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 March 31, 2005
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period __________ To __________
Commission file number 1-44
ARCHER-DANIELS-MIDLAND COMPANY
(Exact name of registrant as specified in its charter)
Delaware | 41-0129150 |
(State or other jurisdiction of incorporation or organization) | (I. R. S. Employer Identification No.) |
4666 Faries Parkway Box 1470 Decatur, Illinois (Address of principal executive offices) | 62525 (Zip Code) |
Registrant's telephone number, including area code: (217) 424-5200 |
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 Noo.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesx Noo.
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 - 656,488,180 shares
(April 30, 2005)
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Archer-Daniels-Midland Company and Subsidiaries
THREE MONTHS ENDED | |||||||
MARCH 31, | |||||||
2005 | 2004 | ||||||
(In thousands, except | |||||||
per share amounts) | |||||||
Net sales and other operating income | $ | 8,484,171 | $ | 9,309,019 | |||
Cost of products sold | 7,909,315 | 8,722,000 | |||||
Gross Profit | 574,856 | 587,019 | |||||
Selling, general and administrative expenses | 280,395 | 251,701 | |||||
Other expense (income) - net | (114,575 | ) | (3,143 | ) | |||
Earnings Before Income Taxes | 409,036 | 338,461 | |||||
Income taxes | 139,941 | 111,692 | |||||
Net Earnings | $ | 269,095 | $ | 226,769 | |||
Average number of shares outstanding - basic | 656,163 | 648,565 | |||||
Average number of shares outstanding - diluted | 658,904 | 650,962 | |||||
Basic earnings per common share | $ | .41 | $ | .35 | |||
Diluted earnings per common share | $ | .41 | $ | .35 | |||
Dividends per common share | $ | .085 | $ | .075 |
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Archer-Daniels-Midland Company and Subsidiaries
NINE MONTHS ENDED | |||||||
MARCH 31, | |||||||
2005 | 2004 | ||||||
(In thousands, except | |||||||
per share amounts) | |||||||
Net sales and other operating income | $ | 26,520,108 | $ | 26,465,425 | |||
Cost of products sold | 24,613,112 | 24,820,358 | |||||
Gross Profit | 1,906,996 | 1,645,067 | |||||
Selling, general and administrative expenses | 801,645 | 749,138 | |||||
Other expense (income) - net | (143,984 | ) | 19,785 | ||||
Earnings Before Income Taxes | 1,249,335 | 876,144 | |||||
Income taxes | 400,434 | 278,373 | |||||
Net Earnings | $ | 848,901 | $ | 597,771 | |||
Average number of shares outstanding - basic | 654,476 | 646,844 | |||||
Average number of shares outstanding - diluted | 656,365 | 649,241 | |||||
Basic earnings per common share | $ | 1.30 | $ | .92 | |||
Diluted earnings per common share | $ | 1.29 | $ | .92 | |||
Dividends per common share | $ | .235 | $ | .195 |
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
Archer-Daniels-Midland Company and Subsidiaries
(Unaudited) | |||||||
MARCH 31, | JUNE 30, | ||||||
2005 | 2004 | ||||||
(In thousands) | |||||||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | 661,883 | $ | 540,207 | |||
Segregated cash and investments | 1,001,259 | 871,439 | |||||
Receivables | 3,991,153 | 4,040,759 | |||||
Inventories | 3,966,730 | 4,591,648 | |||||
Other assets | 423,571 | 294,943 | |||||
Total Current Assets | 10,044,596 | 10,338,996 | |||||
Investments and Other Assets | |||||||
Investments in and advances to affiliates | 1,893,932 | 1,832,619 | |||||
Long-term marketable securities | 989,510 | 1,161,388 | |||||
Goodwill | 344,622 | 337,474 | |||||
Other assets | 460,277 | 443,606 | |||||
3,688,341 | 3,775,087 | ||||||
Property, Plant, and Equipment | |||||||
Land | 209,863 | 190,136 | |||||
Buildings | 2,663,906 | 2,568,472 | |||||
Machinery and equipment | 10,973,962 | 10,658,282 | |||||
Construction in progress | 324,593 | 263,332 | |||||
14,172,324 | 13,680,222 | ||||||
Allowances for depreciation | (8,923,464 | ) | (8,425,484 | ) | |||
5,248,860 | 5,254,738 | ||||||
$ | 18,981,797 | $ | 19,368,821 | ||||
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
Archer-Daniels-Midland Company and Subsidiaries
(Unaudited) | ||||||||||
MARCH 31, | JUNE 30, | |||||||||
2005 | 2004 | |||||||||
(In thousands) | ||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||
Current Liabilities | ||||||||||
Short-term debt | $ | 270,374 | $ | 1,770,512 | ||||||
Accounts payable | 3,651,851 | 3,238,230 | ||||||||
Accrued expenses | 1,356,058 | 1,580,700 | ||||||||
Current maturities of long-term debt | 182,595 | 160,795 | ||||||||
Total Current Liabilities | 5,460,878 | 6,750,237 | ||||||||
Long-Term Liabilities | ||||||||||
Long-term debt | 3,575,477 | 3,739,875 | ||||||||
Deferred income taxes | 756,709 | 653,834 | ||||||||
Other | 615,627 | 526,659 | ||||||||
4,947,813 | 4,920,368 | |||||||||
Shareholders' Equity | ||||||||||
Common stock | 5,492,809 | 5,431,510 | ||||||||
Reinvested earnings | 2,878,684 | 2,183,751 | ||||||||
Accumulated other comprehensive income | 201,613 | 82,955 | ||||||||
8,573,106 | 7,698,216 | |||||||||
$ | 18,981,797 | $ | 19,368,821 | |||||||
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Archer-Daniels-Midland Company and Subsidiaries
NINE MONTHS ENDED | |||||||
MARCH 31, | |||||||
2005 | 2004 | ||||||
(In thousdands) | |||||||
Operating Activities | |||||||
Net earnings | $ | 848,901 | $ | 597,771 | |||
Adjustments to reconcile net earnings to net cash provided by | |||||||
(used in) operating activities | |||||||
Depreciation | 507,599 | 513,293 | |||||
Asset abandonments | 1,896 | 40,184 | |||||
Deferred income taxes | 173,845 | 161,759 | |||||
Stock contributed to employee benefit plans | 17,581 | 17,623 | |||||
(Gain) loss on marketable securities transactions | (113,261 | ) | (11,697 | ) | |||
Equity in (earnings) of affiliates, net of dividends | (57,724 | ) | (69,766 | ) | |||
Pension and postretirement payments in excess of accruals | (4,241 | ) | (32,671 | ) | |||
Other - net | 15,542 | (34,161 | ) | ||||
Changes in operating assets and liabilities | |||||||
Segregated cash and investments | (121,523 | ) | (324,665 | ) | |||
