 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Asset Measurements at
|
|
September 30, 2017
|
|
Inventories
Carried at
Market
|
|
Commodity
Derivative
Contracts
Gains
|
|
Total
Assets
|
|
(In millions)
|
|
|
|
|
|
|
Balance, December 31, 2016
|
$
|
1,322
|
|
|
$
|
140
|
|
|
$
|
1,462
|
|
Total increase (decrease) in net realized/unrealized gains included in cost of products sold*
|
(55
|
)
|
|
194
|
|
|
139
|
|
Purchases
|
8,369
|
|
|
—
|
|
|
8,369
|
|
Sales
|
(8,526
|
)
|
|
—
|
|
|
(8,526
|
)
|
Settlements
|
—
|
|
|
(291
|
)
|
|
(291
|
)
|
Transfers into Level 3
|
37
|
|
|
111
|
|
|
148
|
|
Transfers out of Level 3
|
(53
|
)
|
|
(34
|
)
|
|
(87
|
)
|
Ending balance, September 30, 2017
|
$
|
1,094
|
|
|
$
|
120
|
|
|
$
|
1,214
|
|
* Includes increase in unrealized gains of
$18 million
relating to Level 3 assets still held at
September 30, 2017
.
The following table presents a rollforward of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the
nine months ended
September 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value Liability Measurements at
|
|
September 30, 2017
|
|
Inventory-
related
Payables
|
|
Commodity
Derivative
Contracts
Losses
|
|
Total
Liabilities
|
|
(In millions)
|
|
|
|
|
|
|
Balance, December 31, 2016
|
$
|
30
|
|
|
$
|
142
|
|
|
$
|
172
|
|
Total increase (decrease) in net realized/unrealized losses included in cost of products sold*
|
(4
|
)
|
|
201
|
|
|
197
|
|
Purchases
|
19
|
|
|
—
|
|
|
19
|
|
Sales
|
(25
|
)
|
|
—
|
|
|
(25
|
)
|
Settlements
|
—
|
|
|
(289
|
)
|
|
(289
|
)
|
Transfers into Level 3
|
—
|
|
|
108
|
|
|
108
|
|
Transfers out of Level 3
|
—
|
|
|
(17
|
)
|
|
(17
|
)
|
Ending balance, September 30, 2017
|
$
|
20
|
|
|
$
|
145
|
|
|
$
|
165
|
|
* Includes increase in unrealized losses of
$204 million
relating to Level 3 assets still held at
September 30, 2017
.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 6.
|
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
September 30, 2018
and
December 31, 2017
. The Company’s Level 3 measurements may include basis only, transportation cost only, or both price components. As an example, for Level 3 inventories with basis, the unobservable component as of
September 30, 2018
is a weighted average
24.1%
of the total price for assets and
45.3%
of the total price for liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average % of Total Price
|
|
September 30, 2018
|
|
December 31, 2017
|
Component Type
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
Inventories and Related Payables
|
|
|
|
|
|
|
|
Basis
|
24.1
|
%
|
|
45.3
|
%
|
|
12.8
|
%
|
|
99.9
|
%
|
Transportation cost
|
11.6
|
%
|
|
23.0
|
%
|
|
19.2
|
%
|
|
—
|
|
|
|
|
|
|
|
|
|
Commodity Derivative Contracts
|
|
|
|
|
|
|
|
Basis
|
21.6
|
%
|
|
23.6
|
%
|
|
24.2
|
%
|
|
23.0
|
%
|
Transportation cost
|
14.9
|
%
|
|
22.3
|
%
|
|
12.5
|
%
|
|
10.4
|
%
|
In certain of the Company’s principal markets, the Company relies on price quotes from third parties to value its inventories and physical commodity purchase and sale contracts. These price quotes are generally not further adjusted by the Company in determining the applicable market price. In some cases, availability of third-party quotes is limited to only one or two independent sources. In these situations, absent other corroborating evidence, the Company considers these price quotes as 100% unobservable and, therefore, the fair value of these items is reported in Level 3.
|
|
Note 7.
|
Derivative Instruments and Hedging Activities
|
Derivatives Not Designated as Hedging Instruments
The majority of the Company’s derivative instruments have not been designated as hedging instruments. The Company uses exchange-traded futures and exchange-traded and OTC options contracts to manage its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts to reduce price risk caused by market fluctuations in agricultural commodities and foreign currencies. The Company also uses exchange-traded futures and exchange-traded and OTC options contracts as components of merchandising strategies designed to enhance margins. The results of these strategies can be significantly impacted by factors such as the correlation between the value of exchange-traded commodities futures contracts and the value of the underlying commodities, counterparty contract defaults, and volatility of freight markets. Derivatives, including exchange-traded contracts and physical purchase or sale contracts, and inventories of certain merchandisable agricultural commodities, which include amounts acquired under deferred pricing contracts, are stated at market value. Inventory is not a derivative and therefore fair values of and changes in fair values of inventories are not included in the tables below.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 7.
|
Derivative Instruments and Hedging Activities (Continued)
|
The following table sets forth the fair value of derivatives not designated as hedging instruments as of
September 30, 2018
and
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Foreign Currency Contracts
|
$
|
272
|
|
|
$
|
338
|
|
|
$
|
63
|
|
|
$
|
92
|
|
Commodity Contracts
|
678
|
|
|
822
|
|
|
386
|
|
|
371
|
|
Total
|
$
|
950
|
|
|
$
|
1,160
|
|
|
$
|
449
|
|
|
$
|
463
|
|
The following table sets forth the pre-tax gains (losses) on derivatives not designated as hedging instruments that have been included in the consolidated statements of earnings for the
three and nine
months ended
September 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense (income) - net
|
|
|
|
|
|
Cost of products sold
|
|
|
|
(In millions)
|
Revenues
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
|
|
|
|
Consolidated Statement of Earnings
|
$
|
15,800
|
|
|
$
|
14,742
|
|
|
$
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
Pre-tax gains (losses) on:
|
|
|
|
|
|
|
|
Foreign Currency Contracts
|
$
|
(4
|
)
|
|
$
|
12
|
|
|
$
|
(30
|
)
|
|
|
Commodity Contracts
|
—
|
|
|
84
|
|
|
—
|
|
|
|
Total gain (loss) recognized in earnings
|
$
|
(4
|
)
|
|
$
|
96
|
|
|
$
|
(30
|
)
|
|
$
|
62
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
Consolidated Statement of Earnings
|
$
|
14,827
|
|
|
$
|
14,015
|
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
Pre-tax gains (losses) on:
|
|
|
|
|
|
|
|
Foreign Currency Contracts
|
$
|
(8
|
)
|
|
$
|
52
|
|
|
$
|
52
|
|
|
|
Commodity Contracts
|
—
|
|
|
34
|
|
|
—
|
|
|
|
Total gain (loss) recognized in earnings
|
$
|
(8
|
)
|
|
$
|
86
|
|
|
$
|
52
|
|
|
$
|
130
|
|
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 7.
