EX-13 2 0002.txt ANNUALREPORT Page 1 MANAGEMENT'S DISCUSSION OF OPERATIONS AND FINANCIAL CONDITION - JUNE 30, 2000 Operations The Company is in one business segment - procuring, transporting, storing, processing and merchandising agricultural commodities and products. A summary of net sales and other operating income by classes of products and services is as follows:
2000 1999 1998 (in millions) Oilseed products $7,219 $8,494 $10,15 2 Corn products 1,950 1,855 2,154 Wheat and other milled 1,358 1,378 1,491 products Other products and 2,350 services 2,556 2,312 $12,87 $14,28 $16,10 7 3 9
2000 compared to 1999 Net sales and other operating income decreased 10 percent to $12.9 billion for 2000 due principally to decreases in average selling prices of 11 percent. Sales of oilseed products decreased 15 percent to $7.2 billion due primarily to lower average selling prices reflecting the lower cost of raw materials. Sales of corn products increased 5 percent due primarily to increased sales volume and increased average selling price of the Company's fuel alcohol arising from good demand from existing sales markets and expansion into new markets due to higher gasoline prices and relative ethanol pricing. These increases more than offset slight decreases in sales volumes of the Company's sweetener and amino acid products. Sales of wheat and other milled products decreased 1 percent to $1.4 billion due principally to lower average selling prices reflecting the lower cost of raw materials. This decrease was partially offset by sales attributable to recently acquired operations in the United Kingdom and the Caribbean. The decrease in sales of other products and services was due primarily to decreased sales volumes and lower average selling prices of both the Company's cocoa and formula feed products. This decrease was partially offset by increased grain merchandising revenues. Cost of products sold and other operating costs decreased $1.4 billion to $11.7 billion due primarily to lower average raw material costs arising from an abundant worldwide supply of agriculture commodities. Gross profit decreased $12 million to $1.2 billion in 2000 due primarily to a $108 million charge to cost of products sold related to the abandonment of certain long-lived assets and other asset write-downs. This decrease was partially offset by increased grain merchandising margins. 1 Page 2 Selling, general and administrative expenses increased $28 million for the year to $729 million due principally to $26 million of expenses attributable to recently acquired operations and to newly-established international merchandising offices. Increased bad debt expense and increased severance costs associated with facility closures and consolidations were offset by decreased advertising expenses. Other expense increased $26 million to $137 million due principally to decreased gains on marketable securities transactions and increased interest expense due to both higher average borrowing levels and higher short-term borrowing rates. These increases were partially offset by increased equity in earnings of unconsolidated affiliates resulting primarily from higher valuations of the Company's private equity funds. The decrease in income taxes for 2000 resulted primarily from a $60 million tax credit related to a redetermination of foreign sales corporation benefits for prior years and the resolution of various other tax issues. To a lesser extent, income taxes decreased due to lower pretax earnings. The Company's effective income tax rate for 2000, excluding the aforementioned credit, was 32 percent compared to an effective rate of 33 percent for 1999. 1999 compared to 1998 Net sales and other operating income decreased 11 percent to $14.3 billion for 1999 due principally to decreases in average selling prices of 11 percent and in volumes of products sold of 7 percent. These decreases were partially offset by sales of $852 million attributable to recently acquired operations. Sales of oilseed products decreased 16 percent to $8.5 billion due primarily to lower average selling prices reflecting the lower cost of raw materials. Sales volumes of oilseed products decreased by 8 percent due to weak demand from Asia and Eastern Europe for both protein meals and vegetable oils as well as new domestic industry production capacity more than offsetting good domestic demand for oilseed products. These decreases were partially offset by sales attributable to recently acquired operations. Sales of corn products decreased 14 percent for the year to $1.9 billion as lower average selling prices for the Company's alcohol and amino acid products more than offset the increase in average selling price of the Company's sweetener products. Low gasoline prices have negatively affected average sales prices of fuel alcohol. Excess production capacity in the amino acid industry as well as low protein meal and corn prices have depressed selling prices of the Company's amino acid products to historically low levels. Sales volumes of both the alcohol and sweetener products decreased as excess production capacity in these industries resulted in difficult market conditions. Sales of wheat and other milled products decreased 8 percent to $1.4 billion due principally to lower average selling prices reflecting the lower cost of raw materials. Sales volumes increased slightly for the year due to sales attributable to recently acquired operations. The increase in sales of other products and services was due principally to the sales volumes attributable to the Company's recently acquired feed and cocoa businesses as well as increased grain merchandising and transportation revenues. These increases were partially offset by lower average selling prices for cocoa products. Cost of products sold and other operating costs decreased $1.7 billion to $13.1 billion due primarily to lower average raw material costs arising from an abundant worldwide supply of agricultural commodities and decreased sales volumes. These decreases were partially offset by costs related to recently acquired operations. 