Receivables | (50,074 | ) | (605,594 | ) | |||
Inventories | 762,976 | (1,985,485 | ) | ||||
Other assets | (95,891 | ) | (26,367 | ) | |||
Accounts payable and accrued expenses | 158,126 | 861,135 | |||||
Total Operating Activities | 2,043,752 | (898,641 | ) | ||||
Investing Activities | |||||||
Purchases of property, plant and equipment | (451,223 | ) | (365,752 | ) | |||
Proceeds from sales of property, plant and equipment | 29,072 | 48,840 | |||||
Net assets of businesses acquired | (4,670 | ) | (53,616 | ) | |||
Investments in and advances to affiliates | (96,967 | ) | (92,979 | ) | |||
Distributions from affiliates, excluding dividends | 125,357 | 83,216 | |||||
Purchases of marketable securities | (1,320,069 | ) | (749,531 | ) | |||
Proceeds from sales of marketable securities | 1,595,263 | 658,671 | |||||
Other - net | 18,567 | 28,078 | |||||
Total Investing Activities | (104,670 | ) | (443,073 | ) | |||
Financing Activities | |||||||
Long-term debt borrowings | 8,547 | 2,646 | |||||
Long-term debt payments | (174,018 | ) | (26,731 | ) | |||
Net borrowings (payments) under lines of credit agreements | (1,520,661 | ) | 1,510,532 | ||||
Purchases of treasury stock | (3,514 | ) | (4,083 | ) | |||
Cash dividends | (153,967 | ) | (126,615 | ) | |||
Proceeds from exercises of stock options | 26,207 | 26,021 | |||||
Total Financing Activities | (1,817,406 | ) | 1,381,770 | ||||
Increase In Cash And Cash Equivalents | 121,676 | 40,056 | |||||
Cash And Cash Equivalents Beginning Of Period | 540,207 | 764,959 | |||||
Cash And Cash Equivalents End Of Period | $ | 661,883 | $ | 805,015 | |||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Archer-Daniels-Midland Company and Subsidiaries
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, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and nine months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending June 30, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 2004.
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.
Reclassifications
Certain items in the prior period financial statements have been reclassified to conform to the current period’s presentation.
Note 2. New Accounting Standards
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) Number 153Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29. SFAS Number 153 eliminates the exception to fair value accounting for exchanges of similar productive assets contained in Accounting Principles Board (APB) Opinion Number 29 and replaces it with a general exception for exchange transactions that do not have commercial substance. The exception in APB Opinion Number 29 required certain nonmonetary asset exchanges to be recorded on a carryover basis with no gain/loss recognition. Under SFAS Number 153, exchange transactions with commercial substance are required to be accounted for at fair value with gain/loss recognition on assets surrendered in exchange transactions. The Company will be required to adopt SFAS Number 153 on July 1, 2005, and believes the adoption of this standard will not have a material impact on the Company’s financial statements.
In December 2004, the Financial Accounting Standards Board issued SFAS Number 123 (revised 2004),Share-Based Payment,which is a revision of SFAS Number 123,Accounting for Stock-Based Compensation,and amends SFAS Number 95,Statement of Cash Flows.SFAS Number 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair value. Effective July 1, 2004, the Company adopted the fair value recognition provisions of SFAS Number 123. The adoption of SFAS Number 123(R) on July 1, 2005 will not have a material impact on the Company’s financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Archer-Daniels-Midland Company and Subsidiaries
Note 3. Comprehensive Income
The components of comprehensive income, net of related tax, are as follows:
THREE MONTHS ENDED | NINE MONTHS ENDED | ||||||||||||
MARCH 31, | MARCH 31, | ||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
(In thousands) | (In thousands) | ||||||||||||
Net earnings | $ | 269,095 | $ | 226,769 | $ | 848,901 | $ | 597,771 | |||||
Net change in unrealized gain | |||||||||||||
(loss) on investments | (68,771 | ) | 49,900 | (15,948 | ) | 92,358 | |||||||
Deferred gain (loss) on hedging | |||||||||||||
activities | 7,401 | 69,560 | (59,467 | ) | 64,745 | ||||||||
Minimum pension | |||||||||||||
liability adjustment | (1,566 | ) | 32 | (4,020 | ) | (77 | ) | ||||||
Foreign currency translation | |||||||||||||
adjustment | (126,998 | ) | (43,367 | ) | 198,093 | 148,125 | |||||||
Comprehensive Income | $ | 79,161 | $ | 302,894 | $ | 967,559 | $ | 902,922 | |||||
Note 4. Stock Compensation
Effective July 1, 2004, the Company adopted the fair value recognition provisions of SFAS Number 123,Accounting for Stock-Based Compensation, for stock-based employee compensation. Prior to July 1, 2004, the Company accounted for stock-based employee compensation under the recognition and measurement provisions of APB Opinion Number 25,Accounting for Stock Issued to Employees, and related Interpretations. Under the modified prospective method of adoption selected by the Company under the provisions of SFAS Number 148,Accounting for Stock-Based Compensation - Transition and Disclosure, stock-based employee compensation cost recognized for the quarter and nine months ended March 31, 2005, is the same as that which would have been recognized had the fair value recognition provisions of SFAS Number 123 been applied to all options granted after July 1, 1995. The effect of adopting SFAS Number 123 for stock options was immaterial for the quarter and nine months ended March 31, 2005, and is expected to be immaterial for the year ending June 30, 2005.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Archer-Daniels-Midland Company and Subsidiaries
Note 4. Stock Compensation (Continued)
The following table illustrates the effect on net earnings and earnings per share as if the fair value method had been applied to all outstanding and unvested employee stock options and awards in each period.
