10-Q 1 adm-2018930x10q.htm 10-Q Document

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, 2018
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
admprimarylogoa08.jpg
ARCHER-DANIELS-MIDLAND COMPANY
(Exact name of registrant as specified in its charter)
Delaware
41-0129150
(State or other jurisdiction of
incorporation or organization)
(I. R. S. Employer
Identification No.)
 
 
77 West Wacker Drive, Suite 4600
Chicago, Illinois
(Address of principal executive offices)
 
60601
(Zip Code)
 
 
(312) 634-8100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         Yes  x  No ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x  No  ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer     o 
Smaller reporting company  o
 
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o  No  x.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, no par value – 560,644,375 shares
(November 5, 2018)






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,
 
2018
 
2017
 
2018
 
2017
 
(In millions, except per share amounts)
 
 
 
 
 
 
 
 
Revenues
$
15,800

 
$
14,827

 
$
48,394

 
$
44,758

Cost of products sold
14,742

 
14,015

 
45,266

 
42,182

Gross Profit
1,058

 
812

 
3,128

 
2,576

 
 
 
 
 
 
 
 
Selling, general, and administrative expenses
534

 
478

 
1,607

 
1,519

Asset impairment, exit, and restructuring costs
1

 
107

 
41

 
140

Interest expense
87

 
79

 
267

 
246

Equity in (earnings) losses of unconsolidated affiliates
(131
)
 
(46
)
 
(378
)
 
(327
)
Interest income
(40
)
 
(27
)
 
(115
)
 
(75
)
Other (income) expense – net
(25
)
 
(4
)
 
(42
)
 
7

Earnings Before Income Taxes
632

 
225

 
1,748

 
1,066

 
 
 
 
 
 
 
 
Income taxes
96

 
30

 
250

 
256

Net Earnings Including Noncontrolling Interests
536

 
195

 
1,498

 
810

 
 
 
 
 
 
 
 
Less: Net earnings attributable to noncontrolling interests

 
3

 
3

 
3

 
 
 
 
 
 
 
 
Net Earnings Attributable to Controlling Interests
$
536

 
$
192

 
$
1,495

 
$
807

 
 
 
 
 
 
 
 
Average number of shares outstanding – basic
565

 
566

 
564

 
571

 
 
 
 
 
 
 
 
Average number of shares outstanding – diluted
568

 
569

 
567

 
574

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.95

 
$
0.34

 
$
2.65

 
$
1.41

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
0.94

 
$
0.34

 
$
2.64

 
$
1.41

 
 
 
 
 
 
 
 
Dividends per common share
$
0.335

 
$
0.320

 
$
1.005

 
$
0.960


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,
 
2018
 
2017
 
2018
 
2017
 
(In millions)
 
 
 
 
 
 
 
 
Net earnings including noncontrolling interests
$
536

 
$
195

 
$
1,498

 
$
810

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(178
)
 
245

 
(369
)
 
628

Tax effect
(1
)
 
(40
)
 
(23
)
 
(4
)
Net of tax amount
(179
)
 
205

 
(392
)
 
624

 
 
 
 
 
 
 
 
Pension and other postretirement benefit liabilities adjustment
8

 
174

 
23

 
193

Tax effect
(3
)
 
(66
)
 
(7
)
 
(74
)
Net of tax amount
5

 
108

 
16

 
119

 
 
 
 
 
 
 
 
Deferred gain (loss) on hedging activities
77

 
(26
)
 
(12
)
 
12

Tax effect
(17
)
 
6

 
4

 
1

Net of tax amount
60

 
(20
)
 
(8
)
 
13

 
 
 
 
 
 
 
 
Unrealized gain (loss) on investments
(7
)
 
6

 
(11
)
 
1

Tax effect

 

 

 

Net of tax amount
(7
)
 
6

 
(11
)
 
1

Other comprehensive income (loss)
(121
)
 
299

 
(395
)
 
757

Comprehensive income (loss) including noncontrolling interests
415

 
494

 
1,103

 
1,567

 
 
 
 
 
 
 
 
Less: Comprehensive income (loss) attributable to noncontrolling interests

 
4

 
3

 
5

 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to controlling interests
$
415

 
$
490

 
$
1,100

 
$
1,562


See notes to consolidated financial statements.





3




Archer-Daniels-Midland Company

Consolidated Balance Sheets
(In millions)
September 30, 2018
 
December 31, 2017
 
(Unaudited)
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
915

 
$
804

Segregated cash and investments
4,426

 
4,826

Trade receivables
1,934

 
1,947

Inventories
8,483

 
9,173

Other current assets
3,707

 
3,175

Total Current Assets
19,465

 
19,925

 
 
 
 
Investments and Other Assets
 

 
 

Investments in and advances to affiliates
5,293

 
5,088

Long-term marketable securities
26

 
92

Goodwill and other intangible assets
4,065

 
3,918

Other assets
930

 
802

Total Investments and Other Assets
10,314

 
9,900

 
 
 
 
Property, Plant, and Equipment
 

 
 

Land
462

 
470

Buildings
5,105

 
5,043

Machinery and equipment
18,210

 
18,056

Construction in progress
1,100

 
1,224

 
24,877

 
24,793

Accumulated depreciation
(14,992
)
 
(14,655
)
Net Property, Plant, and Equipment
9,885

 
10,138

Total Assets
$
39,664

 
$
39,963

 
 
 
 
Liabilities, Temporary Equity, and Shareholders’ Equity
 

 
 

Current Liabilities
 

 
 

Short-term debt
$
532

 
$
857

Trade payables
3,082

 
3,894

Payables to brokerage customers
4,519

 
4,973

Accrued expenses and other payables
2,925

 
2,833

Current maturities of long-term debt
590

 
13

Total Current Liabilities
11,648

 
12,570

 
 
 
 
Long-Term Liabilities
 

 
 

Long-term debt
6,730

 
6,623

Deferred income taxes
965

 
1,053

Other
1,275

 
1,342

Total Long-Term Liabilities
8,970

 
9,018

 
 
 
 
Temporary Equity - Redeemable noncontrolling interest
46

 
53

 
 
 
 
Shareholders’ Equity
 

 
 

Common stock
2,541

 
2,398

Reinvested earnings
18,478

 
17,552

Accumulated other comprehensive income (loss)
(2,032
)
 
(1,637
)
Noncontrolling interests
13

 
9

Total Shareholders’ Equity
19,000

 
18,322

Total Liabilities, Temporary Equity, and Shareholders’ Equity
$
39,664

 
$
39,963

 
 
 
 
See notes to consolidated financial statements.

