Archer Daniels Midland 2006 Annual Report Download - page 30

28 Archer Daniels Midland Company
MANAGEMENT’S DISCUSSION OF
OPERATIONS AND FINANCIAL CONDITION - JUNE 30, 2006 (CONTINUED)
volumes and average selling prices and decreased net corn costs,
partially offset by increased energy costs and lower lysine average
selling prices. The increases in ethanol sales volumes and average
sales prices were principally due to increased demand from gasoline
refiners as refiners used ethanol to replace MTBE as a gasoline
additive and from increased gasoline prices. Bioproducts operating
profits include a $6 million charge for abandonment and write-down
of long-lived assets, a $2 million charge related to the adoption of
FIN 47, and $6 million of costs related to the closure of a citric acid
plant. Last year’s Bioproducts operating profits include a $16 million
charge for abandonment and write-down of long-lived assets.
Agricultural Services operating profits increased $14 million to
$275 million as improved results from transportation operations
were partially offset by a decline in global grain merchandising and
North American origination operating results. North American river
transportation operating results increased primarily due to increased
barge freight rates created by strong demand for barge capacity. This
increase was partially offset by increased fuel costs. The gulf coast
hurricanes negatively impacted North American origination and
export activities during the first half of 2006.
Other operating profits decreased $104 million to $310 million.
Other – Food and Feed Ingredient operating results decreased
$104 million due primarily to a $51 million charge for abandonment
and write-down of long-lived assets, a $2 million charge related to
the adoption of FIN 47, and a $9 million charge representing the
Company’s share of a charge for abandonment and write-down
of long-lived assets reported by an unconsolidated affiliate of
the Company. In addition, cocoa processing, natural health and
nutrition, and formula feed operating results declined from prior
year levels. Cocoa processing operating results declined primarily
due to increased industry capacity which caused downward pressure
on cocoa finished product prices. Formula feed operating results
declined due to costs associated with exiting the European animal
feed business. Other – Food and Feed Ingredients operating profits
include a $17 million gain from the sale of long-lived assets. Last
year’s Other – Food and Feed Ingredient operating results include a
$13 million charge for abandonment and write-down of long-lived
assets. Other - Financial operating profits are comparable to prior
year levels as improvements in the Company’s captive insurance
operations and futures commission merchant business offset lower
valuations of the Company’s private equity fund investments.
Corporate decreased $171 million due primarily to a $102 million
decrease in income from the effect of changing commodity prices on
LIFO inventory valuations, last year’s $114 million realized securities
gain from the sale of Tate & Lyle PLC shares, last year’s CIP Gain,
and a $22 million charge upon the adoption of SFAS 123(R),
partially offset by the aforementioned $19 million reversal of
Brazilian transactional taxes and a $97 million reduction in
unallocated interest expense. The reduction in unallocated interest
expense is due principally to higher levels of invested funds and
higher interest rates.
Income taxes increased due principally to higher pretax earnings.
This increase was partially offset by a $36 million reduction in
income tax expense related to the recognition of federal and state
income tax credits and adjustments resulting from the reconciliation
of filed tax returns to the previously estimated tax provision. The
Company’s effective tax rate for 2006 was 29.3% as compared to
31.1% for 2005. Excluding the effect of the $36 million tax credit, the
Company’s effective tax rate was 31.2% for 2006 and, after excluding
the effect of the CIP Gain, was 32.1% for 2005. No tax was provided on
the CIP Gain in the prior year, as CIP is a corporate joint venture of
the Company and permanently reinvested the proceeds from the sale.
Excluding the effect of the $36 million tax credit in 2006 and the
CIP Gain in 2005, the decrease in the Company’s effective tax rate is
primarily due to changes in the geographic mix of pretax earnings.
2005 COMPARED TO 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 2005, oilseed crushing margins in Europe
improved due to increased biodiesel and vegetable oil demand and
lower rapeseed costs due to the large European crop. Oilseed crushing
margins in North America were adversely affected by a limited
near-term soybean supply resulting from strong demand 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. Increased lysine production capacity in
China created excess supplies of lysine which reduced selling prices
and related margins. The record United States corn and soybean
crops 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 have balanced the supply and
demand levels for agricultural commodities, reducing global grain
merchandising opportunities.