|
Derivative Instruments and Hedging Activities (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense (income) - net
|
|
|
|
|
|
Cost of products sold
|
|
|
|
(In millions)
|
Revenues
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
|
Consolidated Statement of Earnings
|
$
|
48,394
|
|
|
$
|
45,266
|
|
|
$
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
Pre-tax gains (losses) on:
|
|
|
|
|
|
|
|
Foreign Currency Contracts
|
$
|
21
|
|
|
$
|
(189
|
)
|
|
$
|
(91
|
)
|
|
|
Commodity Contracts
|
—
|
|
|
163
|
|
|
—
|
|
|
|
Total gain (loss) recognized in earnings
|
$
|
21
|
|
|
$
|
(26
|
)
|
|
$
|
(91
|
)
|
|
$
|
(96
|
)
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
Consolidated Statement of Earnings
|
$
|
44,758
|
|
|
$
|
42,182
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax gains (losses) on:
|
|
|
|
|
|
|
|
Foreign Currency Contracts
|
$
|
(16
|
)
|
|
$
|
82
|
|
|
$
|
186
|
|
|
|
Commodity Contracts
|
—
|
|
|
294
|
|
|
—
|
|
|
|
Total gain (loss) recognized in earnings
|
$
|
(16
|
)
|
|
$
|
376
|
|
|
$
|
186
|
|
|
$
|
546
|
|
|
|
|
|
|
|
|
|
Changes in the market value of inventories of certain merchandisable agricultural commodities, forward cash purchase and sales contracts, exchange-traded futures and exchange-traded and OTC options contracts are recognized in earnings immediately as a component of cost of products sold.
Derivatives Designated as Cash Flow or Fair Value Hedging Strategies
As of
September 30, 2018
and
December 31, 2017
, the Company had certain derivatives designated as cash flow and fair value hedges.
The Company uses interest rate swaps designated as fair value hedges to protect the fair value of
$496 million
in fixed-rate debt due to changes in interest rates. The changes in the fair value of the interest rate swaps and the underlying fixed-rate debt are recorded in other (income) expense - net. The terms of the interest rate swaps match the terms of the underlying debt. At
September 30, 2018
, the Company had
$8 million
in other current liabilities representing the fair value of the interest rate swaps and a corresponding decrease in the underlying debt for the same amount with no net impact to earnings.
For each of the commodity hedge programs described below, the derivatives are designated as cash flow hedges. Assuming normal market conditions, the changes in the market value of such derivative contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of the hedged item. Once the hedged item is recognized in earnings, the gains/losses arising from the hedge are reclassified from AOCI to either revenues or cost of products sold, as applicable. As of
September 30, 2018
, the Company had
$26 million
of after-tax losses in AOCI related to gains and losses from commodity cash flow hedge transactions. The Company expects to recognize
$26 million
of these after-tax losses in its consolidated statement of earnings during the next
12 months
.
The Company uses futures or options contracts to hedge the purchase price of anticipated volumes of corn to be purchased and processed in a future month. The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s forecasted purchases of corn. The Company’s corn processing plants currently grind approximately
72 million
bushels of corn per month. During the past 12 months, the Company hedged between
23%
and
95%
of its monthly anticipated grind. At
September 30, 2018
, the Company had designated hedges representing between
5%
and
95%
of its anticipated monthly grind of corn for the next
12 months
.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 7.
|
Derivative Instruments and Hedging Activities (Continued)
|
The Company, from time to time, also uses futures, options, and swaps to hedge the sales price of certain ethanol sales contracts. The Company has established hedging programs for ethanol sales contracts that are indexed to unleaded gasoline prices and to various exchange-traded ethanol contracts. The objective of these hedging programs is to reduce the variability of cash flows associated with the Company’s sales of ethanol. During the past 12 months, the Company hedged between
1 million
and
135 million
gallons of ethanol sales per month under these programs. At
September 30, 2018
, the Company had designated hedges representing between
15 million
and
121 million
gallons of ethanol sales per month over the next
3 months
.
During the first quarter of 2018, the Company started using futures and options contracts to hedge the purchase price of anticipated volumes of soybeans to be purchased and processed in a future month for certain of its U.S. soybean crush facilities. The Company also uses futures or options contracts to hedge the sales prices of anticipated soybean meal and soybean oil sales proportionate to the soybean crushing process at these facilities. During the past 12 months, the Company hedged between
0%
and
100%
of the anticipated monthly soybean crush for soybean purchases and soybean meal and oil sales at the designated facilities. The Company has designated hedges representing between
0%
and
100%
of the anticipated monthly soybean crush for soybean purchases and soybean meal and oil sales at the designated facilities over the next
12 months
.
The following table sets forth the fair value of derivatives designated as hedging instruments as of
September 30, 2018
and
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
(In millions)
|
Interest Rate Contracts
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Total
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
1
|
|
The following table sets forth the pre-tax gains (losses) on derivatives designated as hedging instruments that have been included in the consolidated statements of earnings for the
three and nine
months ended
September 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
Interest expense
|
|
Other expense (income) - net
|
|
|
(In millions)
|
Revenues
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
|
|
|
|
|
Consolidated Statement of Earnings
|
$
|
15,800
|
|
|
$
|
14,742
|
|
|
$
|
87
|
|
|
$
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective amounts recognized in earnings
|
|
|
|
|
|
|
|
|
|
Pre-tax gains (losses) on:
|
|
|
|
|
|
|
|
|
|
Commodity Contracts
|
$
|
15
|
|
|
$
|
(87
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Total gain (loss) recognized in earnings
|
$
|
15
|
|
|
$
|
(87
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Earnings
|
$
|
14,827
|
|
|
$
|
14,015
|
|
|
$
|
79
|
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective amounts recognized in earnings
|
|
|
|
|
|
|
|
|
|
Pre-tax gains (losses) on:
|
|
|
|
|
|
|
|
|
|
Commodity Contracts
|
$
|
—
|
|
|
$
|
(15
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Ineffective amount recognized in earnings
|
|
|
|
|
|
|
|
|
|
Pre-tax gains (losses) on:
|
|
|
|
|
|
|
|
|
|
Commodity Contracts
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Total gain (loss) recognized in earnings
|
$
|
—
|
|
|
$
|
(19
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 7.