4




Archer-Daniels-Midland Company

Consolidated Statements of Cash Flows
(Unaudited)
(In millions)
Nine Months Ended 
 September 30,
 
2018
 
2017
Operating Activities
 
 
 
Net earnings including noncontrolling interests
$
1,498

 
$
810

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

 
 

Depreciation and amortization
706

 
684

Asset impairment charges
33

 
81

Deferred income taxes
(124
)
 
(27
)
Equity in earnings of affiliates, net of dividends
(147
)
 
(131
)
Stock compensation expense
88

 
63

Deferred cash flow hedges
(11
)
 
12

Gains on sales of assets and businesses
(45
)
 
(66
)
Other – net
(92
)
 
174

Changes in operating assets and liabilities
 

 
 

Segregated investments
1,144

 
268

Trade receivables
(62
)
 
106

Inventories
578

 
703

Deferred consideration in securitized receivables
(5,413
)
 
(5,404
)
Other current assets
(720
)
 
1,317

Trade payables
(776
)
 
(259
)
Payables to brokerage customers
(433
)
 
(94
)
Accrued expenses and other payables
96

 
(1,486
)
Total Operating Activities
(3,680
)
 
(3,249
)
 
 
 
 
Investing Activities
 

 
 

Purchases of property, plant, and equipment
(555
)
 
(696
)
Proceeds from sales of business and assets
177

 
172

Net assets of businesses acquired
(324
)
 
(187
)
Purchases of marketable securities

 
(499
)
Proceeds from sales of marketable securities

 
572

Investments in and advances to affiliates
(127
)
 
(281
)
Investments in retained interest in securitized receivables
(3,391
)
 
(3,089
)
Proceeds from retained interest in securitized receivables
8,804

 
8,493

Other – net
(9
)
 
(14
)
Total Investing Activities
4,575

 
4,471

 
 
 
 
Financing Activities
 

 
 

Long-term debt borrowings
762

 
509

Long-term debt payments
(13
)
 
(840
)
Net borrowings (payments) under lines of credit agreements
(317
)
 
558

Share repurchases

 
(676
)
Cash dividends
(568
)
 
(544
)
Other – net
32

 
4

Total Financing Activities
(104
)
 
(989
)
 
 
 
 
Increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents
791

 
233

Cash, cash equivalents, restricted cash, and restricted cash equivalents - beginning of period
1,858

 
1,561

Cash, cash equivalents, restricted cash, and restricted cash equivalents - end of period
$
2,649

 
$
1,794

 
 
 
 
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the consolidated balance sheets
 
 
 
 
 
 
 
Cash and cash equivalents
$
915

 
$
518

Restricted cash and restricted cash equivalents included in segregated cash and investments
1,734

 
1,276

Total cash, cash equivalents, restricted cash, and restricted cash equivalents
$
2,649

 
$
1,794

 
 
 
 
Supplemental Disclosure of Noncash Investing Activity:
 
 
 
Retained interest in securitized receivables
$
5,598

 
$
5,257


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, 2017
557

 
$
2,398

 
$
17,552

 
$
(1,637
)
 
$
9

 
$
18,322

Comprehensive income
 

 
 

 
 

 
 

 
 

 
 

Net earnings
 
 
 

 
1,495

 
 

 
3

 
 

Other comprehensive income (loss)
 

 
 

 
 

 
(395
)
 

 
 

Total comprehensive income
 

 
 

 
 

 
 

 
 

 
1,103

Dividends paid - $1.005 per share
 

 
 

 
(568
)
 
 

 
 

 
(568
)
Stock compensation expense
1

 
88

 
 

 
 

 
 

 
88

Other
2

 
55

 
(1
)
 

 
1

 
55

Balance, September 30, 2018
560

 
$
2,541

 
$
18,478

 
$
(2,032
)
 
$
13

 
$
19,000


See notes to consolidated financial statements.

6




Archer-Daniels-Midland Company

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.  For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Principles of Consolidation

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

Reclassifications

The Company classified $5.4 billion of cash inflows from net consideration received for beneficial interest obtained for selling trade receivables as investing instead of operating activities for the nine months ended September 30, 2018 in accordance with the adoption of Accounting Standards Codification (ASC) Topic 230, Statement of Cash Flows (see Note 2 for more information). Prior period amounts have been conformed to the current presentation, which resulted in a decrease of $5.4 billion in total cash provided by operating activities and a corresponding increase in cash provided by investing activities for the nine months ended September 30, 2017.

The Company classified $1 million of income and $4 million of other components of net benefit cost as other (income) expense - net in its consolidated statement of earnings for the quarter and nine months ended September 30, 2018, respectively, as a result of the adoption of the amended guidance of ASC Topic 715, Compensation - Retirement Benefits (see Note 2 for more information). Amounts previously reported with the service cost component of net benefit cost in cost of goods sold of $9 million and selling, general, and administrative expenses of $11 million for the nine months ended September 30, 2017 have been reclassified to other (income) expense - net to conform to the current presentation. There were no amounts reported with the service cost component of net benefit cost in cost of goods sold and selling, general, and administrative expenses for the quarter ended September 30, 2017.