2 Page 3 Gross profit decreased $149 million to $1.2 billion in 1999 due primarily to selling price declines exceeding declines in lower average raw material costs and to lower volumes of products sold. These decreases were partially offset by gross profit attributable to recently acquired operations and to increased grain merchandising and transportation margins. Selling, general and administrative expenses increased $40 million to $701 million due principally to $78 million of expenses attributable to recently acquired operations. This increase was partially offset by a decline in on-going expenses, primarily legal and litigation related costs. Other expense of $111 million for 1999 was relatively unchanged from 1998. Increased interest expense due principally to higher average borrowing levels and decreased equity in earnings of unconsolidated affiliates due primarily to lower valuations of the Company's private equity fund investments were offset by increased gains on marketable securities transactions. The decrease in income taxes for 1999 resulted primarily from lower pretax earnings. The Company's effective income tax rate for 1999 was 33 percent compared to an effective rate of 34 percent for 1998. In 1999, the Company incurred an extraordinary charge, net of tax, of $15 million resulting from the repurchase of a portion of its 7 percent debentures due May 2011. Liquidity and Capital Resources At June 30, 2000, the Company continued to show substantial liquidity with working capital of $1.8 billion. Capital resources remained strong as reflected in the Company's net worth of $6.1 billion. The principal source of capital during the year was funds generated from operations. The principal uses of capital during the year were investments in property, plant and equipment expansions, investments in affiliates, and purchases of the Company's common stock. The Company's ratio of long-term debt to total capital at year-end was approximately 32 percent. Annual maturities of long-term debt for the five years after June 30, 2000 are $32 million, $425 million, $273 million, $23 million and $123 million, respectively. Commercial paper and commercial bank lines of credit are available to meet seasonal cash requirements. At June 30, 2000, the Company had $2.2 billion of short-term bank credit lines. Standard & Poor's and Moody's rate the Company's commercial paper as A-1 and P-1, respectively, and rate the Company's long-term debt as A+ and A1, respectively. In addition to the cash flow generated from operations, the Company has access to equity and debt capital through numerous alternatives from public and private sources in domestic and international markets. As described in Note 11 to the consolidated financial statements, the Company has made provisions to cover fines, litigation settlements and costs related to certain putative class action antitrust suits and other proceedings. Because of the early stage of other putative class actions and proceedings, including those related to high fructose corn syrup, the ultimate outcome and materiality of these matters cannot presently be determined. Accordingly, no provision for any liability that may result therefrom has been made in the consolidated financial statements. 3 Page 4 Market Risk Sensitive Instruments and Positions 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, marketable equity security prices, foreign currency exchange rates and interest rates as described below. Commodities The availability and price of agricultural commodities are subject to wide fluctuations due to unpredictable factors such as weather, plantings, government (domestic and foreign) farm programs and policies, shifts in global demand created by population growth and changes in standards of living, and global production of similar and competitive crops. To reduce price risk caused by market fluctuations, the Company generally follows a policy of hedging its inventories and related purchase and sale contracts. In addition, the Company from time to time will hedge portions of its production requirements. The instruments used are principally readily marketable exchange-traded futures contracts which are designated as hedges. The changes in market value of such contracts have a high correlation to the price changes of the hedged commodity. To obtain a proper matching of revenue and expense, gains or losses arising from open and closed hedging transactions are included in inventories as a cost of the commodities and reflected in the consolidated statements of earnings when the product is sold. 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 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. The results of this analysis, which may differ from actual results, are as follows.
2000 1999 Fair Value Fair Value Market Risk Market Risk (in millions) Highest long $254 $25 $319 $32 position Highest short 293 29 149 15 position Average position (25) 2 29 3 long (short)
The decrease in fair value of the average position for 2000 compared to 1999 was principally a result of a decrease in the daily net commodity position and, to a lesser extent, from a decrease in quoted futures prices. Marketable Equity Securities Marketable equity securities, which are recorded at fair value, have exposure to price risk. The fair value of marketable equity securities is based on quoted market prices. Risk is estimated as the potential loss in fair value resulting from a hypothetical 10 percent adverse change in quoted market prices. Actual results may differ. 4 Page 5
2000 1999 (in millions) Fair value $576 $743 Market risk 58 74
The decrease in fair value for 2000 compared to 1999 resulted primarily from a decrease in quoted market prices and, to a lesser extent, to disposals of securities. Currencies In order to reduce the risk of foreign currency exchange rate fluctuations, the Company follows a policy of hedging substantially all transactions, except for amounts permanently invested as described below, denominated in a currency other than the functional currencies applicable to each of its various entities. The instruments used for hedging are readily marketable exchange-traded futures contracts and forward contracts with banks. The changes in market value of such contracts have a high correlation to the price changes in the currency of the related hedged transactions. The potential loss in fair value for such net currency position resulting from 10 percent adverse change in foreign currency exchange rates is not material. The amount the Company considers permanently invested in foreign subsidiaries and affiliates and translated into dollars using the year-end exchange rate is $2.1 billion at June 30, 2000 and $1.8 billion at June 30, 1999. This increase is due to additional investments and earnings of the subsidiaries and affiliates, partially offset by a decrease due to changes in exchange rates. The potential loss in fair value resulting from a hypothetical 10 percent adverse change in quoted foreign currency exchange rates amounts to $207 million and $183 million for 2000 and 1999, respectively. Actual results may differ. Interest The fair value of the Company's long-term debt is estimated below using quoted market prices, where available, and discounted future cash flows based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Such fair value exceeded the long-term debt carrying value. Market risk is estimated as the potential increase in fair value resulting from a hypothetical one-half percent decrease in interest rates.
