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EX-32.1 - EXHIBIT 32.1 - ARCHER DANIELS MIDLAND COadm-ex321_2017930xq3.htm
EX-32.2 - EXHIBIT 32.2 - ARCHER DANIELS MIDLAND COadm-ex322_2017930xq3.htm
EX-31.2 - EXHIBIT 31.2 - ARCHER DANIELS MIDLAND COadm-ex312_2017930xq3.htm
EX-31.1 - EXHIBIT 31.1 - ARCHER DANIELS MIDLAND COadm-ex311_2017930xq3.htm
EX-12 - EXHIBIT 12 - ARCHER DANIELS MIDLAND COadm-ex12_2017930xq3.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.  20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-44
admprimarylogo.jpg
ARCHER-DANIELS-MIDLAND COMPANY
(Exact name of registrant as specified in its charter)
Delaware
41-0129150
(State or other jurisdiction of
incorporation or organization)
(I. R. S. Employer
Identification No.)
 
 
77 West Wacker Drive, Suite 4600
Chicago, Illinois
(Address of principal executive offices)
 
60601
(Zip Code)
 
 
(312) 634-8100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         Yes  x  No ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x  No  ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer     o 
Smaller reporting company  o
 
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o  No  x.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, no par value – 559,250,312 shares
(October 30, 2017)






PART I - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Archer-Daniels-Midland Company

Consolidated Statements of Earnings
(Unaudited)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(In millions, except per share amounts)
 
 
 
 
 
 
 
 
Revenues
$
14,827

 
$
15,832

 
$
44,758

 
$
45,845

Cost of products sold
14,015

 
14,742

 
42,191

 
43,237

Gross Profit
812

 
1,090

 
2,567

 
2,608

 
 
 
 
 
 
 
 
Selling, general, and administrative expenses
478

 
546

 
1,530

 
1,525

Asset impairment, exit, and restructuring costs
107

 
11

 
140

 
36

Interest expense
79

 
78

 
246

 
213

Equity in (earnings) losses of unconsolidated affiliates
(46
)
 
2

 
(327
)
 
(153
)
Interest income
(27
)
 
(23
)
 
(75
)
 
(68
)
Other (income) expense – net
(4
)
 
(4
)
 
(13
)
 
(138
)
Earnings Before Income Taxes
225

 
480

 
1,066

 
1,193

 
 
 
 
 
 
 
 
Income taxes
30

 
136

 
256

 
331

Net Earnings Including Noncontrolling Interests
195

 
344

 
810

 
862

 
 
 
 
 
 
 
 
Less: Net earnings attributable to noncontrolling interests
3

 
3

 
3

 
7

 
 
 
 
 
 
 
 
Net Earnings Attributable to Controlling Interests
$
192

 
$
341

 
$
807

 
$
855

 
 
 
 
 
 
 
 
Average number of shares outstanding – basic
566

 
586

 
571

 
591

 
 
 
 
 
 
 
 
Average number of shares outstanding – diluted
569

 
589

 
574

 
593

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.34

 
$
0.58

 
$
1.41

 
$
1.45

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
0.34

 
$
0.58

 
$
1.41

 
$
1.44

 
 
 
 
 
 
 
 
Dividends per common share
$
0.32

 
$
0.30

 
$
0.96

 
$
0.90


See notes to consolidated financial statements.




2




Archer-Daniels-Midland Company

Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(In millions)
 
 
 
 
 
 
 
 
Net earnings including noncontrolling interests
$
195

 
$
344

 
$
810

 
$
862

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
245

 
(41
)
 
628

 
(57
)
Tax effect
(40
)
 
5

 
(4
)
 
18

Net of tax amount
205

 
(36
)
 
624

 
(39
)
 
 
 
 
 
 
 
 
Pension and other postretirement benefit liabilities adjustment
174

 
11

 
193

 
27

Tax effect
(66
)
 
(4
)
 
(74
)
 
(7
)
Net of tax amount
108

 
7

 
119

 
20

 
 
 
 
 
 
 
 
Deferred gain (loss) on hedging activities
(26
)
 
1

 
12

 
(10
)
Tax effect
6

 
3

 
1

 
3

Net of tax amount
(20
)
 
4

 
13

 
(7
)
 
 
 
 
 
 
 
 
Unrealized gain (loss) on investments
6

 
(28
)
 
1

 
(16
)
Tax effect

 
1

 

 
(2
)
Net of tax amount
6

 
(27
)
 
1

 
(18
)
Other comprehensive income (loss)
299

 
(52
)
 
757

 
(44
)
Comprehensive income (loss) including noncontrolling interests
494

 
292

 
1,567

 
818

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

 
3

 
5

 
7

 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to controlling interests
$
490

 
$
289

 
$
1,562

 
$
811


See notes to consolidated financial statements.





3




Archer-Daniels-Midland Company

Consolidated Balance Sheets
(In millions)
September 30, 2017
 
December 31, 2016
 
(Unaudited)
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
518

 
$
619

Short-term marketable securities
261

 
296

Segregated cash and investments
5,040

 
5,011

Trade receivables
1,911

 
1,905

Inventories
8,326

 
8,831

Other current assets
3,084

 
4,383

Total Current Assets
19,140

 
21,045

 
 
 
 
Investments and Other Assets
 

 
 

Investments in and advances to affiliates
4,972

 
4,497

Long-term marketable securities
207

 
187

Goodwill and other intangible assets
3,939

 
3,703

Other assets
755

 
579

Total Investments and Other Assets
9,873

 
8,966

 
 
 
 
Property, Plant, and Equipment
 

 
 

Land
467

 
445

Buildings
4,974

 
4,679

Machinery and equipment
17,858

 
17,160

Construction in progress
1,166

 
1,213

 
24,465

 
23,497

Accumulated depreciation
(14,509
)
 