|
Derivative Instruments and Hedging Activities (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
Interest expense
|
|
Other expense (income) - net
|
|
|
(In millions)
|
Revenues
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
|
Consolidated Statement of Earnings
|
$
|
48,394
|
|
|
$
|
45,266
|
|
|
$
|
267
|
|
|
$
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective amounts recognized in earnings
|
|
|
|
|
|
|
|
|
|
Pre-tax gains (losses) on:
|
|
|
|
|
|
|
|
|
|
|
Commodity Contracts
|
$
|
16
|
|
|
$
|
(115
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Interest Contracts
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
|
Total gain (loss) recognized in earnings
|
$
|
16
|
|
|
$
|
(115
|
)
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Earnings
|
$
|
44,758
|
|
|
$
|
42,182
|
|
|
$
|
246
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective amounts recognized in earnings
|
|
|
|
|
|
|
|
|
|
Pre-tax gains (losses) on:
|
|
|
|
|
|
|
|
|
|
Foreign Currency Contracts
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
|
Commodity Contracts
|
—
|
|
|
(20
|
)
|
|
—
|
|
|
—
|
|
|
|
Ineffective amount recognized in earnings
|
|
|
|
|
|
|
|
|
|
Pre-tax gains (losses) on:
|
|
|
|
|
|
|
|
|
|
Commodity Contracts
|
$
|
4
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Total gain (loss) recognized in earnings
|
$
|
4
|
|
|
$
|
(15
|
)
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
(13
|
)
|
On October 1, 2017, the Company adopted the amended guidance of Topic 815. As a result, hedge ineffectiveness related to effective relationships is now deferred in AOCI until the hedged item impacts earnings. Prior to October 1, 2017, gains or losses on the derivative instrument in excess of the cumulative change in the cash flows of the hedged item, if any (i.e., the ineffective portion) were recognized in the consolidated statement of earnings during the current period.
Net Investment Hedging Strategies
On June 24, 2015, the Company issued
€500 million
aggregate principal amount of Floating Rate Notes and
€600 million
aggregate principal amount of
1.75%
Notes (collectively, the “Notes”). The Company has designated
€1.1 billion
of the Notes as a hedge of its net investment in a foreign subsidiary. As of
September 30, 2018
and December 31, 2017, the Company had
$40 million
of after-tax losses and
$59 million
of after-tax losses, respectively, in AOCI related to gains and losses from the net investment hedge transaction. The amount is deferred in AOCI until the underlying investment is divested.
In July 2018, the Company entered into forward foreign exchange contracts and designated
€500 million
as a hedge of its net investment in a foreign subsidiary. As of
September 30, 2018
, the Company had an immaterial after-tax loss in AOCI related to losses from the net investment hedge transaction. The amount is deferred in AOCI until the underlying investment is divested.
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 8. Other Current Assets
The following table sets forth the items in other current assets:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2018
|
|
2017
|
|
(In millions)
|
|
|
|
|
Unrealized gains on derivative contracts
|
$
|
950
|
|
|
$
|
449
|
|
Deferred receivables consideration
|
475
|
|
|
307
|
|
Customer omnibus receivable
|
455
|
|
|
477
|
|
Financing receivables - net
(1)
|
579
|
|
|
413
|
|
Insurance premiums receivable
|
48
|
|
|
129
|
|
Prepaid expenses
|
257
|
|
|
232
|
|
Tax receivables
|
416
|
|
|
425
|
|
Non-trade receivables
(2)
|
324
|
|
|
371
|
|
Other current assets
|
203
|
|
|
372
|
|
|
$
|
3,707
|
|
|
$
|
3,175
|
|
|
|
|
|
(1)
The Company provides financing to certain suppliers, primarily Brazilian farmers, to finance a portion of the suppliers’ production costs. The amounts are reported net of allowances of
$3 million
and
$6 million
at
September 30, 2018
and
December 31, 2017
, respectively. Additionally, at September 30, 2018, the Company had increased prepayments to farmers in South America for purchases of grain due to higher farmer selling activity in 2018 and the recent truckers strike in Brazil, which has created logistical delays in the delivery of grain. Interest earned on financing receivables of
$6 million
and
$18 million
for the
three and nine
months ended
September 30, 2018
, respectively, and
$6 million
and
$18 million
for the
three and nine
months ended
September 30, 2017
, respectively, is included in interest income in the consolidated statements of earnings.
(2)
Non-trade receivables included
$67 million
and
$91 million
of reinsurance recoverables as of
September 30, 2018
and
December 31, 2017
, respectively.
Note 9. Accrued Expenses and Other Payables
The following table sets forth the items in accrued expenses and other payables:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2018
|
|
2017
|
|
(In millions)
|
|
|
|
|
Unrealized losses on derivative contracts
|
$
|
1,173
|
|
|
$
|
464
|
|
Accrued compensation
|
295
|
|
|
235
|
|
Income tax payable
|
158
|
|
|
140
|
|
Other taxes payable
|
97
|
|
|
99
|
|
Reinsurance premiums payable
|
26
|
|
|
111
|
|
Insurance claims payable
|
253
|
|
|
268
|
|
Contract liability
|
106
|
|
|
185
|
|
Other accruals and payables
|
817
|
|
|
1,331
|
|
|
$
|
2,925
|
|
|
$
|
2,833
|
|
Archer-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 10.
|
Debt and Financing Arrangements
|
On
September 12, 2018
, the Company issued
€650 million
(
$754 million
as of September 30, 2018) aggregate principal amount of
1.0%
Notes due in
2025
. Net proceeds before expenses were
$747 million
.
At
September 30, 2018
, the fair value of the Company’s long-term debt exceeded the carrying value by
$0.7 billion
, as estimated using quoted market prices (a Level 2 measurement under applicable accounting standards).
At
September 30, 2018
, the Company had lines of credit, including the accounts receivable securitization programs described below, totaling
$8.8 billion
, of which
$6.8 billion
was unused. Of the Company’s total lines of credit,
$5.0 billion
supported the combined U.S. and European commercial paper borrowing programs, against which there was
$0.4 billion
of U.S. commercial paper outstanding at
September 30, 2018
. There was no commercial paper outstanding under the European program at
September 30, 2018
.
