ADM 10Q FY07 Q2
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 December 31, 2006
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the transition period from __________ to __________
Commission
file number 1-44
ARCHER-DANIELS-MIDLAND
COMPANY
(Exact
name of registrant as specified in its charter)
Delaware
|
41-0129150
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.
R. S. Employer
Identification
No.)
|
|
|
4666
Faries Parkway Box 1470
Decatur,
Illinois
(Address
of principal executive offices)
|
62525
(Zip
Code)
|
|
|
(217)
424-5200
|
(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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
Accelerated Filer
X
Accelerated Filer ___ Non-accelerated Filer ___
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
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 - 652,729,207 shares
(January
31, 2007)
PART
I - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
CONSOLIDATED
STATEMENTS OF EARNINGS
(Unaudited)
Archer-Daniels-Midland
Company
|
|
THREE
MONTHS ENDED
|
|
|
DECEMBER
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands, except
|
|
|
per
share amounts)
|
|
|
|
|
|
|
|
|
Net
sales and other operating income
|
|
$
|
10,976,039
|
|
$
|
9,298,985
|
|
Cost
of products sold
|
|
|
10,068,119
|
|
|
8,515,517
|
|
Gross
Profit
|
|
|
907,920
|
|
|
783,468
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
298,211
|
|
|
294,392
|
|
Other
(income) expense - net
|
|
|
(19,018
|
)
|
|
(17,628
|
)
|
Earnings
Before Income Taxes
|
|
|
628,727
|
|
|
506,704
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
187,459
|
|
|
139,027
|
|
|
|
|
|
|
|
|
|
Net
Earnings
|
|
$
|
441,268
|
|
$
|
367,677
|
|
|
|
|
|
|
|
|
|
Average
number of shares outstanding - basic
|
|
|
656,563
|
|
|
653,270
|
|
|
|
|
|
|
|
|
|
Average
number of shares outstanding - diluted
|
|
|
660,548
|
|
|
655,508
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per common share
|
|
$
|
.67
|
|
$
|
.56
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$
|
.10
|
|
$
|
.085
|
|
See
notes
to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF EARNINGS
(Unaudited)
Archer-Daniels-Midland
Company
|
|
SIX
MONTHS ENDED
|
|
|
DECEMBER
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands, except
|
|
|
per
share amounts)
|
|
|
|
|
|
|
|
|
Net
sales and other operating income
|
|
$
|
20,422,961
|
|
$
|
17,925,934
|
|
Cost
of products sold
|
|
|
18,649,463
|
|
|
16,559,755
|
|
Gross
Profit
|
|
|
1,773,498
|
|
|
1,366,179
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
608,046
|
|
|
598,847
|
|
Other
(income) expense - net
|
|
|
(38,528
|
)
|
|
(13,104
|
)
|
Earnings
Before Income Taxes
|
|
|
1,203,980
|
|
|
780,436
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
359,967
|
|
|
226,421
|
|
|
|
|
|
|
|
|
|
Net
Earnings
|
|
$
|
844,013
|
|
$
|
554,015
|
|
|
|
|
|
|
|
|
|
Average
number of shares outstanding - basic
|
|
|
656,586
|
|
|
652,606
|
|
|
|
|
|
|
|
|
|
Average
number of shares outstanding - diluted
|
|
|
660,705
|
|
|
654,656
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$
|
1.29
|
|
$
|
.85
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
$
|
1.28
|
|
$
|
.85
|
|
|
|
|
|
|
|
|
|
Dividends
per common share
|
|
$
|
.20
|
|
$
|
.17
|
|
See
notes
to consolidated financial statements.
CONSOLIDATED
BALANCE SHEETS
Archer-Daniels-Midland
Company
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
DECEMBER
31,
|
|
|
JUNE
30,
|
|
|
|
|
2006
|
|
|
2006
|
|
|
|
(In
thousands)
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
822,780
|
|
$
|
1,112,853
|
|
Segregated
cash and investments
|
|
|
1,341,718
|
|
|
1,220,666
|
|
Receivables
|
|
|
5,978,888
|
|
|
4,471,201
|
|
Inventories
|
|
|
6,286,536
|
|
|
4,677,508
|
|
Other
assets
|
|
|
762,978
|
|
|
344,049
|
|
Total Current Assets
|
|
|
15,192,900
|
|
|
11,826,277
|
|
|
|
|
|
|
|
|
|
Investments
and Other Assets
|
|
|
|
|
|
|
|
Investments
in and advances to affiliates
|
|
|
1,980,163
|
|
|
1,985,662
|
|
Long-term
marketable securities
|
|
|
1,098,424
|
|
|
1,110,177
|
|
Goodwill
|
|
|
319,799
|
|
|
322,292
|
|
Other
assets
|
|
|
756,558
|
|
|
731,590
|
|
|
|
|
4,154,944
|
|
|
4,149,721
|
|
|
|
|
|
|
|
|
|
Property,
Plant, and Equipment
|
|
|
|
|
|
|
|
Land
|
|
|
219,994
|
|
|
214,091
|
|
Buildings
|
|
|
2,871,051
|
|
|
2,774,164
|
|
Machinery
and equipment
|
|
|
11,602,721
|
|
|
11,131,992
|
|
Construction
in progress
|
|
|
619,788
|
|
|
430,997
|
|
|
|
|
15,313,554
|
|
|
14,551,244
|
|
Accumulated
depreciation
|
|
|
(9,615,784
|
)
|
|
(9,258,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
5,697,770
|
|
|
5,293,032
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,045,614
|
|
$
|
21,269,030
|
|
See
notes
to consolidated financial statements.