(13,739
)
Net Property, Plant, and Equipment
9,956

 
9,758

Total Assets
$
38,969

 
$
39,769

 
 
 
 
Liabilities, Temporary Equity, and Shareholders’ Equity
 

 
 

Current Liabilities
 

 
 

Short-term debt
$
728

 
$
154

Trade payables
3,449

 
3,606

Payables to brokerage customers
5,135

 
5,158

Accrued expenses and other payables
2,548

 
3,982

Current maturities of long-term debt
13

 
273

Total Current Liabilities
11,873

 
13,173

 
 
 
 
Long-Term Liabilities
 

 
 

Long-term debt
6,595

 
6,504

Deferred income taxes
1,754

 
1,669

Other
1,117

 
1,218

Total Long-Term Liabilities
9,466

 
9,391

 
 
 
 
Temporary Equity - Redeemable noncontrolling interest
53

 
24

 
 
 
 
Shareholders’ Equity
 

 
 

Common stock
2,390

 
2,327

Reinvested earnings
17,023

 
17,444

Accumulated other comprehensive income (loss)
(1,843
)
 
(2,598
)
Noncontrolling interests
7

 
8

Total Shareholders’ Equity
17,577

 
17,181

Total Liabilities, Temporary Equity, and Shareholders’ Equity
$
38,969

 
$
39,769

 
 
 
 
See notes to consolidated financial statements.

4




Archer-Daniels-Midland Company

Consolidated Statements of Cash Flows
(Unaudited)
(In millions)
Nine Months Ended 
 September 30,
 
2017
 
2016
Operating Activities
 
 
 
Net earnings including noncontrolling interests
$
810

 
$
862

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

 
 

Depreciation and amortization
684

 
678

Asset impairment charges
81

 
28

Deferred income taxes
(27
)
 
36

Equity in earnings of affiliates, net of dividends
(131
)
 
25

Stock compensation expense
63

 
58

Deferred cash flow hedges
12

 
(10
)
Gains on sales of assets and businesses/revaluation
(66
)
 
(117
)
Other – net
174

 
1

Changes in operating assets and liabilities
 

 
 

Segregated investments
268

 
46

Trade receivables
106

 
(463
)
Inventories
703

 
1,053

Other current assets
1,317

 
(415
)
Trade payables
(259
)
 
(554
)
Payables to brokerage customers
(94
)
 
355

Accrued expenses and other payables
(1,486
)
 
(287
)
Total Operating Activities
2,155

 
1,296

 
 
 
 
Investing Activities
 

 
 

Purchases of property, plant, and equipment
(696
)
 
(621
)
Proceeds from sales of business and assets
172

 
104

Net assets of businesses acquired
(187
)
 
(136
)
Purchases of marketable securities
(499
)
 
(1,127
)
Proceeds from sales of marketable securities
572

 
1,162

Investments in and advances to affiliates
(281
)
 
(628
)
Other – net
(14
)
 
15

Total Investing Activities
(933
)
 
(1,231
)
 
 
 
 
Financing Activities
 

 
 

Long-term debt borrowings
509

 
1,036

Long-term debt payments
(840
)
 
(9
)
Net borrowings (payments) under lines of credit agreements
558

 
107

Share repurchases
(676
)
 
(754
)
Cash dividends
(544
)
 
(528
)
Other – net
4

 
14

Total Financing Activities
(989
)
 
(134
)
 
 
 
 
Increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents
233

 
(69
)
Cash, cash equivalents, restricted cash, and restricted cash equivalents - beginning of period
1,561

 
1,796

Cash, cash equivalents, restricted cash, and restricted cash equivalents - end of period
$
1,794

 
$
1,727

 
 
 
 
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the consolidated balance sheets
 
 
 
 
 
 
 
Cash and cash equivalents
$
518

 
$
701

Restricted cash and restricted cash equivalents included in segregated cash and investments
1,276

 
1,026

Total cash, cash equivalents, restricted cash, and restricted cash equivalents
$
1,794

 
$
1,727

 
 
 
 
See notes to consolidated financial statements.

5




Archer-Daniels-Midland-Company

Consolidated Statement of Shareholders’ Equity
(Unaudited)
 
Common Stock
 
Reinvested
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Total
Shareholders’
Equity
 
Shares
 
Amount
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
573

 
$
2,327

 
$
17,444

 
$
(2,598
)
 
$
8

 
$
17,181

Impact of ASU 2016-16 (see Note 2)
 
 
 
 
(7
)
 
 
 
 
 
(7
)
Balance, January 1, 2017
573

 
$
2,327

 
$
17,437

 
$
(2,598
)
 
$
8

 
$
17,174

Comprehensive income
 

 
 

 
 

 
 

 
 

 
 

Net earnings
 
 
 

 
807

 
 

 
3

 
 

   Other comprehensive
     income (loss)
 

 
 

 
 

 
755

 
2

 
 

      Total comprehensive
       income
 

 
 

 
 

 
 

 
 

 
1,567

Cash dividends paid- $0.96 per share
 

 
 

 
(544
)
 
 

 
 

 
(544
)
Share repurchases
(16
)
 
 
 
(676
)
 
 
 
 
 
(676
)
Stock compensation expense
1

 
63

 
 

 
 

 
 

 
63

Other
1

 

 
(1
)
 

 
(6
)
 
(7
)
Balance, September 30, 2017
559

 
$
2,390

 
$
17,023

 
$
(1,843
)
 
$
7

 
$
17,577


See notes to consolidated financial statements.

6




Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements
(Unaudited)
Note 1.
Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.  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, 2016.

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.

Retirement Benefit Changes

On July 31, 2017, the Company announced that all participants in the Company’s U.S. salaried pension plan and the Supplemental Executive Retirement Plan (SERP) will begin accruing benefits under the cash balance formula effective January 1, 2022. Benefits for participants who were accruing under the final average pay formula will be frozen as of December 31, 2021, including pay and service through that date.