The Company has accounts receivable securitization programs (the “Programs”). The Programs, as amended, provide the Company with up to
$1.8 billion
in funding resulting from the sale of accounts receivable, of which
$0.3 billion
was unused as of
September 30, 2018
(see Note 16 for more information about the Programs).
The Company’s effective tax rate for the
three and nine
months ended
September 30, 2018
was
15.2%
and
14.3%
, respectively, compared to
13.3%
and
24.0%
for the
three and nine
months ended
September 30, 2017
, respectively. The rate for the three and nine months ended
September 30, 2018
includes the impacts of the Tax Cuts and Jobs Act (the “Act”) which was enacted on December 22, 2017. The rate for the nine months ended
September 30, 2018
also includes the impacts of the 2017 biodiesel tax credit which was retroactively reinstated in January 2018, and favorable second quarter discrete items. The rate for the three and nine months ended
September 30, 2017
includes the impact of changes in discrete tax items, including the favorable resolution of an uncertain tax position related to a 2014 acquisition and a return to provision.
The Act includes numerous significant tax law changes and modifications with varying effective dates, such as reducing the U.S. federal corporate income tax rate from
35%
to
21%
, creating a territorial tax system (with a one-time transition tax on previously deferred foreign earnings), broadening the tax base, and allowing for immediate capital expensing of certain qualified property. As of
September 30, 2018
, the Company has not yet completed the accounting for the tax effects of the Act; however, the Company has recorded an increase to the 2017 provisional transition tax of
$13 million
and
$4 million
for the
three and nine
months ended
September 30, 2018
, respectively, based on recently issued guidance. The Company has one year from the date of enactment to adjust the 2017 provisional tax.
The Act also contains new provisions related to Global Intangible Low Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) which are effective for fiscal year 2018. The Company has estimated GILTI and FDII impacts and will update the estimates each quarter as needed. The Company has made an accounting policy election to treat GILTI as a period cost.
It is likely that additional guidance will be issued providing further clarification on the application of the Act. It is also reasonable to expect that global taxing authorities will be reviewing their current legislation for potential modifications in reaction to the implementation of the Act. This additional guidance, along with the potential for additional global tax legislation changes, may affect deductions and income inclusions and could have a material adverse effect on the Company's net income or cash flow.
A
rcher-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 11. Income Taxes (Continued)
The Company is subject to income taxation and routine examinations in many jurisdictions around the world and frequently faces challenges regarding the amount of taxes due. These challenges include positions taken by the Company related to the timing, nature and amount of deductions and the allocation of income among various tax jurisdictions. In its routine evaluations of the exposure associated with various tax filing positions, the Company recognizes a liability, when necessary, for estimated potential tax owed by the Company in accordance with applicable accounting standards. Resolution of the related tax positions, through negotiations with relevant tax authorities or through litigation, may take years to complete. Therefore, it is difficult to predict the timing for resolution of tax positions and the Company cannot predict or provide assurance as to the ultimate outcome of these ongoing or future examinations. However, the Company does not anticipate that the total amount of unrecognized tax benefits will increase or decrease significantly in the next twelve months. Given the long periods of time involved in resolving tax positions, the Company does not expect that the recognition of unrecognized tax benefits will have a material impact on the Company’s effective income tax rate in any given period.
In December 2009 and June 2010, the Company’s wholly-owned subsidiary, ADM do Brasil Ltda. (ADM do Brasil), received
three
separate tax assessments from the Brazilian Federal Revenue Service
(BFRS)
challenging the tax deductibility of commodity hedging losses and related expenses for the tax years 2004, 2006, and 2007. These assessments totaled approximately
$105 million
in tax, and
$295 million
in interest and penalties as of
September 30, 2018
(adjusted for variation in currency exchange rates). The statute of limitations for tax years 2005 and 2008 to 2011 has expired. The Company does not expect to receive any additional tax assessments with respect to this issue.
ADM do Brasil enters into commodity hedging transactions that can result in gains, which are included in ADM do Brasil’s calculation of taxable income in Brazil, and losses, which ADM do Brasil deducts from its taxable income in Brazil. The Company has evaluated its tax position regarding these hedging transactions and concluded, based upon advice from Brazilian legal counsel, that it was appropriate to recognize both gains and losses resulting from hedging transactions when determining its Brazilian income tax expense. Therefore, the Company has continued to recognize the tax benefit from hedging losses in its financial statements and has not recorded any tax liability for the amounts assessed by the BFRS.
ADM do Brasil filed an administrative appeal for each of the assessments. The appeal panel found in favor of the BFRS on these assessments and ADM do Brasil filed a second level administrative appeal. The second administrative appeal panel continues to conduct customary procedural activities, including ongoing dialogue with the BFRS auditor. If ADM do Brasil continues to be unsuccessful in the administrative appellate process, the Company intends to file appeals in the Brazilian federal courts. While the Company believes its consolidated financial statements properly reflect the tax deductibility of these hedging losses, the ultimate resolution of this matter could result in the future recognition of additional payments of, and expense for, income tax and the associated interest and penalties. The Company intends to vigorously defend its position against the current assessments.
During the quarter ended March 31, 2012, the Company’s subsidiaries in Argentina, ADM Argentina and Alfred Toepfer Argentina, received tax assessments challenging transfer prices used to price grain exports for the tax years 2004 through 2010. As of
September 30, 2018
, these assessments totaled
$16 million
in tax and
$55 million
in interest and penalties (adjusted for variation in currency exchange rates). The Argentine tax authorities conducted a review of income and other taxes paid by large exporters and processors of cereals and other agricultural commodities resulting in allegations of income tax evasion. The Company strongly believes that it has complied with all Argentine tax laws. To date, the Company has not received assessments for tax years 2011 to 2017. However, it cannot rule out receiving additional assessments challenging transfer prices used to price grain exports for these years, and estimates that these potential assessments could be approximately
$45 million
in tax and
$44 million
in interest (adjusted for variation in currency exchange rates as of
September 30, 2018
). The Company believes that it has appropriately evaluated the transactions underlying these assessments, and has concluded, based on Argentine tax law, that its tax position would be sustained, and accordingly, has not recorded a tax liability for these assessments. The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2010.
In accordance with the accounting requirements for uncertain tax positions, the Company has not recorded an uncertain tax liability for these assessments because it has concluded that it is more likely than not to prevail on the Brazil and Argentina matters based upon their technical merits and because the taxing jurisdictions’ processes do not provide a mechanism for settling at less than the full amount of the assessment. The Company’s consideration of these tax assessments requires judgments about the application of income tax regulations to specific facts and circumstances. The final outcome of these matters cannot reliably be predicted, may take many years to resolve, and could result in financial impacts of up to the entire amount of these assessments.