CONSOLIDATED
BALANCE SHEETS
Archer-Daniels-Midland
Company
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
DECEMBER
31,
|
|
|
JUNE
30,
|
|
|
|
|
2006
|
|
|
2006
|
|
|
|
(In
thousands)
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Short-term
debt
|
|
$
|
1,746,245
|
|
$
|
549,419
|
|
Accounts
payable
|
|
|
5,175,348
|
|
|
4,014,392
|
|
Accrued
expenses
|
|
|
1,994,626
|
|
|
1,521,188
|
|
Current
maturities of long-term debt
|
|
|
66,355
|
|
|
79,768
|
|
Total
Current Liabilities
|
|
|
8,982,574
|
|
|
6,164,767
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
4,011,194
|
|
|
4,050,323
|
|
Deferred
income taxes
|
|
|
743,128
|
|
|
756,600
|
|
Other
|
|
|
536,034
|
|
|
490,460
|
|
|
|
|
5,290,356
|
|
|
5,297,383
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
Common
stock
|
|
|
5,457,649
|
|
|
5,511,019
|
|
Reinvested
earnings
|
|
|
4,793,889
|
|
|
4,081,490
|
|
Accumulated
other comprehensive income
|
|
|
521,146
|
|
|
214,371
|
|
|
|
|
|
|
|
|
|
|
|
|
10,772,684
|
|
|
9,806,880
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,045,614
|
|
$
|
21,269,030
|
|
See
notes
to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
Archer-Daniels-Midland
Company
|
|
SIX
MONTHS ENDED
|
|
|
DECEMBER
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
Operating
Activities
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
844,013
|
|
$
|
554,015
|
|
Adjustments
to reconcile net earnings to net cash provided by
|
|
|
|
|
|
|
|
(used
in) operating activities
|
|
|
|
|
|
|
|
Depreciation
|
|
|
344,929
|
|
|
327,265
|
|
Asset
abandonments
|
|
|
1,393
|
|
|
22,725
|
|
Deferred
income taxes
|
|
|
26,248
|
|
|
(118,076
|
)
|
Gain
on marketable securities transactions
|
|
|
(10,759
|
)
|
|
(28,234
|
)
|
Equity
in earnings of affiliates, net of dividends
|
|
|
(78,484
|
)
|
|
(37,498
|
)
|
Stock
contributed to employee benefit plans
|
|
|
13,367
|
|
|
12,284
|
|
Pension
and postretirement accruals (contributions), net
|
|
|
26,639
|
|
|
(100,542
|
)
|
Other
- net
|
|
|
83,678
|
|
|
44,283
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
Segregated
cash and investments
|
|
|
(112,755
|
)
|
|
(91,251
|
)
|
Receivables
|
|
|
(812,327
|
)
|
|
7,612
|
|
Inventories
|
|
|
(1,625,622
|
)
|
|
(493,139
|
)
|
Other
assets
|
|
|
(152,124
|
)
|
|
(111,775
|
)
|
Accounts
payable and accrued expenses
|
|
|
1,155,566
|
|
|
756,530
|
|
Total
Operating Activities
|
|
|
(296,238
|
)
|
|
744,199
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
Purchases
of property, plant, and equipment
|
|
|
(560,035
|
)
|
|
(318,450
|
)
|
Proceeds
from sales of property, plant, and equipment
|
|
|
20,439
|
|
|
12,140
|
|
Net
assets of businesses acquired
|
|
|
(54,795
|
)
|
|
(91,911
|
)
|
Investments
in and advances to affiliates
|
|
|
(46,307
|
)
|
|
(94,712
|
)
|
Distributions
from affiliates, excluding dividends
|
|
|
81,485
|
|
|
29,031
|
|
Purchases
of marketable securities
|
|
|
(485,363
|
)
|
|
(524,355
|
)
|
Proceeds
from sales of marketable securities
|
|
|
228,602
|
|
|
202,738
|
|
Other
- net
|
|
|
(3,123
|
)
|
|
(5,667
|
)
|
Total
Investing Activities
|
|
|
(819,097
|
)
|
|
(791,186
|
)
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
Long-term
debt borrowings
|
|
|
15,424
|
|
|
598,624
|
|
Long-term
debt payments
|
|
|
(129,678
|
)
|
|
(121,799
|
)
|
Net
borrowings (payments) under line of credit agreements
|
|
|
1,180,394
|
|
|
(27,488
|
)
|
Purchases
of treasury stock
|
|
|
(135,984
|
)
|
|
(29
|
)
|
Cash
dividends
|
|
|
(131,453
|
)
|
|
(111,021
|
)
|
Other
- net
|
|
|
26,559
|
|
|
10,146
|
|
Total
Financing Activities
|
|
|
825,262
|
|
|
348,433
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease) In Cash and Cash Equivalents
|
|
|
(290,073
|
)
|
|
301,446
|
|
Cash
and Cash Equivalents-Beginning of Period
|
|
|
1,112,853
|
|
|
522,420
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents-End of Period
|
|
$
|
822,780
|
|
$
|
823,866
|
|
|
|
|
|
|
|
|
|
See
notes
to consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Archer-Daniels-Midland
Company
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 complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation
have
been included. Operating results for the quarter and six months ended December
31, 2006 are not necessarily indicative of the results that may be expected
for
the year ending June 30, 2007. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended June 30, 2006.
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
During
July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation
Number 48, Accounting
for Uncertainty in Income Taxes
(FIN
48). FIN 48 clarifies the accounting for income taxes by prescribing the
minimum requirements a tax position must meet before being recognized in the
financial statements. In addition, FIN 48 prohibits the use of Statement
of Financial Accounting Standards (SFAS) Number 5, Accounting
for Contingencies,
in
evaluating the recognition and measurement of uncertain tax positions. The
Company will be required to adopt FIN 48 on July 1, 2007, and is in the process
of assessing the impact of the adoption of this standard on the Company’s
financial statements.
During
September 2006, the FASB issued Statement of Financial Accounting
Standards (SFAS) Number 157, Fair
Value Measurements.
SFAS
Number 157 establishes a framework for measuring fair value within generally
accepted accounting principles, clarifies the definition of fair value within
that framework, and expands disclosures about the use of fair value
measurements. SFAS Number 157 does not require any new fair value measurements
in generally accepted accounting principles. However, the definition of fair
value in SFAS Number 157 may affect assumptions used by companies in determining
fair value. The Company will be required to adopt SFAS Number 157 on July 1,
2008. The Company has not completed its evaluation of the impact of adopting
SFAS Number 157 on the Company’s financial statements, but currently believes
the impact of the adoption of SFAS Number 157 will not require material
modification of the Company’s fair value measurements and will be substantially
limited to expanded disclosures in the notes to the Company’s consolidated
financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Archer-Daniels-Midland
Company
Note
2. New Accounting Standards (Continued)
During
September 2006, the FASB issued SFAS Number 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans.
This Statement requires an employer to recognize the overfunded or
underfunded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its balance sheet and to
recognize changes in the funded status of a defined benefit postretirement
plan
in comprehensive income in the year in which the changes occur. SFAS Number
158
also requires companies to measure the funded status of defined benefit
postretirement plans as of the end of the fiscal year instead of a date up
to
three months prior to the end of the fiscal year. Pursuant to SFAS Number 158,
the Company will be required to recognize the funded status of its defined
benefit postretirement plans in its consolidated balance sheet as of June 30,
2007. The Company will be required to adopt the measurement date
provisions of SFAS Number 158 on June 30, 2009. Had the Company recognized
the overfunded and underfunded status of its defined benefit postretirement
plans as of June 30, 2006, other long-term assets, deferred income taxes, and
accumulated other comprehensive income would have been reduced $230 million,
$120 million, and $197 million, respectively, while other long-term liabilities
would have increased by $87 million.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Archer-Daniels-Midland
Company
Note
3. Comprehensive Income
The
components of comprehensive income, net of related tax, are as
follows:
|
|
THREE
MONTHS ENDED
|
SIX
MONTHS ENDED
|
|
|
DECEMBER
31,
|
DECEMBER
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
441,268
|
|
$
|
367,677
|
|
$
|
844,013
|
|
$
|
554,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(loss)
on investments
|
|
|
7,296
|
|
|
(46,725
|
)
|
|
15,067
|
|
|
(58,442
|
)
|
Deferred
gain (loss) on hedging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
|
|
78,890
|
|
|
(35,644
|
)
|
|
127,144
|
|
|
24,760
|
|
Minimum
pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liability
adjustment
|
|
|
(437
|
)
|
|
279
|
|
|
(323
|
)
|
|
383
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
|
|
|
135,940
|
|
|
(32,584
|
)
|
|
164,887
|
|
|
(39,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
662,957
|
|
$
|
253,003
|
|
$
|
1,150,788
|
|
$
|
481,011
|
|
Note
4.
Other (Income) Expense - Net
|
|
THREE
MONTHS ENDED
|
SIX
MONTHS ENDED
|
|
|
DECEMBER
31,
|
DECEMBER
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
$
|
111,071
|
|
$
|
86,609
|
|
$
|
208,122
|
|
$
|
172,898
|
|
Investment
income
|
|
|
(64,622
|
)
|
|
(60,074
|
)
|
|
(125,331
|
)
|
|
(97,848
|
)
|
Net
gain on marketable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
transactions
|
|
|
(6,487
|
)
|
|
(22,975
|
)
|
|
(10,760
|
)
|
|
(28,234
|
)
|
Equity
in earnings of affiliates
|
|
|
(65,986
|
)
|
|
(22,994
|
)
|
|
(122,601
|
)
|
|
(58,674
|
)
|
Other
- net
|
|
|
7,006
|
|
|
1,806
|
|
|
12,042
|
|
|
(1,246
|
)
|
|
|
$
|
(19,018
|
)
|
$
|
(17,628
|
)
|
$
|
(38,528
|
)
|
$
|
(13,104
|
)
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Archer-Daniels-Midland
Company
Note
5.
