10-Q 1 adm-2014930x10q.htm 10-Q ADM-2014.9.30-10Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.  20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-44
ARCHER-DANIELS-MIDLAND COMPANY
(Exact name of registrant as specified in its charter)
Delaware
41-0129150
(State or other jurisdiction of
incorporation or organization)
(I. R. S. Employer
Identification No.)
 
 
77 West Wacker Drive, Suite 4600
Chicago, Illinois
(Address of principal executive offices)
 
60601
(Zip Code)
 
 
(312) 634-8100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         Yes  x  No ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x  No  ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer  x
Accelerated Filer  o
Non-accelerated Filer     o 
Smaller reporting Company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o  No  x.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, no par value – 643,787,556 shares
(October 31, 2014)






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

Consolidated Statements of Earnings
(Unaudited)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(In millions, except per share amounts)
 
 
 
 
 
 
 
 
Revenues
$
18,117

 
$
21,393

 
$
60,307

 
$
65,661

Cost of products sold
16,647

 
20,237

 
56,990

 
62,942

Gross Profit
1,470

 
1,156

 
3,317

 
2,719

 
 
 
 
 
 
 
 
Selling, general, and administrative expenses
451

 
429

 
1,270

 
1,317

Asset impairment, exit, and restructuring costs

 
23

 
31

 
23

Interest expense
79

 
105

 
251

 
318

Equity in earnings of unconsolidated affiliates
(21
)
 
(63
)
 
(231
)
 
(262
)
Interest income
(16
)
 
(12
)
 
(62
)
 
(68
)
Other (income) expense – net
(56
)
 
(35
)
 
(76
)
 
(10
)
Earnings Before Income Taxes
1,033

 
709

 
2,134

 
1,401

 
 
 
 
 
 
 
 
Income taxes
285

 
228

 
586

 
424

Net Earnings Including Noncontrolling Interests
748

 
481

 
1,548

 
977

 
 
 
 
 
 
 
 
Less: Net earnings (losses) attributable to noncontrolling interests
1

 
5

 
1

 
9

 
 
 
 
 
 
 
 
Net Earnings Attributable to Controlling Interests
$
747

 
$
476

 
$
1,547

 
$
968

 
 
 
 
 
 
 
 
Average number of shares outstanding – basic
650

 
661

 
655

 
661

 
 
 
 
 
 
 
 
Average number of shares outstanding – diluted
653

 
664

 
658

 
663

 
 
 
 
 
 
 
 
Basic earnings per common share
$
1.15

 
$
0.72

 
$
2.36

 
$
1.46

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
1.14

 
$
0.72

 
$
2.35

 
$
1.46

 
 
 
 
 
 
 
 
Dividends per common share
$
0.24

 
$
0.19

 
$
0.72

 
$
0.57


See notes to consolidated financial statements.




2




Archer-Daniels-Midland Company

Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(In millions)
 
 
 
 
 
 
 
 
Net earnings including noncontrolling interests
$
748

 
$
481

 
$
1,548

 
$
977

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(462
)
 
225

 
(462
)
 
(1
)
Tax effect
7

 

 
8

 
2

Net of tax amount
(455
)
 
225

 
(454
)
 
1

 
 
 
 
 
 
 
 
Pension and other postretirement benefit liabilities adjustment
14

 
10

 
24

 
45

Tax effect
(4
)
 
(4
)
 
(7
)
 
(16
)
Net of tax amount
10

 
6

 
17

 
29

 
 
 
 
 
 
 
 
Deferred gain (loss) on hedging activities
59

 
16

 
32

 
18

Tax effect
(23
)
 
(7
)
 
(13
)
 
(7
)
Net of tax amount
36

 
9

 
19

 
11

 
 
 
 
 
 
 
 
Unrealized gain (loss) on investments
10

 
3

 
3

 
2

Tax effect

 
(3
)
 
3

 

Net of tax amount
10

 

 
6

 
2

Other comprehensive income (loss)
(399
)
 
240

 
(412
)
 
43

Comprehensive income including noncontrolling interests
349

 
721

 
1,136

 
1,020

 
 
 
 
 
 
 
 
Less: Comprehensive income (loss) attributable to noncontrolling interests
1

 
5

 
1

 

 
 
 
 
 
 
 
 
Comprehensive income attributable to controlling interests
$
348

 
$
716

 
$
1,135

 
$
1,020


See notes to consolidated financial statements.





3




Archer-Daniels-Midland Company

Consolidated Balance Sheets
 
September 30,
 
December 31,
(In millions)
2014
 
2013
 
(Unaudited)
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
4,539

 
$
3,121

Short-term marketable securities
348

 
433

Segregated cash and investments
4,751

 
3,961

Trade receivables
2,121

 
3,224

Inventories
8,034

 
11,441

Other current assets
6,846

 
6,350

Total Current Assets
26,639

 
28,530

 
 
 
 
Investments and Other Assets
 

 
 

Investments in and advances to affiliates
3,513

 
3,340

Long-term marketable securities
518

 
508

Goodwill and other intangible assets
732

 
759

Other assets
424

 
478

Total Investments and Other Assets
5,187

 
5,085

 
 
 
 
Property, Plant, and Equipment
 

 
 

Land
409

 
408

Buildings
4,876

 
4,877

Machinery and equipment
17,488

 
17,472

Construction in progress
882

 
773

 
23,655

 
23,530

Accumulated depreciation
(13,660
)
 