A
rcher-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 11. Income Taxes (Continued)
During the quarter ended September 30, 2016, the Company’s wholly-owned subsidiary in the Netherlands, ADM Europe B.V., received a tax assessment from the Netherlands tax authority challenging the transfer pricing aspects of a 2009 business reorganization which involved two of its subsidiary companies in the Netherlands. As of
September 30, 2018
, this assessment was
$94 million
in tax and
$28 million
in interest (adjusted for variation in currency exchange rates). The Company has appealed the assessment and carefully evaluated the underlying transactions and has concluded that the amount of the gain recognized on the reorganization for tax purposes was appropriate. While the Company plans to vigorously defend its position against the assessment, it has accrued an amount it believes would be the likely outcome of the litigation. The Company’s defense of the judicial appeal may take an extended period of time and could result in additional financial impacts of up to the entire amount of this assessment.
Note 12. Accumulated Other Comprehensive Income (AOCI)
The following tables set forth the changes in AOCI by component for the
three and nine
months ended
September 30, 2018
and the reclassifications out of AOCI for the
three and nine
months ended
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2018
|
|
Foreign Currency Translation Adjustment
|
|
Deferred Gain (Loss) on Hedging Activities
|
|
Pension Liability Adjustment
|
|
Unrealized Gain (Loss) on Investments
|
|
Total
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018
|
$
|
(1,566
|
)
|
|
$
|
(51
|
)
|
|
$
|
(310
|
)
|
|
$
|
16
|
|
|
$
|
(1,911
|
)
|
Other comprehensive income (loss) before reclassifications
|
(177
|
)
|
|
5
|
|
|
—
|
|
|
(7
|
)
|
|
(179
|
)
|
Amounts reclassified from AOCI
|
(1
|
)
|
|
72
|
|
|
8
|
|
|
—
|
|
|
79
|
|
Tax effect
|
(1
|
)
|
|
(17
|
)
|
|
(3
|
)
|
|
—
|
|
|
(21
|
)
|
Net of tax amount
|
(179
|
)
|
|
60
|
|
|
5
|
|
|
(7
|
)
|
|
(121
|
)
|
Balance at September 30, 2018
|
$
|
(1,745
|
)
|
|
$
|
9
|
|
|
$
|
(305
|
)
|
|
$
|
9
|
|
|
$
|
(2,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2018
|
|
Foreign Currency Translation Adjustment
|
|
Deferred Gain (Loss) on Hedging Activities
|
|
Pension Liability Adjustment
|
|
Unrealized Gain (Loss) on Investments
|
|
Total
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
$
|
(1,353
|
)
|
|
$
|
17
|
|
|
$
|
(321
|
)
|
|
$
|
20
|
|
|
$
|
(1,637
|
)
|
Other comprehensive income before reclassifications
|
(368
|
)
|
|
(110
|
)
|
|
—
|
|
|
(11
|
)
|
|
(489
|
)
|
Amounts reclassified from AOCI
|
(1
|
)
|
|
98
|
|
|
23
|
|
|
—
|
|
|
120
|
|
Tax effect
|
(23
|
)
|
|
4
|
|
|
(7
|
)
|
|
—
|
|
|
(26
|
)
|
Net current period other comprehensive income
|
(392
|
)
|
|
(8
|
)
|
|
16
|
|
|
(11
|
)
|
|
(395
|
)
|
Balance at September 30, 2018
|
$
|
(1,745
|
)
|
|
$
|
9
|
|
|
$
|
(305
|
)
|
|
$
|
9
|
|
|
$
|
(2,032
|
)
|
A
rcher-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
|
|
Nine months ended
|
|
|
Details about AOCI components
|
|
Sep 30
2018
|
|
Sep 30
2017
|
|
Sep 30
2018
|
|
Sep 30
2017
|
|
Affected line item in the consolidated statement of earnings
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
Other (income) expense - net
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Tax
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loss (gain) on hedging activities
|
|
|
|
|
|
|
|
|
|
|
$
|
87
|
|
|
$
|
15
|
|
|
$
|
115
|
|
|
$
|
20
|
|
|
Cost of products sold
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
Interest expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
Other (income) expense - net
|
|
|
(15
|
)
|
|
—
|
|
|
(16
|
)
|
|
—
|
|
|
Revenues
|
|
|
72
|
|
|
15
|
|
|
98
|
|
|
22
|
|
|
Total before tax
|
|
|
(18
|
)
|
|
(5
|
)
|
|
(24
|
)
|
|
(8
|
)
|
|
Tax
|
|
|
$
|
54
|
|
|
$
|
10
|
|
|
$
|
74
|
|
|
$
|
14
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
Pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
Amortization of defined benefit pension items:
|
|
|
|
|
|
|
|
|
Prior service credit
|
|
$
|
(8
|
)
|
|
$
|
(2
|
)
|
|
$
|
(25
|
)
|
|
$
|
(8
|
)
|
|
Other (income) expense - net
|
Actuarial losses
|
|
16
|
|
|
16
|
|
|
48
|
|
|
50
|
|
|
Other (income) expense - net
|
|
|
8
|
|
|
14
|
|
|
23
|
|
|
42
|
|
|
Total before tax
|
|
|
(3
|
)
|
|
(5
|
)
|
|
(6
|
)
|
|
(15
|
)
|
|
Tax
|
|
|
$
|
5
|
|
|
$
|
9
|
|
|
$
|
17
|
|
|
$
|
27
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13.
|
Other (Income) Expense - Net
|
The following table sets forth the items in other (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(In millions)
|
|
|
|
|
|
|
|
|
Gains on sales of assets
|
$
|
(33
|
)
|
|
$
|
(15
|
)
|
|
$
|
(45
|
)
|
|
$
|
(66
|
)
|
Loss on debt extinguishment
|
—
|
|
|
11
|
|
|
—
|
|
|
11
|
|
Other – net
|
8
|
|
|
—
|
|
|
3
|
|
|
62
|
|
Other (Income) Expense - Net
|
$
|
(25
|
)
|
|
$
|
(4
|
)
|
|
$
|
(42
|
)
|
|
$
|
7
|
|
A
rcher-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 13. Other (Income) Expense - Net (Continued)
Gains on sales of assets in the
three and nine
months ended
September 30, 2018
included gains on the sale of the Company’s oilseeds operations in Bolivia and an equity investment, and disposals of individually insignificant assets in the ordinary course of business.