2000 1999 (in millions) Fair value of long-term debt $3,279 $3,430 Excess of fair value over 238 carrying value 2 Market risk 140 171
The decrease in fair value for the current year resulted from the effect of an increase in quoted interest rates. Page 5 Page 6 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business The Company is in one business segment - procuring, transporting, storing, processing, and merchandising agricultural commodities and products. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries over which the Company exercises control. Investments in affiliates are carried at cost plus equity in undistributed earnings since acquisition. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in its consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Marketable Securities The Company classifies all of its marketable securities as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of income taxes, reported as a component of shareholders' equity. Inventories Inventories, consisting primarily of merchandisable agricultural commodities and related value-added products, are carried at cost, which is not in excess of market prices. Inventory cost methods include the last-in, first-out (LIFO) method, the first- in, first-out (FIFO) method and the hedging procedure method. The hedging procedure method approximates FIFO cost by valuing inventory at market adjusted for gains and losses on forward purchase and sale contracts and exchange-traded futures. To reduce price risk caused by market fluctuations, the Company generally follows a policy of hedging its inventories and related purchase and sale contracts. In addition, the Company from time to time will hedge portions of its production requirements. The instruments used are readily marketable exchange-traded futures contracts which are designated as hedges. The changes in market value of such contracts have a high correlation to the price changes of the hedged commodity. Also, the underlying commodity can be delivered against such contracts. To obtain a proper matching of revenue and expense, gains or losses arising from open and closed hedging transactions are included in inventories as a cost of the commodities and reflected in the consolidated statements of earnings when the product is sold. 6 Page 7 Property, Plant and Equipment Property, plant and equipment are recorded at cost. The Company generally uses the straight-line method in computing depreciation for financial reporting purposes and generally uses accelerated methods for income tax purposes. The annual provisions for depreciation have been computed principally in accordance with the following ranges of asset lives: buildings - 10 to 50 years; machinery and equipment - 3 to 30 years. Asset Abandonments and Write-Downs The Company recorded a $108 million charge in the fourth quarter of fiscal year 2000 principally related to the abandonment of certain long-lived assets and other asset write-downs. The majority of the long-lived assets were idle and the decision to abandon was finalized after consideration of the ability to utilize the assets for their intended purpose, employ the assets in alternative uses or sell the assets to recover the carrying value. The remaining long-lived assets were in use in a product line, which is currently being marketed for sale, but were written down to fair value to recognize an impairment in the value of the assets. Net Sales The Company follows a policy of recognizing sales at the time of product shipment. Net margins from grain merchandised, rather than the total sales value thereof, are included in net sales in the consolidated statements of earnings. Sales of the Company, including the sales value of grain merchandised, were $18.6 billion in 2000, $18.5 billion in 1999, and $19.8 billion in 1998, and such sales include export sales of $5 billion in 2000, $5.2 billion in 1999, and $5.5 billion in 1998. Per Share Data Share and per share information has been adjusted to give effect to all stock dividends, including the 5 percent stock dividend declared in July 2000 and payable in September 2000. Basic earnings per common share are determined by dividing net earnings by the weighted average number of common shares outstanding. New Accounting Standards Effective July 1, 2000, the Company adopted Statement of Financial Accounting Standards Number 133 (SFAS 133) "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 establishes standards for recognition and measurement of derivatives and hedging activities. As a result of this adoption, the Company will record in the first quarter of fiscal 2001 the cumulative effect of change in accounting adjustment to other comprehensive income (loss) of $(32 million), net of $19 million tax benefit, for derivatives which hedge the variable cash flows of certain forecasted transactions. The fair value of these derivative instruments was previously classified in inventory. Effective June 30, 2001, the Company will adopt Emerging Issues Task Force Issue Number 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent". The adoption of this Issue will result in the Company reporting revenue including the sales value of grain merchandised but will have no impact on gross profit or net earnings. 7 Page 8
CONSOLIDATED STATEMENTS OF EARNINGS Year Ended June 30 2000 1999 1998 (In thousands, except per share amounts) Net sales and other operating income $12,876 $14,283,335 $16,108 ,817 ,630 Cost of products sold and other 11,657, 13,051,306 14,727, operating costs 242 670 Gross Profit 1,219,5 1,232,029 1,380,9 75 60 Selling, general and administrative 729,358 701,075 660,692 expenses Earnings From Operations 490,217 530,954 720,268 Other expense (136,98 (111,121) (110,25 0) 6) Earnings Before Income Taxes and 353,237 419,833 610,012 Extraordinary Loss Income taxes 52,334 138,545 206,403 Earnings Before Extraordinary 300,903 281,288 403,609 Loss - - Extraordinary loss, net of tax, on (15,324) - debt repurchase - Net Earnings $300,90 $265,964 $403,60 3 9 Basic and diluted earnings per common share Before extraordinary loss $0.47 $0.43 $0.62 Extraordinary loss on debt (.02) repurchase - - After Extraordinary Loss $0.47 $0.41 $0.62 Average number of shares outstanding 637,409 652,694 653,378 See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS June 30 ASSETS 2000 1999 (In thousan ds) CURRENT ASSETS Cash and cash $681,378 equivalents $477,226 Marketable securities 222,191 454,223 Receivables 1,922,163 2,139,896 Inventories 2,732,694 2,856,884 Prepaid expenses 231,162 234,138 Total Current 5,789,588 Assets 6,162,367 Investments and Other Assets Investments in and 1,484,980 advances to affiliates 1,876,633 Long-term marketable 779,916 securities 617,633 Other assets 408,236 489,386 2,673,132 2,983,652 Property, Plant and Equipment Land 163,607 163,722 Buildings 1,949,211 2,098,124 Machinery and 8,384,865 equipment 8,702,639 Construction in 675,870 progress 416,546 Less allowances for depreciation (6,103,95 (5,606,392) 0) 5,567,161 5,277,081 $14,029,8 $14,423,1 81 00 9 Page 10