(13,393
)
Net Property, Plant, and Equipment
9,995

 
10,137

 
 
 
 
Total Assets
$
41,821

 
$
43,752

 
 
 
 
Liabilities and Shareholders’ Equity
 

 
 

Current Liabilities
 

 
 

Short-term debt
$
177

 
$
358

Trade payables
3,134

 
4,513

Payables to brokerage customers
5,745

 
4,832

Accrued expenses and other payables
4,677

 
4,790

Current maturities of long-term debt
18

 
1,165

Total Current Liabilities
13,751

 
15,658

 
 
 
 
Long-Term Liabilities
 

 
 

Long-term debt
5,346

 
5,347

Deferred income taxes
1,522

 
1,448

Other
941

 
1,105

Total Long-Term Liabilities
7,809

 
7,900

 
 
 
 
Shareholders’ Equity
 

 
 

Common stock
5,541

 
6,136

Reinvested earnings
15,154

 
14,077

Accumulated other comprehensive income (loss)
(469
)
 
(57
)
Noncontrolling interests
35

 
38

Total Shareholders’ Equity
20,261

 
20,194

Total Liabilities and Shareholders’ Equity
$
41,821

 
$
43,752

 
 
 
 
See notes to consolidated financial statements.

4




Archer-Daniels-Midland Company

Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
(In millions)
 
 
 
 
Operating Activities
 
 
 
Net earnings including noncontrolling interests
$
1,548

 
$
977

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

 
 

Depreciation and amortization
646

 
681

Asset impairment charges

 
23

Deferred income taxes
(13
)
 
4

Equity in earnings of affiliates, net of dividends
(110
)
 
(152
)
Stock compensation expense
43

 
30

Pension and postretirement accruals (contributions), net
6

 
7

Deferred cash flow hedges
32

 
18

Gains on sales of assets and equity dilution
(197
)
 
(27
)
Other – net
(8
)
 
(115
)
Changes in operating assets and liabilities, net of businesses acquired
 

 
 

Segregated cash and investments
(795
)
 
(360
)
Trade receivables
957

 
92

Inventories
3,181

 
4,788

Other current assets
(482
)
 
615

Trade payables
(1,307
)
 
(2,154
)
Payables to brokerage customers
960

 
132

Accrued expenses and other payables
(37
)
 
310

Total Operating Activities
4,424

 
4,869

 
 
 
 
Investing Activities
 

 
 

Purchases of property, plant, and equipment
(605
)
 
(659
)
Proceeds from sales of property, plant, and equipment
29

 
36

Net assets of businesses acquired
(3
)
 
(35
)
Purchases of marketable securities
(885
)
 
(530
)
Proceeds from sales of marketable securities
951

 
826

Distributions from affiliates
88

 
150

Other – net
5

 
38

Total Investing Activities
(420
)
 
(174
)
 
 
 
 
Financing Activities
 

 
 

Long-term debt borrowings
1

 
23

Long-term debt payments
(1,167
)
 
(265
)
Net borrowings (payments) under lines of credit agreements
(178
)
 
(2,489
)
Purchases of treasury stock
(702
)
 
(95
)
Cash dividends
(470
)
 
(376
)
Acquisition of noncontrolling interest
(157
)
 

Other – net
87

 
45

Total Financing Activities
(2,586
)
 
(3,157
)
 
 
 
 
Increase (decrease) in cash and cash equivalents
1,418

 
1,538

Cash and cash equivalents beginning of period
3,121

 
1,714

 
 
 
 
Cash and cash equivalents end of period
$
4,539

 
$
3,252

 
 
 
 
See notes to consolidated financial statements.

5




Archer-Daniels-Midland-Company

Consolidated Statement of Shareholders’ Equity
(Unaudited)
 
Common Stock
 
Reinvested
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Total
Shareholders’
Equity
 
Shares
 
Amount
 
 
 
 
 
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2013
659

 
$
6,136

 
$
14,077

 
$
(57
)
 
$
38

 
$
20,194

Comprehensive income
 

 
 

 
 

 
 

 
 

 
 

Net earnings
 
 
 

 
1,547

 
 

 
1

 
 

   Other comprehensive
     income (loss)
 

 
 

 
 

 
(412
)
 


 
 

      Total comprehensive
       income
 

 
 

 
 

 
 

 
 

 
1,136

Cash dividends paid- $0.72 per share
 

 
 

 
(470
)
 
 

 
 

 
(470
)
Treasury stock purchases
(16
)
 
(702
)
 
 
 
 
 
 
 
(702
)
Stock compensation expense
 

 
43

 
 

 
 

 
 

 
43

Other
3

 
64

 


 
 

 
(4
)
 
60

Balance September 30, 2014
646

 
$
5,541

 
$
15,154

 
$
(469
)
 
$
35

 
$
20,261


See notes to consolidated financial statements.

6




Archer-Daniels-Midland Company

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all of the information and footnotes required by generally accepted accounting principles for 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 ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.  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 December 31, 2013.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated.  The Company consolidates all entities, including variable interest entities (VIEs), in which it has a controlling financial interest. For VIEs, the Company assesses whether it is the primary beneficiary as defined under the applicable accounting standard. Investments in affiliates, including VIEs through which the Company exercises significant influence but does not control the investee and is not the primary beneficiary of the investee’s activities, are carried at cost plus equity in undistributed earnings since acquisition and are adjusted, where appropriate, for basis differences between the investment balance and the underlying net assets of the investee.  The Company’s portion of the results of certain affiliates and results of certain VIEs are included using the most recent available financial statements.  In each case, the financial statements are within 93 days of the Company’s year end and are consistent from period to period.