Gains on sales of assets in the
three months ended September 30, 2017
included gains on disposals of individually insignificant assets in the ordinary course of business.
Gains on sales of assets in the
nine months ended
September 30, 2017
included gains related to the sale of the crop risk services business and disposals of other individually insignificant assets in the ordinary course of business, partially offset by an adjustment of the proceeds of the 2015 sale of the cocoa business.
Loss on debt extinguishment for the
three and nine
months ended
September 30, 2017
related to the early redemption of the Company’s $559 million notes due on March 15, 2018.
Other - net in the
three and nine
months ended
September 30, 2018
included foreign exchange losses partially offset by other income. Other - net in the
nine months ended September 30, 2017
included foreign exchange losses, changes in contingent settlement provisions, and the non-service cost components of net pension benefit cost of
$20 million
.
Note 14. Segment Information
The Company is principally engaged in procuring, transporting, storing, processing, and merchandising agricultural commodities, products, and ingredients. The Company’s operations are organized, managed, and classified into
four
reportable business segments: Origination, Oilseeds, Carbohydrate Solutions, and Nutrition. Each of these segments is organized based upon the nature of products and services offered. The Company’s remaining operations are not reportable segments, as defined by the applicable accounting standard
,
and are classified as Other.
Effective January 1, 2018, the Company changed its segment reporting to reflect changes in its operating structure: Origination (formerly Agricultural Services), Oilseeds (formerly Oilseeds Processing), Carbohydrate Solutions (formerly Corn Processing) and Nutrition (formerly Wild Flavors and Specialty Ingredients). The European origination business previously reported in Oilseeds is now managed by leaders in Origination to better coordinate continental trading activities. Carbohydrate Solutions now includes the results of ADM Milling which were previously reported in Origination. In addition, the Company also moved the segment reporting of its renewable chemicals business from Carbohydrate Solutions to Oilseeds effective July 1, 2018. Nutrition now includes the results of Animal Nutrition and certain product lines previously reported in Carbohydrate Solutions as well as certain product lines previously reported in Oilseeds.
Prior period results have been reclassified to conform to the current period presentation.
The Origination segment utilizes its extensive global grain elevator and transportation networks and port operations to buy, store, clean, and transport agricultural commodities, such as oilseeds, corn, wheat, milo, oats, rice, and barley, and resells these commodities primarily as food and feed ingredients and as raw materials for the agricultural processing industry. The Origination segment includes international agricultural commodities merchandising and handling activities managed through a global trade desk based in Rolle, Switzerland. The Origination segment’s grain sourcing, handling, and transportation network provides reliable and efficient services to the Company’s customers and agricultural processing operations. The Origination segment’s transportation network capabilities include barge, ocean-going vessel, truck, rail, and container freight services. The Origination segment also includes the activities related to structured trade finance, the import and distribution of agricultural feed products, and the Company’s share of the results of its Pacificor joint venture.
A
rcher-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 14.
|
Segment Information (Continued)
|
The Oilseeds segment includes global activities related to the origination, merchandising, crushing, and further processing of oilseeds such as soybeans and soft seeds (cottonseed, sunflower seed, canola, rapeseed, and flaxseed) into vegetable oils and protein meals. Oilseeds products produced and marketed by the Company include ingredients for the food, feed, energy, and industrial products industries. Crude vegetable oils produced by the segment’s crushing activities are sold “as is” or are further processed by refining, blending, bleaching, and deodorizing into salad oils. Salad oils are sold “as is” or are further processed by hydrogenating and/or interesterifying into margarine, shortening, and other food products. Partially refined oils are used to produce biodiesel and glycols or are sold to other manufacturers for use in chemicals, paints, and other industrial products. Oilseed protein meals are principally sold to third parties to be used as ingredients in commercial livestock and poultry feeds. In South America, the Oilseeds segment includes origination and merchandising activities as adjuncts to its oilseeds processing assets. These activities include a network of grain elevators, port facilities, and transportation assets used to buy, store, clean, and transport grains and oilseeds. The Oilseeds segment is a major supplier of peanuts, tree nuts, and peanut-derived ingredients to both the U.S. and export markets. In North America, cottonseed flour is produced and sold primarily to the pharmaceutical industry and cotton cellulose pulp is manufactured and sold to the chemical, paper, and other industrial markets. The Oilseeds segment also includes the Company’s share of the results of its equity investment in Wilmar International Limited (Wilmar) and its share of the results of its Stratas Foods LLC, Edible Oils Limited, and Olenex Sarl (Olenex) joint ventures. In June 2018, the Company invested in a
50%
joint venture with Cargill to provide soybean meal and oil for customers in Egypt. In July 2018, the Company completed the sale of its oilseeds operations in Bolivia to Inversiones Piuranas S.A.
The Company’s Carbohydrate Solutions segment is engaged in corn and wheat wet and dry milling and other activities. The Carbohydrate Solutions segment converts corn and wheat into sweeteners, corn and wheat starches, wheat flour, and bioproducts. Its products include ingredients used in the food and beverage industry including sweeteners, starch, syrup, glucose, flour, and dextrose. Dextrose and starch are used by the Carbohydrate Solutions segment as feedstocks for its bioproducts operations. By fermentation of dextrose, the Carbohydrate Solutions segment produces alcohol and other food and animal feed ingredients. Ethyl alcohol is produced by the Company for industrial use as ethanol or as beverage grade. Ethanol, in gasoline, increases octane and is used as an extender and oxygenate. Corn gluten feed and meal, as well as distillers’ grains, are produced for use as animal feed ingredients. Corn germ, a by-product of the wet milling process, is further processed into vegetable oil and protein meal. Other Carbohydrate Solutions products include citric acids which are used in various food and industrial products. This segment also includes the Company’s share of the results of its equity investments in Hungrana Ltd., Almidones Mexicanos S.A., and Red Star Yeast Company, LLC. In June 2018, the Company completed the acquisition of a
50%
equity stake in the starches and sweeteners business of Russian-based Aston Foods and Food Ingredients.
The Nutrition segment engages in the manufacturing, sales, and distribution of specialty products including natural flavor ingredients, flavor systems, natural colors, proteins, emulsifiers, soluble fiber, polyols, hydrocolloids, natural health and nutrition products, and other specialty food and feed ingredients. The Nutrition segment includes the activities related to the procurement, processing, and distribution of edible beans. The Nutrition segment also includes activities related to the processing and distribution of formula feeds and animal health and nutrition products and the manufacture of contract and private label pet treats and foods. In August 2018, the Company completed the acquisition of Probiotics International Limited, a British-based provider of probiotic supplements for human, pet, and production-animal uses and Rodelle Inc., a premium originator, processor and supplier of vanilla products.