Retirement Plan Expense
The
Company provides substantially all domestic employees and employees at certain
international subsidiaries with pension benefits. The Company also provides
substantially all domestic salaried employees with postretirement health care
and life insurance benefits. Retirement plan expense for these pension and
postretirement benefits for the quarter and six months ended December 31, 2006
and 2005 is as follows:
|
|
Pension
Benefits
|
|
|
THREE
MONTHS ENDED
|
SIX
MONTHS ENDED
|
|
|
DECEMBER
31,
|
DECEMBER
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost (benefits earned during the period)
|
|
$
|
15,358
|
|
$
|
23,619
|
|
$
|
30,716
|
|
$
|
38,249
|
|
Interest
cost
|
|
|
23,100
|
|
|
21,428
|
|
|
46,200
|
|
|
42,857
|
|
Expected
return on plan assets
|
|
|
(25,303
|
)
|
|
(20,075
|
)
|
|
(50,606
|
)
|
|
(40,151
|
)
|
Actuarial
loss
|
|
|
4,858
|
|
|
8,749
|
|
|
9,716
|
|
|
17,498
|
|
Net
amortization
|
|
|
1,561
|
|
|
1,432
|
|
|
3,122
|
|
|
2,610
|
|
Net
periodic defined benefit plan expense
|
|
$
|
19,574
|
|
$
|
35,153
|
|
$
|
39,148
|
|
$
|
61,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
Benefits
|
|
|
THREE
MONTHS ENDED
|
SIX
MONTHS ENDED
|
|
|
DECEMBER
31,
|
DECEMBER
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost (benefits earned during the period)
|
|
$
|
1,756
|
|
$
|
1,665
|
|
$
|
3,512
|
|
$
|
3,330
|
|
Interest
cost
|
|
|
2,435
|
|
|
2,131
|
|
|
4,870
|
|
|
4,262
|
|
Expected
return on plan assets
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Actuarial
loss
|
|
|
159
|
|
|
107
|
|
|
318
|
|
|
214
|
|
Net
amortization
|
|
|
(279
|
)
|
|
(279
|
)
|
|
(558
|
)
|
|
(558
|
)
|
Net
periodic defined benefit plan expense
|
|
$
|
4,071
|
|
$
|
3,624
|
|
$
|
8,142
|
|
$
|
7,248
|
|
Note
6. Guarantees
The
Company has entered into debt guarantee agreements, primarily related to
equity-method investees, which could obligate the Company to make future
payments if the primary entity fails to perform its contractual obligation.
The
Company has not recorded a liability for these contingent obligations, as the
Company believes the fair value of these contingent obligations is immaterial.
The Company has collateral for a portion of these contingent obligations. These
contingent obligations totaled $149 million at December 31, 2006. Outstanding
borrowings under these contingent obligations were $104 million at December
31,
2006.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Archer-Daniels-Midland
Company
Note
7. Segment Information
The
Company is principally engaged in procuring, transporting, storing, processing,
and merchandising agricultural commodities and products. The Company’s
operations are classified into three reportable business segments: Oilseeds
Processing, Corn Processing, and Agricultural Services. Each of these segments
is organized based upon the nature of products and services offered. The
Company’s remaining operations are aggregated and classified as Other.
The
Oilseeds Processing segment includes activities related to processing oilseeds
such as soybeans, cottonseed, sunflower seeds, canola, peanuts, and flaxseed
into vegetable oils and meals principally for the food and feed industries.
In
addition, oilseeds may be resold into the marketplace as a raw material for
other processors. Crude vegetable oil is sold "as is" or is further processed
by
refining, bleaching, and deodorizing into salad oils. Salad oils can be further
processed by hydrogenating and/or interesterifying into margarine, shortening,
and other food products. Partially refined oil is sold for use in chemicals,
paints, and other industrial products. Refined oil can be further processed
for
use in the production of biodiesel. Oilseed meals are primary ingredients used
in the manufacture of commercial livestock and poultry feeds.
The
Corn
Processing segment includes activities related to the production of sweeteners,
starches, dextrose, and syrups for the food and beverage industry as well as
activities related to the production, by fermentation, of bioproducts such
as
alcohol, amino acids, and other specialty food and feed ingredients.
The
Agricultural Services segment utilizes the Company’s extensive grain elevator
and transportation network to buy, store, clean, and transport agricultural
commodities, such as oilseeds, corn, wheat, milo, oats, and barley, and resells
these commodities primarily as feed ingredients and as raw materials for the
agricultural processing industry. Agricultural Services’ grain sourcing and
transportation network provides reliable and efficient services to the Company’s
agricultural processing operations. Also included in Agricultural Services
are
the activities of A.C. Toepfer International, a global merchandiser of
agricultural commodities and processed products.
Other
includes the Company’s remaining operations, consisting principally of food and
feed ingredient businesses, industrial businesses, and financial activities.
Food and feed ingredient businesses include Wheat Processing with activities
related to the production of wheat flour; Cocoa Processing with activities
related to the production of chocolate and cocoa products; the production of
natural health and nutrition products; and the production of other specialty
food and feed ingredients. Financial activities include banking, captive
insurance, private equity fund investments, and futures commission merchant
activities.
Intersegment
sales have been recorded at amounts approximating market. Operating profit
for
each segment is based on net sales less identifiable operating expenses,
including an interest charge related to working capital usage. Also included
in
operating profit are the related equity in earnings of affiliates based on
the equity method of accounting. General corporate expenses, investment income,
unallocated interest expense, marketable securities transactions, and FIFO
to
LIFO inventory adjustments have been excluded from segment operations and
classified as Corporate.
For
detailed information regarding the Company’s reportable segments, see Note 13 to
the consolidated financial statements included in the Company’s annual report on
Form 10-K for the year ended June 30, 2006.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Archer-Daniels-Midland
Company
Note
7.