On June 6, 2014, the Company completed its acquisition of the remaining 20% minority interest in Alfred C. Toepfer International (Toepfer), a global merchandiser of agricultural commodities and processed products, for $157 million. The excess of the purchase price over the carrying value of the associated noncontrolling interest of $12 million was recorded as a reduction in additional paid in capital.

Adoption of New Accounting Standards

Effective January 1, 2014, the Company adopted the amended guidance of Accounting Standards Codification (ASC) Topic 740, Income Taxes, which requires the Company to present an unrecognized tax benefit in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or if the Company does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be combined with deferred tax assets. The adoption of this amended guidance does not have an impact on the Company’s financial results.

Effective January 1, 2014, the Company adopted the amended guidance of ASC Topic 830, Foreign Currency Matters (Topic 830), which requires the Company to transfer currency translation adjustments from other comprehensive income into net income in certain circumstances. The amended guidance aims to resolve diversity in practice as to whether ASC Topic 810, Consolidation or Topic 830 applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity, or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business. The adoption of this amended guidance did not have an impact on the Company’s current period results. If the Company disposes all or part of a qualifying foreign entity, it will be required to release the portion of cumulative translation adjustment applicable to the disposed entity.

Effective January 1, 2014, the Company adopted the amended guidance of ASC Topic 405, Liabilities, which addresses the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements, for which the total amount under the arrangement is fixed at the reporting date. The amended guidance aims to resolve diversity in practice among companies that are subject to joint and several liabilities. The retrospective adoption of this amended guidance did not have an impact on current and prior period results and is not expected to have any material impact on the Company’s financial results.
 


7

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 1.
Basis of Presentation (Continued)

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.
Pending Accounting Standards

Effective January 1, 2015, the Company will be required to adopt the amended guidance of ASC Topic 205, Presentation of Financial Statements (Topic 205) and ASC Topic 360, Property, Plant, and Equipment, which limits the definition of discontinued operations as only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The amended guidance also expands the definition of discontinued operations to include a business or nonprofit activity that, on acquisition, meets the criteria to be classified as held for sale and a disposal of an equity method investment that meets the definition of discontinued operations. The amended guidance requires the Company to report discontinued operations if (1) the component of an entity or group of components of an entity meets the criteria in Topic 205 to be classified as held for sale; (2) the component of an entity or group of components of an entity is disposed of by sale; or (3) the component of an entity or group of components of an entity is disposed other than by sale. The Company will be required to adopt the presentation and expanded disclosure requirements of the amended guidance prospectively. Early adoption is permitted. The adoption of this amended guidance may change financial statement presentation and require expanded disclosures but will not impact financial results.

Effective January 1, 2016, the Company will be required to adopt the amended guidance of ASC Topic 718, Compensation - Stock Compensation (Topic 718), which seeks to resolve the diversity in practice that exists when accounting for share-based payments. The amended guidance requires a performance target that affects vesting and that could be achieved after the requisite service period to be treated as a performance condition. The Company will be required to adopt the amended guidance either prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The Company does not expect the adoption of this amended guidance to impact financial results.

Effective January 1, 2017, the Company will be required to adopt the new guidance of ASC Topic 606, Revenue from Contracts with Customers (Topic 606), which will supersede the revenue recognition requirements in ASC Topic 605, Revenue Recognition. Topic 606 requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. The Company will be required to adopt Topic 606 either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application. If the Company elects the modified retrospective approach, it will be required to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes. The Company has not yet completed its assessment of the impact of the new guidance on its consolidated financial statements.

8


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 3.
Fair Value Measurements

The following tables set forth, by level, the Company’s assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2014 and December 31, 2013.
 
 
Fair Value Measurements at September 30, 2014
 

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

 
$
2,188

 
$
1,522

 
$
3,710

Unrealized derivative gains:
 
 
 
 
 
 
 
Commodity contracts

 
737

 
552

 
1,289

Foreign exchange contracts
1

 
238

 

 
239

Interest rate contracts

 
3

 

 
3

Cash equivalents
1,012

 

 

 
1,012

Marketable securities
779

 
81

 

 
860

Segregated investments
1,877

 

 

 
1,877

Deferred receivables consideration

 
695

 

 
695

Total Assets
$
3,669

 
$
3,942

 
$
2,074

 
$
9,685

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Unrealized derivative losses:
 
 
 
 
 
 
 
Commodity contracts
$

 
$
804

 
$
261

 
$
1,065

Foreign exchange contracts

 
246

 

 
246

Interest rate contracts

 
4

 

 
4

Inventory-related payables

 
290

 
20

 
310

Total Liabilities
$

 
$
1,344

 
$
281

 
$
1,625




9

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 3.
Fair Value Measurements (Continued)

 
Fair Value Measurements at December 31, 2013
 
 
Quoted Prices in
 Active Markets
 for Identical
 Assets
 (Level 1)
 
Significant
 Other
 Observable
 Inputs
 (Level 2)
 
Significant 
Unobservable
Inputs
(Level 3)
 
Total
 
(In millions)
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Inventories carried at market
$

 
$
4,247

 
$
1,812

 
$
6,059

Unrealized derivative gains:
 
 
 
 
 