Effective January 1, 2018, the Company changed its segment reporting to reflect changes in its operating structure: Origination (formerly Agricultural Services), Oilseeds (formerly Oilseeds Processing), Carbohydrate Solutions (formerly Corn Processing) and Nutrition (formerly Wild Flavors and Specialty Ingredients). The European origination business previously reported in Oilseeds is now managed by leaders in Origination to better coordinate continental trading activities. Carbohydrate Solutions now includes the results of ADM Milling which were previously reported in Origination. In addition, the Company also moved the segment reporting of its renewable chemicals business from Carbohydrate Solutions to Oilseeds effective July 1, 2018. Nutrition now includes the results of Animal Nutrition and certain product lines previously reported in Carbohydrate Solutions, as well as certain product lines previously reported in Oilseeds.

Throughout this quarterly report on Form 10-Q, prior period results have been reclassified to conform to the current period presentation.



7

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 1.
Basis of Presentation (Continued)

Segregated Cash and Investments

The Company segregates certain cash, cash equivalents, and investment balances in accordance with regulatory requirements, commodity exchange requirements, and insurance arrangements. These balances represent deposits received from customers of the Company’s registered futures commission merchant and commodity brokerage services, cash margins and securities pledged to commodity exchange clearinghouses, and cash pledged as security under certain insurance arrangements. Segregated cash and investments also include restricted cash collateral for the various insurance programs of the Company’s captive insurance business. To the degree these segregated balances are comprised of cash and cash equivalents, they are considered restricted cash and cash equivalents on the statement of cash flows.

Last-in, First-out (LIFO) Inventories

Interim period LIFO calculations are based on interim period costs and management’s estimates of year-end inventory levels.  Because the availability and price of agricultural commodity-based LIFO inventories are unpredictable due to factors such as weather, government farm programs and policies, and changes in global demand, quantities of LIFO-based inventories at interim periods may vary significantly from management’s estimates of year-end inventory levels.

Note 2.
New Accounting Standards

Effective January 1, 2018, the Company adopted the amended guidance of ASC Subtopic 825-10, Financial Instruments - Overall, which is intended to improve the recognition and measurement of financial instruments. The amended guidance requires an entity to measure equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, at fair value with changes in fair value recognized in net income. The amended guidance also simplifies the impairment assessment of equity investments without readily determinable fair values by using a qualitative assessment to identify impairment. The adoption of this amended guidance did not have a significant impact on the Company’s financial results.
Effective January 1, 2018, the Company adopted the new guidance of ASC Topic 606, Revenue from Contracts with Customers (Topic 606), for all contracts that had not been completed as of the adoption date (the modified retrospective approach). Topic 606 requires the Company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance requires the Company to apply the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the Company satisfies a performance obligation. Many of the Company’s forward commodity sales contracts are considered physically settled derivatives under ASC Topic 815, Derivatives and Hedging (Topic 815), and are therefore excluded from the scope of Topic 606. Comparative balance sheet and statement of earnings information has not been restated and continues to be reported under the guidance of ASC 605, Revenue Recognition (Topic 605), that was in effect as of December 31, 2017 and in the three and nine months ended September 30, 2018. The cumulative effect of initially applying the guidance as an adjustment to the opening reinvested earnings balance at January 1, 2018 was less than $1 million. For more information about the adoption of Topic 606, see Note 4.
Effective January 1, 2018, the Company adopted the amended guidance of ASC 230, Statement of Cash Flows (Topic 230), which provides guidance on the application of the predominance principle and the presentation and classification of specific cash flow issues including a requirement to classify consideration received for beneficial interest obtained for selling trade receivables as investing instead of operating activities. The adoption of the amended guidance on the Company’s accounts receivable securitization programs resulted in expanded disclosures and a reclassification of cash inflows from operating activities to investing activities (see Note 1 for reclassification amounts). The adoption of amendments related to the other cash flow items did not have a significant impact on the Company's consolidated statements of cash flows.

Effective January 1, 2018, the Company adopted the amended guidance of ASC Topic 715, Compensation - Retirement Benefits, which requires that an employer report the service cost component in the same line or items as other compensation costs arising from services rendered by the pertinent employees during the period.  The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The adoption of this amended guidance requires expanded disclosures and the reclassification of the other components of net benefit cost from cost of products sold and selling, general, and administrative expenses to other (income) expense - net in the Company’s consolidated statements of earnings but did not impact financial results (see Note 1 for reclassification amounts).

8


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 3.
Pending Accounting Standards

Effective January 1, 2019, the Company will be required to adopt the new guidance of ASC Topic 842, Leases (Topic 842), which will supersede ASC Topic 840, Leases. Topic 842 requires lessees to recognize assets and liabilities for all leases. The Company expects to adopt Topic 842 using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The adoption of this new guidance will require expanded disclosures in the Company’s consolidated financial statements. The Company has established a cross-functional implementation team consisting of representatives from accounting, legal, procurement, and operations. The Company utilized surveys to centrally gather more information about its existing leases and lease processes and to gather lease contracts. To ensure completeness of the population of lease contracts, the results of the survey will be cross-referenced against other available lease information (i.e., year-end disclosures and lease expense). The Company is also working with a vendor to implement a lease accounting system which will assist in delivering the required accounting changes and disclosures. As of September 30, 2018, the Company has completed the configuration of the lease accounting system and started testing activities. The final phase of the implementation plan will include testing and dry-run activities, updating the system with additional lease data since the initial upload, and system reconfiguration as needed. The impact of the new standard will result in a significant increase to right of use assets and lease liabilities on the Company’s consolidated balance sheet, primarily as a result of operating leases currently not recognized on the balance sheet. The Company expects to complete its assessment of the impact of the new guidance on its financial results during the final phase of the implementation, which is expected to be completed in early 2019.

