Archer-Daniels-Midland Company — 2016 Q2 Form 10-Q Summary
Business context and reporting period
ADM is a global agricultural commodity company engaged in procuring, transporting, storing, processing, and merchandising agricultural products across 165 countries. Reported results cover the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. Reportable segments are Agricultural Services, Corn Processing, Oilseeds Processing, Wild Flavors and Specialty Ingredients, and Other.
Financial performance and key metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $15.629 billion | $17.186 billion | $30.013 billion | $34.692 billion |
| Gross profit | $757 million | $964 million | $1.553 billion | $2.066 billion |
| Gross margin | Approximately 4.8% | Approximately 5.6% | Approximately 5.2% | Approximately 6.0% |
| Net earnings attributable to controlling interests | $284 million | $386 million | $514 million | $879 million |
| Diluted EPS | $0.48 | $0.62 | $0.87 | $1.39 |
| Adjusted diluted EPS | $0.41 | $0.60 | $0.83 | $1.38 |
| Adjusted EBITDA | $677 million | $823 million | $1.309 billion | $1.806 billion |
| Cash from operating activities | Not separately presented for the quarter | $(366) million | $407 million |
Q2 earnings before income taxes were $407 million versus $526 million, and the effective tax rate increased to 29.2% from 27.2%, including $20 million of unfavorable discrete items. The six-month effective tax rate decreased to 27.3% from 28.0%.
At June 30, 2016, cash and cash equivalents were $334 million, short-term marketable securities were $396 million, and segregated cash and investments were $5.540 billion. Total assets were $40.098 billion and shareholders’ equity was $17.669 billion. Current assets were $20.867 billion versus current liabilities of $13.778 billion, implying a current ratio of approximately 1.5 to 1.
Debt included $1.554 billion of short-term debt, $271 million of current maturities of long-term debt, and $5.561 billion of long-term debt. ADM had $7.5 billion of total credit lines, of which $4.9 billion was unused. Commercial paper outstanding was $1.4 billion, and $1.1 billion was utilized under accounts receivable securitization programs with aggregate capacity of $1.5 billion.
For the six months, capital expenditures were $396 million, acquisitions used $120 million, additional investment in Wilmar used $464 million, share repurchases used $487 million, and dividends used $353 million. The company repurchased approximately 13.5 million shares during the six months.
Material changes versus the prior comparable period
- Q2 revenue declined 9%, primarily from lower commodity prices and volumes; six-month revenue declined 13%.
- Q2 net earnings attributable to controlling interests fell 26% and six-month earnings fell 42%. Six-month adjusted EBITDA declined 28%.
- Segment operating profit decreased to $680 million from $808 million in Q2 and to $1.253 billion from $1.663 billion for the six months.
- Agricultural Services declined because of weak U.S. grain export competitiveness, compressed grain-handling margins, lower merchandising opportunities, and weaker barge demand.
- Oilseeds Processing declined materially because of weaker canola and soy crush margins, following unusually strong prior-year margins. Six-month segment operating profit decreased $319 million.
- Corn Processing profit increased in both periods, supported by stronger sweeteners and starches performance, although ethanol margins remained weak because of high industry inventories.
- Wild Flavors and Specialty Ingredients was broadly stable operationally, with Q2 profit of $106 million versus $104 million.
- Q2 gross profit included an $88 million negative LIFO inventory valuation impact versus $61 million in the prior year; the six-month impacts were $102 million and $59 million, respectively.
- Other income included significant nonrecurring or unusual items, including $48 million of additional Gruma-related consideration, $63 million related to the sale of Brazilian sugar ethanol facilities, and a $12 million Amazon Flavors revaluation gain.
Guidance, outlook, management commentary, risks and unusual items
Management expected approximately $1.0 billion of 2016 capital expenditures, approximately $0.7 billion of dividends, and $1.0 billion to $1.5 billion of share repurchases, subject to strategic capital requirements. ADM was reviewing the capital intensity of its operations and portfolio and seeking opportunities to reduce and redeploy capital.
Management cited continued exposure to weather, crop conditions, commodity prices, global demand, energy costs, government policies, foreign exchange, freight markets, and margin volatility. The company stated that ethanol demand was strong but industry production and inventories pressured margins; protein demand was stronger than expected, while softseed and crush margins remained weak.
On July 19, 2016, Wilmar announced a preliminary expected quarterly net loss of approximately $230 million. Because ADM records Wilmar’s results one quarter in arrears, ADM expected to recognize approximately $50 million of equity losses in its September 30, 2016 results.
ADM disclosed Brazilian tax assessments of approximately $452 million related to the deductibility of commodity hedging losses and Argentine tax assessments of $112 million related to transfer pricing, with potential subsequent Argentine assessments estimated at approximately $155 million. ADM has not accrued liabilities for these matters because it believes it is more likely than not to prevail, but the ultimate outcome could result in financial impacts up to the assessed amounts.
Purchase obligations were $13.7 billion at June 30, 2016, including $12.9 billion expected to be paid within 12 months. The filing also describes commodity derivative exposure, Level 3 valuations, foreign exchange risk, and routine litigation. Management stated that no legal proceeding or environmental claim was expected to have a material adverse effect, and that there were no significant changes to reported risk factors.
Most important facts for investors to verify
- Whether weak agricultural margins, ethanol inventories, and oilseed crush margins persist or normalize.
- The timing and financial effect of the expected approximately $50 million Wilmar equity loss in the third quarter.
- The ultimate resolution and potential cash exposure from the Brazilian and Argentine tax assessments.
- ADM’s ability to fund working capital while operating cash flow is negative and commercial paper borrowings are elevated.
- Progress and returns from recent acquisitions, the Wilmar investment, portfolio actions, and the planned Olenex expansion.
- Whether planned 2016 capital expenditures and share repurchases remain consistent with liquidity and strategic capital requirements.