 
 
Commodity contracts
31

 
540

 
279

 
850

Foreign exchange contracts
30

 
88

 

 
118

Interest rate contracts

 
1

 

 
1

Cash equivalents
2,518

 

 

 
2,518

Marketable securities
881

 
26

 

 
907

Segregated investments
1,707

 

 

 
1,707

Deferred receivables consideration

 
757

 

 
757

Total Assets
$
5,167

 
$
5,659

 
$
2,091

 
$
12,917

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Unrealized derivative losses:
 
 
 
 
 
 
 
Commodity contracts
$
45

 
$
343

 
$
261

 
$
649

Foreign exchange contracts

 
166

 

 
166

Interest rate contracts

 
9

 

 
9

Inventory-related payables

 
708

 
34

 
742

Total Liabilities
$
45

 
$
1,226

 
$
295

 
$
1,566


Estimated fair values for inventories carried at market are based on exchange-quoted prices, adjusted for differences in local markets, broker or dealer quotations or market transactions in either listed or over-the-counter (OTC) markets.  Market valuations for the Company’s inventories are adjusted for location and quality because the exchange-quoted prices represent contracts that have standardized terms for commodity, quantity, future delivery period, delivery location, and commodity quality or grade. When unobservable inputs have a significant impact on the measurement of fair value, the inventory is classified as Level 3. Changes in the fair value of inventories are recognized in the consolidated statements of earnings as a component of cost of products sold.


10

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 3.
Fair Value Measurements (Continued)

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

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

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

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

The Company has deferred consideration under its accounts receivable securitization programs (the “Programs”) which represents notes receivable from the purchasers under the Programs (see Note 14). This amount is reflected in other current assets on the consolidated balance sheet (see Note 6). The Company carries the deferred consideration at fair value determined by calculating the expected amount of cash to be received. The fair value is principally based on observable inputs (a Level 2 measurement) consisting mainly of the face amount of the receivables adjusted for anticipated credit losses and discounted at the appropriate market rate. Payment of deferred consideration is not subject to significant risks other than delinquencies and credit losses on accounts receivable transferred under the Programs which have historically been insignificant.


11

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 3.
Fair Value Measurements (Continued)

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2014.

 
Level 3 Fair Value Asset Measurements at
 
September 30, 2014
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, June 30, 2014
$
1,139

 
$
239

 
$
1,378

Total increase (decrease) in unrealized gains included in cost of products sold*
(33
)
 
285

 
252

Purchases
2,526

 

 
2,526

Sales
(2,352
)
 

 
(2,352
)
Settlements

 
(166
)
 
(166
)
Transfers into Level 3
266

 
207

 
473

Transfers out of Level 3
(24
)
 
(13
)
 
(37
)
Ending balance, September 30, 2014
$
1,522

 
$
552

 
$
2,074


* Includes increase in unrealized gains of $145 million relating to Level 3 assets still held at September 30, 2014.

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2014.

 
Level 3 Fair Value Liability Measurements at
 
September 30, 2014
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, June 30, 2014
$
19

 
$
162

 
$
181

Total increase (decrease) in unrealized losses included in cost of products sold*

 
110

 
110

Purchases
12

 

 
12

Sales
(11
)
 

 
(11
)
Settlements

 
(130
)
 
(130
)
Transfers into Level 3

 
127

 
127

Transfers out of Level 3

 
(8
)
 
(8
)
Ending balance, September 30, 2014
$
20

 
$
261

 
$
281


* Includes increase in unrealized losses of $111 million relating to Level 3 liabilities still held at September 30, 2014.


12

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 3.
Fair Value Measurements (Continued)

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2013.

 
Level 3 Fair Value Asset Measurements at
 
September 30, 2013
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, June 30, 2013
$
1,926

 
$
267

 
$
2,193

Total increase (decrease) in unrealized gains included in cost of products sold*
162

 
143

 
305

Purchases
2,896

 

 
2,896

Sales
(3,264
)
 

 
(3,264
)
Settlements

 
(153
)
 
(153
)
Transfers into Level 3
35

 
69

 
104

Transfers out of Level 3
(483
)
 
(64
)
 
(547
)
Ending balance, September 30, 2013
$
1,272

 
$
262

 
$
1,534


* Includes increase in unrealized gains of $289 million relating to Level 3 assets still held at September 30, 2013.

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2013.

 
Level 3 Fair Value Liability Measurements at
 
September 30, 2013
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, June 30, 2013
$
63

 
$
233

 
$
296

Total increase (decrease) in unrealized losses included in cost of products sold*

 
127

 
127

Purchases
4

 

 
4

Sales
(17
)
 

 
(17
)
Settlements

 
(186
)
 
(186
)
Transfers into Level 3

 
30

 
30

Transfers out of Level 3
(41
)
 
(18
)
 
(59
)
Ending balance, September 30, 2013
$
9

 
$
186

 
$
195


* Includes increase in unrealized losses of $127 million relating to Level 3 liabilities still held at September 30, 2013.


13

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 3.
Fair Value Measurements (Continued)

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2014.

 
Level 3 Fair Value Asset Measurements at
 
September 30, 2014
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2013
$
1,812

 
$
279

 
$
2,091

Total increase (decrease) in unrealized gains included in cost of products sold*
(208
)
 
507

 
299

Purchases
10,474

 

 
10,474

Sales
(10,711
)
 

 
(10,711
)
Settlements

 
(529
)
 
(529
)
Transfers into Level 3
266

 
328

 
594

Transfers out of Level 3
(111
)
 
(33
)
 
(144
)
Ending balance, September 30, 2014
$
1,522

 
$
552

 
$
2,074


* Includes increase in unrealized gains of $516 million relating to Level 3 assets still held at September 30, 2014.