Other includes the Company’s remaining operations, primarily its financial business units, related to futures commission and insurance activities. On May 1, 2017, the Company completed the sale of its crop risk services business to Validus Holdings, a global group of insurance and reinsurance companies.
Intersegment sales have been recorded at amounts approximating market. Operating profit for each segment is based on net sales less identifiable operating expenses. Also included in operating profit for each segment is equity in earnings of affiliates based on the equity method of accounting. Specified items included in total segment operating profit and certain corporate items are not allocated to the Company’s individual business segments because operating performance of each business segment is evaluated by management exclusive of these items. Corporate results principally include the impact of LIFO-related adjustments, unallocated corporate expenses, interest cost net of investment income, and the Company’s share of the results of its equity investment in Compagnie Industrialle et Financiere des Produits Amylaces SA (Luxembourg) (CIP).
A
rcher-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 14.
|
Segment Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
(In millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Gross revenues
|
|
|
|
|
|
|
|
Origination
|
$
|
7,090
|
|
|
$
|
6,671
|
|
|
$
|
21,940
|
|
|
$
|
20,195
|
|
Oilseeds
|
7,031
|
|
|
6,780
|
|
|
22,148
|
|
|
20,016
|
|
Carbohydrate Solutions
|
2,909
|
|
|
2,858
|
|
|
8,625
|
|
|
8,346
|
|
Nutrition
|
933
|
|
|
894
|
|
|
2,920
|
|
|
2,698
|
|
Other
|
84
|
|
|
98
|
|
|
291
|
|
|
293
|
|
Intersegment elimination
|
(2,247
|
)
|
|
(2,474
|
)
|
|
(7,530
|
)
|
|
(6,790
|
)
|
Total gross revenues
|
$
|
15,800
|
|
|
$
|
14,827
|
|
|
$
|
48,394
|
|
|
$
|
44,758
|
|
|
|
|
|
|
|
|
|
Intersegment sales
|
|
|
|
|
|
|
|
|
|
|
|
Origination
|
$
|
1,240
|
|
|
$
|
1,169
|
|
|
$
|
3,269
|
|
|
$
|
3,043
|
|
Oilseeds
|
621
|
|
|
1,045
|
|
|
3,388
|
|
|
3,003
|
|
Carbohydrate Solutions
|
375
|
|
|
251
|
|
|
843
|
|
|
719
|
|
Nutrition
|
11
|
|
|
9
|
|
|
30
|
|
|
25
|
|
Total intersegment sales
|
$
|
2,247
|
|
|
$
|
2,474
|
|
|
$
|
7,530
|
|
|
$
|
6,790
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
|
|
|
|
|
|
|
|
|
|
Origination
|
|
|
|
|
|
|
|
Merchandising and Handling
|
$
|
5,786
|
|
|
$
|
5,450
|
|
|
$
|
18,489
|
|
|
$
|
16,998
|
|
Transportation
|
64
|
|
|
52
|
|
|
182
|
|
|
154
|
|
Total Origination
|
5,850
|
|
|
5,502
|
|
|
18,671
|
|
|
17,152
|
|
Oilseeds
|
|
|
|
|
|
|
|
Crushing and Origination
|
4,439
|
|
|
3,697
|
|
|
12,872
|
|
|
10,917
|
|
Refining, Packaging, Biodiesel, and Other
|
1,971
|
|
|
2,038
|
|
|
5,888
|
|
|
6,096
|
|
Total Oilseeds
|
6,410
|
|
|
5,735
|
|
|
18,760
|
|
|
17,013
|
|
Carbohydrate Solutions
|
|
|
|
|
|
|
|
Starches and Sweeteners
|
1,706
|
|
|
1,689
|
|
|
5,048
|
|
|
4,893
|
|
Bioproducts
|
828
|
|
|
918
|
|
|
2,734
|
|
|
2,734
|
|
Total Carbohydrate Solutions
|
2,534
|
|
|
2,607
|
|
|
7,782
|
|
|
7,627
|
|
Nutrition
|
|
|
|
|
|
|
|
Wild Flavors and Specialty Ingredients
|
641
|
|
|
590
|
|
|
1,970
|
|
|
1,825
|
|
Animal Nutrition
|
281
|
|
|
295
|
|
|
920
|
|
|
848
|
|
Total Nutrition
|
922
|
|
|
885
|
|
|
2,890
|
|
|
2,673
|
|
|
|
|
|
|
|
|
|
Other
|
84
|
|
|
98
|
|
|
291
|
|
|
293
|
|
Total revenues from external customers
|
$
|
15,800
|
|
|
$
|
14,827
|
|
|
$
|
48,394
|
|
|
$
|
44,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
rcher-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
|
|
Note 14.
|
Segment Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
(In millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Segment operating profit
|
|
|
|
|
|
|
|
Origination
|
$
|
129
|
|
|
$
|
39
|
|
|
$
|
363
|
|
|
$
|
143
|
|
Oilseeds
|
349
|
|
|
113
|
|
|
1,042
|
|
|
624
|
|
Carbohydrate Solutions
|
288
|
|
|
300
|
|
|
748
|
|
|
793
|
|
Nutrition
|
67
|
|
|
68
|
|
|
277
|
|
|
239
|
|
Other
|
28
|
|
|
21
|
|
|
72
|
|
|
78
|
|
Specified Items:
|
|
|
|
|
|
|
|
Gains (losses) on sales of assets and businesses
(1)
|
21
|
|
|
12
|
|
|
21
|
|
|
20
|
|
Impairment, restructuring, and settlement charges
(2)
|
(1
|
)
|
|
(63
|
)
|
|
(36
|
)
|
|
(98
|
)
|
Hedge timing effects
(3)
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
4
|
|
Total segment operating profit
|
881
|
|
|
485
|
|
|
2,487
|
|
|
1,803
|
|
Corporate
|
(249
|
)
|
|
(260
|
)
|
|
(739
|
)
|
|
(737
|
)
|
Earnings before income taxes
|
$
|
632
|
|
|
$
|
225
|
|
|
$
|
1,748
|
|
|
$
|
1,066
|
|
|
|
|
|
|
|
|
|
(1)
Current quarter and year-to-date gains related to the sale of a business and an equity investment. Prior quarter gains related to disposals of other individually insignificant assets in the ordinary course of business. Prior year-to-date gains related to the sale of the crop risk services businesses and disposals of other individually insignificant assets in the ordinary course of business, partially offset by an adjustment of the proceeds of the 2015 sale of the cocoa business.