This change, along with other changes in participation associated with divestitures and restructuring, triggered a remeasurement of the salaried pension plan and the SERP resulting in decreases in the fiscal 2017 pension expense, accumulated other comprehensive loss, and underfunded status by $18 million, $182 million, and $164 million, respectively.

Concurrent with this change, the Company also changed the method used to estimate the service and interest cost components of the net periodic pension and postretirement benefit costs for its U.S. plans. The new method uses the spot rate yield curve approach to estimate the service and interest costs. Previously, those costs were determined using a single weighted-average discount rate applied to all future cash outflows. The change does not affect the measurement of the Company’s benefit obligations and was accounted for as a change in accounting estimate in accordance with the guidance of ASC Topic 250, Accounting Estimates and Error Corrections, thereby impacting the current and future quarters. The impact of this change on after-tax earnings and diluted earnings per share for the quarter ended September 30, 2017 was immaterial.

Reclassifications

The Company classified $17 million and $49 million of fees from its U.S. futures commission brokerage business in cost of products sold in the quarter and nine months ended September 30, 2017, respectively. Prior period amounts of $15 million and $50 million in the quarter and nine months ended September 30, 2016, respectively, have been reclassified from selling, general, and administrative expenses in the consolidated statement of earnings to conform to the current presentation.

In the quarter ended June 30, 2017, the Company began presenting certain specified items separately from the individual business segments, as further described in Note 14.



7

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 1.
Basis of Presentation (Continued)

In line with the futures brokerage industry practice, the Company has correctly classified $1.2 billion of segregated cash and cash equivalents as restricted cash and cash equivalents in the statement of cash flows effective September 30, 2017. Prior period amounts have been restated to conform to the current presentation which resulted in an increase of $145 million in total cash provided by operating activities for the nine months ended September 30, 2016 and an increase of $938 million in the ending balance of cash, cash equivalents, restricted cash, and restricted cash equivalents as of September 30, 2016.

Segregated Cash and Investments

The Company segregates certain cash, cash equivalent, 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, 2017, the Company adopted the amended guidance of ASC Topic 330, Inventory, which simplifies the measurement of inventory. The amended guidance requires an entity to measure its cost-based inventory at the lower of cost or net realizable value, where net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

Effective January 1, 2017, the Company adopted the amended guidance of ASC Topic 323, Investments - Equity Method and Joint Ventures, which simplifies the transition to the equity method of accounting. The amended guidance eliminates the requirement of an investor to adjust the investment, results of operations, and retained earnings retroactively when an investment qualifies for equity method accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments require the investor add the cost of acquiring the additional interest in the investee to the current basis of the investors’ previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The adoption of this amended guidance did not have an impact on the Company’s financial results.

Effective January 1, 2017, the Company adopted the amended guidance of ASC Topic 810, Consolidation, which affects reporting entities that are required to evaluate whether they should consolidate a variable interest entity in certain situations involving entities under common control. The amended guidance changes the evaluation of whether a reporting entity is the primary beneficiary of a variable interest entity by changing how a reporting entity that is a single decision maker of a variable interest entity treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The Company was required to adopt the amended guidance using a retrospective transition approach to all periods presented. The adoption of this amended guidance did not result in the deconsolidation or consolidation of any of its variable interest entities.

Effective January 1, 2017, the Company adopted the amended guidance of ASC Topic 740, Income Taxes, which requires entities to recognize the income tax consequences of an intra-entity transfer, other than inventory, when the transfer occurs.  Under the previous accounting rules, entities were prohibited from recognizing current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party.  The amended guidance does not change the accounting for the pre-tax effects of an intra-entity asset transfer or for an intra-entity transfer of inventory.  The Company adopted the amended guidance on a modified retrospective approach basis through a $7 million cumulative effect adjustment to retained earnings as of January 1, 2017.


8


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 3.
Pending Accounting Standards

Effective January 1, 2018, the Company will be required to adopt the amended guidance of ASC Subtopic 825-10, Financial Instruments - Overall, which is intended to improve the recognition and measurement of financial instruments. The amended guidance requires an entity to measure equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, at fair value with changes in fair value recognized in net income and simplify the impairment assessment of equity investments without readily determinable fair values by using a qualitative assessment to identify impairment. The Company does not expect the adoption of this amended guidance to have a significant impact on the Company’s financial results.

Effective January 1, 2018, the Company will be required to adopt the new guidance of ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which will supersede the revenue recognition requirements in ASC Topic 605, Revenue Recognition. Topic 606 requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The Company will adopt Topic 606 on a modified retrospective basis and will be required to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes. The adoption of this new guidance will require expanded disclosures in the Company’s consolidated financial statements including separate quantitative disclosure of revenues within the scope of Topic 606 and revenues excluded from the scope of Topic 606. Many of the Company’s sales contracts are considered derivatives under ASC Topic 815, Derivatives and Hedging, and are therefore excluded from the scope of Topic 606. The Company has established a cross-functional implementation team consisting of representatives from all of its business segments. The Company utilized surveys to validate all of its current revenue recognition streams and identify areas of its business where potential differences could result from applying the requirements of the new standard. The Company also conducted workshops and performed contract reviews to gather more information about the nature, magnitude, and frequency of the underlying transactions that drove the survey responses. Based on the surveys, workshops, and contract reviews, the Company identified potential accounting changes in the areas of control transfer, voyage charter revenue, bill and hold arrangements, and variable consideration. In the fourth quarter of 2017, the Company will complete the final phase of its revenue recognition implementation plan which includes quantification of the areas of accounting change, assessment of the financial impact of the new guidance on its consolidated financial statements, and finalization of its revenue recognition accounting policy and position papers.