THREE MONTHS ENDED | NINE MONTHS ENDED | ||||||||||||
MARCH 31, | MARCH 31, | ||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
(In thousands, except per share data) | |||||||||||||
Net earnings, as reported | $ | 269,095 | $ | 226,769 | $ | 848,901 | $ | 597,771 | |||||
Add: stock-based compensation | |||||||||||||
expense reported in net earnings, | |||||||||||||
net of related tax | 4,739 | 1,357 | 13,234 | 3,366 | |||||||||
Deduct: stock-based compensation | |||||||||||||
expense determined under fair | |||||||||||||
value method, net of related tax | (4,739 | ) | (2,415 | ) | (13,234 | ) | (6,723 | ) | |||||
Pro forma net earnings | $ | 269,095 | $ | 225,711 | $ | 848,901 | $ | 594,414 | |||||
Basic earnings per common share | |||||||||||||
As reported | $ | .41 | $ | .35 | $ | 1.30 | $ | .92 | |||||
Pro forma | $ | .41 | $ | .35 | $ | 1.30 | $ | .92 | |||||
Diluted earnings per common share | |||||||||||||
As reported | $ | .41 | $ | .35 | $ | 1.29 | $ | .92 | |||||
Pro forma | $ | .41 | $ | .35 | $ | 1.29 | $ | .92 |
Note 5. Other Expense (Income) - Net
THREE MONTHS ENDED | NINE MONTHS ENDED | ||||||||||||
MARCH 31, | MARCH 31, | ||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
(In thousands) | (In thousands) | ||||||||||||
Interest expense | $ | 80,293 | $ | 86,856 | $ | 241,903 | $ | 259,849 | |||||
Investment income | (36,300 | ) | (35,775 | ) | (91,756 | ) | (89,524 | ) | |||||
Net (gain) loss on marketable securities transactions | (113,820 | ) | (10,677 | ) | (113,261 | ) | (11,697 | ) | |||||
Equity in (earnings) losses of affiliates | (36,611 | ) | (44,804 | ) | (173,409 | ) | (141,453 | ) | |||||
Other | (8,137 | ) | 1,257 | (7,461 | ) | 2,610 | |||||||
$ | (114,575 | ) | $ | (3,143 | ) | $ | (143,984 | ) | $ | 19,785 | |||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Archer-Daniels-Midland Company and Subsidiaries
Note 6. Retirement Plan Expense
The Company provides substantially all domestic employees and employees at certain international subsidiaries with pension benefits. The Company also provides substantially all domestic salaried employees with postretirement health care and life insurance benefits. Retirement plan expense for these pension and postretirement benefits for the quarter and nine months ended March 31, 2005 and 2004, is as follows:
Pension Benefits | Postretirement Benefits | ||||||||||||
THREE MONTHS ENDED | THREE MONTHS ENDED | ||||||||||||
MARCH 31, | MARCH 31, | ||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
(In thousands) | (In thousands) | ||||||||||||
Service cost (benefits earned during the period) | $ | 13,361 | $ | 11,534 | $ | 1,616 | $ | 1,530 | |||||
Interest cost | 19,297 | 15,502 | 1,925 | 1,928 | |||||||||
Expected return on plan assets | (17,067 | ) | (13,060 | ) | | - | |||||||
Actuarial loss (gain) | 8,143 | 4,943 | 22 | 15 | |||||||||
Net amortization | 1,140 | 916 | (279 | ) | (279 | ) | |||||||
Net periodic defined benefit plan expense | $ | 24,874 | $ | 19,835 | $ | 3,284 | $ | 3,194 | |||||
NINE MONTHS ENDED | NINE MONTHS ENDED | ||||||||||||
MARCH 31, | MARCH 31, | ||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
(In thousands) | (In thousands) | ||||||||||||
Service cost (benefits earned during the period) | $ | 40,084 | $ | 35,227 | $ | 4,849 | $ | 4,591 | |||||
Interest cost | 57,891 | 46,506 | 5,775 | 5,784 | |||||||||
Expected return on plan assets | (51,199 | ) | (39,181 | ) | - | - | |||||||
Actuarial loss (gain) | 24,427 | 14,830 | 67 | 46 | |||||||||
Net amortization | 3,419 | 2,749 | (837 | ) | (837 | ) | |||||||
Net periodic defined benefit plan expense | $ | 74,622 | $ | 60,131 | $ | 9,854 | $ | 9,584 |
Note 7. Guarantees
The Company has entered into debt guarantee agreements, primarily related to equity-method investees, which could obligate the Company to make future payments if the primary entity fails to perform its contractual obligation. The Company has not recorded a liability for these contingent obligations, as the Company believes the likelihood of any payments being made is remote. Should the Company be required to make any payments pursuant to these guarantees, the Company has, for a majority of these agreements, a security interest in the underlying assets of the primary entity. These debt guarantees totaled $424 million at March 31, 2005. Outstanding borrowings under these guarantees were $309 million at March 31, 2005.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Archer-Daniels-Midland Company and Subsidiaries
Note 8. Segment Information
The Company is principally engaged in procuring, transporting, storing, processing, and merchandising agricultural commodities and products. The Company’s operations are classified into three reportable business segments: Oilseeds Processing, Corn Processing, and Agricultural Services. Each of these segments is organized based upon the nature of products and services offered. The Company’s remaining operations are aggregated and classified as Other.
The Oilseeds Processing segment includes activities related to processing oilseeds such as soybeans, cottonseed, sunflower seeds, canola, peanuts, and flaxseed into vegetable oils and meals principally for the food and feed industries. In addition, oilseeds may be resold into the marketplace as a raw material for other processors. Crude vegetable oil is sold "as is" or is further processed by refining, bleaching, and deodorizing into salad oils. Salad oils can be further processed by hydrogenating and/or interesterifying into margarine, shortening, and other food products. Partially refined oil is sold for use in chemicals, paints, and other industrial products. Oilseed meals are primary ingredients used in the manufacture of commercial livestock and poultry feeds.
The Corn Processing segment includes activities related to the production of sweeteners, starches, dextrose, and syrups for the food and beverage industry as well as activities related to the production, by fermentation, of bioproducts such as alcohol, amino acids, and other specialty food and feed ingredients.
The Agricultural Services segment utilizes the Company’s extensive grain elevator and transportation network to buy, store, clean, and transport agricultural commodities, such as oilseeds, corn, wheat, milo, oats, and barley, and resells these commodities primarily as feed ingredients and as raw materials for the agricultural processing industry. Agricultural Services’ grain sourcing and transportation network provides reliable and efficient services to the Company’s agricultural processing operations. Also included in Agricultural Services are the activities of A.C. Toepfer International, a global merchandiser of agricultural commodities and processed products.
Other includes the Company’s remaining operations, consisting principally of food and feed ingredient businesses and financial activities. Food and feed ingredient businesses include Wheat Processing with activities related to the production of wheat flour; Cocoa Processing with activities related to the production of chocolate and cocoa products; the production of natural health and nutrition products; and the production of other specialty food and feed ingredients. Financial activities include banking, captive insurance, private equity fund investments, and futures commission merchant activities.
Intersegment sales have been recorded at amounts approximating market. Operating profit for each segment is based on net sales less identifiable operating expenses, including an interest charge related to working capital usage. Also included in operating profit are the related equity in earnings (losses) of affiliates based on the equity method of accounting. General corporate expenses, investment income, unallocated interest expense, marketable securities transactions, and FIFO to LIFO inventory adjustments have been excluded from segment operations and classified as Corporate.