CONSOLIDATED BALANCE SHEETS June 30 Liabilities and Shareholders' 2000 1999 Equity (In thousan ds) Current Liabilities Short-term debt 1,550,5 1,241,369 71 Accounts payable 2,139,7 2,004,396 44 Accrued expenses 610,735 567,593 Current maturities of long- 31,895 26,907 term debt Total Current Liabilities 4,332,9 3,840,265 45 Long-Term Debt 3,277,2 3,191,883 18 Deferred Liabilities Income taxes 560,772 619,752 Other 141,922 137,341 702,694 757,093 Shareholders' Equity Common stock 5,232,5 5,081,320 97 Reinvested earnings 1,325,3 1,419,321 23 Accumulated other (260, comprehensive loss (447,677 001) ) 6,110,2 6,240,640 43 $14,423 $14,029,8 ,100 81 See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS June 30 2000 1999 1998 (In thousands) Operating Activities Net earnings $300, $265,964 $403,6 903 09 Adjustments to reconcile to net cash provided by operations Depreciation and amortization 604,2 584,965 526,81 29 3 Asset abandonments and write-downs - 108,4 - 77 Deferred income taxes (23,8 12) 49,676 28,659 Amortization of long-term debt discount 43,41 37,216 33,297 0 (Gain) loss on marketable (10,1 (101,780) (36,30 securities transactions 66) 3) Extraordinary loss on debt - - repurchase 15,324 Other 43,42 95,456 39,292 7 Changes in operating assets and liabilities Receivables (278, (294,4 383) 56,946 07) Inventories (160, (79,811) (150,5 422) 09) Prepaid expenses (3,33 (63,294) (27,27 8) 5) Accounts payable and accrued expenses 191,0 359,185 90,203 71 Total Operating Activities 815,3 1,219,847 613,37 96 9 Investing Activities Purchases of property, plant and (428, (671,471) (702,6 equipment 737) 83) Net assets of businesses acquired (30,4 (136,021) (370,5 22) 61) Investments in and advances to (362, (117,371) (366,9 affiliates, net 072) 68) Purchases of marketable securities (1,10 (635,562) (1,202 1,100 ,662) ) Proceeds from sales of marketable securities 912,9 1,139,466 1,007, 23 373 Increase in other assets (50,0 - 00) - Total Investing Activities (1,05 (420,959) (1,635 9,408 ,501) ) Financing Activities Long-term debt borrowings 108,8 383,735 441,46 95 4 Long-term debt payments (54,6 (88,785) (55,97 09) 2) Net borrowings under line of credit (338,109) agreements 316,9 774,03 32 3 Purchases of treasury stock (210, (313,829) (81,15 911) 4) Cash dividends and other (120, (106,847) (107,7 447) 12) Total Financing Activities (463,835) 39,86 970,65 0 9 Increase (Decrease) in Cash and (204, Cash Equivalents 152) 335,053 51,463 Cash and Cash Equivalents Beginning of Year 681,3 346,325 397,78 78 8 Cash and Cash Equivalents End of Year $477, $681,378 $346,3 226 25 Supplemental cash flow information Non-cash investing and financing activities Common stock issued in purchase $ $ $298,2 acquisition - - 44 See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Accumul Other ated Comprehensive Income (Loss) Unrealiz ed Net Gains Foreign (losses) Total Common Stock Reinv Currenc on Shareh ested y Marketab olders le ' Shares Amoun Earni Transla Securiti Equity t ngs tion es Balance July 1, 1997 557,874 $4,19 $1,84 ($107,4 $120,498 $6,050 2,321 4,744 34) ,129 Comprehensive income Net earnings 403,6 09 Foreign currency (108,55 translation 1) Change in unrealized net gains 1,187 (losses) on marketable securities Total 296,24 comprehensive income 5 Cash dividends paid- (111, (111,5 $.17 per share 551) 51) 5% stock dividend 28,534 473,9 (473, 48 948) Treasury stock (3,767) (81,1 (81,15 purchases 54) 4) Common stock issued 13,953 298,2 298,24 in purchase 44 4 acquisition Other 2,627 53,29 (291) 52,999 0 Balance June 599,221 4,936 1,662 (215,98 121,685 6,504, 30, 1998 ,649 ,563 5) 912 Comprehensive income Net earnings 265,9 64 Foreign currency (83,842 translation ) Change in unrealized net gains (81,859) (losses) on marketable securities Total 100,26 comprehensive income 3 Cash dividends paid- (117, (117,0 $.18 per share 089) 89) 5% stock dividend 29,180 391,8 (391, 89 889) Treasury stock (19,867) (313, (313,8 purchases 829) 29) Other 4,261 66,61 (228) 66,383 1 Balance June 612,795 5,081 1,419 (299,82 39,826 6,240, 30, 1999 ,320 ,321 7) 640 Comprehensive income Net earnings 300,9 03 Foreign currency (97,030 translation ) Change in unrealized net gains (90,646) (losses) on marketable securities Total 113,22 comprehensive income 7 Cash dividends paid- (120, (120,0 $.19 per share 001) 01) 5% stock dividend 30,109 274,4 (274, 73 473) Treasury stock (17,711) (210, (210,9 purchases 911) 11) Other 7,103 87,71 (427) 87,288 5 Balance June 632,296 $5,23 $1,32 ($396,8 ($50,820 $6,110 30, 2000 2,597 5,323 57) ) ,243 See notes to consolidated financial statements.
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Note 1-Marketable Securities and Cash Equivalents Unreali Unreali zed zed Cost Gains Losses Fair Value 2000 (In Thousan ds) United States government obligations Maturity less than 1 $499,50 $489 $467 $499,53 year 9 1 Maturity 1 year to 5 39,788 74 39,862 years - Other debt securities Maturity less than 1 173,454 700 1 174,153 year Equity securities 665,095 60,192 149,142 576,145 $1,377, $61,455 $149,61 $1,289, 846 0 691 Unreali Unreali zed zed Cost Gains Losses Fair Value 1999 (In Thousan ds) United States government obligations Maturity less than 1 $405,72 $260 $279 $405,70 year 3 4 Maturity 1 year to 5 35,392 298 35,094 years - Other debt securities Maturity less than 1 238,827 75 2 238,900 year Equity securities 705,156 103,762 $65,808 743,110 $1,385, $104,09 $66,387 $1,422, 098 7 808
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Note 2-Inventories 2000 1999 (In thousands) LIFO inventories $420,824 367,902 FIFO value (1,360) - LIFO valuation reserve 420,824 366,542 LIFO carrying value FIFO inventories, including 2,436,06 hedging 0 2,366,152 procedure method $2,856,8 84 $2,732,694
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Note 3-Investments In and Advances to Affiliates The Company has 97 unconsolidated affiliates located in North and South America, Africa, Europe and Asia, accounted for under the equity method. The following table summarizes the Balance sheets as of June 30, 2000 and 1999, and the statements of earnings for the three years Ended June 30, 2000 of the Company's unconsolidated affiliates: 2000 1999 1998 (In thousands) Current assets $3,894,202 $3,359,596 Non-current assets 7,571,209 6,155,709 Current liabilities 2,286,132 2,241,739 Non-current liabilities 1,910,057 1,695,557 Minority interests 265,937 309,712 Net sales 15,009,536 $13,651, 14,605,815 086 Gross profit 1,211,868 1,161,67 1,124,363 3 Net income (loss) 725,759 (2,630) 216,178 The Company's investment in unconsolidated affiliates exceeds the underlying equity in net assets by $109 million, which amount is being amortized on a straight-line basis over 10 to 40 years. Three foreign affiliates for which the Company has a carrying value of $370 million have a market value of $183 million based on quoted market prices and exchange rates at June 30, 2000.
