Archer Daniels Midland 2007 Annual Report Download - page 37

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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Agricultural Services operating profits increased $13 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, Feed, and Industrial 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, Feed, and
Industrial operating profits include a $17 million gain from the sale of long-lived assets. Other – Food, Feed, and
Industrial operating results for 2005 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, the $114 million realized securities gain in 2005 from the sale of
Tate & Lyle PLC shares, the CIP Gain in 2005, and a $22 million charge in 2006 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 2005, as CIP is a corporate joint venture of the
Company and the proceeds from the sale are permanently reinvested. 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.
Liquidity and Capital Resources
The Company’s objective is to have sufficient liquidity, balance sheet strength, and financial flexibility to fund the
operating and capital requirements of a capital intensive agricultural-based commodity business.