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2014.

 
Level 3 Fair Value Liability Measurements at
 
September 30, 2014
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2013
$
34

 
$
261

 
$
295

Total increase (decrease) in unrealized losses included in cost of products sold*
10

 
384

 
394

Purchases
18

 

 
18

Sales
(42
)
 

 
(42
)
Settlements

 
(580
)
 
(580
)
Transfers into Level 3

 
234

 
234

Transfers out of Level 3

 
(38
)
 
(38
)
Ending balance, September 30, 2014
$
20

 
$
261

 
$
281


* Includes increase in unrealized losses of $397 million relating to Level 3 liabilities still held at September 30, 2014.



14

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 3.
Fair Value Measurements (Continued)

The following table presents a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2013.

 
Level 3 Fair Value Asset Measurements at
 
September 30, 2013
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2012
$
1,745

 
$
143

 
$
1,888

Total increase (decrease) in unrealized gains included in cost of products sold*
(677
)
 
372

 
(305
)
Purchases
11,795

 

 
11,795

Sales
(11,576
)
 

 
(11,576
)
Settlements

 
(381
)
 
(381
)
Transfers into Level 3
35

 
209

 
244

Transfers out of Level 3
(50
)
 
(81
)
 
(131
)
Ending balance, September 30, 2013
$
1,272

 
$
262

 
$
1,534


* Includes increase in unrealized gains of $553 million relating to Level 3 assets still held at September 30, 2013.

The following table presents a reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2013.

 
Level 3 Fair Value Liability Measurements at
 
September 30, 2013
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2012
$
33

 
$
138

 
$
171

Total increase (decrease) in unrealized losses included in cost of products sold*
(191
)
 
382

 
191

Purchases
190

 

 
190

Sales
(23
)
 

 
(23
)
Settlements

 
(397
)
 
(397
)
Transfers into Level 3

 
104

 
104

Transfers out of Level 3

 
(41
)
 
(41
)
Ending balance, September 30, 2013
$
9

 
$
186

 
$
195


* Includes increase in unrealized losses of $237 million relating to Level 3 liabilities still held at September 30, 2013.


15

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 3.
Fair Value Measurements (Continued)

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

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

The following table sets forth the weighted average percentage of the unobservable price components included in the Company’s Level 3 valuations as of September 30, 2014 and December 31, 2013. The Company’s Level 3 measurements may include Basis only, transportation cost only, or both price components. As an example, for Level 3 inventories with Basis, the unobservable component as of September 30, 2014 is a weighted average 32.1% of the total price for assets and 30.8% for liabilities.



 
Weighted Average % of Total Price
 
September 30, 2014
 
December 31, 2013
Component Type
Assets
 
Liabilities
 
Assets
 
Liabilities
Inventories and Related Payables
 
 
 
 
 
 
 
Basis
32.1
%
 
30.8
%
 
21.9
%
 
13.2
%
Transportation cost
11.4
%
 
%
 
12.3
%
 
%
 
 
 
 
 
 
 
 
Commodity Derivative Contracts
 
 
 
 
 
 
 
Basis
20.1
%
 
18.5
%
 
22.8
%
 
17.6
%
Transportation cost
8.1
%
 
24.4
%
 
32.5
%
 
12.3
%

In certain of the Company’s principal markets, the Company relies on price quotes from third parties to value its inventories and physical commodity purchase and sale contracts. These price quotes are generally not further adjusted by the Company in determining the applicable market price. In some cases, availability of third-party quotes is limited to only one or two independent sources. In these situations, the Company considers these price quotes as 100 percent unobservable and, therefore, the fair value of these items is reported in Level 3.


16


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Derivative Instruments and Hedging Activities

Within the Note 4 tables, zeros represent minimal amounts.

Derivatives Not Designated as Hedging Instruments

The majority of the Company’s derivative instruments have not been designated as hedging instruments. The Company uses exchange-traded futures and exchange-traded and OTC options contracts to manage its net position of merchandisable agricultural commodity inventories and forward cash purchase and sales contracts to reduce price risk caused by market fluctuations in agricultural commodities and foreign currencies.  The Company also uses exchange-traded futures and exchange-traded and OTC options contracts as components of merchandising strategies designed to enhance margins. The results of these strategies can be significantly impacted by factors such as the correlation between the value of exchange-traded commodities futures contracts and the value of the underlying commodities, counterparty contract defaults, and volatility of freight markets. Derivatives, including exchange-traded contracts and physical purchase or sale contracts, are stated at market value.  Inventories of certain merchandisable agricultural commodities, which include amounts acquired under deferred pricing contracts, are stated at market value.  Inventory is not a derivative and therefore fair values of and changes in fair values of inventories are not included in the tables below.
  
The following table sets forth the fair value of derivatives not designated as hedging instruments as of September 30, 2014 and December 31, 2013.