Effective January 1, 2018, the Company will be required to adopt the amended guidance of ASC Topic 805, Business Combinations, which clarifies the definition of a business. The amended guidance is intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (disposals) of assets or businesses and provides a more robust framework to use in determining when a set of assets and activities is a business. Early adoption is permitted for transactions that have not been reported in financial statements that have been issued or made available for issuance. No disclosures are required at adoption. The Company plans to adopt the amended guidance on October 1, 2017.

Effective January 1, 2018, the Company will be required to adopt 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 will require 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 will not impact financial results.








9

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 3.
Pending Accounting Standards (Continued)


Effective January 1, 2018, the Company will be required to adopt the amended guidance of ASC Topic 718, Compensation - Stock Compensation (Topic 718), which provides clarity and reduces diversity in practice as well as cost and complexity when applying the guidance in Topic 718 to the modification of the terms and conditions of a share-based payment. The amendments include guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting. Early adoption is permitted, including in any interim period for which financial statements have not yet been issued. The Company plans to adopt the amended guidance on October 1, 2017 and does not expect the adoption of this amended guidance to have a significant impact on the Company’s financial results.
 
Effective January 1, 2019, the Company will be required to adopt the new guidance of ASC Topic 842, Leases (Topic 842), which will supersede ASC Topic 840, Leases. Topic 842 requires lessees to recognize assets and liabilities for all leases with lease terms of more than 12 months. The Company 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 were cross-referenced against other available lease information (i.e., year-end disclosures and general ledger). The Company is also working with a vendor to implement a lease management system which will assist in delivering the required accounting changes and disclosures. The next phase of the implementation plan is the abstraction of the relevant lease contract data points which is expected to be completed in the first quarter of 2018. The impact of the new standard will be a significant increase to right of use assets and lease liabilities on the Company’s consolidated balance sheet, primarily as a result of operating leases currently not recognized on the balance sheet. The Company has not yet completed its assessment of the impact of the new guidance on its consolidated statement of earnings.

Effective January 1, 2019, the Company will be required to adopt the amended guidance of ASC Topic 815, Derivatives and Hedging, which expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amended guidance also simplifies the application of hedge accounting guidance and eases the administrative burden of hedge documentation requirements and assessing hedge effectiveness. Early adoption is permitted in any interim period with the effect of adoption reflected as an adjustment to the opening balance of retained earnings as of the beginning of the fiscal year of adoption. The Company is considering adopting the amended guidance on January 1, 2018 but has not yet completed its assessment of the impact of this amended guidance on the Company’s financial results.

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

Effective January 1, 2020, the Company will be required to adopt the amended guidance of ASC Topic 350, Goodwill and Other, which simplifies the subsequent measurement of goodwill. The amended guidance removes the second step of the goodwill impairment test and requires the application of a one-step quantitative test where the amount of goodwill impairment is the excess of a reporting unit's carrying amount over its fair value, but not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company plans to adopt the amended guidance on October 1, 2017 and does not expect the adoption of this amended guidance to have a significant impact on the Company’s financial results.

10


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Acquisitions

During the nine months ended September 30, 2017, the Company acquired Crosswind Industries, Inc., Chamtor SA, a 51% controlling interest in Industries Centers, and an 89% controlling interest in Biopolis SL. The aggregate cash purchase price of these acquisitions of $187 million, net of cash acquired of $7 million, was preliminarily allocated as follows:

 
(In millions)
Working capital
$
16

Property, plant, and equipment
111

Goodwill
34

Other intangible assets
50

Other long-term assets
6

Long-term liabilities
(19
)
Noncontrolling interest
(11
)
Aggregate cash purchase price, net of cash acquired
$
187

 
Note 5.
Fair Value Measurements

The following tables set forth, by level, the Company’s assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2017 and December 31, 2016.
 
Fair Value Measurements at September 30, 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
$

 
$
3,361

 
$
1,094

 
$
4,455

Unrealized derivative gains:
 
 
 
 
 
 
 
Commodity contracts

 
240

 
120

 
360

Foreign currency contracts

 
81

 

 
81

Interest rate contracts

 
2

 

 
2

Cash equivalents
49

 

 

 
49

Marketable securities
376

 
92

 

 
468

Segregated investments
1,827

 

 

 
1,827

Deferred receivables consideration

 
399

 

 
399

Total Assets
$
2,252

 
$
4,175

 
$
1,214

 
$
7,641

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Unrealized derivative losses:
 
 
 
 
 
 
 
Commodity contracts
$

 
$
300

 
$
145

 
$
445

Foreign currency contracts

 
119

 

 
119

Inventory-related payables

 
493

 
20

 
513

Total Liabilities
$

 
$
912

 
$
165

 
$
1,077


11

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

 
Fair Value Measurements at December 31, 2016
 
 
Quoted Prices in
 Active Markets
 for Identical
 Assets
 (Level 1)
 
Significant
 Other
 Observable
 Inputs
 (Level 2)
 
Significant 
Unobservable
Inputs
(Level 3)
 
Total
 
(In millions)
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Inventories carried at market
$

 
$
3,102

 
$
1,322

 
$
4,424

Unrealized derivative gains:
 
 
 
 
 
 
 
Commodity contracts

 
371

 
140

 
511

Foreign exchange contracts

 
102

 

 
102

Interest rate contracts

 
11

 

 
11

Cash equivalents
286

 

 

 
286

Marketable securities
408

 
69

 

 
477

Segregated investments
1,613

 

 

 
1,613

Deferred receivables consideration

 
540

 

 
540

Total Assets
$
2,307

 
$
4,195

 
$
1,462

 
$
7,964

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Unrealized derivative losses:
 
 
 
 
 
 
 
Commodity contracts
$

 
$
419

 
$
142

 
$
561

Foreign exchange contracts

 
90

 

 
90

Inventory-related payables

 
491

 
30

 
521

Total Liabilities
$

 
$
1,000

 
$
172

 
$
1,172


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.