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Note 4-Debt and Financing Arrangements 2000 1999 (In thousands) 7.5% Debentures $350 million face amount, due in 2027 $347,926 $347,903 Zero Coupon Debt $400 million face amount, due in 2002 313,344 274,198 6.625% Debentures $300 million face amount, due in 2029 298,579 298,563 8.875% Debentures $300 million face amount, due in 2011 298,545 298,467 8.125% Debentures $300 million face amount, due in 2012 298,305 298,224 8.375% Debentures $300 million face amount, due in 2017 294,669 294,530 6.25% Notes $250 million face amount, due in 2003 249,600 249,513 7.125% Debentures $250 million face amount, due in 2013 249,485 249,460 6.95% Debentures $250 million face amount, due in 2097 246,124 246,095 6.75% Debentures $200 million face amount, due in 2027 195,676 195,572 5.87% Debentures $196 million face amount, due in 2010 109,074 105,520 Other 407,786 360,745 Total long-term debt 3,309,11 3,218,790 3 Less current maturities (31,895) (26,907) $3,277,2 $3,191,88 18 3 In 1999, the Company incurred a pre-tax extraordinary charge of $24 million resulting from the repurchase of a portion of its 7% debentures due in 2011. The remaining 7% debentures were exchanged for 5.87% debentures due in 2010. At June 30, 2000, the fair value of the Company's long-term debt exceeded the carrying value by $1.5 million, as estimated by using quoted market prices or discounted future cash flows based on the Company's current incremental bor- rowing rates for similar types of borrowing arrangements. Unamortized original issue discount on the Zero Coupon Debt is being amor- tized at 13.80%. Accelerated amortization of the discount for tax purposes has the effect of lowering the actual rate of interest to be paid over the remaining life of the issue to approximately 4.94%. The aggregate maturities for long-term debt for the five years after June 30, 2000 are $32 million, $425 million, $273 million, $23 million, and $123 million, respectively. At June 30, 2000, the Company had lines of credit totaling $2.2 billion. The weighted average interest rates on short-term borrowings outstanding at June 30, 2000 and 1999 were 6.57% and 4.71%, respectively. Note 5-Shareholders' Equity The Company has authorized 800 million shares of common stock and 500,000 shares of preferred stock, both without par value. No preferred stock has been issued. At June 30, 2000 and 1999, the Company had approximately 18.7 million and 23.7 million common shares, respectively, in treasury. Treasury stock is recorded at cost, $210 million at June 30, 2000, as a reduction of common stock. Stock option plans provide for the granting of options to employees to purchase common stock of the Company at market value on the date of grant. Options expire five to ten years after the date of grant. At June 30, 2000, there were 7.8 million shares available for future grant. Stock option activity during the years indicated is as follows: Weighted Average Number Exercise Price of Shares Per Share (In thousands) Shares under option at June 5,002 $12.44 30, 1997 Granted 38 19.17 Exercised 11.40 (560) Cancelled 13.75 (71) Shares under option at June 4,409 12.61 30, 1998 Granted 2,398 14.22 Exercised (1,286) 10.99 Cancelled 11.62 (216) Shares under option at June 5,305 13.77 30, 1999 Granted 5,795 10.72 Exercised 12.43 (5) Cancelled 12.82 (652) Shares under option at June $12.14 30, 2000 10,443 Shares exercisable at June 30, 1,795 13.72 2000 Shares exercisable at June 30, 1,440 13.11 1999 Shares exercisable at June 30, 2,332 11.73 1998 At June 30, 2000, the range of exercise prices and weighted average remaining contractual life of outstanding options was $9.52 to $19.51 and six years, respectively. The Company accounts for its stock option plans in accordance with Accounting Principles Board Opinion Number 25 (APB 25) "Accounting for Stock Issued to Employees." Under APB 25, compensation expense is recognized if the exercise price of the employee stock option is less than the market price on the grant date. Statement of Financial Accounting Standards Number 123 "Accounting for Stock-Based Compensation" requires the fair value of options granted and the pro forma impact on earnings and earnings per share be disclosed when material. Had compensation expense for stock options been determined based on the fair value of options granted, the Company's 2000 net earnings would have been impacted by approximately one and one-half percent. 1999 net earnings would have been impacted by approximately one-half of one percent and 1998 net earnings by less than one-quarter of one percent. The Company's 2000 earnings per share would have been affected by approximately three- quarters of one percent. 1999 and 1998 earnings per share would have been affected by approximately one- quarter of one percent. The weighted average fair values of options granted during 2000, 1999 and 1998 are $3.20, $4.62 and $5.88, respectively. The fair value of each option grant is estimated as of the date of grant using the Black-Scholes single option pricing model for pro forma footnote purposes. Expected dividend yield was assumed to be 2 percent in 2000 and 1 percent in 1999 and 1998. An expected risk-free interest rate of 8 percent was assumed in 2000 and 6 percent in 1999 and 1998. Expected volatility was assumed to be .3 percent in 2000 and 1999 and .2 percent in 1998. Expected option life was assumed to be six years in 2000, five years in 1999 and four years in 1998.