 
September 30, 2014
 
December 31, 2013
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(In millions)
 
(In millions)
 
 
 
 
 
 
 
 
FX Contracts
$
239

 
$
246

 
$
118

 
$
166

Interest Contracts

 

 
1

 

Commodity Contracts
1,289

 
1,065

 
850

 
649

Total
$
1,528

 
$
1,311

 
$
969

 
$
815



17

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Derivative Instruments and Hedging Activities (Continued)

The following tables set forth the pre-tax gains (losses) on derivatives not designated as hedging instruments that have been included in the consolidated statements of earnings for the three and nine months ended September 30, 2014 and 2013.

 
Three months ended September 30,
 
2014
 
2013
 
(In millions)
 
 
 
 
Interest Contracts
 
 
 
Interest expense
$

 
$
0

Other income (expense) – net

 
1

 
 
 
 
FX Contracts
 

 
 

Revenues
$
5

 
$
(3
)
Cost of products sold
17

 
29

Other income (expense) – net
(148
)
 
85

 
 
 
 
Commodity Contracts
 

 
 

Cost of products sold
$
720

 
$
(3
)
Total gain (loss) recognized in earnings
$
594

 
$
109



 
Nine months ended September 30,
 
2014
 
2013
 
(In millions)
Interest Contracts
 
 
 
Interest expense
$

 
$
0

Other income (expense) – net
0

 
1

 
 
 
 
FX Contracts
 

 
 

Revenues
$
(3
)
 
$
106

Cost of products sold
105

 
(58
)
Other income (expense) – net
(172
)
 
30

 
 
 
 
Commodity Contracts
 

 
 

Cost of products sold
$
213

 
$
204

Total gain (loss) recognized in earnings
$
143

 
$
283


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






18

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Derivative Instruments and Hedging Activities (Continued)

Derivatives Designated as Cash Flow or Fair Value Hedging Strategies

As of September 30, 2014 and December 31, 2013, the Company has certain derivatives designated as cash flow and fair value hedges.

The Company uses interest rate swaps designated as fair value hedges to protect the fair value of fixed-rate debt due to changes in interest rates. The changes in the fair value of the interest rate swaps and the underlying fixed-rate debt are recorded in other (income) expense - net. The terms of the interest rate swaps match the terms of the underlying debt resulting in no ineffectiveness. At September 30, 2014, the Company has $3 million in other current assets and $4 million in accrued expenses and other payables representing the fair value of the interest rate swaps and corresponding increases and decreases in the underlying debt for the same amount with no impact to earnings.
For each of the commodity hedge programs described below, the derivatives are designated as cash flow hedges.  Assuming normal market conditions, the changes in the market value of such derivative contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of the hedged item.  Once the hedged item is recognized in earnings, the gains/losses arising from the hedge are reclassified from AOCI to either revenues or cost of products sold, as applicable.  As of September 30, 2014, the Company has $9 million of after-tax gains in AOCI related to gains and losses from commodity cash flow hedge transactions.  The Company expects to recognize all of these after-tax gains in its consolidated statement of earnings during the next 12 months.
The Company, from time to time, uses futures or options contracts to fix the purchase price of anticipated volumes of corn to be purchased and processed in a future month.  The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s forecasted purchases of corn.  The Company’s corn processing plants currently grind approximately 76 million bushels of corn per month.  During the past 12 months, the Company hedged between 16% and 71% of its monthly anticipated grind.  At September 30, 2014, the Company has designated hedges representing between 0.1% and 44% of its anticipated monthly grind of corn for the next 12 months.

The Company, from time to time, also uses futures, options, and swaps to fix the sales price of certain ethanol sales contracts.  The Company has established hedging programs for ethanol sales contracts that are indexed to unleaded gasoline prices and to various exchange-traded ethanol contracts. The objective of these hedging programs is to reduce the variability of cash flows associated with the Company’s sales of ethanol.  During the past 12 months, the Company hedged between 9 million and 109 million gallons of ethanol sales per month under these programs.  For the next 9 months, the Company has designated hedges representing between 1 million and 61 million gallons of ethanol sales per month.

The following table sets forth the fair value of derivatives designated as hedging instruments as of September 30, 2014 and December 31, 2013.

 
September 30, 2014
 
December 31, 2013
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(In millions)
 
(In millions)
Interest Contracts
$
3

 
$
4

 
$
0

 
$
9

Total
$
3

 
$
4

 
$
0

 
$
9













19

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Derivative Instruments and Hedging Activities (Continued)

The following tables set forth the pre-tax gains (losses) on derivatives designated as hedging instruments that have been included in the consolidated statements of earnings for the three and nine months ended September 30, 2014 and 2013.
 
 
 
 
Three months ended
 
Consolidated Statement of
Earnings Locations
 
September 30,
 
 
2014
 
2013
 
 
 
(In millions)
Effective amounts recognized in earnings
 
 
 
 
 
FX Contracts
Other income/expense – net
 
$
2

 
$
0

Interest Contracts
Interest expense
 
1

 
1

Commodity Contracts
Cost of products sold
 
(110
)
 
(2
)
 
Revenues
 
(1
)
 
(2
)
Ineffective amount recognized in earnings
 
 
 
 
 
Commodity Contracts
Revenues
 
(4
)
 


Cost of products sold
 
(12
)
 
(73
)
Total amount recognized in earnings
 
 
$
(124
)
 
$
(76
)

 
 
 
Nine months ended
 
Consolidated Statement of
Earnings Locations
 
September 30,
 
 
2014
 
2013
 
 
 
(In millions)
Effective amounts recognized in earnings
 
 
 
 
 
FX Contracts
Other income/expense – net
 
$
2

 
$
0

Interest Contracts
Interest expense
 
1

 
1

Commodity Contracts
Cost of products sold
 
(103
)
 
(7
)
 
Revenues
 
(86
)
 
3

Ineffective amount recognized in earnings
 
 
 
 
 
Commodity Contracts
Revenues
 
(28
)
 


Cost of products sold
 
(19
)
 
(128
)
Total amount recognized in earnings
 
 
$
(233
)
 
$
(131
)

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











20

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Derivative Instruments and Hedging Activities (Continued)

The following tables set forth the changes in AOCI related to derivatives gains (losses) for the three and nine months ended September 30, 2014 and 2013.
 