Segment Information (Continued)
|
|
THREE
MONTHS ENDED
|
SIX
MONTHS ENDED
|
|
|
DECEMBER
31,
|
DECEMBER
31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
to external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oilseeds
Processing
|
|
$
|
3,349,449
|
|
$
|
2,933,162
|
|
$
|
6,583,239
|
|
$
|
5,922,128
|
|
Corn
Processing
|
|
|
1,324,724
|
|
|
1,142,388
|
|
|
2,585,614
|
|
|
2,302,601
|
|
Agricultural
Services
|
|
|
5,021,129
|
|
|
4,067,181
|
|
|
8,836,225
|
|
|
7,421,140
|
|
Other
|
|
|
1,280,737
|
|
|
1,156,254
|
|
|
2,417,883
|
|
|
2,280,065
|
|
Total
|
|
$
|
10,976,039
|
|
$
|
9,298,985
|
|
$
|
20,422,961
|
|
$
|
17,925,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oilseeds
Processing
|
|
$
|
113,265
|
|
$
|
40,257
|
|
$
|
218,090
|
|
$
|
81,179
|
|
Corn
Processing
|
|
|
89,911
|
|
|
103,466
|
|
|
166,174
|
|
|
192,114
|
|
Agricultural
Services
|
|
|
560,156
|
|
|
282,307
|
|
|
865,848
|
|
|
593,774
|
|
Other
|
|
|
30,606
|
|
|
29,340
|
|
|
60,794
|
|
|
56,929
|
|
Total
|
|
$
|
793,938
|
|
$
|
455,370
|
|
$
|
1,310,906
|
|
$
|
923,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oilseeds
Processing
|
|
$
|
3,462,714
|
|
$
|
2,973,419
|
|
$
|
6,801,329
|
|
$
|
6,003,307
|
|
Corn
Processing
|
|
|
1,414,635
|
|
|
1,245,854
|
|
|
2,751,788
|
|
|
2,494,715
|
|
Agricultural
Services
|
|
|
5,581,285
|
|
|
4,349,488
|
|
|
9,702,073
|
|
|
8,014,914
|
|
Other
|
|
|
1,311,343
|
|
|
1,185,594
|
|
|
2,478,677
|
|
|
2,336,994
|
|
Intersegment
elimination
|
|
|
(793,938
|
)
|
|
(455,370
|
)
|
|
(1,310,906
|
)
|
|
(923,996
|
)
|
Total
|
|
$
|
10,976,039
|
|
$
|
9,298,985
|
|
$
|
20,422,961
|
|
$
|
17,925,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oilseeds
Processing
|
|
$
|
192,005
|
|
$
|
128,077
|
|
$
|
361,650
|
|
$
|
227,192
|
|
Corn
Processing
|
|
|
335,460
|
|
|
236,532
|
|
|
625,958
|
|
|
372,790
|
|
Agricultural
Services
|
|
|
122,836
|
|
|
93,606
|
|
|
234,135
|
|
|
113,615
|
|
Other
|
|
|
116,736
|
|
|
65,680
|
|
|
193,228
|
|
|
160,816
|
|
Total
segment operating profit
|
|
|
767,037
|
|
|
523,895
|
|
|
1,414,971
|
|
|
874,413
|
|
Corporate
|
|
|
(138,310
|
)
|
|
(17,191
|
)
|
|
(210,991
|
)
|
|
(93,977
|
)
|
Earnings
before income taxes
|
|
$
|
628,727
|
|
$
|
506,704
|
|
$
|
1,203,980
|
|
$
|
780,436
|
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
COMPANY
OVERVIEW
The
Company is principally engaged in procuring, transporting, storing, processing,
and merchandising agricultural commodities and products. The Company’s
operations are classified into three reportable business segments: Oilseeds
Processing, Corn Processing, and Agricultural Services. Each of these segments
is organized based upon the nature of products and services offered. The
Company’s remaining operations are aggregated and classified as Other.
The
Oilseeds Processing segment includes activities related to processing oilseeds
such as soybeans, cottonseed, sunflower seeds, canola, peanuts, and flaxseed
into vegetable oils and meals principally for the food and feed industries.
In
addition, oilseeds may be resold into the marketplace as a raw material for
other processors. Crude vegetable oil is sold "as is" or is further processed
by
refining, bleaching, and deodorizing into salad oils. Salad oils can be further
processed by hydrogenating and/or interesterifying into margarine, shortening,
and other food products. Partially refined oil is sold for use in chemicals,
paints, and other industrial products. Refined oil can be further processed
for
use in the production of biodiesel. Oilseed meals are primary ingredients used
in the manufacture of commercial livestock and poultry feeds.
The
Corn
Processing segment includes activities related to the production of sweeteners,
starches, dextrose, and syrups for the food and beverage industry as well as
activities related to the production, by fermentation, of bioproducts such
as
alcohol, amino acids, and other specialty food and feed ingredients.
The
Agricultural Services segment utilizes the Company’s extensive grain elevator
and transportation network to buy, store, clean, and transport agricultural
commodities, such as oilseeds, corn, wheat, milo, oats, and barley, and resells
these commodities primarily as feed ingredients and as raw materials for the
agricultural processing industry. Agricultural Services’ grain sourcing and
transportation network provides reliable and efficient services to the Company’s
agricultural processing operations. Also included in Agricultural Services
are
the activities of A.C. Toepfer International, a global merchandiser of
agricultural commodities and processed products.
Other
includes the Company’s remaining operations, consisting principally of food and
feed ingredient businesses, industrial businesses, and financial activities.
Food and feed ingredient businesses include Wheat Processing with activities
related to the production of wheat flour; Cocoa Processing with activities
related to the production of chocolate and cocoa products; the production of
natural health and nutrition products; and the production of other specialty
food and feed ingredients. Financial activities include banking, captive
insurance, private equity fund investments, and futures commission merchant
activities.
Operating
Performance Indicators
The
Company is exposed to certain risks inherent to an agricultural-based commodity
business. These risks are further described in Item 1A, “Risk Factors” included
in the Company’s annual report on Form 10-K for the year ended June 30,
2006.
The
Company’s Oilseeds Processing, Agricultural Services, and Wheat Processing
operations are principally agricultural commodity-based businesses where changes
in segment selling prices move in relationship to changes in prices of the
commodity-based agricultural raw materials. Therefore, changes in agricultural
commodity prices have relatively equal impacts on both net sales and cost of
products sold and minimal impact on the gross profit of underlying transactions.
As a result, changes in net sales amounts of these business segments do not
necessarily correspond to the changes in gross profit realized by these
businesses.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
The
Company’s Corn Processing operations and certain other food and feed processing
operations also utilize agricultural commodities (or products derived from
agricultural commodities) as raw materials. In these operations, agricultural
commodity price changes can result in significant fluctuations in cost of
products sold and such price changes cannot necessarily be passed directly
through to the selling price of the finished products. For products such as
ethanol, selling prices bear no direct relationship to the raw material cost
of
the agricultural commodity from which it is produced.
The
Company conducts its business in many countries. For the majority of the
Company’s subsidiaries located outside the United States, the local currency is
the functional currency. Revenues and expenses denominated in foreign currencies
are translated into U.S. dollars at the weighted average exchange rates for
the
applicable periods. Fluctuations in the exchange rates of foreign currencies,
primarily the Euro and British pound, as compared to the U.S. dollar will result
in corresponding fluctuations in the relative U.S. dollar value of the Company’s
revenues and expenses. The impact of these currency exchange rate changes was
not significant during the quarter and six months ended December 31,
2006.
The
Company measures the performance of its business segments using key operating
statistics such as segment operating profit and return on fixed capital
investment and net assets. The Company’s operating results can vary
significantly due to changes in unpredictable factors such as fluctuations
in
energy prices, weather conditions, plantings, global government farm programs
and policies, changes in global demand resulting from population growth and
changes in standards of living, and global production of similar and competitive
crops. Due to these unpredictable factors, the Company does not provide
forward-looking information in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” Additionally, the Company’s
operating results for the current quarter are not necessarily indicative of
the
results that may be expected for the year ending June 30, 2007.
THREE
MONTHS ENDED DECEMBER 31, 2006 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2005
As
an
agricultural-based commodity business, the Company is subject to a variety
of
market factors which affect the Company’s operating results. Strong biodiesel
demand in Europe continued to create increased vegetable oil demand and has
positively impacted rapeseed crushing margins in Europe. Abundant oilseed
supplies, improved vegetable oil values, and strong protein meal demand have
positively impacted oilseed crushing margins in North America. Increased ethanol
contract prices and continuing strong ethanol demand led to improved corn
processing results. Solid demand for sweetener and starch products also improved
corn processing results. North American river transportation operations were
favorably impacted by strong demand for river transportation services which
increased barge freight rates. These conditions resulted in improved operating
results during the quarter for Oilseed Processing, Corn Processing, and
Agricultural Services. Increasing commodity price levels negatively affected
LIFO inventory valuations partially offsetting the improvements in operating
results.