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Note 6-Other Expense 2000 1999 1998 Investment income $136,317 $118,720 $123,729 Interest expense (377,404 (326,207 (293,220 ) ) ) Net gain on marketable securities transactions 10,103 101,319 36,544 Equity in earnings (losses) of affiliates 88,206 (4,273) 20,364 Other 5,798 (680) 2,327 ($136,98 ($111,12 ($110,25 0) 1) 6) Interest expense is net of interest capitalized of $23 million, $26 million and $37 million in 2000, 1999 and 1998, respectively. The Company made interest payments of $366 million, $299 million and $295 million in 2000, 1999, and 1998, respectively. Realized gains on sales of available-for-sale marketable securities totaled $17 million, $102 million and $37 million in 2000, 1999 and 1998, respectively. Realized losses totaled $7 million and $1 million in 2000 and 1999, respectively. Note 7-Income Taxes For financial reporting purposes, earnings before income taxes and extraordinary loss includes the following components: 2000 1999 1998 (In thousands United States $ $ 211,159 327,489 $458,184 Foreign 142,078 92,344 151,828 $ $ $ 353,237 419,833 610,012 Significant components of income taxes are as follows: 2000 1999 1998 (In thousands) Current Federal $ $ $36,624 74,040 111,152 State 22,099 12,787 20,879 Foreign 30,480 27,968 54,724 Deferred Federal (33,025) 25,085 14,474 State (7,693) 674 1,451 Foreign 3,849 (2,009) 3,723 $ $ $52,334 138,545 206,403 Significant components of the Company's deferred tax liabilities and assets are as follows: 2000 1999 (In thousands) Deferred tax liabilities Depreciation $514,822 $527,833 Bond discount 49,733 58,286 amortization Other 91,851 85,285 656,406 671,404 Deferred tax assets Unrealized loss on marketable 37,336 2,117 securities Postretirement 35,103 32,786 benefits Other 129,139 107,771 201,578 142,674 Net deferred tax 454,828 528,730 liabilities Current net deferred tax assets included in prepaid expenses 105,944 91,022 Non-current net $560,772 $619,752 deferred tax liabilities Reconciliation of the statutory federal income tax rate to the Company's effective tax rate on earnings before extraordinary loss is as follows: 2000 1999 1998 Statutory rate 35.0% 35.0% 35.0% Prior years tax (17.0) - - redetermination Foreign sales (6.3) (4.5) (4.7) corporation State income taxes, net of federal tax benefit 2.7 2.2 2.4 Indefinitely invested earnings of foreign affiliates (0.3) (1.8) 0.7 Litigation settlements and fines - - 1.4 Other 0.7 2.1 (1.0) Effective rate 14.8% 33.0% 33.8% The Company made income tax payments of $89 million, $111 million, and $225 million in 2000, 1999, and 1998 respectively. During the fourth quarter of 2000, the Company recognized a reduction in income tax related to a redetermination of foreign sales corporation benefits for prior years and the resolution of various other tax issues. This resulted in a $60 million credit, or $.09, per share to the current year provision. Undistributed earnings of the Company's foreign subsidiaries amounting to approximately $523 million at June 30, 2000 are considered to be permanently reinvested and, accordingly, no provision for U.S. income taxes has been provided thereon. It is not practicable to determine the deferred tax liability for temporary differences related to these undistributed earnings.
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Note 8-Leases The Company leases manufacturing and warehouse facilities, real estate, Transportation and other equipment under operating leases which expire at various dates through the year 2026. Rent expense for 2000, 1999 and 1998 was $89 million, $86 million and $82 million, respectively. Future minimum rental payments for non-cancelable operating leases with initial or remaining terms in excess of one year are as follows: Fiscal years (In thousands) 2000 $32,375 2001 21,320 2002 18,715 2003 13,889 2004 11,524 Thereafter 66,440 Total minimum lease payments $164,263
Note 9-Employee Benefit Plans The Company provides substantially all employees with pension benefits. The Company also provides substantially all domestic employees with postretirement health care and life insurance benefits. It is the Company's policy to fund pension costs as required by applicable laws and regulations. In addition, the Company has savings and investment plans available to eligible employees with one year of service. Total retirement plan expense includes the following components: Pension Benefits Postretirement Benefits 2000 1999 1998 2000 1999 1998 (In (In thousa thous nds) ands) Defined benefit plans Service cost $ $ $ $ $ $ (benefits earned 31,084 23,239 22,559 5,546 4,355 4,139 During the period) Interest cost 47,818 37,903 33,658 5,693 4,284 4,403 Expected return on plan assets (50,910) (43,84 (37,15 - - - 4) 9) Actuarial loss (gain) 891 969 (53) (265) (769) (663) Net amortization 1,071 40 (951) 165 (111) (111) Net periodic pension 29,954 18,307 18,054 11,13 7,759 7,768 expense 9 Defined contribution plans 18,455 17,775 15,497 Total retirement $ $ $ $ $ $ plan expense 48,409 36,082 33,551 11,13 7,759 7,768 9 The following tables set forth changes in the benefit obligation and the fair value of plan assets: 2000 1999 2000 1999 (In thousands) Benefit obligation, $ $ $ $ beginning 696,658 638,00 81,330 61,19 6 0 Service cost 31,084 23,239 5,546 4,355 Interest cost 47,818 37,903 5,693 4,284 Actuarial loss (gain) (25,443) (6,581 4,237 8,288 ) Benefits paid (32,461) (23,96 (4,500 (2,85 1) ) 1) Plan amendments 1,822 35,254 - - Acquisitions/divestit ures, net 2,472 - - 6,065 Foreign currency effects (9,934) (7,202 (1) (1) ) Benefit obligation, $ $ $ ending 712,016 696,65 $92,30 81,33 8 5 0 Fair value of plan $ $ $ $ assets, beginning 615,977 613,51 - - 6 Actual return on plan assets 52,000 15,685 - - Employer contributions 29,762 20,378 4,500 2,851 Benefits paid (32,461) (23,96 (4,500 (2,85 1) ) 1) Acquisitions/divestit ures, net 6,031 - - - Foreign currency effects (14,565) (9,641 - - ) Fair value of plan $ $ $ $ assets, ending 656,744 615,97 - - 7 Funded status $ $ (55,272) (80,68 $(92,3 $(81, 1) 05) 330) Unamortized transition amount (17,090) (14,72 - - 9) Unrecognized net loss (gain) 25,537 40,146 (9,468 (13,9 ) 71) Unrecognized prior service costs 44,575 59,600 4,613 4,779 Adjustment for fourth quarter contributions 3,846 491 - - Pension asset $ $ (liability) 1,596 4,827 $(97,1 $(90, recognized in the 60) 522) balance sheet At June 30, 2000 and 1999, a prepaid pension benefit cost of $54 million and $57 million, respectively, and an accrued pension benefit liability of $75 million and $83million, respectively, were recognized in the consolidated balance sheets. For postretirement benefit plans, an accrued benefit liability of $97 million and $91 million was recognized at June 30, 2000 and 1999, respectively. The following table sets forth the principal assumptions used in developing the benefit obligation and the net periodic pension expense: Pension Benef Pensi Bene its on fits 2000 1999 2000 1999 Discount rate 7.1% 7.0% 7.5% 7.0% Expected return 8.3% 8.9% N/A N/A on plan assets Rate of 4.2% 4.5% N/A N/A compensation increase