12

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

Derivative contracts include exchange-traded commodity futures and options contracts, forward commodity purchase and sale contracts, and OTC instruments related primarily to agricultural commodities, energy, interest rates, and foreign currencies.  Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified in Level 1.  The majority of the Company’s exchange-traded futures and options contracts are cash-settled on a daily basis and, therefore, are not included in these tables.  Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets.  These differences are generally determined using inputs from broker or dealer quotations or market transactions in either the listed or OTC markets.  When observable inputs are available for substantially the full term of the contract, it is classified in Level 2.  When unobservable inputs have a significant impact on the measurement of fair value, the contract is classified in Level 3. Except for certain derivatives designated as cash flow hedges, changes in the fair value of commodity-related derivatives are recognized in the consolidated statements of earnings as a component of cost of products sold.  Changes in the fair value of foreign currency-related derivatives are recognized in the consolidated statements of earnings as a component of revenues, cost of products sold, or other (income) expense - net depending upon the purpose of the contract. The effective portions of changes in the fair value of derivatives designated as cash flow hedges are recognized in the consolidated balance sheets as a component of accumulated other comprehensive income (loss) (AOCI) until the hedged items are recorded in earnings or it is probable the hedged transaction will no longer occur.

The Company’s cash equivalents are comprised of money market funds valued using quoted market prices and are classified as Level 1.

The Company’s marketable securities are comprised of equity investments, U.S. Treasury securities, corporate debt securities, and other debt securities.  Publicly traded equity investments and U.S. Treasury securities are valued using quoted market prices and are classified in Level 1.  Corporate debt and other debt securities are valued using third-party pricing services and substantially all are classified in Level 2. Unrealized changes in the fair value of available-for-sale marketable securities are recognized in the consolidated balance sheets as a component of AOCI unless a decline in value is deemed to be other-than-temporary at which point the decline is recorded in earnings.

The Company’s segregated investments are comprised of U.S. Treasury securities. U.S. Treasury securities are valued using quoted market prices and are classified in Level 1.

The Company has deferred consideration under its accounts receivable securitization programs (the “Programs”) which represents notes receivable from the purchasers under the Programs (see Note 16). This amount is reflected in other current assets on the consolidated balance sheet (see Note 8). The Company carries the deferred consideration at fair value determined by calculating the expected amount of cash to be received. The fair value is principally based on observable inputs (a Level 2 measurement) consisting mainly of the face amount of the receivables adjusted for anticipated credit losses and discounted at the appropriate market rate. Payment of deferred consideration is not subject to significant risks other than delinquencies and credit losses on accounts receivable transferred under the Programs, which have historically been insignificant.


13

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

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


14

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2016.

 
Level 3 Fair Value Asset Measurements at
 
September 30, 2016
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, June 30, 2016
$
1,099

 
$
153

 
$
1,252

Total increase (decrease) in net realized/unrealized gains included in cost of products sold*
(97
)
 
76

 
(21
)
Purchases
2,523

 

 
2,523

Sales
(2,529
)
 

 
(2,529
)
Settlements

 
(85
)
 
(85
)
Transfers into Level 3
206

 
66

 
272

Transfers out of Level 3
(38
)
 
(6
)
 
(44
)
Ending balance, September 30, 2016
$
1,164

 
$
204

 
$
1,368


* Includes increase in unrealized gains of $22 million relating to Level 3 assets still held at September 30, 2016.

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2016.

 
Level 3 Fair Value Liability Measurements at
 
September 30, 2016
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, June 30, 2016
$
12

 
$
500

 
$
512

Total increase (decrease) in net realized/unrealized losses included in cost of products sold*
3

 
(1
)
 
2

Purchases
3

 

 
3

Sales
(3
)
 

 
(3
)
Settlements

 
(247
)
 
(247
)
Transfers into Level 3

 
33

 
33

Transfers out of Level 3

 
(167
)
 
(167
)
Ending balance, September 30, 2016
$
15

 
$
118

 
$
133


* Includes increase in unrealized losses of $1 million relating to Level 3 liabilities still held at September 30, 2016.



15

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the 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 reconciliation 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 liabilities still held at September 30, 2017.




16

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2016.

 
Level 3 Fair Value Asset Measurements at
 
September 30, 2016
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2015
$
1,004

 
$
243

 
$
1,247

Total increase (decrease) in net realized/unrealized gains included in cost of products sold*
(210
)
 
171

 
(39
)
Purchases
7,565

 

 
7,565

Sales
(7,272
)
 

 
(7,272
)
Settlements

 
(302
)
 
(302
)
Transfers into Level 3
206

 
132

 
338

Transfers out of Level 3
(129
)
 
(40
)
 
(169
)
Ending balance, September 30, 2016
$
1,164

 
$
204

 
$
1,368


*Includes increase in unrealized gains of $36 million relating to Level 3 assets still held at September 30, 2016.

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2016.

 
Level 3 Fair Value Liability Measurements at
 
September 30, 2016
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2015
$
16

 
$
113

 
$
129

Total increase (decrease) in net realized/unrealized losses included in cost of products sold*
5

 
494

 
499

Purchases
5

 

 
5

Sales
(11
)
 

 
(11
)
Settlements

 
(392
)
 
(392
)
Transfers into Level 3

 
115

 
115

Transfers out of Level 3

 
(212
)
 
(212
)
Ending balance, September 30, 2016
$
15

 
$
118

 
$
133


*Includes increase in unrealized losses of $499 million relating to Level 3 assets still held at September 30, 2016.


17

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Fair Value Measurements (Continued)

For all periods presented, the Company had no transfers between Level 1 and 2. Transfers into Level 3 of assets and liabilities previously classified in Level 2 were due to the relative value of unobservable inputs to the total fair value measurement of certain products and derivative contracts rising above the 10% threshold. Transfers out of Level 3 were primarily due to the relative value of unobservable inputs to the total fair value measurement of certain products and derivative contracts falling below the 10% threshold and thus permitting reclassification to Level 2.