For detailed information regarding the Company’s reportable segments, see Note 13 to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended June 30, 2004.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Archer-Daniels-Midland Company and Subsidiaries
Note 8. Segment Information (Continued)
THREE MONTHS ENDED | NINE MONTHS ENDED | ||||||||||||
MARCH 31, | MARCH 31, | ||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
(In thousands) | (In thousands) | ||||||||||||
Sales to external customers | |||||||||||||
Oilseeds Processing | $ | 2,620,693 | $ | 2,907,903 | $ | 8,614,395 | $ | 8,796,193 | |||||
Corn Processing | 1,093,949 | 1,082,237 | 3,291,771 | 2,968,272 | |||||||||
Agricultural Services | 3,654,129 | 4,195,375 | 11,137,261 | 11,309,379 | |||||||||
Other | 1,115,400 | 1,123,504 | 3,476,681 | 3,391,581 | |||||||||
Total | $ | 8,484,171 | $ | 9,309,019 | $ | 26,520,108 | $ | 26,465,425 | |||||
Intersegment sales | |||||||||||||
Oilseeds Processing | $ | 43,897 | $ | 47,039 | $ | 119,556 | $ | 126,977 | |||||
Corn Processing | 75,354 | 78,762 | 214,202 | 233,266 | |||||||||
Agricultural Services | 269,531 | 559,501 | 828,825 | 1,899,056 | |||||||||
Other | 26,997 | 26,971 | 81,434 | 80,858 | |||||||||
Total | $ | 415,779 | $ | 712,273 | $ | 1,244,017 | $ | 2,340,157 | |||||
Net sales | |||||||||||||
Oilseeds Processing | $ | 2,664,590 | $ | 2,954,942 | $ | 8,733,951 | $ | 8,923,170 | |||||
Corn Processing | 1,169,303 | 1,160,999 | 3,505,973 | 3,201,538 | |||||||||
Agricultural Services | 3,923,660 | 4,754,876 | 11,966,086 | 13,208,435 | |||||||||
Other | 1,142,397 | 1,150,475 | 3,558,115 | 3,472,439 | |||||||||
Intersegment elimination | (415,779 | ) | (712,273 | ) | (1,244,017 | ) | (2,340,157 | ) | |||||
Total | $ | 8,484,171 | $ | 9,309,019 | $ | 26,520,108 | $ | 26,465,425 | |||||
Segment operating profit | |||||||||||||
Oilseeds Processing | $ | 60,734 | $ | 117,510 | $ | 270,789 | $ | 306,223 | |||||
Corn Processing | 177,873 | 231,491 | 412,954 | 510,895 | |||||||||
Agricultural Services | 54,644 | 55,827 | 193,779 | 205,011 | |||||||||
Other | 83,336 | 96,880 | 322,422 | 271,265 | |||||||||
Total segment operating profit | 376,587 | 501,708 | 1,199,944 | 1,293,394 | |||||||||
Corporate | 32,449 | (163,247 | ) | 49,391 | (417,250 | ) | |||||||
Earnings before income taxes | $ | 409,036 | $ | 338,461 | $ | 1,249,335 | $ | 876,144 | |||||
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
COMPANY OVERVIEW
The Company is principally engaged in procuring, transporting, storing, processing and merchandising agricultural commodities and products. The Company’s operations are classified into three reportable business segments: Oilseeds Processing, Corn Processing, and Agricultural Services. Each of these segments is organized based upon the nature of products and services offered. The Company’s remaining operations are aggregated and classified as Other.
The Oilseeds Processing segment includes activities related to processing oilseeds such as soybeans, cottonseed, sunflower seeds, canola, peanuts, and flaxseed into vegetable oils and meals principally for the food and feed industries. In addition, oilseeds may be resold into the marketplace as a raw material for other processors. Crude vegetable oil is sold "as is" or is further processed by refining, bleaching, and deodorizing into salad oils. Salad oils can be further processed by hydrogenating and/or interesterifying into margarine, shortening, and other food products. Partially refined oil is sold for use in chemicals, paints, and other industrial products. Oilseed meals are primary ingredients used in the manufacture of commercial livestock and poultry feeds.
The Corn Processing segment includes activities related to the production of syrups, starches, dextrose, and sweeteners for the food and beverage industry as well as activities related to the production, by fermentation, of bioproducts such as alcohol, amino acids, and other specialty food and feed ingredients.
The Agricultural Services segment utilizes the Company’s extensive grain elevator and transportation network to buy, store, clean, and transport agricultural commodities, such as oilseeds, corn, wheat, milo, oats, and barley, and resells these commodities primarily as feed ingredients and as raw materials for the agricultural processing industry. Agricultural Services’ grain sourcing and transportation network provides reliable and efficient services to the Company’s agricultural processing operations. Also included in Agricultural Services are the activities of A.C. Toepfer International, a global merchandiser of agricultural commodities and processed products.
Other includes the Company’s remaining operations, consisting principally of food and feed ingredient businesses and financial activities. Food and feed ingredient businesses include Wheat Processing with activities related to the production of wheat flour; Cocoa Processing with activities related to the production of chocolate and cocoa products; the production of natural health and nutrition products; and the production of other specialty food and feed ingredients. Financial activities include banking, captive insurance, private equity fund investments, and futures commission merchant activities.
Operating Performance Indicators and Risk Factors
The Company is exposed to certain risks inherent to an agricultural-based commodity business. These risks are further described in the “Critical Accounting Policies” and “Market Risk Sensitive Instruments and Positions” sections of “Management’s Discussion of Operations and Financial Condition,” included in the Company’s annual report on Form 10-K for the year ended June 30, 2004.
The Company’s Oilseeds Processing, Agricultural Services, and Wheat Processing operations are principally agricultural commodity-based businesses where changes in segment selling prices move in relationship to changes in prices of the commodity-based agricultural raw materials. Therefore, agricultural commodity price changes have relatively equal impacts on both net sales and cost of products sold and minimal impact on the gross profit of underlying transactions. As a result, changes in net sales amounts of these business segments do not necessarily correspond to the changes in gross profit realized by these businesses.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
The Company’s Corn Processing operations and certain other food and feed processing operations also utilize agricultural commodities (or products derived from agricultural commodities) as raw materials. In these operations, agricultural commodity price changes can result in significant fluctuations in cost of products sold and such price changes cannot necessarily be passed directly through to the selling price of the finished products. For products such as ethanol, selling prices bear no direct relationship to the raw material cost of the agricultural commodity from which it is produced.