ANALYSIS
OF STATEMENTS OF EARNINGS
Net
sales
and other operating income increased 18% to $11.0 billion for the quarter due
primarily to increased selling prices of agricultural commodities and of corn
processing products and, to a lesser extent, increased sales volumes of
agricultural commodities.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Net
sales
and other operating income by segment for the quarter are as
follows:
|
|
THREE
MONTHS ENDED
|
|
|
|
|
|
DECEMBER
31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
(In
thousands)
|
Oilseeds
Processing
|
|
$
|
3,349,449
|
|
$
|
2,933,162
|
|
$
|
416,287
|
|
Corn
Processing
|
|
|
|
|
|
|
|
|
|
|
Sweeteners
and Starches
|
|
|
531,834
|
|
|
481,831
|
|
|
50,003
|
|
Bioproducts
|
|
|
792,890
|
|
|
660,557
|
|
|
132,333
|
|
Total
Corn Processing
|
|
|
1,324,724
|
|
|
1,142,388
|
|
|
182,336
|
|
Agricultural
Services
|
|
|
5,021,129
|
|
|
4,067,181
|
|
|
953,948
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Food,
Feed and Industrial
|
|
|
1,259,183
|
|
|
1,139,343
|
|
|
119,840
|
|
Financial
|
|
|
21,554
|
|
|
16,911
|
|
|
4,643
|
|
Total
Other
|
|
|
1,280,737
|
|
|
1,156,254
|
|
|
124,483
|
|
Total
|
|
$
|
10,976,039
|
|
$
|
9,298,985
|
|
$
|
1,677,054
|
|
Oilseeds
Processing sales increased 14% to $3.3 billion for the quarter due principally
to increased average selling prices of vegetable oil and protein meal and
increased sales volumes of vegetable oil and biodiesel. Vegetable oil selling
prices and volumes improved as the markets anticipate new demand from the
developing U.S. biodiesel industry. Protein meal average selling prices
increased as a result of higher oilseed commodity prices. Corn Processing sales
increased 16% to $1.3 billion for the quarter principally due to Bioproducts
sales increases and, to a lesser extent, increased sales of Sweeteners and
Starches. Bioproducts sales increased primarily due to increased average selling
prices of ethanol, partially offset by lower sales volumes of ethanol. Ethanol
average sales prices increased principally due to strong demand from gasoline
refiners. Ethanol sales volumes declined as last year’s sales volumes exceeded
production due to the release of inventories built up in anticipation of
refiners replacing MTBE with ethanol. Sweeteners and Starches sales increased
primarily due to higher average selling prices resulting from solid demand
for
sweetener and starch products. Agricultural Services sales increased 23% to
$5.0
billion for the quarter principally due to increased agricultural commodity
prices. Other sales increased 11% to $1.3 billion for the quarter primarily
due
to increased sales of wheat flour and cocoa products.
Cost
of
products sold increased 18% to $10.1 billion for the quarter primarily due
to
higher average prices of agricultural commodities and increased sales volumes.
Manufacturing costs increased $54 million primarily due to higher plant
maintenance costs, increased employee-related costs, and increased energy costs.
Last year’s manufacturing costs included a $23 million charge for abandonment
and write-down of long-lived assets.
Selling,
general, and administrative expenses increased 1% to $298 million for the
quarter due principally to increased employee-related costs. Last year’s
selling, general, and administrative expenses included $15 million of severance
costs associated with the closure of a citric acid plant.
Other
income increased slightly to $19 million for the quarter due principally to
increased equity in earnings of unconsolidated affiliates, partially offset
by
increased interest expense and a $16 million decrease in realized securities
gains. Equity in earnings of unconsolidated affiliates improved principally
due
to higher valuations of the Company’s private equity fund investments. Interest
expense increased primarily due to higher average borrowing levels and, to
a
lesser extent, higher interest rates. Last year’s interest expense and
investment income included a $19 million credit related to the reversal of
Brazilian transactional taxes assessed on investment income upon positive
resolution in the Brazilian Supreme Court.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Operating
profit by segment for the quarter is as follows:
|
|
THREE
MONTHS ENDED
|
|
|
|
|
|
DECEMBER
31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
(In
thousands)
|
Oilseeds
Processing
|
|
$
|
192,005
|
|
$
|
128,077
|
|
$
|
63,928
|
|
Corn
Processing
|
|
|
|
|
|
|
|
|
|
|
Sweeteners
and Starches
|
|
|
146,188
|
|
|
114,043
|
|
|
32,145
|
|
Bioproducts
|
|
|
189,272
|
|
|
122,489
|
|
|
66,783
|
|
Total
Corn Processing
|
|
|
335,460
|
|
|
236,532
|
|
|
98,928
|
|
Agricultural
Services
|
|
|
122,836
|
|
|
93,606
|
|
|
29,230
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Food,
Feed and Industrial
|
|
|
53,209
|
|
|
34,902
|
|
|
18,307
|
|
Financial
|
|
|
63,527
|
|
|
30,778
|
|
|
32,749
|
|
Total
Other
|
|
|
116,736
|
|
|
65,680
|
|
|
51,056
|
|
Total
Segment Operating Profit
|
|
|
767,037
|
|
|
523,895
|
|
|
243,142
|
|
Corporate
|
|
|
(138,310
|
)
|
|
(17,191
|
)
|
|
(121,119
|
)
|
Earnings
Before Income Taxes
|
|
$
|
628,727
|
|
$
|
506,704
|
|
$
|
122,023
|
|
Oilseeds
Processing operating profits increased 50% to $192 million for the quarter
due
to improved market conditions in all geographic regions. North American
processing results improved principally due to abundant oilseed supplies in
the
U.S. and good demand for soybean meal. Vegetable oil values improved as the
markets anticipate new demand from the developing U.S. biodiesel industry.
European processing results improved principally due to abundant oilseed
supplies in Europe and strong demand for vegetable oil. The strong demand for
vegetable oil is the result of strong biodiesel demand. These increases were
partially offset by decreased biodiesel operating profits resulting from higher
vegetable oil prices and lower diesel fuel prices. Improved operating results
in
South America also contributed to the increase in operating
profits.
Corn
Processing operating profits increased 42% to $335 million for the quarter
primarily due to higher average selling prices, partially offset by lower
ethanol sales volumes, and higher net corn costs. Sweeteners and Starches
operating profits increased $32 million due primarily to higher average sales
prices and sales volumes. Sales volumes and prices have increased principally
due to good demand for sweetener and starch products. These increases were
partially offset by increased net corn costs. Bioproducts operating profits
increased $67 million primarily due to higher ethanol average selling prices,
partially offset by lower ethanol sales volumes and increased net corn costs.
Ethanol average sales prices increased principally due to strong demand from
gasoline refiners. Ethanol sales volumes declined as last year’s sales volumes
exceeded production due to the release of inventories built up in anticipation
of refiners replacing MTBE with ethanol. Last year’s Bioproducts operating
results included $15 million of severance costs related to the closure of a
citric acid plant.