(2)
Current quarter charge related to a settlement. Current year-to-date charges consisted of impairment charges related to a financing receivable and an equity investment, restructuring charges and a settlement charge. Prior period charges related to impairment of certain long-lived assets and restructuring charges.
(3)
Hedge timing effects relate to hedge ineffectiveness associated with documented hedge programs.
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
(In millions)
|
2018
|
|
2017
|
Identifiable Assets
|
|
|
|
Origination
|
$
|
8,131
|
|
|
$
|
8,311
|
|
Oilseeds
|
12,559
|
|
|
11,992
|
|
Carbohydrate Solutions
|
5,846
|
|
|
6,085
|
|
Nutrition
|
7,169
|
|
|
5,568
|
|
Other
|
5,068
|
|
|
5,658
|
|
Corporate
|
891
|
|
|
2,349
|
|
Total Identifiable Assets
|
$
|
39,664
|
|
|
$
|
39,963
|
|
|
|
|
|
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
three months ended September 30, 2018
consisted of
$1 million
of individually insignificant restructuring charges in Corporate. Asset impairment, exit, and restructuring costs in the
nine months ended September 30, 2018
consisted of
$12 million
of an equity investment impairment,
$21 million
of asset impairments, and
$2 million
of individually insignificant restructuring charges presented as specified items within segment operating profit, and
$6 million
of individually insignificant restructuring charges in Corporate.
Asset impairment of
$21 million
in the
nine months ended September 30, 2018
related to a long-term financing receivable in other assets and is based on the fair value of the collateral provided as security for the advance. The fair value is determined using internal and external resources, including published information concerning Brazilian land values.
Asset impairment, exit, and restructuring costs in the
three months ended September 30, 2017
consisted of
$62 million
of asset impairments and
$1 million
of individually insignificant restructuring charges presented as specified items within segment operating profit, and
$44 million
of restructuring charges in Corporate related to the reduction of certain positions within the Company’s global workforce. Asset impairment, exit, and restructuring costs in the
nine months ended September 30, 2017
consisted of
$80 million
of asset impairments and
$13 million
of individually insignificant restructuring charges presented as specified items within segment operating profit, and
$47 million
of restructuring charges in Corporate primarily related to the reduction of certain positions within the Company’s global workforce.
Asset impairment of
$61 million
in the three and
nine months ended September 30, 2017
was related to the reconfiguration of the Peoria, Illinois ethanol complex due to the Company’s decision to focus on the more profitable high grade industrial and beverage alcohol as well as export fuel. The impaired assets were determined to have no alternative use with zero net salvage value.
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 “First 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 First 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
and an additional amount upon the collection of the accounts receivable (deferred consideration). The Program terminates on June 20, 2019, 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
$0.6 billion
(
€0.5 billion
) and an additional amount upon the collection of the accounts receivable (deferred consideration). The Second Program terminates on March 15, 2019, 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 First Purchasers and Second Purchasers (collectively, the “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
September 30, 2018
and
December 31, 2017
, 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.
A
rcher-Daniels-Midland Company
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Note 16. Sale of Accounts Receivable (Continued)
As of
September 30, 2018
and
December 31, 2017
, the fair value of trade receivables transferred to the Purchasers under the Programs and derecognized from the Company’s consolidated balance sheet was
$2.0 billion
and
$1.7 billion
, respectively. In exchange for the transfers as of
September 30, 2018
and
December 31, 2017
, the Company received cash of
$1.5 billion
and
$1.4 billion
, respectively, and recorded a receivable for deferred consideration included in other current assets of
$475 million
and
$307 million
, respectively. Cash collections from customers on receivables sold were
$26.3 billion
and
$24.3 billion
for the
nine months ended September 30, 2018
and
2017
, respectively. Of this amount,
$8.8 billion
and
$8.5 billion
were cash collections on the deferred consideration reflected as cash inflows from investing activities for the
nine months ended September 30, 2018
and
2017
, respectively. Deferred consideration is paid to the Company in cash on behalf of the Purchasers as receivables are collected; however, as this is a revolving facility, cash collected from the Company’s customers is reinvested by the Purchasers daily in new receivable purchases under the Programs.
The Company’s risk of loss following the transfer of accounts receivable under the Programs is limited to the deferred consideration outstanding. The Company carries the deferred consideration at fair value determined by calculating the expected amount of cash to be received and is principally based on observable inputs (a Level 2 measurement under the applicable accounting standards) consisting mainly of the face amount of the receivables adjusted for anticipated credit losses and discounted at the appropriate market rate. Payment of deferred consideration is not subject to significant risks other than delinquencies and credit losses on accounts receivable transferred under the Programs which have historically been insignificant.
Transfers of receivables under the Programs resulted in an expense for the loss on sale of
$4 million
and
$2 million
for the
three months ended September 30, 2018
and
2017
, respectively, and
$14 million
and
$7 million
for the
nine months ended September 30, 2018
and
2017
, respectively, which is classified as selling, general, and administrative expenses in the consolidated statements of earnings.
In accordance with the amended guidance of Topic 230, the Company reflects cash flows related to the deferred consideration of the Programs as investing activities in its consolidated statements of cash flows. All other cash flows are classified as operating activities because the cash received from Purchasers upon both the sale and collection of the receivables is not subject to significant interest rate risk given the short-term nature of the Company’s trade receivables.
Note 17. Subsequent Events
On October 29, 2018, the Company announced the launch of GrainBridge LLC, a
50%
joint venture with Cargill that will develop and offer revolutionary new digital tools to help farmers make more informed grain marketing decisions based on personalized production economics.
The Company amended the ADM Retirement Plan (the “Plan”) and on October 29, 2018, entered into a binding agreement to purchase a group annuity contract from The Prudential Insurance Company of America (“Prudential”), irrevocably transferring the future benefit obligations and annuity administration for approximately
3,800
retirees from the Plan to Prudential. The purchase of the group annuity contract was funded directly by the Plan’s assets and reduced the Company’s pension obligations by approximately
$0.5 billion
. As a result of the transaction, the Company expects to recognize a non-cash after-tax pension settlement charge of approximately
$0.1 billion
in the fourth quarter of 2018.