Three months ended
 
September 30,
 
2014
 
2013
 
(In millions)
Balance at June 30, 2014 and 2013
$
(12
)
 
$
6

Unrealized gains (losses)
(49
)
 
13

Losses (gains) reclassified to earnings
108

 
3

Tax effect
(23
)
 
(7
)
Balance at September 30, 2014 and 2013
$
24

 
$
15

 
Nine months ended
 
September 30,
 
2014
 
2013
 
(In millions)
 
 
 
 
Balance at December 31, 2013 and 2012
$
5

 
$
4

Unrealized gains (losses)
(154
)
 
15

Losses (gains) reclassified to earnings
186

 
3

Tax effect
(13
)
 
(7
)
Balance at September 30, 2014 and 2013
$
24

 
$
15



21


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Marketable Securities

 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(In millions)
 
 
 
 
 
 
 
 
September 30, 2014
 
 
 
 
 
 
 
United States government obligations
 
 
 
 
 
 
 
Maturity less than 1 year
$
282

 
$

 
$

 
$
282

Maturity 1 to 5 years
90

 

 

 
90

Government–sponsored enterprise obligations
 

 
 

 
 

 
 

Maturity 1 to 5 years
1

 

 

 
1

Corporate debt securities
 

 
 

 
 

 
 

Maturity 1 to 5 years
74

 

 

 
74

Other debt securities
 

 
 

 
 

 
 

Maturity less than 1 year
66

 

 

 
66

Maturity 1 to 5 years
3

 

 

 
3

Equity securities
 
 
 

 
 

 
 

Available-for-sale
355

 
2

 
(7
)
 
350

 
$
871

 
$
2

 
$
(7
)
 
$
866


 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
(In millions)
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
United States government obligations
 
 
 
 
 
 
 
Maturity less than 1 year
$
395

 
$

 
$

 
$
395

Maturity 1 to 5 years
124

 

 

 
124

Government–sponsored enterprise obligations
 

 
 

 
 

 
 

Maturity 1 to 5 years
4

 

 

 
4

Corporate debt securities
 

 
 

 
 

 
 

Maturity 1 to 5 years
16

 

 

 
16

Other debt securities
 

 
 

 
 

 
 

Maturity less than 1 year
38

 

 

 
38

Maturity 1 to 5 years
3

 

 

 
3

Equity securities
 

 
 

 
 

 
 

Available-for-sale
362

 
1

 
(2
)
 
361

 
$
942

 
$
1

 
$
(2
)
 
$
941


Of the $7 million in unrealized losses at September 30, 2014, $5 million arose within the last 12 months and is related to the Company’s investment in one available-for-sale equity security with a fair value of $6 million.  The market value of the Company’s investment that has been in an unrealized loss position for 12 months or longer is $4 million and is related to one available-for-sale equity security. The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment.  Based on that evaluation and the Company’s ability and intent to hold these investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2014.


22


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.     Other Current Assets

The following table sets forth the items in other current assets:

 
September 30,
 
December 31,
 
2014
 
2013
 
(In millions)
 
 
 
 
Unrealized gains on derivative contracts
$
1,531

 
$
969

Deferred receivables consideration
695

 
757

Customer omnibus receivable
1,489

 
1,298

Financing receivables - net (1)
371

 
576

Other current assets
2,760

 
2,750

 
$
6,846

 
$
6,350


(1) The Company provides financing to certain suppliers, primarily Brazilian farmers, to finance a portion of the suppliers’ production costs. The amounts are reported net of allowances of $12 million and $15 million at September 30, 2014 and December 31, 2013, respectively. Changes in the allowance for the nine months ended September 30, 2014 included an increase of $2 million for additional bad debt provisions and a reduction in the allowance for adjustments of $5 million. Interest earned on financing receivables of $5 million and $17 million for the three and nine months ended September 30, 2014, respectively, and $4 million and $18 million for the three and nine months ended September 30, 2013, respectively, is included in interest income in the consolidated statements of earnings.

Note 7.
Accrued Expenses and Other Payables

The following table sets forth the items in accrued expenses and other payables:

 
September 30,
 
December 31,
 
2014
 
2013
 
(In millions)
 
 
 
 
Unrealized losses on derivative contracts
$
1,315

 
$
824

Accrued expenses and other payables
3,362

 
3,966

 
$
4,677

 
$
4,790



23


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 8.
Debt and Financing Arrangements

As of December 31, 2013, the Company had outstanding $1.15 billion principal amount of convertible senior notes (the “Notes”) due in February 2014. On February 18, 2014, the Notes were repaid with available funds.

At September 30, 2014, the fair value of the Company’s long-term debt exceeded the carrying value by $1.2 billion, as estimated using quoted market prices (a Level 2 measurement under applicable accounting standards).