In some cases, the price components that result in differences between exchange-traded prices and local prices for inventories and commodity purchase and sale contracts are observable based upon available quotations for these pricing components, and in some cases, the differences are unobservable. These price components primarily include transportation costs and other adjustments required due to location, quality, or other contract terms. In the table below, these other adjustments are referred to as Basis. The changes in unobservable price components are determined by specific local supply and demand characteristics at each facility and the overall market. Factors such as substitute products, weather, fuel costs, contract terms, and futures prices also impact the movement of these unobservable price components.

The following table sets forth the weighted average percentage of the unobservable price components included in the Company’s Level 3 valuations as of September 30, 2017 and December 31, 2016. 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, 2017 is a weighted average 16.2% of the total price for assets and 62.7% of the total price for liabilities.

 
Weighted Average % of Total Price
 
September 30, 2017
 
December 31, 2016
Component Type
Assets
 
Liabilities
 
Assets
 
Liabilities
Inventories and Related Payables
 
 
 
 
 
 
 
Basis
16.2
%
 
62.7
%
 
16.5
%
 
67.1
%
Transportation cost
18.2
%
 
%
 
8.3
%
 

 
 
 
 
 
 
 
 
Commodity Derivative Contracts
 
 
 
 
 
 
 
Basis
22.3
%
 
21.3
%
 
16.9
%
 
27.0
%
Transportation cost
12.9
%
 
12.3
%
 
11.6
%
 
13.4
%

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.


18


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Derivative Instruments and Hedging Activities

Derivatives Not Designated as Hedging Instruments

The majority of the Company’s derivative instruments have not been designated as hedging instruments. The Company uses exchange-traded futures and exchange-traded and OTC options contracts to manage its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts to reduce price risk caused by market fluctuations in agricultural commodities and foreign currencies.  The Company also uses exchange-traded futures and exchange-traded and OTC options contracts as components of merchandising strategies designed to enhance margins. The results of these strategies can be significantly impacted by factors such as the correlation between the value of exchange-traded commodities futures contracts and the value of the underlying commodities, counterparty contract defaults, and volatility of freight markets. Derivatives, including exchange-traded contracts and physical purchase or sale contracts, are stated at market value and inventories of certain merchandisable agricultural commodities, which include amounts acquired under deferred pricing contracts, are stated at market value.  Inventory is not a derivative and therefore fair values of and changes in fair values of inventories are not included in the tables below.
  
The following table sets forth the fair value of derivatives not designated as hedging instruments as of September 30, 2017 and December 31, 2016.

 
September 30, 2017
 
December 31, 2016
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(In millions)
 
 
 
 
 
 
 
 
Foreign Currency Contracts
$
81

 
$
119

 
$
102

 
$
90

Commodity Contracts
360

 
445

 
511

 
561

Total
$
441

 
$
564

 
$
613

 
$
651


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, 2017 and 2016.

 
Three months ended September 30,
 
2017
 
2016
 
(In millions)
Foreign Currency Contracts
 

 
 

Revenues
$
(8
)
 
$
(19
)
Cost of products sold
52

 
1

Other income (expense) – net
52

 
(3
)
 
 
 
 
Commodity Contracts
 

 
 

Cost of products sold
34

 
369

Total gain (loss) recognized in earnings
$
130

 
$
348


19

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Derivative Instruments and Hedging Activities (Continued)

 
Nine months ended September 30,
 
2017
 
2016
 
(In millions)
Foreign Currency Contracts
 

 
 

Revenues
$
(16
)
 
$
(32
)
Cost of products sold
82

 
263

Other income (expense) – net
186

 
(108
)
 
 
 
 
Commodity Contracts
 

 
 

Cost of products sold
$
294

 
$
(266
)
Total gain (loss) recognized in earnings
$
546

 
$
(143
)

Inventories of certain merchandisable agricultural commodities, which include amounts acquired under deferred pricing contracts, are stated at market value. Changes in the market value of inventories of certain merchandisable agricultural commodities, forward cash purchase and sales contracts, exchange-traded futures and exchange-traded and OTC options contracts are recognized in earnings immediately.

Derivatives Designated as Cash Flow or Fair Value Hedging Strategies

As of September 30, 2017 and December 31, 2016, the Company has certain derivatives designated as cash flow and fair value hedges.

The Company uses interest rate swaps designated as fair value hedges to protect the fair value of fixed-rate debt due to changes in interest rates. The changes in the fair value of the interest rate swaps and the underlying fixed-rate debt are recorded in other (income) expense - net. The terms of the interest rate swaps match the terms of the underlying debt resulting in no ineffectiveness. At September 30, 2017, the Company has $2 million in other current assets representing the fair value of the interest rate swaps and a corresponding increase in the underlying debt for the same amount with no 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, 2017, the Company has $12 million of after-tax losses in AOCI related to gains and losses from commodity cash flow hedge transactions.  The Company expects to recognize $12 million of these after-tax losses in its consolidated statement of earnings during the next 12 months.
The Company uses futures or options contracts to fix the purchase price of anticipated volumes of corn to be purchased and processed in a future month.  The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s forecasted purchases of corn.  The Company’s corn processing plants currently grind approximately 72 million bushels of corn per month.  During the past 12 months, the Company hedged between 19% and 62% of its monthly anticipated grind.  At September 30, 2017, the Company has designated hedges representing between 6% and 41% of its anticipated monthly grind of corn for the next 12 months.