Effective January 1, 2019, the Company will be required to adopt the amended guidance of ASC Topic 220, Income Statement - Reporting Comprehensive Income (Topic 220), which allows a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Act”), eliminating the stranded tax effects resulting from the Act and improving the usefulness of information reported to financial statement users. In addition, the Company will be required to disclose (1) a description of its accounting policy for releasing income tax effects from accumulated other comprehensive income; (2) whether it elects to reclassify the stranded income tax effects from the Act; and (3) information about other income tax effects related to the application of the Act that are reclassified from AOCI to retained earnings, if any. Early adoption is permitted in any interim period for which financial statements have not been issued. The Company expects to make a decision whether it will elect to reclassify the stranded tax effects resulting from the Act by the end of 2018.

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

Effective January 1, 2020, the Company will be required to adopt the amended guidance of ASC Topic 820, Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. Early adoption is permitted. The adoption of this amended guidance will not impact the Company’s financial results.

Effective December 31, 2021, the Company will be required to adopt the amended guidance of ASC Subtopic 715-20, Compensation - Retirement Benefits - Defined Benefit Plans - General, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Early adoption is permitted. The adoption of this amended guidance will not impact the Company’s financial results.
 


9


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Revenues

Revenue Recognition

The Company principally generates revenue from merchandising and transporting agricultural commodities and manufactured products used as ingredients in food, feed, energy, and industrial products. Revenue is measured based on the consideration specified in the contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company follows a policy of recognizing revenue at a single point in time when it satisfies its performance obligation by transferring control over a product or service to a customer. For transportation service contracts, the Company recognizes revenue over time as the barge, ocean-going vessel, truck, rail, or container freight moves towards its destination in accordance with the transfer of control guidance of Topic 606. For physically settled derivative sales contracts that are outside the scope of Topic 606, the Company recognizes revenue when control of the inventory is transferred within the meaning of Topic 606 as required by ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610-20).
Shipping and Handling Costs

Shipping and handling costs related to contracts with customers for sale of goods are accounted for as a fulfillment activity and are included in cost of products sold. Accordingly, amounts billed to customers for such costs are included as a component of revenues.
Taxes Collected from Customers and Remitted to Governmental Authorities
 
The Company does not include taxes assessed by governmental authorities that are (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers, in the measurement of transactions prices or as a component of revenues and cost of products sold.
Transaction Price Allocated to Remaining Performance Obligations

The Company generally recognizes revenue at a point in time with the exception of revenue from transportation services which is recognized over time. The majority of the Company’s contracts with customers have one performance obligation and a contract duration of one year or less. The Company applies the practical expedient in paragraph 10-50-14 of Topic 606 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

























10

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Revenues (Continued)


Disaggregation of Revenues

The following table presents revenue disaggregated by timing of recognition and major product lines for the three months ended September 30, 2018.

 
Topic 606 Revenue
Topic 815(1)
Total
 
Point in Time
Over Time
Total
Revenue
Revenues
 
(In millions)
Origination
 
 
 
 
 
Merchandising and Handling
$
396

$
57

$
453

$
5,333

$
5,786

Transportation

64

64


64

Total Origination
396

121

517

5,333

5,850

Oilseeds
 
 
 
 
 
Crushing and Origination
330


330

4,109

4,439

Refining, Packaging, Biodiesel, and Other
593


593

1,378

1,971

Total Oilseeds
923


923

5,487

6,410

Carbohydrate Solutions
 
 
 
 
 
Starches and Sweeteners
1,261


1,261

445

1,706

Bioproducts
828


828


828

Total Carbohydrate Solutions
2,089


2,089

445

2,534

Nutrition
 
 
 
 
 
Wild Flavors and Specialty Ingredients
641


641


641

Animal Nutrition
281


281


281

Total Nutrition
922


922


922

 
 
 
 
 
 
Other
84


84


84

Total Revenues
$
4,414

$
121

$
4,535

$
11,265

$
15,800


(1) Topic 815 revenue relates to the physical delivery or the settlement of the Company’s sales contracts that are accounted for as derivatives and are outside the scope of Topic 606.



















11

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Revenues (Continued)


The following table presents revenue disaggregated by timing of recognition and major product lines for the nine months ended September 30, 2018.

 
Topic 606 Revenue
Topic 815(1)
Total
 
Point in Time
Over Time
Total
Revenue
Revenues
 
(In millions)
Origination
 
 
 
 
 
Merchandising and Handling
$
1,542

$
179

$
1,721

$
16,768

$
18,489

Transportation

182

182


182

Total Origination
1,542

361

1,903

16,768

18,671

Oilseeds
 
 
 
 
 
Crushing and Origination
647


647

12,225

12,872

Refining, Packaging, Biodiesel, and Other
1,787


1,787

4,101

5,888

Total Oilseeds
2,434


2,434

16,326

18,760

Carbohydrate Solutions
 
 
 
 
 
Starches and Sweeteners
3,699


3,699

1,349

5,048

Bioproducts
2,734


2,734


2,734

Total Carbohydrate Solutions
6,433


6,433

1,349

7,782

Nutrition
 
 
 
 
 
Wild Flavors and Specialty Ingredients
1,970


1,970


1,970

Animal Nutrition
920


920


920

Total Nutrition
2,890


2,890


2,890

 
 
 
 
 
 
Other
291


291


291

Total Revenues
$
13,590

$
361

$
13,951

$
34,443

$
48,394


(1) Topic 815 revenue relates to the physical delivery or the settlement of the Company’s sales contracts that are accounted for as derivatives and are outside the scope of Topic 606.

Origination

The Origination segment generates revenue from the sale of commodities and from service fees for the transportation of goods. Revenue is measured based on the consideration specified in the contract and excludes any sales incentives and amounts collected on behalf of third parties. Revenue is recognized when a performance obligation is satisfied by transferring control over a product or providing service to a customer. For transportation service contracts in Transportation, the Company recognizes revenue over time as the barge, ocean-going vessel, truck, rail, or container freight moves towards its destination in accordance with the transfer of control guidance of Topic 606. For physically settled derivative sales contracts that are outside the scope of Topic 606, the Company recognizes revenue when control of the inventory is transferred within the meaning of Topic 606 as required by Topic 610-20.