Agricultural
Services operating profits increased 31% to $123 million for the quarter
primarily due to improvements in transportation and global grain merchandising
operating results, partially offset by a decline in North American origination
operating results. North American river transportation operating results
increased primarily due to increased barge freight rates created by strong
demand for barge capacity. Global grain merchandising results improved as
regional production imbalances allowed the Company to capitalize on
its
merchandising capabilities. North American origination results declined as
last
year’s results were favorably impacted by increased volumes as origination
activities recovered from the disruptions caused by the Gulf Coast hurricanes
during the first quarter of fiscal 2006.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Other
operating profits increased $51 million to $117 million for the quarter. Other
-
Food, Feed and Industrial operating profits increased $18 million primarily
due
to last year’s $23 million charge for abandonment and write-down of long-lived
assets, last year’s $9 million charge representing the Company’s share of a
charge for abandonment and write-down of long-lived assets reported by an
unconsolidated affiliate of the Company, and improved operating results of
wheat
processing and formula feed operations. These increases were partially offset
by
a decline in cocoa processing operating results primarily due to increased
industry capacity which caused downward pressure on cocoa finished product
prices. Other - Financial operating profits increased $33 million principally
due to increased valuations of the Company’s private equity fund investments and
improvements in the Company’s futures commission merchant business.
Corporate
expense increased $121 million primarily due to a $107 million charge, compared
to a $3 million credit in the prior year, related to the effect of changing
commodity prices on LIFO inventory valuations. In addition, a reduction in
realized securities gains, partially offset by a reduction in unallocated
interest expense also contributed to the increase in Corporate expense. Last
year’s Corporate expense included a $19 million credit related to the
aforementioned reversal of Brazilian transactional taxes.
Income
taxes increased due to last year’s $36 million reduction in income tax expense
related to the recognition of federal and state income tax credits and
adjustments resulting from the reconciliation of filed tax returns to the
previously estimated tax provision and to higher pretax earnings. The Company’s
effective tax rate during the quarter was 29.8% and, after excluding the effect
of last year’s $36 million tax credit, was 34.5% for the prior year quarter. The
decrease in the Company’s effective tax rate is primarily due to changes in the
geographic mix of pretax earnings.
SIX
MONTHS ENDED DECEMBER 31, 2006 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2005
As
an
agricultural-based commodity business, the Company is subject to a variety
of
market factors which affect the Company’s operating results. Strong biodiesel
demand in Europe continued to create increased vegetable oil demand and has
positively impacted rapeseed crushing margins in Europe. Abundant oilseed
supplies, improved vegetable oil values, and strong protein meal demand have
positively impacted oilseed crushing margins in North America. Increased ethanol
contract prices and continuing strong ethanol demand led to improved corn
processing results. Solid demand for sweetener and starch products also improved
corn processing results. North American grain origination and agricultural
commodity export operations experienced favorable operating conditions as a
result of abundant supplies of agricultural commodities. North American river
transportation operations were favorably impacted by strong demand for river
transportation services which increased barge freight rates. These conditions
resulted in improved operating results during the six months for
Oilseeds Processing, Corn Processing, and Agricultural Services. Increasing
commodity price levels negatively affected LIFO inventory valuations partially
offsetting the improvements in operating results.
ANALYSIS
OF STATEMENTS OF EARNINGS
Net
sales
and other operating income increased 14% to $20.4 billion for the six months
due
primarily to increased selling prices of agricultural commodities and of corn
processing products and, to a lesser extent, increased sales volumes of oilseed
processing products and agricultural commodities.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Net
sales
and other operating income by segment for the six months are as
follows:
|
|
SIX
MONTHS ENDED
|
|
|
|
|
|
DECEMBER
31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
(In
thousands)
|
Oilseeds
Processing
|
|
$
|
6,583,239
|
|
$
|
5,922,128
|
|
$
|
661,111
|
|
Corn
Processing
|
|
|
|
|
|
|
|
|
|
|
Sweeteners
and Starches
|
|
|
1,070,815
|
|
|
984,918
|
|
|
85,897
|
|
Bioproducts
|
|
|
1,514,799
|
|
|
1,317,683
|
|
|
197,116
|
|
Total
Corn Processing
|
|
|
2,585,614
|
|
|
2,302,601
|
|
|
283,013
|
|
Agricultural
Services
|
|
|
8,836,225
|
|
|
7,421,140
|
|
|
1,415,085
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Food,
Feed and Industrial
|
|
|
2,372,662
|
|
|
2,247,224
|
|
|
125,438
|
|
Financial
|
|
|
45,221
|
|
|
32,841
|
|
|
12,380
|
|
Total
Other
|
|
|
2,417,883
|
|
|
2,280,065
|
|
|
137,818
|
|
Total
|
|
$
|
20,422,961
|
|
$
|
17,925,934
|
|
$
|
2,497,027
|
|
Oilseeds
Processing sales increased 11% to $6.6 billion for the six months due
principally to increased average selling prices of vegetable oil and increased
sales volumes of vegetable oil, biodiesel, and South American oilseed exports.
Vegetable oil selling prices and volumes improved as the markets anticipate
new
demand from the developing U.S. biodiesel industry. Corn Processing sales
increased 12% to $2.6 billion for the six months principally due to Bioproducts
sales increases and, to a lesser extent, increased sales of Sweeteners and
Starches. Bioproducts sales increased primarily due to increased average selling
prices of ethanol, partially offset by lower sales volumes of ethanol. Ethanol
average sales prices increased principally due to strong demand from gasoline
refiners. Ethanol sales volumes declined as last year’s sales volumes exceeded
production due to the release of inventories built up in anticipation of
refiners replacing MTBE with ethanol. Sweeteners and Starches sales increased
primarily due to higher average selling prices resulting from solid demand
for
sweetener and starch products. Agricultural Services sales increased 19% to
$8.8
billion for the six months principally due to increased agricultural commodity
prices and, to a lesser extent, increased sales volumes of North American grain
origination activities. Other sales increased 6% to $2.4 billion for the six
months primarily due to increased sales of wheat flour and cocoa
products.
Cost
of
products sold increased 13% to $18.6 billion for the six months primarily due
to
higher average prices of agricultural commodities, increased sales volumes
and
increased manufacturing costs. Manufacturing costs increased $145 million
primarily due to increased energy costs, higher plant maintenance costs, and
increased employee-related costs. Last year’s manufacturing costs include a $23
million charge for abandonment and write-down of long-lived assets.
Selling,
general, and administrative expenses increased 2% to $608 million for the six
months principally due to increased employee-related costs. During the six
months ended December 31, 2006 and 2005, the Company issued option grants and
restricted stock awards to officers and key employees pursuant to the Company’s
Long-term Management Incentive Program. Certain officers and key employees
of
the Company receiving option grants and restricted stock awards are eligible
for
retirement. Compensation expense related to option grants and restricted stock
awards issued to these retirement-eligible employees is recognized in earnings
on the date of grant. Selling, general, and administrative expense for the
six
months ended December 31, 2006 and 2005 include compensation expense related
to
option grants and restricted stock awards granted to retirement-eligible
employees of $30 million and $31 million, respectively. Last year’s selling,
general, and administrative expenses include $15 million of severance costs
associated with the closure of a citric acid plant.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Other
income increased $25 million for the six months primarily due to a $64 million
increase in equity in earnings of unconsolidated affiliates and a $27 million
increase in investment income, partially offset by a $35 million increase in
interest expense and a $17 million decrease in realized securities gains. The
increase in equity in earnings of unconsolidated affiliates is primarily due
to
higher valuations of the Company’s private equity fund investments and improved
operating results of the Company’s Asian joint ventures. Interest expense and
investment income increased primarily due to increased average borrowing and
investment levels. In addition, last year’s interest expense and investment
income included a $19 million credit related to the aforementioned reversal
of
Brazilian transactional taxes.