The Company, from time to time, also uses futures, options, and swaps to fix the sales price of certain ethanol sales contracts.  The Company has established hedging programs for ethanol sales contracts that are indexed to unleaded gasoline prices and to various exchange-traded ethanol contracts. The objective of these hedging programs is to reduce the variability of cash flows associated with the Company’s sales of ethanol.  During the past 12 months, the Company hedged between 1 million and 66 million gallons of ethanol sales per month under these programs.  At September 30, 2017, the Company has designated hedges representing between 0 and 1 million gallons of ethanol sales per month over the next 12 months.


20

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Derivative Instruments and Hedging Activities (Continued)

The following table sets forth the fair value of derivatives designated as hedging instruments as of September 30, 2017 and December 31, 2016.

 
September 30, 2017
 
December 31, 2016
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(In millions)
Interest Rate Contracts
$
2

 
$

 
$
11

 
$

Total
$
2

 
$

 
$
11

 
$


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, 2017 and 2016.
 
 
 
 
Three months ended
 
Consolidated Statement of
Earnings Locations
 
September 30,
 
 
2017
 
2016
 
 
 
(In millions)
Effective amounts recognized in earnings
 
 
 
 
 
Foreign Currency Contracts
Other income/expense – net
 
$

 
$
(3
)
Interest Contracts
Interest expense
 

 
(2
)
Commodity Contracts
Revenues
 

 
(9
)
 
Cost of products sold
 
(15
)
 
(37
)
Ineffective amount recognized in earnings
 
 
 
 
 
Commodity Contracts
Revenues
 

 
(1
)

Cost of products sold
 
(4
)
 
1

Total amount recognized in earnings
 
 
$
(19
)
 
$
(51
)
 
 
 
Nine months ended
 
Consolidated Statement of
Earnings Locations
 
September 30,
 
 
2017
 
2016
 
 
 
(In millions)
Effective amounts recognized in earnings
 
 
 
 
 
Foreign Currency Contracts
Other income/expense – net
 
$
(2
)
 
$
(25
)
Interest Contracts
Interest expense
 

 
(2
)
Commodity Contracts
Revenues
 

 
(14
)

Cost of products sold
 
(20
)
 
(61
)
Ineffective amount recognized in earnings
 
 
 
 
 
Commodity Contracts
Revenues
 
4

 


Cost of products sold
 
5

 
5

Total amount recognized in earnings
 
 
$
(13
)
 
$
(97
)

Hedge ineffectiveness for commodity contracts results when the change in the price of the underlying commodity in a specific cash market differs from the change in the price of the derivative financial instrument used to establish the hedging relationship.  As an example, if the change in the price of a corn futures contract is strongly correlated to the change in cash price paid for corn, the gain or loss on the derivative instrument is deferred and recognized at the time the corn grind occurs.  If the change in price of the derivative does not strongly correlate to the change in the cash price of corn, in the same example, some portion or all of the derivative gains or losses may be required to be recognized in earnings prior to when the corn grind occurs.

21

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Derivative Instruments and Hedging Activities (Continued)

Net Investment Hedging Strategies

On June 24, 2015, the Company issued €500 million aggregate principal amount of Floating Rate Notes and €600 million aggregate principal amount of 1.75% Notes (collectively, the “Notes”). The Company has designated €1.1 billion of the Notes as a hedge of its net investment in a foreign subsidiary. As of September 30, 2017, the Company has $47 million of after-tax losses in AOCI related to gains and losses from the net investment hedge transaction. The amount is deferred in AOCI until the underlying investment is divested.

Note 7.
Marketable Securities

 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(In millions)
 
 
 
 
 
 
 
 
September 30, 2017
 
 
 
 
 
 
 
United States government obligations
 
 
 
 
 
 
 
Maturity less than 1 year
$
259

 
$

 
$

 
$
259

Maturity 1 to 5 years
117

 

 

 
117

Corporate debt securities
 

 
 

 
 

 
 

Maturity less than 1 year
2

 

 

 
2

Maturity 1 to 5 years
90

 

 

 
90

 
$
468

 
$

 
$

 
$
468


 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(In millions)
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
United States government obligations
 
 
 
 
 
 
 
Maturity less than 1 year
$
287

 
$

 
$

 
$
287

Maturity 1 to 5 years
121

 

 
(1
)
 
120

Corporate debt securities
 

 
 

 
 

 
 

Maturity less than 1 year
1

 

 

 
1

Maturity 1 to 5 years
66

 

 

 
66

Other debt securities
 

 
 

 
 

 
 

Maturity less than 1 year
8

 

 

 
8

Equity securities
 

 
 

 
 

 
 

Available-for-sale
1

 

 

 
1

 
$
484

 
$

 
$
(1
)
 
$
483





22


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,
 
2017
 
2016
 
(In millions)
 
 
 
 
Unrealized gains on derivative contracts
$
443

 
$
624

Deferred receivables consideration
399

 
540

Customer omnibus receivable
474

 
521

Financing receivables - net (1)
407

 
373

Insurance premiums receivable
137

 
648

Prepaid expenses
248

 
268

Tax receivables
423

 
480

Non-trade receivables (2)
374

 
478

Other current assets
179

 
451

 
$
3,084

 
$
4,383


(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 $6 million and $7 million at September 30, 2017 and December 31, 2016, respectively. Interest earned on financing receivables of $6 million and $18 million for the three and nine months ended September 30, 2017, respectively, and $5 million and $17 million for the three and nine months ended September 30, 2016, respectively, is included in interest income in the consolidated statements of earnings.

(2) Non-trade receivables included $75 million and $223 million of reinsurance recoverables as of September 30, 2017 and December 31, 2016, 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,
 
2017
 
2016
 
(In millions)
 
 
 
 
Unrealized losses on derivative contracts
$
564

 
$
651

Reinsurance premiums payable
104

 
479

Insurance claims payables
260

 
373

Deferred income
570

 
1,065

Other accruals and payable
1,050

 
1,414

 
$
2,548

 
$
3,982



23


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 10.
Debt and Financing Arrangements

On September 14, 2017, the Company issued $500 million aggregate principal amount of 3.75% notes due in 2047. Proceeds before expenses were $493 million.