Oilseeds

The Oilseeds segment generates revenue primarily from the sale of products manufactured in its global processing facilities.  The segment also generates revenue from the sale of raw commodities in its South American grain origination business and from the sale of peanuts, tree nuts, and peanut-derived ingredients.  Revenue is recognized when a performance obligation is satisfied by transferring control over a product.  The amount of revenue recognized follows the contractually specified price which may include freight or other contractually specified cost components.  For physically settled derivative sales contracts that are outside the scope of Topic 606, the Company recognizes revenue when control of the inventory is transferred within the meaning of Topic 606 as required by Topic 610-20.

12

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Revenues (Continued)


Carbohydrate Solutions

The Carbohydrate Solutions segment generates revenue from the sale of products manufactured at the Company’s global corn and milling facilities around the world. Revenue is recognized when control over products is transferred to the customer. Products are shipped to the customers from the Company’s various facilities and from its network of storage terminals. The amount of revenue recognized is based on the consideration specified in the contract which could include freight and other costs depending on the specific shipping terms of each contract. For physically settled derivative sales contracts that are outside the scope of Topic 606, the Company recognizes revenue when control of the inventory is transferred within the meaning of Topic 606 as required by Topic 610-20.

Nutrition

The Nutrition segment sells specialty products including natural flavor ingredients, flavor systems, natural colors, animal nutrition products, other specialty food and feed ingredients. Revenue is recognized when control over products is transferred to the customer. The amount of revenue recognized follows the contracted price or the mutually agreed price of the product. Freight and shipping are recognized as a component of revenue at the same time control transfers to the customer.

Other

Other includes the Company’s futures commission business whose primary sources of revenue are commissions and brokerage income generated from executing orders and clearing futures contracts and options on futures contracts on behalf of its customers. Commissions and brokerage revenue are recognized on the date the transaction is executed. Other also includes the Company’s captive insurance business which generates third party revenue through its proportionate share of premiums from third-party reinsurance pools. Reinsurance premiums are recognized on a straight-line basis over the period underlying the policy.

Contract Liabilities

Contract liabilities relate to advance payments from customers for goods and services that the Company has yet to provide. Contract liabilities of $106 million and $185 million as of September 30, 2018 and January 1, 2018, respectively, were recorded in accrued expenses and other payables in the consolidated balance sheet. Contract liabilities recognized as revenues for the three and nine months ended September 30, 2018 were $36 million and $286 million, respectively.

























13

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 4.
Revenues (Continued)


Impacts on Financial Statements

The following tables summarize the impacts of Topic 606 adoption on the various lines of the Company’s consolidated financial statements.
           
Consolidated Balance Sheets (excerpt)
 
January 1, 2018
 
September 30, 2018
 
After Adoption
 
As
Under
Effect of
 
of Topic 606
 
Reported
Topic 605
Change
 
(In millions)
Assets
 
 
 
 
 
Trade receivables
$
2,343

 
$
1,934

$
1,675

$
259

Inventories
8,770

 
8,483

8,760

(277
)
Other current assets
3,175

 
3,707

3,713

(6
)
Total Current Assets
19,918

 
19,465

19,489

(24
)
Total Assets
$
39,956

 
$
39,664

$
39,688

$
(24
)
Liabilities, Temporary Equity, and Shareholders’ Equity
 
 
 
 
 
Accrued expenses and other payables
$
2,826

 
$
2,925

$
2,947

$
(22
)
Total Current Liabilities
12,563

 
11,648

11,670

(22
)
Reinvested earnings
17,552

 
18,478

18,480

(2
)
Total Shareholders’ Equity
18,322

 
19,000

19,002

(2
)
Total Liabilities, Temporary Equity, and Shareholders’ Equity
$
39,956

 
$
39,664

$
39,688

$
(24
)
Consolidated Statements of Earnings (excerpt)
 
Three Months Ended
Nine Months Ended
 
September 30, 2018
September 30, 2018
 
As
Under
Effect of
As
Under
Effect of
 
Reported
Topic 605
Change
Reported
Topic 605
Change
 
(In millions)
Revenues
$
15,800

$
15,785

$
15

$
48,394

$
48,518

$
(124
)
Cost of products sold
14,742

14,729

13

45,266

45,388

(122
)
Gross profit
1,058

1,056

2

3,128

3,130

(2
)
Earnings before income taxes
632

630

2

1,748

1,750

(2
)
Income taxes
96

95

1

250

250


Net earnings including noncontrolling interests
536

535

1

1,498

1,500

(2
)
Net earnings attributable to controlling interests
536

535

1

1,495

1,497

(2
)


14


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 5.
Acquisitions

During the nine months ended September 30, 2018, the Company acquired Probiotics International Limited (also known as Protexin) and Rodelle Inc. for an aggregate consideration of $366 million in cash. The aggregate consideration of these acquisitions, net of $42 million in cash acquired, was allocated as follows:

 
(In millions)
Working capital
$
(7
)
Property, plant, and equipment
39

Goodwill
165

Other intangible assets
137

Long-term liabilities
(1
)
Noncontrolling interest
(9
)
Aggregate cash consideration, net of cash acquired
$
324


Goodwill allocated in connection with the acquisitions is primarily attributable to synergies expected to arise after the Company’s acquisition of the businesses.


15


Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Fair Value Measurements

The following tables set forth, by level, the Company’s assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2018 and December 31, 2017.
 