18 Page 19 The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the U.S. retirement plans with accumulated benefit obligations in excess of plan assets were $539 million, $459 million, and $414 million, respectively, as of June 30, 2000 and $539 million, $455 million, and $386 million, respectively, as of June 30, 1999 For measurement purposes, a 7.6% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001. The rate was assumed to decrease gradually to 5.5% for 2004 and remain at that level thereafter. Assumed health care cost trend rates have a significant impact on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effect:
1% 1% Increa Decre se ase (In thousa nds) Effect on total of service and $ $ interest cost components 1,092 (1,01 1) Effect on accumulated $ $ postretirement benefit 6,695 (6,35 obligations 3)
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Note 10-Segment and Geographic Information Based on the Company's organizational structure and the manner in which Performance is assessed and operating decisions are made, the Company operates as one business segment - procuring, transporting, storing, processing and merchandising agricultural commodities and products. Information about the Company's operations by geographic areas is as follows: 2000 1999 1998 (In millions) Net sales and other operating income United States $8,258 $9,288 $10, 784 Germany 1,523 1,795 1,88 9 Other foreign 3,096 3,200 3,43 6 $12,877 $14,283 $16, 109 Sales or transfers between geographic areas: United States $339 $339 $354 Europe 47 47 51 Other foreign 228 228 146 * $614 $614 $551 Earnings from operations: United States $412 $552 $550 Germany 23 37 8 Other foreign 96 131 67 $531 $720 $625 Long-lived assets United States $4,275 $4,525 $4,3 50 Germany 172 196 206 Other foreign 958 987 924 $5,405 $5,708 $5,4 80 Information about the Company's revenues by classes of products and services is as follows: 2000 1999 1998 (In millions) Oilseed products $7,219 $8,494 $10, 152 Corn products 1,950 1,855 2,15 4 Wheat and other milled products 1,358 1,378 1,49 1 Other products and services 2,350 2,556 2,31 2 $12,877 $14,283 $16, 109
20 Page 21 Note 11-Antitrust Investigation and Related Litigation The Company, along with other domestic and foreign companies, was named as a defendant in a number of putative class action antitrust suits and other proceedings involving the sale of lysine, citric acid, sodium gluconate, monosodium glutamate and high fructose corn syrup. These actions and proceedings generally involve claims for unspecified compensatory damages, fines, costs, expenses and unspecified relief. The Company intends to vigorously defend these actions and proceedings unless they can be settled on terms deemed acceptable by the parties. These matters have resulted and could result in the Company being subject to monetary damages, other sanctions and expenses. The Company has made provisions to cover the fines, litigation settlements and costs related to certain of the aforementioned suits and proceedings. Because of the early stage of other putative class actions and proceedings, including those related to high fructose corn syrup, the ultimate outcome and materiality of these matters cannot presently be determined. Accordingly, no provision for any liability that may result therefrom has been made in the consolidated financial statements. 21 Page 22 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Archer Daniels Midland Company Decatur, Illinois We have audited the accompanying consolidated balance sheets of Archer Daniels Midland Company and subsidiaries as of June 30, 2000 and 1999, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended June 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Archer Daniels Midland Company and its subsidiaries at June 30, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States. St. Louis, Missouri July 28, 2000 22 Page 23
Quarterly Financial Data (Unaudited) Quarter First Second Third Fourth Total (In thousands, except per share amounts) Fiscal 2000 Net sales $3,220, $3,420, $3,111 $3,123 $12,876 980 346 ,809 ,682 ,817 Gross profit 272,320 406,273 334,97 206,00 1,219,5 6 6 75 Net earnings 36,367 101,920 103,02 59,587 300,903 9 Per common share 0.06 0.16 0.16 0.09 0.47 Fiscal 1999 Net sales $3,801, $3,911, $3,378 $3,192 $14,283 421 539 ,126 ,249 ,335 Gross profit 293,636 421,330 238,92 278,14 1,232,0 3 0 29 Earnings before 116,855 110,434 11,742 42,257 281,288 extraordinary loss Per common share 0.18 0.16 0.02 0.07 0.43 Net earnings 116,855 95,110 11,742 42,257 265,964 Per common share 0.18 0.14 0.02 0.07 0.41 Net earnings for the three months ended June 30, 2000 and the year ended June 30, 2000 include a charge to cost of products sold of $108 million ($72 million after tax, equal to $.11 per share) related to the abandonment of certain long-lived assets and other asset write-downs and a $60 million tax credit, equal to $.09 per share, related to a redeter- mination of foreign sales corporation benefits for prior years and the resolution of various other tax issues. During the second quarter of the year ended June 30, 1999, the Company incurred an extraordinary charge, net of tax, of $15 million, or $ .02 per share, resulting from the repurchase of a portion of its 7 percent debentures due May 2011.