On September 29, 2017, the Company redeemed $559 million aggregate principal amount of 5.45% notes due on March 15, 2018 and incurred an early extinguishment charge of $11 million in the quarter ended September 30, 2017.

At September 30, 2017, the fair value of the Company’s long-term debt exceeded the carrying value by $1.1 billion, as estimated using quoted market prices (a Level 2 measurement under applicable accounting standards).

At September 30, 2017, the Company had lines of credit, including the accounts receivable securitization programs, totaling $6.9 billion, of which $4.8 billion was unused.  Of the Company’s total lines of credit, $4.0 billion support a commercial paper borrowing facility, against which there was $0.6 billion of commercial paper outstanding at September 30, 2017.

The Company has accounts receivable securitization programs (the “Programs”). The Programs provide the Company with up to $1.7 billion in funding resulting from the sale of accounts receivable. As of September 30, 2017, the Company utilized $1.4 billion of its facility under the Programs (see Note 16 for more information on the Programs).

Note 11.
Income Taxes

The Company’s effective tax rate for the three and nine months ended September 30, 2017 was 13.3% and 24.0%, respectively, compared to 28.3% and 27.7% for the three and nine months ended September 30, 2016, respectively. The change in the rates was primarily due to the impact of changes in discrete tax items, including the favorable resolution of an uncertain tax position related to a 2014 acquisition and return to provision in the current quarter, partially offset by changes in the forecasted geographic mix of pre-tax earnings and the expiration of U.S. tax credits, including the biodiesel credit, at the end of 2016.

The Company is subject to routine examination by domestic and foreign tax authorities and frequently faces challenges regarding the amount of taxes due.  These challenges include positions taken by the Company related to the timing, nature and amount of deductions and the allocation of income among various tax jurisdictions.  Resolution of the related tax positions, through negotiation with relevant tax authorities or through litigation, may take years to complete. Therefore, it is difficult to predict the timing for resolution of tax positions. In its routine evaluations of the exposure associated with various tax filing positions, the Company recognizes a liability, when necessary, for estimated potential additional tax owed by the Company in accordance with the applicable accounting standard.  However, the Company cannot predict or provide assurance as to the ultimate outcome of these ongoing or future examinations.

The Company’s wholly-owned subsidiary, ADM do Brasil Ltda. (ADM do Brasil), has received three separate tax assessments from the Brazilian Federal Revenue Service (BFRS) challenging the tax deductibility of commodity hedging losses and related expenses for the tax years 2004, 2006, and 2007. As of September 30, 2017, these assessments, updated for estimated penalties, interest, and variation in currency exchange rates, totaled approximately $490 million. The statute of limitations for tax years 2005 and 2008 to 2011 has expired. The Company does not expect to receive any additional tax assessments.

ADM do Brasil enters into commodity hedging transactions that can result in gains, which are included in ADM do Brasil’s calculations of taxable income in Brazil, and losses, which ADM do Brasil deducts from its taxable income in Brazil. The Company has evaluated its tax position regarding these hedging transactions and concluded, based upon advice from Brazilian legal counsel, that it was appropriate to recognize both gains and losses resulting from hedging transactions when determining its Brazilian income tax expense. Therefore, the Company has continued to recognize the tax benefit from hedging losses in its financial statements and has not recorded any tax liability for the amounts assessed by the BFRS.






24

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 11.     Income Taxes (Continued)

ADM do Brasil filed an administrative appeal for each of the assessments. The appeal panel found in favor of the BFRS on these assessments and ADM do Brasil filed a second level administrative appeal. The second administrative appeal panel continues to conduct customary procedural activities, including ongoing dialogue with the BFRS auditor. If ADM do Brasil continues to be unsuccessful in the administrative appellate process, the Company intends to file appeals in the Brazilian federal courts. While the Company believes its consolidated financial statements properly reflect the tax deductibility of these hedging losses, the ultimate resolution of this matter could result in the future recognition of additional payments of, and expense for, income tax and the associated interest and penalties.

The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2011.

The Company’s subsidiaries in Argentina have received tax assessments challenging transfer prices used to price grain exports totaling $128 million (inclusive of interest and adjusted for variation in currency exchange rates) for the tax years 2004 through 2010. The Argentine tax authorities have been conducting a review of income and other taxes paid by large exporters and processors of cereals and other agricultural commodities resulting in allegations of income tax evasion. While the Company believes that it has complied with all Argentine tax laws, it cannot rule out receiving additional assessments challenging transfer prices used to price grain exports for years subsequent to 2010, and estimates that these potential assessments would be approximately $213 million (as of September 30, 2017 and subject to variation in currency exchange rates).  The Company believes that it has appropriately evaluated the transactions underlying these assessments, and has concluded, based on Argentine tax law, that its tax position would be sustained, and accordingly, has not recorded a tax liability for these assessments. The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 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.

The Company’s wholly-owned subsidiary in the Netherlands, ADM Europe B.V., has received a tax assessment totaling $106 million 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. 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.


25


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 12.     Accumulated Other Comprehensive Income (AOCI)

The following tables set forth the changes in AOCI by component for the three and nine months ended September 30, 2017 and the reclassifications out of AOCI for the three and nine months ended September 30, 2017 and 2016:
 
Three months ended September 30, 2017
 
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, 2017
$
(1,684
)
 
$
39

 
$
(510
)
 
$
14

 
$
(2,141
)
Other comprehensive income (loss) before reclassifications
244

 
(41
)
 
160

 
6

 
369

Amounts reclassified from AOCI

 
15

 
14

 

 
29

Tax effect
(40
)
 
6

 
(66
)
 

 
(100
)
Net current period other comprehensive income
204

 
(20
)
 
108

 
6

</