60 Understanding the Numbers
is expressed in terms of the relationship of the tax reduction to income from
continuing operations before taxes. ADM’s 2000 pretax income from continu-
ing operations is $353,237,000 and its total tax provision was $52,334,000. The
2000 effective tax rate, disclosed in Exhibit 2.18, is derived by dividing the
total tax provision by income from continuing operations before taxes:
$52,334,000 divided by $353,237,000 equals 14.8%.
The dollar, as opposed to percentage tax savings, is found by multiplying
17% times the 2000 pretax earnings: $353,237,000×0.17=$60 million. ADM
explained that “The decrease in income taxes for 2000 resulted primarily from
a $60 million tax credit related to a redetermination of foreign sales corpora-
tion benefits and the resolution of various other tax issues.”^28 ADM had a dis-
pute with tax authorities over taxes for previous years, and it won. While there
may be some ongoing benefit from this outcome, the $60 million should be
viewed as nonrecurring in evaluating ADM’s earnings performance. Ongoing
tax savings from its foreign sales corporations will continue to be realized and
will be ref lected in the reduced level of the ADM effective tax rate.
ADM’s 1998 effective tax rate was also increased by 1.4 percentage points
as a result of fines and litigation settlements being deducted in arriving at pretax
earnings. For income tax purposes, however, these amounts are not deductible,
which means that unlike most other expenses these fines and settlements reduce
after-tax earnings by the full amount of the expenses. There are no associated in-
come tax savings, and the 1.4-percentage-point increase in the effective tax rate
for 1998 is due to the nondeductible character of the litigation settlements and
fines. The nonrecurring item in this case is simply the total of the fines and set-
tlements. The tax benefit not realized because of the nondeductibility of the
fines and settlements is not a separate nonrecurring item.
ADM’s net income increased from about $266 million in 1999 to about
$301 million in 2000. Without the $60 million nonrecurring tax benefit, ADM’s
2000 net income would have declined to $241 million: $301 million−$60 mil-
lion=$241 million. Identifying and adjusting 2000 earnings for this nonrecur-
ring tax benefit results in a far different message: a decline in earnings in
contrast to the reported increase.
EXHIBIT 2.18 Reconciliation of statutory and actual federal tax rates:
Archer Daniels Midland Company, years ended June 30.
1998 1999 2000
Statutory rate 35.0% 35.0% 35.0%
Prior years tax redetermination — — (17.0)
Foreign sales corporation (4.7) (4.5) (6.3)
State income taxes, net of federal benefit 2.4 2.2 2.7
Indefinitely invested foreign earnings 0.7 (1.8) (0.3)
Litigation settlements and fines 1.4 — —
Other (1.0) 2.1 0.7
Effective rate 33.8% 33.0% 14.8%
SOURCE: Archer Daniels Midland Company, annual report, June 2000, 32.