The Company conducts its business in many foreign countries. For many of the Company’s subsidiaries located outside the United States, the local currency is the functional currency. Revenues and expenses denominated in foreign currencies are translated into U.S. dollars at the weighted average exchange rates for the applicable periods. Fluctuations in the exchange rates of primarily the euro and British pound as compared to the U.S. dollar will result in corresponding fluctuations in the relative U.S. dollar value of the Company’s revenues and expenses. The impact of these currency exchange rate changes, where significant, is discussed below.
The Company measures the performance of its business segments using key operating statistics such as segment operating profit and return on fixed capital investment. The Company’s operating results can vary significantly due to changes in unpredictable factors such as weather conditions, plantings, government (domestic and foreign) farm programs and policies, changes in global demand resulting from population growth and changes in standards of living, and global production of similar and competitive crops. Due to these factors, the Company does not provide forward-looking information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Additionally, the Company’s operating results for the current quarter and nine months are not necessarily indicative of the results that may be expected for the year ending June 30, 2005.
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
As an agricultural-based commodity business, the Company is subject to a variety of market factors which affect the Company’s operating results. During the quarter ended March 31, 2005, oilseed crushing margins in North America were adversely affected by a limited near-term soybean supply resulting from strong export interest from China. Oilseed crushing margins in Europe improved due to increased biodiesel and vegetable oil demand and the large European rapeseed crop.
Ethanol experienced good demand and increased selling prices. Improved global oilseed crop conditions have resulted in adequate protein supply levels available for feeding livestock, which has adversely impacted lysine selling prices and related margins. The record United States corn and soybean crop resulted in increased demand for rail and barge transportation and provided favorable operating conditions for domestic grain origination and trading activities. The improved crop conditions in North America and Europe has balanced the supply and demand levels for agricultural commodities, which has adversely affected global grain merchandising opportunities. Additionally, improved global equity markets favorably impacted private equity fund investments.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Net earnings for the quarter increased principally due to $114 million in realized securities gains from the sale of Tate & Lyle PLC shares and a $99 million charge in the prior year quarter related to LIFO inventory valuations. These increases were partially offset by decreased operating profits of Oilseeds Processing and Corn Processing. Oilseeds Processing operating profits were lower due to lower oilseed crushing results in North America, partially offset by improved crushing results in Europe. Corn Processing operating profits were lower due to decreased lysine average selling prices, lower ethanol sales volumes, and higher energy costs.
ANALYSIS OF STATEMENTS OF EARNINGS
Net sales and other operating income decreased 9% for the quarter to $8.5 billion principally due to lower average selling prices of commodity-based oilseeds finished products and merchandised agricultural commodities. These decreases were partially offset by increased sales volumes of merchandised agricultural commodities and currency exchange rate increases of $214 million.
Net sales and other operating income by segment for the quarter are as follows:
THREE MONTHS ENDED | ||||||||||
MARCH 31, | ||||||||||
2005 | 2004 | Change | ||||||||
(In thousands) | ||||||||||
Oilseeds Processing | $ | 2,620,693 | $ | 2,907,903 | $ | (287,210 | ) | |||
Corn Processing | ||||||||||
Sweeteners and Starches | 450,111 | 440,083 | 10,028 | |||||||
Bioproducts | 643,838 | 642,154 | 1,684 | |||||||
Total Corn Processing | 1,093,949 | 1,082,237 | 11,712 | |||||||
Agricultural Services | 3,654,129 | 4,195,375 | (541,246 | ) | ||||||
Other | ||||||||||
Food and Feed Ingredients | 1,098,255 | 1,104,654 | (6,399 | ) | ||||||
Financial | 17,145 | 18,850 | (1,705 | ) | ||||||
Total Other | 1,115,400 | 1,123,504 | (8,104 | ) | ||||||
Total | $ | 8,484,171 | $ | 9,309,019 | $ | (824,848 | ) |
Oilseeds Processing sales decreased 10% to $2.6 billion primarily due to decreased average selling prices of protein meal and South American soybean exports. The impact of the record United States soybean crop and abundant European rapeseed crop has resulted in decreased average selling prices for oilseeds and commodity-based oilseed finished products. Corn Processing sales increased slightly primarily due to increased sales of Sweeteners and Starches and, to a lesser extent, increased sales of Bioproducts. Sweeteners and Starches sales increased primarily due to increased sales volumes and, to a lesser extent, increased average selling prices. Agricultural Services sales decreased 13% to $3.7 billion principally due to lower average global commodity prices and lower sales volumes of corn in North America. These decreases were partially offset by increased sales volumes of soybeans in North America. Other sales decreased slightly primarily due to lower sales volumes of the Company’s animal feed products.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Cost of products sold decreased 9% to $7.9 billion for the quarter primarily due to lower prices of merchandised agricultural commodities. This decrease was partially offset by increased sales volumes of merchandised agricultural commodities, and currency exchange rate increases of $207 million. Manufacturing costs increased $107 million from prior year levels primarily due to increased energy and employee-related costs, including pensions. Last year’s cost of products sold includes a $12 million charge for abandonment and write-down of long-lived assets.
Selling, general, and administrative expenses increased $29 million to $280 million for the quarter principally due to increased litigation settlement costs, auditing fees, and employee-related costs, including pensions.
Other expense (income) improved $111 million to income of $115 million for the quarter due primarily to $114 million of gains realized from the sale of Tate & Lyle PLC shares.
Operating profit by segment for the quarter is as follows:
THREE MONTHS ENDED | ||||||||||
MARCH 31, | ||||||||||
2005 | 2004 | Change | ||||||||
(In thousands) | ||||||||||
Oilseeds Processing | $ | 60,734 | $ | 117,510 | $ | (56,776 | ) | |||
Corn Processing | ||||||||||
Sweeteners and Starches | 79,817 | 91,542 | (11,725 | ) | ||||||
Bioproducts | 98,056 | 139,949 | (41,893 | ) | ||||||
Total Corn Processing | 177,873 | 231,491 | (53,618 | ) | ||||||
Agricultural Services | 54,644 | 55,827 | (1,183 | ) | ||||||
Other | ||||||||||
Food and Feed Ingredients | 43,544 | 70,031 | (26,487 | ) | ||||||
Financial | 39,792 | 26,849 | 12,943 | |||||||
Total Other | 83,336 | 96,880 | (13,544 | ) | ||||||
Total Segment Operating Profit | 376,587 | 501,708 | (125,121 | ) | ||||||
Corporate | 32,449 | (163,247 | ) | 195,696 | ||||||
Earnings Before Income Taxes | $ | 409,036 | $ | 338,461 | $ | 70,575 |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Oilseeds Processing operating profit decreased $57 million to $61 million for the quarter due principally to lower operating results of the Company’s North American and Asian operations. Oilseed crush margins in North America decreased due to a near-term tight soybean supply in the United States which resulted in higher soybean price levels. Operating results in Asia decreased primarily due to lower capacity utilization resulting from decreased demand. These decreases were partially offset by improved operating results in Europe due to improved crop conditions and good biodiesel demand.