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Common Stock Market Prices and Dividends The Company's common stock is listed and traded on the New York Stock Exchange, Chicago Stock Exchange, Tokyo Stock Exchange, Frankfurt Stock Exchange and Swiss Exchange. The following table sets forth, for the periods indicated, the high and low market prices of the common stock and common stock cash dividends. Cash Market Price Divid ends High Low Per Share Fiscal 2000-- Quarter Ended June 30 $ 1 7/8 $ 9 $ 0.048 1 1/16 March 31 1 3/4 8 3/8 0.048 2 December 31 1 1/2 1 7/8 0.048 3 0 September 30 1 15/16 1 1/4 0.045 3 1 Fiscal 1999-- Quarter Ended June 30 $ 1 3/16 $ 1 1/4 0.045 5 2 $ March 31 1 1/2 1 1/8 0.045 5 3 December 31 1 9/16 1 0.045 7 4 5/16 September 30 1 3/16 1 0.043 7 3 7/16 The number of shareholders of the Company's common stock at June 30, 2000 was 29, 911. The Company expects to continue its policy of paying regular cash dividends, although there is no assurance as to future dividends because they are dependent on future earnings, capital requirements and financial condition.
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TEN YEAR SUMMARY Operating, Financial and Other Data (Dollars in thousands, except per share data) 2000 1999 1998 1997 Operating Net sales and other $12,876 $14,283 $16,108 $13,853 operating income ,817 ,335 ,630 ,262 Depreciation and 604,229 584,965 526,813 446,412 amortization Net earnings 300,903 265,964 403,609 377,309 Per common share 0.47 0.41 0.62 0.57 Cash dividends 120,001 117,089 111,551 106,990 Per common share 0.19 0.18 0.17 0.16 Financial Working capital $1,829, $1,949, $1,734, $2,035, 422 323 411 580 Per common share 2.89 3.03 2.63 3.15 Current ratio 1.4 1.5 1.5 1.9 Inventories 2,856,8 2,732,6 2,562,6 2,094,0 84 94 50 92 Net property, plant and 5,277,0 5,567,1 5,322,7 4,708,5 equipment 81 61 04 95 Gross additions to 475,396 property, plant and 825,676 1,127,3 equipment 1,228,55 60 3 Total assets 14,423, 14,029, 13,833, 11,354, 100 881 534 367 Long-term debt 3,277,2 3,191,8 2,847,1 2,344,9 18 83 30 49 Shareholders' equity 6,110,2 6,240,6 6,504,9 6,050,1 43 40 12 29 Per common share 9.66 9.70 9.85 9.37 Other Weighted average shares 637,409 outstanding 652,694 653,378 657,478 (000s) Number of shareholders 29,911 31,764 32,539 33,834 Number of employees 22,753 23,603 23,132 17,160 Share and per share data have been adjusted for a three-for- two stock split in December 1994 and annual 5% stock dividends through September 2000. Net earnings for 1999 include an extraordinary charge of $15 million, or $.02 per share, from the repurchase of debt. Net earnings for 1993 include a net credit of $68 million, or $.09 per share, and a charge of $35 million, or $.05 per share, for the cumulative effects of changes in accounting for income taxes and postretirement benefits, respectively.
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1996 1995 1994 1993 1992 1991 $13,239 $12,555 $11,158 $9,578 $9,026 $8,271 ,839 ,403 ,479 ,370 ,177 ,588 393,605 384,872 354,463 328,54 293,72 261,36 9 9 7 695,912 795,915 484,069 567,52 503,75 466,67 7 7 8 1.04 1.15 0.69 0.78 0.69 0.64 90,860 46,825 32,586 32,266 30,789 29,527 0.14 0.07 0.05 0.04 0.04 0.04 $2,751, $2,540, $2,783, $2,961 $2,276 $1,674 132 260 817 ,503 ,564 ,735 4.15 3.74 4.03 4.10 3.15 2.31 2.7 3.2 3.5 4.1 3.4 3.0 1,790,6 1,473,8 1,422,1 1,131, 1,025, 917,49 36 96 47 787 030 5 4,114,3 3,762,2 3,538,5 3,214, 3,060, 2,695, 01 81 75 834 096 625 801,426 657,915 682,485 572,02 614,84 911,58 2 4 6 10,449, 9,756,8 8,746,8 8,404, 7,524, 6,260, 869 87 53 111 530 607 2,002,9 2,070,0 2,021,4 2,039, 1,562, 980,27 79 95 17 143 491 3 6,144,8 5,854,1 5,045,4 4,883, 4,492, 3,922, 12 65 21 251 353 295 9.26 8.61 7.30 6.76 6.21 5.42 668,583 690,105 697,246 723,47 725,41 727,92 9 5 7 35,431 34,385 33,940 33,654 32,277 28,981 14,811 14,833 16,013 14,168 13,524 13,049
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