Operating
profit by segment for the six months is as follows:
|
|
SIX
MONTHS ENDED
|
|
|
|
|
|
DECEMBER
31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
(In
thousands)
|
Oilseeds
Processing
|
|
$
|
361,650
|
|
$
|
227,192
|
|
$
|
134,458
|
|
Corn
Processing
|
|
|
|
|
|
|
|
|
|
|
Sweeteners
and Starches
|
|
|
259,102
|
|
|
206,524
|
|
|
52,578
|
|
Bioproducts
|
|
|
366,856
|
|
|
166,266
|
|
|
200,590
|
|
Total
Corn Processing
|
|
|
625,958
|
|
|
372,790
|
|
|
253,168
|
|
Agricultural
Services
|
|
|
234,135
|
|
|
113,615
|
|
|
120,520
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Food,
Feed and Industrial
|
|
|
91,378
|
|
|
104,131
|
|
|
(12,753
|
)
|
Financial
|
|
|
101,850
|
|
|
56,685
|
|
|
45,165
|
|
Total
Other
|
|
|
193,228
|
|
|
160,816
|
|
|
32,412
|
|
Total
Segment Operating Profit
|
|
|
1,414,971
|
|
|
874,413
|
|
|
540,558
|
|
Corporate
|
|
|
(210,991
|
)
|
|
(93,977
|
)
|
|
(117,014
|
)
|
Earnings
Before Income Taxes
|
|
$
|
1,203,980
|
|
$
|
780,436
|
|
$
|
423,544
|
|
Oilseeds
Processing operating profits increased $134 million to $362 million for the
six
months due to improved market conditions in all geographic regions. North
American processing results improved principally due to abundant oilseed
supplies in the U.S. and good demand for soybean meal. Vegetable oil values
improved as the markets anticipate new demand from the developing U.S. biodiesel
industry. European processing results improved principally due to abundant
oilseed supplies in Europe and strong demand for vegetable oil. The strong
demand for vegetable oil is the result of strong biodiesel demand. These
increases were partially offset by decreased biodiesel operating profits
resulting from higher vegetable oil prices and lower diesel fuel prices.
Improved operating results in South America and Asia also contributed to the
increase in operating profits.
Corn
Processing operating profits increased $253 million to $626 million for the
six
months principally due to higher average selling prices, partially offset by
lower ethanol sales volumes, higher energy costs, and higher net corn costs.
Sweeteners and Starches operating profits increased $53 million due primarily
to
higher average sales prices and sales volumes. Sales volumes and prices have
increased principally due to good demand for sweetener and starch products.
These increases were partially offset by increased energy and net corn costs.
Bioproducts operating profits increased $201 million primarily due to higher
ethanol average selling prices, partially offset by lower ethanol sales volumes,
increased energy costs and increased net corn costs.
Ethanol average sales prices increased principally due to strong demand from
gasoline refiners. Ethanol sales volumes declined as last year’s sales volumes
exceeded production due to the release of inventories built up in anticipation
of refiners replacing MTBE with ethanol. Last year’s Bioproducts operating
results included $15 million of severance costs related to the closure of a
citric acid plant.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Agricultural
Services operating profits increased $121 million to $234 million for the six
months principally due to improved transportation and global grain merchandising
operating results and, to a lesser extent, improved operating results of North
American origination activities. North American river transportation operating
results increased primarily due to increased barge freight rates created by
strong demand for barge capacity. Global grain merchandising results improved
as
regional production imbalances allowed the Company to capitalize on its
merchandising capabilities.
Other
operating profits increased 20% to $193 million for the six months. Other -
Food, Feed and Industrial operating profits decreased $13 million. Last year’s
operating results include a $23 million charge for abandonment and write-down
of
long-lived assets, and a $9 million charge representing the Company’s share of a
charge for abandonment and write-down of long-lived assets reported by an
unconsolidated affiliate of the Company. Excluding last year’s charges for
abandonment and write-down of long-lived assets, Other - Food, Feed and
Industrial operating profits declined $45 million due primarily to cocoa
processing and natural health and nutrition operating results declining from
prior year levels. Cocoa processing operating results declined primarily due
to
increased industry capacity which caused downward pressure on cocoa finished
product prices. Other - Financial operating profits increased $45 million
principally due to increased valuations of the Company’s private equity fund
investments and higher operating results of the Company’s futures commission
merchant business, partially offset by lower operating results of the Company’s
captive insurance operations.
Corporate
expense increased $117 million to $211 million for the six months principally
due to a $124 million charge, compared to a $12 million credit in the prior
year, related to the effect of changing commodity prices on LIFO inventory
valuations. In addition, a $27 million reduction in realized securities gains
also contributed to the increase in Corporate expense. These increases were
partially offset by a reduction in unallocated interest expense due principally
to higher levels of invested funds and higher interest rates. Last year’s
Corporate expense included a $19 million credit related to the aforementioned
reversal of Brazilian transactional taxes.
Income
taxes increased due to last year’s $36 million reduction in income tax expense
related to the recognition of federal and state income tax credits and
adjustments resulting from the reconciliation of filed tax returns to the
previously estimated tax provision and to higher pretax earnings. The Company’s
effective tax rate during the six months was 29.9% and, after excluding the
effect of last year’s $36 million tax credit, was 33.6% for the prior year. The
decrease in the Company’s effective tax rate is primarily due to changes in the
geographic mix of pretax earnings.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
LIQUIDITY
AND CAPITAL RESOURCES
The
Company’s objective is to have sufficient liquidity, balance sheet strength, and
financial flexibility to fund the operating and capital requirements of a
capital intensive agricultural-based commodity business.
At
December 31, 2006, the Company continued to show substantial liquidity with
working capital of $6.2 billion and a current ratio, defined as current assets
divided by current liabilities, of 1.7 to 1. Included in working capital is
$1.2
billion of cash, cash equivalents, and short-term marketable securities as
well
as $4.4 billion of readily marketable commodity inventories. Working capital
increased $549 million during the six months principally due to increased prices
and quantities of agricultural commodity inventories. Capital resources remained
strong as reflected by the increase in the Company’s net worth from $9.8 billion
to $10.8 billion. The Company’s ratio of long-term debt to total capital (the
sum of the Company’s long-term debt and shareholders’ equity) was 27% at
December 31, 2006 compared to 29% at June 30, 2006. This ratio is a measure
of
the Company’s long-term liquidity and is an indicator of financial flexibility.
Contractual
Obligations and Commercial Commitments
During
the
six months ended December 31, 2006, the Company’s inventory purchase obligations
increased $3.9 billion to $11.4 billion. This increase was principally related
to increased obligations to purchase agricultural commodities. As of December
31, 2006, the Company expects to make payments related to inventory purchase
obligations of $11.0 billion within the next twelve months. There were no other
material changes in the Company’s contractual obligations and off balance sheet
arrangements during the six months ended December 31, 2006.
Critical
Accounting Policies
There
were
no material changes in the Company’s critical accounting policies during the six
months ended December 31, 2006.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The
market
risk inherent in the Company’s market risk sensitive instruments and positions
is the potential loss arising from adverse changes in: commodity prices as
they
relate to the Company’s net commodity position; marketable equity security
prices; market prices of limited partnerships’ investments; foreign currency
exchange rates; and interest rates. Significant changes in market risk sensitive
instruments and positions for the six months ended December 31, 2006 are
described below. There were no material changes during the six months in the
Company’s potential loss arising from changes in market prices of limited
partnerships’ investments, marketable equity securities, foreign currency
exchange rates, and interest rates.
For
detailed information regarding the Company’s market risk sensitive instruments
and positions, see the “Market Risk Sensitive Instruments and Positions” section
of “Management’s Discussion of Operations and Financial Condition” in the
Company’s annual report on Form 10-K for the year ended June 30,
2006.