Corn Processing operating profits decreased 23% to $178 million for the quarter primarily due to lower lysine average selling prices, lower ethanol sales volumes, and higher energy costs. These decreases were partially offset by lower net corn costs and increased ethanol average selling prices. Sweeteners and Starches operating profits last year included a $15 million gain from an insurance related lawsuit pertaining to the flood of 1993. Excluding this gain, Sweeteners and Starches operating profits increased slightly due to lower net corn costs and improved selling prices, partially offset by higher energy costs. Bioproducts operating profits decreased $42 million for the quarter primarily due to lower lysine average selling prices, lower ethanol sales volumes, and higher energy costs. Lysine average selling prices are impacted by the relationship between the price of protein meal and the price of corn, and are lower this quarter due to increased protein supply levels resulting from the improved oilseed crop conditions in North America and Europe. Ethanol sales volumes declined as last year’s volume increases to meet new market introductions in the northeastern United States were not repeated in the current quarter. These decreases were partially offset by lower net corn costs and higher average ethanol selling prices. Last year’s Bioproducts operating profits include a $6 million charge for abandonment and write-down of long-lived assets.
Agricultural Services operating profits decreased slightly for the quarter due to lower global grain merchandising results partially offset by improved North American origination and transportation results. Global grain merchandising results decreased principally due to improved crop conditions in Europe, which resulted in decreased European demand for imported agricultural commodities and agricultural commodity products. The record United States corn crop and soybean crop provided the Company with the opportunity for solid storage, transportation, origination and marketing profits.
Other operating profits decreased 14% to $83 million for the quarter. Other - Food and Feed Ingredient operating profits decreased $26 million for the quarter principally due to lower sales volumes of Vitamin E products and increased marketing costs related to the introduction of Enova Oil by the Company’s ADM Kao joint venture. In addition, reduced operating results of the Company’s Cocoa Processing operations contributed to the decline. Other - Financial results increased $13 million for the quarter due principally to improved valuations of the Company’s private equity fund investments.
Corporate improved $196 million to income of $32 million for the quarter primarily due to $114 million of realized securities gains from the sale of Tate & Lyle PLC shares. In addition, the prior year quarter includes a $99 million charge related to LIFO inventory valuations.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Income taxes increased for the quarter due principally to higher pretax earnings and, to a lesser extent, an increase in the Company’s effective tax rate. The Company’s effective tax rate for the quarter was 34.2% as compared to 33.0% for the comparable period of a year ago. The increase in the Company’s effective tax rate is principally due to changes in the jurisdictional mix of pretax earnings and the fixed benefits of the Company’s tax planning initiatives.
NINE MONTHS ENDED MARCH 31, 2005 COMPARED TO NINE MONTHS ENDED MARCH 31, 2004
As an agricultural-based commodity business, the Company is subject to a variety of market factors which affect the Company’s operating results. During the nine months ended March 31, 2005, oilseed crushing margins in Europe improved due to increased biodiesel and vegetable oil demand and the large European rapeseed crop. Oilseed crushing margins in North America were adversely affected by a limited near-term soybean supply resulting from strong export interest from China. Oilseed crushing margins in South America continue to be weak as a result of industry overcapacity.
Ethanol experienced good demand and increased selling prices due to higher gasoline prices. The improved global oilseed crop conditions have resulted in an abundance of protein supply available for feeding livestock, which has adversely impacted lysine selling prices and related margins. The record United States corn and soybean crop resulted in, increased demand for rail and barge transportation and provided favorable operating conditions for domestic grain origination and trading activities. The improved crop conditions in North America and Europe has balanced the supply and demand levels for agricultural commodities, which has adversely affected global grain merchandising opportunities.
Net earnings for the nine months increased principally due to a $45 million gain representing the Company’s equity share of the gain reported by the Company’s unconsolidated affiliate, Compagnie Industrielle et Financiere des Produits Amylaces SA ("CIP"), upon the sale of its interest in Tate & Lyle PLC (the “CIP Gain”), $135 million of income in the current year as compared to a $160 million charge in the prior year from the effect of commodity price changes on LIFO inventory valuations, and $114 million of realized securities gains from the sale of Tate & Lyle PLC shares. These increases were partially offset by decreased Corn Processing operating results. Corn Processing operating results declined as a result of higher net corn costs, higher energy costs, and lower lysine average selling prices. Last year’s nine months included a $41 million charge for abandonment and write-down of long-lived assets, which was partially offset by a $21 million gain from an insurance related lawsuit pertaining to the flood of 1993.
ANALYSIS OF STATEMENTS OF EARNINGS
Net sales and other operating income increased slightly for the nine months to $26.5 billion principally due to currency exchange rate increases of $769 million, higher sales volumes of merchandised agricultural commodities, and increased average selling prices of ethanol. These increases were partially offset by lower average selling prices of merchandised agricultural commodities.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Net sales and other operating income by segment for the nine months are as follows:
NINE MONTHS ENDED | ||||||||||
MARCH 31, | ||||||||||
2005 | 2004 | Change | ||||||||
(In thousands) | ||||||||||
Oilseeds Processing | $ | 8,614,395 | $ | 8,796,193 | $ | (181,798 | ) | |||
Corn Processing | ||||||||||
Sweeteners and Starches | 1,412,269 | 1,275,056 | 137,213 | |||||||
Bioproducts | 1,879,502 | 1,693,216 | 186,286 | |||||||
Total corn Processing | 3,291,771 | 2,968,272 | 323,499 | |||||||
Agricultural Services | 11,137,261 | 11,309,379 | (172,118 | ) | ||||||
Other | ||||||||||
Food and Feed Ingredients | 3,424,093 | 3,338,548 | 85,545 | |||||||
Financial | 52,588 | 53,033 | (445 | ) | ||||||
Total Other | 3,476,681 | 3,391,581 | 85,100 | |||||||
Total | $ | 26,520,108 | $ | 26,465,425 | $ | 54,683 |
Oilseeds Processing sales decreased 2% to $8.6 billion for the nine months primarily due to decreased sales volumes of oilseed exports and vegetable oil, and lower average selling prices of protein meal. These decreases were partially offset by higher average selling prices of vegetable oil. Corn Processing sales increased 11% to $3.3 billion for the nine months primarily due to increased Bioproducts sales and, to a lesser extent, increased sales of Sweeteners and Starches. Bioproducts sales increased primarily due to increased average selling prices of ethanol, which was partially offset by lower ethanol sales volumes and lower average selling prices of lysine. The increase in ethanol selling prices was primarily due to higher gasoline prices. Ethanol sales volumes declined as last year’s volume increases to meet new market introductions in the northeastern United States were not repeated in the current year. Sweeteners and Starches sales increased primarily due to higher average selling prices and, to a lesser extent, increased sales volumes. Agricultural Services sales decreased 2% to $11.1 billion for the nine months principally due to lower average commodity prices in North America, decreased sales volumes of global grain merchandising activities, and decreased sales volumes of wheat and corn in North America. These decreases were partially offset by increased sales volumes of soybeans in North America. Other sales increased 3% to $3.4 billion for the nine months primarily due to increased average selling prices of wheat flour products.