Fair Value Measurements at September 30, 2018
 

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

 
$
2,932

 
$
1,799

 
$
4,731

Unrealized derivative gains:
 
 
 
 
 
 
 
Commodity contracts

 
461

 
217

 
678

Foreign currency contracts

 
272

 

 
272

Cash equivalents
492

 

 

 
492

Marketable securities
25

 
1

 

 
26

Segregated investments
1,193

 

 

 
1,193

Deferred receivables consideration

 
475

 

 
475

Total Assets
$
1,710

 
$
4,141

 
$
2,016

 
$
7,867

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Unrealized derivative losses:
 
 
 
 
 
 
 
Commodity contracts
$

 
$
619

 
$
203

 
$
822

Foreign currency contracts

 
338

 

 
338

Interest rate contracts

 
13

 

 
13

Inventory-related payables

 
657

 
44

 
701

Total Liabilities
$

 
$
1,627

 
$
247

 
$
1,874


16

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Fair Value Measurements (Continued)

 
Fair Value Measurements at December 31, 2017
 
 
Quoted Prices in
 Active Markets
 for Identical
 Assets
 (Level 1)
 
Significant
 Other
 Observable
 Inputs
 (Level 2)
 
Significant 
Unobservable
Inputs
(Level 3)
 
Total
 
(In millions)
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Inventories carried at market
$

 
$
3,400

 
$
1,486

 
$
4,886

Unrealized derivative gains:
 
 
 
 
 
 
 
Commodity contracts

 
275

 
111

 
386

Foreign currency contracts

 
63

 

 
63

Cash equivalents
352

 

 

 
352

Marketable securities
91

 
1

 

 
92

Segregated investments
1,733

 

 

 
1,733

Deferred receivables consideration

 
307

 

 
307

Total Assets
$
2,176

 
$
4,046

 
$
1,597

 
$
7,819

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Unrealized derivative losses:
 
 
 
 
 
 
 
Commodity contracts
$

 
$
268

 
$
103

 
$
371

Foreign currency contracts

 
92

 

 
92

Interest rate contracts

 
1

 

 
1

Inventory-related payables

 
680

 
39

 
719

Total Liabilities
$

 
$
1,041

 
$
142

 
$
1,183


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


17

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Fair Value Measurements (Continued)

Derivative contracts include exchange-traded commodity futures and options contracts, forward commodity purchase and sale contracts, and OTC instruments related primarily to agricultural commodities, energy, interest rates, and foreign currencies.  Exchange-traded futures and options contracts are valued based on unadjusted quoted prices in active markets and are classified in Level 1.  The majority of the Company’s exchange-traded futures and options contracts are cash-settled on a daily basis and, therefore, are not included in these tables.  Fair value for forward commodity purchase and sale contracts is estimated based on exchange-quoted prices adjusted for differences in local markets.  These differences are generally determined using inputs from broker or dealer quotations or market transactions in either the listed or OTC markets.  When observable inputs are available for substantially the full term of the contract, it is classified in Level 2.  When unobservable inputs have a significant impact (more than 10%) on the measurement of fair value, the contract is classified in Level 3. Except for certain derivatives designated as cash flow hedges, changes in the fair value of commodity-related derivatives are recognized in the consolidated statements of earnings as a component of cost of products sold.  Changes in the fair value of foreign currency-related derivatives are recognized in the consolidated statements of earnings as a component of revenues, cost of products sold, or other (income) expense - net depending upon the purpose of the contract. The changes in the fair value of derivatives designated as cash flow hedges are recognized in the consolidated balance sheets as a component of accumulated other comprehensive income (loss) (AOCI) until the hedged items are recorded in earnings or it is probable the hedged transaction will no longer occur.

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

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

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

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


18

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Fair Value Measurements (Continued)

The following table presents a rollforward of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2018.

 
Level 3 Fair Value Asset Measurements at
 
September 30, 2018
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, June 30, 2018
$
1,378

 
$
208

 
$
1,586

Total increase (decrease) in net realized/unrealized gains included in cost of products sold*
183

 
130

 
313

Purchases
3,518

 

 
3,518

Sales
(3,282
)
 

 
(3,282
)
Settlements

 
(150
)
 
(150
)
Transfers into Level 3
235

 
38

 
273

Transfers out of Level 3
(233
)
 
(9
)
 
(242
)
Ending balance, September 30, 2018
$
1,799

 
$
217

 
$
2,016


* Includes increase in unrealized gains of $243 million relating to Level 3 assets still held at September 30, 2018.

The following table presents a rollforward of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2018.

 
Level 3 Fair Value Liability Measurements at
 
September 30, 2018
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, June 30, 2018
$
22

 
$
200

 
$
222

Total increase (decrease) in net realized/unrealized losses included in cost of products sold*
4

 
114

 
118

Purchases
30

 

 
30

Sales
(12
)
 

 
(12
)
Settlements

 
(130
)
 
(130
)
Transfers into Level 3

 
30

 
30

Transfers out of Level 3

 
(11
)
 
(11
)
Ending balance, September 30, 2018
$
44

 
$
203

 
$
247


* Includes increase in unrealized losses of $118 million relating to Level 3 liabilities still held at September 30, 2018.


19

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Fair Value Measurements (Continued)

The following table presents a rollforward of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2017.
 
Level 3 Fair Value Asset Measurements at
 
September 30, 2017
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, June 30, 2017
$
1,000

 
$
106

 
$
1,106

Total increase (decrease) in net realized/unrealized gains included in cost of products sold*
15

 
54

 
69

Purchases
2,792

 

 
2,792

Sales
(2,655
)
 

 
(2,655
)
Settlements

 
(82
)
 
(82
)
Transfers into Level 3
37

 
45

 
82

Transfers out of Level 3
(95
)
 
(3
)
 
(98
)
Ending balance, September 30, 2017
$
1,094

 
$
120

 
$
1,214


* Includes increase in unrealized gains of $52 million relating to Level 3 assets still held at September 30, 2017.

The following table presents a rollforward of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2017.
 