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(CONTINUED)
|
Commodities
The
availability and price of agricultural commodities are subject to wide
fluctuations due to unpredictable factors such as weather, plantings, global
government farm programs and policies, changes in global demand resulting from
population growth and changes in standards of living, and global production
of
similar and competitive crops. A sensitivity analysis has been prepared to
estimate the Company’s exposure to market risk of its commodity position. The
Company’s daily net commodity position consists of inventories, related purchase
and sale contracts, and exchange-traded futures contracts, including those
to
hedge portions of production requirements. The fair value of such position
is a
summation of the fair values calculated for each commodity by valuing each
net
position at quoted futures prices. Market risk is estimated as the potential
loss in fair value resulting from a hypothetical 10 percent adverse change
in
such prices. Actual results may differ.
|
|
DECEMBER
31, 2006
|
JUNE
30, 2006
|
|
|
|
Fair
Value
|
|
|
Market
Risk
|
|
|
Fair
Value
|
|
|
Market
Risk
|
|
|
|
(in
millions)
|
Highest
long position
|
|
$
|
682
|
|
$
|
68
|
|
$
|
510
|
|
$
|
51
|
|
Highest
short position
|
|
|
278
|
|
|
28
|
|
|
574
|
|
|
57
|
|
Average
position - long (short)
|
|
|
287
|
|
|
29
|
|
|
(203
|
)
|
|
(20
|
)
|
The
increase in fair value of the average position was principally the result of
an
increase in the daily net commodity position.
ITEM
4. CONTROLS AND PROCEDURES
As
of
December 31, 2006, an evaluation was performed under the supervision and with
the participation of the Company’s management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company’s “disclosure controls and procedures” (as defined in
Rules 13a - 15(e) and 15d - 15(e) under the Securities Exchange Act of 1934
(the
“Exchange Act”)). Based on that evaluation, the Company’s management, including
the Chief Executive Officer and Chief Financial Officer, concluded the Company’s
disclosure controls and procedures were effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is (a) recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms and (b) accumulated and communicated to the Company’s management,
including the Chief Executive Officer and the Chief Financial Officer, to allow
timely decisions regarding required disclosure. There was no change in the
Company’s internal controls over financial reporting during the Company’s most
recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company’s internal controls over financial
reporting.
PART
II - OTHER INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
|
ENVIRONMENTAL
MATTERS
The
Company is involved in approximately twenty administrative and judicial
proceedings in which it has been identified as a potentially responsible party
(“PRP”) under the federal Superfund law and its state analogs for the study and
clean-up of sites contaminated by material discharged into the environment.
In
all of these matters there are numerous PRPs. Due to various factors such as
the
required level of remediation and participation in the clean-up effort by
others, the Company’s future clean-up costs at these sites cannot be reasonably
estimated. In management’s opinion, these proceedings will not, either
individually or in the aggregate, have a material adverse affect on the
Company’s financial condition or results of operations.
There
were
no significant changes in the Company’s risk factors during the three months
ended
December
31, 2006.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
ISSUER
PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
Total
Number of
|
|
Number
of Shares
|
|
|
|
Total
Number
|
|
|
Average
|
|
|
Shares
Purchased as
|
|
Remaining
that May be
|
|
|
|
of
Shares
|
|
|
Price
Paid
|
|
|
Part
of Publicly
|
|
Purchased
Under the
|
Period
|
|
|
Purchased
(1)
|
|
|
per
Share
|
|
|
Announced
Program (2)
|
|
Program
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October
1, 2006 to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October
31, 2006
|
|
|
304,174
|
|
$
|
36.93
|
|
|
273
|
|
|
92,863,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
1, 2006 to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
30, 2006
|
|
|
1,051,816
|
|
|
33.62
|
|
|
1,047,445
|
|
|
91,815,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
1, 2006 to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
3,105,519
|
|
|
32.52
|
|
|
3,097,009
|
|
|
88,718,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,461,509
|
|
$
|
33.08
|
|
|
4,144,727
|
|
|
88,718,607
|
|
(1)
|
Total
shares purchased represents those shares purchased as part of the
Company’s publicly announced share repurchase program described below,
shares received as payment of the exercise price for stock option
exercises, and shares received as payment of the withholding taxes
on
vested restricted stock grants. |
|
|
(2)
|
On
November 4, 2004, the Company’s Board of Directors approved a stock
repurchase program authorizing the Company to repurchase up to 100,000,000
shares of the Company’s common stock during the period commencing January
1, 2005 and ending December 31, 2009. |
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
The
Annual
Meeting of Stockholders was held on November 2, 2006. Proxies for the Annual
Meeting were solicited pursuant to Regulation 14A of the Securities Exchange
Act
of 1934, as amended. There was no solicitation in opposition to the Board of
Director nominees as listed in the proxy statement and all nominees were elected
as follows:
|
Nominee
|
Shares
Cast For
|
Shares
Withheld
|
|
|
|
|
|
G.
A. Andreas
|
549,008,476
|
23,681,263
|
|
A.
L. Boeckmann
|
551,055,354
|
21,634,385
|
|
M.
H. Carter
|
383,077,036
|
189,612,703
|
|
R.
S. Joslin
|
535,963,289
|
36,726,450
|
|
A.
Maciel
|
559,965,357
|
12,724,382
|
|
P.
J. Moore
|
552,549,529
|
20,140,210
|
|
M.
B. Mulroney
|
534,456,858
|
38,232,881
|
|
T.
F. O’Neill
|
534,013,079
|
38,676,660
|
|
O.
G. Webb
|
367,090,965
|
205,598,774
|
|
K.
R. Westbrook
|
548,619,719
|
24,070,020
|
|
P.
A. Woertz
|
551,356,837
|
21,332,902
|
|
The
Stockholder’s Proposal No. 1 (Labeling Genetically Engineered Food) was
defeated as follows: |
For
|
Against
|
Abstain
|
|
|
|
32,325,360
|
417,072,901
|
40,177,202
|
|
The
Stockholder’s Proposal No. 2 (Code of Conduct Regarding Global
Human Rights Standards) was defeated as
follows: |
For
|
Against
|
Abstain
|
|
|
|
118,097,442
|
325,510,551
|
45,967,470
|
|
|
Composite
Certificate of Incorporation, as amended, filed on November 13,
2001 as
Exhibit 3(i) to Form 10-Q for the quarter ended September 30, 2001
(File
No. 1-44), is incorporated herein by
reference.
|
|
(ii)
|
Bylaws,
as amended, filed on February 6, 2007 as Exhibit 3(ii) to Form 8-K
(File No. 1-44), are incorporated herein by reference.
|
|
(4)
|
Indenture
dated as of September 20, 2006 between the Company and JP Morgan
Chase
Bank, filed on September 22, 2006 as Exhibit 4 to Form S-3 (File
No.
333-137541), is incorporated herein by
reference.
|
|
(31.1)
|
Certification
of Chief Executive Officer pursuant to Rule 13a - 14(a) and Rule
15d-14(a)
of the Securities Exchange Act, as
amended.
|
|
(31.2)
|
Certification
of Chief Financial Officer pursuant to Rule 13a - 14(a) and Rule
15d-14(a)
of the Securities Exchange Act, as
amended.
|
|
(32.1)
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
(32.2)
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
ARCHER-DANIELS-MIDLAND
COMPANY
|
|
|
|
|
|
/s/
D. J. Schmalz
|
|
|
D.
J. Schmalz
|
|
|
Senior
Vice President
|
|
|
and
Chief Financial Officer
|
|
|
|
|
|
/s/
D. J. Smith
|
|
|
D.
J. Smith
|
|
|
Executive
Vice President, Secretary and
|
|
|
General
Counsel
|
Dated:
February 6, 2007