Cost of products sold decreased 1% to $24.6 billion for the nine months primarily due to lower average commodity prices of merchandised agricultural commodities, partially offset by higher sales volumes of merchandised agricultural commodities and currency exchange rate increases of $735 million. Manufacturing costs increased $214 million from prior year levels primarily due to increased energy and personnel-related costs. Last year’s manufacturing costs included a $41 million charge for abandonment and write-down of long-lived assets.
Selling, general, and administrative expenses increased $53 million to $802 million for the nine months principally due to increased employee-related costs, including pensions, and auditing fees, which were partially offset by reduced legal expenses and provisions for doubtful accounts.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Other expense (income) improved $164 million to income of $144 million for the nine months due primarily to $114 million of realized securities gains from the sale of Tate & Lyle PLC shares and a $32 million increase in equity in earnings of unconsolidated affiliates. The increase in equity in earnings of unconsolidated affiliates is primarily due to the CIP Gain. Interest expense for the nine months decreased $18 million primarily due to lower average borrowing levels.
Operating profit by segment for the nine months is as follows:
NINE MONTHS ENDED | ||||||||||
MARCH 31, | ||||||||||
2005 | 2004 | Change | ||||||||
(In thousands) | ||||||||||
Oilseeds Processing | $ | 270,789 | $ | 306,223 | $ | (35,434 | ) | |||
Corn Processing | ||||||||||
Sweeteners and Starches | 179,455 | 256,214 | (76,759 | ) | ||||||
Bioproducts | 233,499 | 254,681 | (21,182 | ) | ||||||
Total Corn Processing | 412,954 | 510,895 | (97,941 | ) | ||||||
Agricultural Services | 193,779 | 205,011 | (11,232 | ) | ||||||
Other | ||||||||||
Food and Feed Ingredients | 203,591 | 202,598 | 993 | |||||||
Financial | 118,831 | 68,667 | 50,164 | |||||||
Total Other | 322,422 | 271,265 | 51,157 | |||||||
Total Segment Operating Profit | 1,199,944 | 1,293,394 | (93,450 | ) | ||||||
Corporate | 49,391 | (417,250 | ) | 466,641 | ||||||
Earnings Before Income Taxes | $ | 1,249,335 | $ | 876,144 | $ | 373,191 |
Oilseeds Processing operating profits decreased 12% to $271 million for the nine months due primarily to lower operating results of the Company’s North American, South American, and Asian operations. Oilseed crush margins in North America decreased due to a near-term tight soybean supply in the United States which resulted in higher soybean price levels. Operating results in Asia decreased primarily due to lower capacity utilization resulting from decreased demand. Industry overcapacity in South America continues to have an adverse affect on oilseed crushing margins. These decreases were partially offset by improved operating results in Europe due to improved crop conditions and good biodiesel demand.
Corn Processing operating profits decreased 19% to $413 million for the nine months as higher net corn costs, higher energy costs, and lower lysine average selling prices negatively impacted operating results. Sweeteners and Starches operating profits decreased for the nine months due to higher net corn and energy costs. Last year’s Sweeteners and Starches operating profits include a $15 million gain from an insurance related lawsuit pertaining to the flood of 1993. Bioproducts operating profits decreased $21 million for the nine months principally due to lower lysine operating results as a result of lower average selling prices. Lysine average selling prices are lower due to increased protein supply levels resulting from the improved oilseed crop conditions in North America and Europe. This decrease was partially offset by improved ethanol operating results due to higher ethanol selling prices. Ethanol selling prices remained strong and more than offset the effect of lower ethanol sales volumes and higher net corn and energy costs. Last year’s Bioproducts operating profits include a $16 million charge for abandonment and write-down of long-lived assets.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) |
Agricultural Services operating profits decreased 5% to $194 million for the nine months principally due to lower global grain merchandising results partially offset by improvements in North American origination and transportation operating results. Global grain merchandising results decreased principally due to improved crop conditions in Europe and North America, which resulted in lower European demand for imported agricultural commodities and agricultural commodity products. The record United States corn crop and soybean crop provided the Company with the opportunity for solid storage, transportation, origination and marketing profits.
Other operating profits increased 19% to $322 million for the nine months. Other - Food and Feed Ingredient operating profits for the nine months were comparable to the prior year, while Other - Financial operating profits increased $50 million for the nine months primarily due to improved valuations of the Company’s private equity fund investments and improved results of the Company’s captive insurance operations. Last year’s captive insurance results included a loss incurred from a fire at a Company-owned cocoa finished products warehouse.
Corporate improved $467 million to income of $49 million for the nine months primarily due to the CIP Gain, $135 million of income in the current year as compared to a $160 million charge in the prior year from the effect of commodity price changes on LIFO inventory valuations, $114 million of realized securities gains from the sale of Tate & Lyle PLC shares, and last year’s $14 million charge for abandonment and write-down of long-lived assets.
Income taxes increased due principally to higher pretax earnings and, to a lesser extent, an increase in the Company’s effective tax rate. These increases were partially offset by the effect of the CIP Gain. No tax has been provided on the CIP Gain as CIP is a corporate joint venture of the Company, and intends to permanently reinvest the proceeds from the sale. The Company’s effective tax rate for the nine months, excluding the effect of the CIP Gain, was 33.3% compared to 31.8% for the prior year. The increase in the Company’s effective tax rate is principally due to changes in the jurisdictional mix of pretax earnings and the fixed benefits of the Company’s tax planning initiatives.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2005, the Company continued to show substantial liquidity with working capital of $4.6 billion and a current ratio, defined as current assets divided by current liabilities, of 1.8. Working capital increased $1.0 billion during the nine months even after the $400 million payment in July 2004 related to the fructose litigation settlement that had been accrued in fiscal 2004. In addition, as inventory levels declined $625 million, due principally to lower commodity price levels, short-term debt was reduced by $1.5 billion. Capital resources remained strong as reflected in the Company’s net worth of $8.6 billion. The Company’s ratio of long-term debt to total capital (the sum of the Company’s long-term debt and shareholders’ equity) at March 31, 2005 was 29.4% a decline from 32.7% at June 30, 2004. This ratio is a measure of the Company’s long-term liquidity and is an indicator of financial flexibility.