Level 3 Fair Value Liability Measurements at
 
September 30, 2017
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, June 30, 2017
$
32

 
$
154

 
$
186

Total increase (decrease) in net realized/unrealized losses included in cost of products sold*
(9
)
 
82

 
73

Purchases
2

 

 
2

Sales
(5
)
 

 
(5
)
Settlements

 
(123
)
 
(123
)
Transfers into Level 3

 
35

 
35

Transfers out of Level 3

 
(3
)
 
(3
)
Ending balance, September 30, 2017
$
20

 
$
145

 
$
165


* Includes increase in unrealized losses of $79 million relating to Level 3 liabilities still held at September 30, 2017.

20

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Fair Value Measurements (Continued)

The following table presents a rollforward of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2018.
 
Level 3 Fair Value Asset Measurements at
 
September 30, 2018
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2017
$
1,486

 
$
111

 
$
1,597

Total increase (decrease) in net realized/unrealized gains included in cost of products sold*
559

 
302

 
861

Purchases
7,890

 

 
7,890

Sales
(8,264
)
 

 
(8,264
)
Settlements

 
(294
)
 
(294
)
Transfers into Level 3
235

 
123

 
358

Transfers out of Level 3
(107
)
 
(25
)
 
(132
)
Ending balance, September 30, 2018
$
1,799

 
$
217

 
$
2,016


* Includes increase in unrealized gains of $523 million relating to Level 3 assets still held at September 30, 2018.

The following table presents a rollforward of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2018.
 
Level 3 Fair Value Liability Measurements at
 
September 30, 2018
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2017
$
39

 
$
103

 
$
142

Total increase (decrease) in net realized/unrealized losses included in cost of products sold*
12

 
360

 
372

Purchases
54

 

 
54

Sales
(61
)
 

 
(61
)
Settlements

 
(348
)
 
(348
)
Transfers into Level 3

 
136

 
136

Transfers out of Level 3

 
(48
)
 
(48
)
Ending balance, September 30, 2018
$
44

 
$
203

 
$
247


* Includes increase in unrealized losses of $364 million relating to Level 3 liabilities still held at September 30, 2018.


21

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Fair Value Measurements (Continued)

The following table presents a rollforward of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2017.
 
Level 3 Fair Value Asset Measurements at
 
September 30, 2017
 
Inventories
 Carried at
 Market
 
Commodity
Derivative
Contracts
Gains
 
 
Total 
Assets
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2016
$
1,322

 
$
140

 
$
1,462

Total increase (decrease) in net realized/unrealized gains included in cost of products sold*
(55
)
 
194

 
139

Purchases
8,369

 

 
8,369

Sales
(8,526
)
 

 
(8,526
)
Settlements

 
(291
)
 
(291
)
Transfers into Level 3
37

 
111

 
148

Transfers out of Level 3
(53
)
 
(34
)
 
(87
)
Ending balance, September 30, 2017
$
1,094

 
$
120

 
$
1,214


* Includes increase in unrealized gains of $18 million relating to Level 3 assets still held at September 30, 2017.

The following table presents a rollforward of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2017.
 
Level 3 Fair Value Liability Measurements at
 
September 30, 2017
 
Inventory-
 related
 Payables
 
Commodity
Derivative
Contracts
Losses
 
 
Total 
Liabilities
 
(In millions)
 
 
 
 
 
 
Balance, December 31, 2016
$
30

 
$
142

 
$
172

Total increase (decrease) in net realized/unrealized losses included in cost of products sold*
(4
)
 
201

 
197

Purchases
19

 

 
19

Sales
(25
)
 

 
(25
)
Settlements

 
(289
)
 
(289
)
Transfers into Level 3

 
108

 
108

Transfers out of Level 3

 
(17
)
 
(17
)
Ending balance, September 30, 2017
$
20

 
$
145

 
$
165


* Includes increase in unrealized losses of $204 million relating to Level 3 assets still held at September 30, 2017.


22

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 6.
Fair Value Measurements (Continued)

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

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

The following table sets forth the weighted average percentage of the unobservable price components included in the Company’s Level 3 valuations as of September 30, 2018 and December 31, 2017. The Company’s Level 3 measurements may include basis only, transportation cost only, or both price components. As an example, for Level 3 inventories with basis, the unobservable component as of September 30, 2018 is a weighted average 24.1% of the total price for assets and 45.3% of the total price for liabilities.

 
Weighted Average % of Total Price
 
September 30, 2018
 
December 31, 2017
Component Type
Assets
 
Liabilities
 
Assets
 
Liabilities
Inventories and Related Payables
 
 
 
 
 
 
 
Basis
24.1
%
 
45.3
%
 
12.8
%
 
99.9
%
Transportation cost
11.6
%
 
23.0
%
 
19.2
%
 

 
 
 
 
 
 
 
 
Commodity Derivative Contracts
 
 
 
 
 
 
 
Basis
21.6
%
 
23.6
%
 
24.2
%
 
23.0
%
Transportation cost
14.9
%
 
22.3
%
 
12.5
%
 
10.4
%

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

Note 7.
Derivative Instruments and Hedging Activities

Derivatives Not Designated as Hedging Instruments

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

23

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 7.
Derivative Instruments and Hedging Activities (Continued)

The following table sets forth the fair value of derivatives not designated as hedging instruments as of September 30, 2018 and December 31, 2017.

 
September 30, 2018
 
December 31, 2017
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(In millions)
 
 
 
 
 
 
 
 
Foreign Currency Contracts
$
272

 
$
338

 
$
63

 
$
92

Commodity Contracts
678

 
822

 
386

 
371

Total
$
950

 
$
1,160

 
$
449

 
$
463


The following table sets forth the pre-tax gains (losses) on derivatives not designated as hedging instruments that have been included in the consolidated statements of earnings for the three and nine months ended September 30, 2018 and 2017.
 