At September 30, 2014, the Company had lines of credit totaling $6.7 billion, of which $6.6 billion was unused.  Of the Company’s total lines of credit, $4.0 billion support a commercial paper borrowing facility, against which there was no commercial paper outstanding at September 30, 2014.

The Company has accounts receivable securitization programs (the “Programs”). The Programs provide the Company with up to $1.6 billion in funding resulting from the sale of accounts receivable. As of September 30, 2014, the Company utilized $1.3 billion of its facility under the Programs (see Note 14 for more information on the Programs).

Note 9.
Income Taxes

The Company’s effective tax rate for the three and nine months ended September 30, 2014 was 27.6% and 27.5%, respectively, compared to 32.2% and 30.3% for the three and nine months ended September 30, 2013, respectively, due primarily to the effect of discrete tax adjustments partially offset by changes in the geographic mix of pretax earnings.

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

The Company’s wholly-owned subsidiary, ADM do Brasil Ltda. (ADM do Brasil), has received three separate tax assessments from the Brazilian Federal Revenue Service (BFRS) challenging the tax deductibility of commodity hedging losses and related expenses for the tax years 2004, 2006, and 2007. As of September 30, 2014, these assessments, updated for estimated penalties, interest, and variation in currency exchange rates, totaled approximately $527 million. ADM do Brasil’s tax return for 2005 was also audited and no assessment was received. The statutes of limitation for 2005 and 2008 have expired. If the BFRS were to challenge commodity hedging deductions in tax years after 2008, the Company estimates it could face additional claims of approximately $60 million (based on currency exchange rates as of September 30, 2014).

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

ADM do Brasil filed an administrative appeal for each of the assessments. During the second quarter of fiscal 2011, the appeal panel found in favor of the BFRS on the 2004 assessment and ADM do Brasil filed a second level administrative appeal, which is still ongoing. In January of 2012, the appeal panel found in favor of the BFRS on the 2006 and 2007 assessments and ADM do Brasil filed a second level administrative appeal, which is still ongoing. If ADM do Brasil continues to be unsuccessful in the administrative appellate process, it intends to file appeals in the Brazilian federal courts. While the Company believes its consolidated financial statements properly reflect the tax deductibility of these hedging losses, the ultimate resolution of this matter could result in the future recognition of additional payments of, and expense for, income tax and the associated interest and penalties. The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2008.

24

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 9.     Income Taxes (Continued)


The Company’s subsidiaries in Argentina have received tax assessments challenging transfer prices used to price grain exports totaling $37 million (inclusive of interest and adjusted for variation in currency exchange rates) for the tax years 2004 and 2005. The Argentine tax authorities have been conducting a review of income and other taxes paid by large exporters and processors of cereals and other agricultural commodities resulting in allegations of income tax evasion. While the Company believes that it has complied with all Argentine tax laws, it cannot rule out receiving additional assessments challenging transfer prices used to price grain exports for certain years subsequent to 2005, and estimates that these potential assessments would be approximately $367 million (as of September 30, 2014 and subject to variation in currency exchange rates).  The Company intends to vigorously defend its position against the current assessments and any similar assessments that may be issued for years subsequent to 2005. The Company believes that it has appropriately evaluated the transactions underlying these assessments, and has concluded, based on Argentine tax law, that its tax position would be sustained, and accordingly, has not recorded a tax liability for these assessments.
  
In accordance with the accounting requirements for uncertain tax positions, the Company has concluded that it is more likely than not to prevail on the Brazil and Argentina matters based upon their technical merits. The Company has not recorded an uncertain tax liability for these assessments partly because the taxing jurisdictions’ processes do not provide a mechanism for settling at less than the full amount of the assessment. The Company’s consideration of these tax assessments requires judgments about the application of income tax regulations to specific facts and circumstances. The final outcome of these matters cannot reliably be predicted, may take many years to resolve, and could result in the payment and expense of up to the entire amount of these assessments.


25


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 10.     Accumulated Other Comprehensive Income (AOCI)

The following tables set forth the changes in AOCI by component for the three and nine months ended September 30, 2014 and the reclassifications out of AOCI for the three and nine months ended September 30, 2014 and 2013:
 
Three months ended September 30, 2014
 
Foreign Currency Translation Adjustment
 
Deferred Gain (Loss) on Hedging Activities
 
Pension Liability Adjustment
 
Unrealized Gain (Loss) on Investments
 
Total
 
(In millions)
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2014
$
270

 
$
(12
)
 
$
(323
)
 
$
(5
)
 
$
(70
)
Other comprehensive income (loss) before reclassifications
(462
)
 
(49
)
 
8

 
10

 
(493
)
Amounts reclassified from AOCI

 
108

 
6

 

 
114

Tax effect
7

 
(23
)
 
(4
)
 

 
(20
)
Net current period other comprehensive income
(455
)
 
36

 
10

 
10

 
(399
)
Balance at September 30, 2014
$
(185
)
 
$
24

 
$
(313
)
 
$
5

 
$
(469
)
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2014
 
Foreign Currency Translation Adjustment
 
Deferred Gain (Loss) on Hedging Activities
 
Pension Liability Adjustment
 
Unrealized Gain (Loss) on Investments
 
Total
 
(In millions)
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
269

 
$
5

 
$
(330
)
 
$
(1
)
 
$
(57
)
Other comprehensive income before reclassifications
(462
)
 
(154
)
 
8

 
3

 
(605
)