Contractual Obligations and Commercial Commitments
There were no material changes in the Company’s contractual obligations and commercial commitments during the nine months ended March 31, 2005.
Critical Accounting Policies
There were no material changes in the Company’s critical accounting policies during the nine months ended March 31, 2005.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The market risk inherent in the Company’s market risk sensitive instruments and positions is the potential loss arising from adverse changes in: commodity prices as they relate to the Company’s net commodity position; marketable equity security prices; market prices of limited partnerships’ investments; foreign currency exchange rates; and interest rates. Significant changes in market risk sensitive instruments and positions for the nine months ended March 31, 2005 are described below. There were no material changes during the nine months in the Company’s potential loss arising from changes in market prices of limited partnerships’ investments, marketable equity securities, foreign currency exchange rates, and interest rates.
For detailed information regarding the Company’s market risk sensitive instruments and positions, see the “Market Risk Sensitive Instruments and Positions” section of “Management’s Discussion of Operations and Financial Condition” in the Company’s annual report on Form 10-K for the year ended June 30, 2004.
Commodities
The availability and price of agricultural commodities are subject to wide fluctuations due to unpredictable factors such as weather, plantings, government (domestic and foreign) farm programs and policies, changes in global demand resulting from population growth and changes in standards of living, and global production of similar and competitive crops. A sensitivity analysis has been prepared to estimate the Company’s exposure to market risk of its commodity position. The Company’s daily net commodity position consists of inventories, related purchase and sale contracts, and exchange-traded futures contracts, including those to hedge portions of production requirements. The fair value of such position is a summation of the fair values calculated for each commodity by valuing each net position at quoted futures prices. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10 percent adverse change in such prices. Actual results may differ.
MARCH 31, 2005 | JUNE 30, 2004 | ||||||||||||
Fair Value | Market Risk | Fair Value | Market Risk | ||||||||||
(in millions) | |||||||||||||
Highest long position | $ | 226 | $ | 23 | $ | 754 | $ | 75 | |||||
Highest short position | 944 | 94 | 506 | 51 | |||||||||
Average position long (short) | (262) | (26) | 31 | 3 |
The decrease in fair value of the average position was principally the result of a decrease in the daily net commodity position.
ITEM 4. | CONTROLS AND PROCEDURES |
As of March 31, 2005, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rules 13a - 15(e) and 15d - 15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in the Company’s internal controls over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
ENVIRONMENTAL MATTERS
The United States Environmental Protection Agency (“USEPA”) issued a Finding of Violation on March 3, 2005, regarding alleged violations of the National Emission Standards for Hazardous Air Pollutants for Pharmaceutical Production relating to the operation of the Company’s Vitamin E Plant in Decatur, Illinois. The alleged violations relate to compliance demonstrations for equipment testing and monitoring, recordkeeping and reporting, but do not allege any violations of applicable air emissions limitations. The Company met with representatives of USEPA on April 12, 2005, to discuss the allegations, and it is likely that USEPA will seek a civil penalty in excess of $100,000. The Company intends to work cooperatively with USEPA to ensure that all applicable requirements are met. In management’s opinion, the civil penalty imposed will not have a material adverse effect on the Company’s financial condition or results of operations.
The Company is involved in approximately 25 administrative and judicial proceedings in which it has been identified as a potentially responsible party (“PRP”) under the federal Superfund law and its state analogs for the study and clean-up of sites contaminated by material discharged into the environment. In all of these matters, there are numerous PRPs. Due to various factors such as the required level of remediation and participation in the clean-up effort by others, the Company’s future clean-up costs at these sites cannot be reasonably estimated. In management’s opinion, these proceedings will not, either individually or in the aggregate, have a material adverse effect on the Company’s financial condition or results of operations.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of | Number of Shares | |||||||||||||||
Total Number | Average | Shares Purchased as | Remaining that May be | |||||||||||||
of Shares | Price Paid | Part of Publicly | Purchased Under the | |||||||||||||
Period | Purchased (1) | per Share | Announced Program (2) | Program (2) | ||||||||||||
January 1, 2005 to | ||||||||||||||||
January 31, 2005 | 13,352 | $ | 23.81 | 250 | 99,999,750 | |||||||||||
February 1, 2005 to | ||||||||||||||||
February 28, 2005 | 220,252 | 23.46 | 149,350 | 99,850,400 | ||||||||||||
March 1, 2005 to | ||||||||||||||||
March 31, 2005 | 25,968 | 24.52 | 445 | 99,849,955 | ||||||||||||
Total | 259,572 | $ | 23.59 | 150,045 | 99,849,955 |
(1) | Total shares purchased represents those shares purchased as part of the Company’s publicly announced share repurchase program described below and shares received as payment of the exercise price for stock option exercises. |
(2) | On November 4, 2004, the Company’s Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to 100,000,000 shares of the Company’s common stock during the period commencing January 1, 2005 and ending December 31, 2009. |
ITEM 6. | EXHIBITS |
(3)(i) | Composite Certificate of Incorporation, as amended, filed on November 13, 2001 as exhibit 3(i) to Form 10-Q for the quarter ended September 30, 2001 (File No. 1-44), is incorporated herein by reference. |
(ii) | Bylaws, as amended and restated, filed on May 12, 2000 as Exhibit 3(ii) to Form 10-Q for the quarter ended March 31, 2000 (File No. 1-44), are incorporated herein by reference. |
(10.1) | Management Compensation Arrangement |
(10.2) | Form of Stock Option Agreement |
(10.3) | Form of Restricted Stock Agreement |
(31.1) | Certification of Chief Executive Officer pursuant to Rule 13a - 14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. |
(31.2) | Certification of Chief Financial Officer pursuant to Rule 13a - 14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. |
(32.1) | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(32.2) | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ARCHER-DANIELS-MIDLAND COMPANY | ||
/s/ D. J. Schmalz | ||
D. J. Schmalz | ||
Senior Vice President | ||
and Chief Financial Officer | ||
/s/ D. J. Smith | ||
D. J. Smith | ||
Executive Vice President, Secretary and | ||
General Counsel |
Dated: May 6, 2005