 
 
 
 
Other expense (income) - net
 
 
 
 
 
Cost of products sold
 
 
 
(In millions)
Revenues
 
 
 
 
Three Months Ended September 30, 2018
 
 

 
 
 
 
Consolidated Statement of Earnings
$
15,800

 
$
14,742

 
$
(25
)
 
 
 
 
 
 
 
 
 
 
Pre-tax gains (losses) on:
 
 
 
 
 
 
 
Foreign Currency Contracts
$
(4
)
 
$
12

 
$
(30
)
 
 
Commodity Contracts

 
84

 

 
 
Total gain (loss) recognized in earnings
$
(4
)
 
$
96

 
$
(30
)
 
$
62

 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
 
 
 
 
 
 
Consolidated Statement of Earnings
$
14,827

 
$
14,015

 
$
(4
)
 
 
 
 
 
 
 
 
 
 
Pre-tax gains (losses) on:
 
 
 
 
 
 
 
Foreign Currency Contracts
$
(8
)
 
$
52

 
$
52

 
 
Commodity Contracts

 
34

 

 
 
Total gain (loss) recognized in earnings
$
(8
)
 
$
86

 
$
52

 
$
130


24

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 7.
Derivative Instruments and Hedging Activities (Continued)

 
 
 
 
 
Other expense (income) - net
 
 
 
 
 
Cost of products sold
 
 
 
(In millions)
Revenues
 
 
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
Consolidated Statement of Earnings
$
48,394

 
$
45,266

 
$
(42
)
 
 
 
 
 
 
 
 
 
 
Pre-tax gains (losses) on:
 
 
 
 
 
 
 
Foreign Currency Contracts
$
21

 
$
(189
)
 
$
(91
)
 
 
Commodity Contracts

 
163

 

 
 
Total gain (loss) recognized in earnings
$
21

 
$
(26
)
 
$
(91
)
 
$
(96
)
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
Consolidated Statement of Earnings
$
44,758

 
$
42,182

 
$
7

 
 
 
 
 
 
 
 
 
 
Pre-tax gains (losses) on:
 
 
 
 
 
 
 
Foreign Currency Contracts
$
(16
)
 
$
82

 
$
186

 
 
Commodity Contracts

 
294

 

 
 
Total gain (loss) recognized in earnings
$
(16
)
 
$
376

 
$
186

 
$
546

 
 
 
 
 
 
 
 
Changes in the market value of inventories of certain merchandisable agricultural commodities, forward cash purchase and sales contracts, exchange-traded futures and exchange-traded and OTC options contracts are recognized in earnings immediately as a component of cost of products sold.

Derivatives Designated as Cash Flow or Fair Value Hedging Strategies

As of September 30, 2018 and December 31, 2017, the Company had certain derivatives designated as cash flow and fair value hedges.

The Company uses interest rate swaps designated as fair value hedges to protect the fair value of $496 million in fixed-rate debt due to changes in interest rates. The changes in the fair value of the interest rate swaps and the underlying fixed-rate debt are recorded in other (income) expense - net. The terms of the interest rate swaps match the terms of the underlying debt. At September 30, 2018, the Company had $8 million in other current liabilities representing the fair value of the interest rate swaps and a corresponding decrease in the underlying debt for the same amount with no net impact to earnings.
For each of the commodity hedge programs described below, the derivatives are designated as cash flow hedges.  Assuming normal market conditions, the changes in the market value of such derivative contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price movements of the hedged item.  Once the hedged item is recognized in earnings, the gains/losses arising from the hedge are reclassified from AOCI to either revenues or cost of products sold, as applicable. As of September 30, 2018, the Company had $26 million of after-tax losses in AOCI related to gains and losses from commodity cash flow hedge transactions.  The Company expects to recognize $26 million of these after-tax losses in its consolidated statement of earnings during the next 12 months.
The Company uses futures or options contracts to hedge the purchase price of anticipated volumes of corn to be purchased and processed in a future month.  The objective of this hedging program is to reduce the variability of cash flows associated with the Company’s forecasted purchases of corn.  The Company’s corn processing plants currently grind approximately 72 million bushels of corn per month.  During the past 12 months, the Company hedged between 23% and 95% of its monthly anticipated grind.  At September 30, 2018, the Company had designated hedges representing between 5% and 95% of its anticipated monthly grind of corn for the next 12 months.



25

Archer-Daniels-Midland Company

Notes to Consolidated Financial Statements (Continued)
(Unaudited)

Note 7.
Derivative Instruments and Hedging Activities (Continued)

The Company, from time to time, also uses futures, options, and swaps to hedge the sales price of certain ethanol sales contracts.  The Company has established hedging programs for ethanol sales contracts that are indexed to unleaded gasoline prices and to various exchange-traded ethanol contracts. The objective of these hedging programs is to reduce the variability of cash flows associated with the Company’s sales of ethanol.  During the past 12 months, the Company hedged between 1 million and 135 million gallons of ethanol sales per month under these programs.  At September 30, 2018, the Company had designated hedges representing between 15 million and 121 million gallons of ethanol sales per month over the next 3 months.

During the first quarter of 2018, the Company started using futures and options contracts to hedge the purchase price of anticipated volumes of soybeans to be purchased and processed in a future month for certain of its U.S. soybean crush facilities. The Company also uses futures or options contracts to hedge the sales prices of anticipated soybean meal and soybean oil sales proportionate to the soybean crushing process at these facilities. During the past 12 months, the Company hedged between 0% and 100% of the anticipated monthly soybean crush for soybean purchases and soybean meal and oil sales at the designated facilities. The Company has designated hedges representing between 0% and 100% of the anticipated monthly soybean crush for soybean purchases and soybean meal and oil sales at the designated facilities over the next 12 months.

The following table sets forth the fair value of derivatives designated as hedging instruments as of September 30, 2018 and December 31, 2017.

 
September 30, 2018
 
December 31, 2017
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(In millions)
Interest Rate Contracts
$

 
$
13

 
$

 
$
1

Total
$

 
$
13

 
$

 
$
1


The following table sets forth the pre-tax gains (losses) on derivatives designated as hedging instruments that have been included in the consolidated statements of earnings for the three and nine months ended September 30, 2018 and 2017.