Archer-Daniels-Midland Company — Form 10-Q Summary
Business context and reporting period
ADM is a global agricultural commodities company engaged in procuring, transporting, storing, processing, and merchandising agricultural products. Reportable segments are Oilseeds Processing, Corn Processing, and Agricultural Services; remaining activities are classified as Other. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods.
Financial performance and position
| Metric | Three months 2014 | Three months 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $18.117 billion | $21.393 billion | $60.307 billion | $65.661 billion |
| Gross profit | $1.470 billion | $1.156 billion | $3.317 billion | $2.719 billion |
| Net earnings attributable to controlling interests | $747 million | $476 million | $1.547 billion | $968 million |
| Diluted EPS | $1.14 | $0.72 | $2.35 | $1.46 |
| Dividends per share | $0.24 | $0.19 | $0.72 | $0.57 |
- Gross margin was approximately 8.1% in the third quarter and 5.5% for the first nine months, compared with approximately 5.4% and 4.1%, respectively, in the prior-year periods. Net margin attributable to controlling interests was approximately 4.1% and 2.6%, compared with 2.2% and 1.5%.
- Earnings before income taxes were $1.033 billion for the quarter and $2.134 billion for the nine months. Effective tax rates were 27.6% and 27.5%, compared with 32.2% and 30.3%.
- Cash provided by operating activities was $4.424 billion for the nine months, compared with $4.869 billion in 2013. Investing activities used $420 million and financing activities used $2.586 billion.
- Cash and cash equivalents were $4.539 billion at September 30, 2014, versus $3.121 billion at December 31, 2013. Cash, cash equivalents, and short-term marketable securities totaled approximately $4.9 billion. The current ratio was 1.9 to 1.
- Long-term debt was $5.346 billion and short-term debt was $177 million. The company had $6.7 billion of credit lines, of which $6.6 billion was unused; no commercial paper was outstanding. Accounts receivable securitization facilities provided up to $1.6 billion, of which $1.3 billion was utilized.
- Total assets were $41.821 billion and shareholders’ equity was $20.261 billion at September 30, 2014. Long-term debt represented approximately 21% of total capital.
Material changes versus the prior comparable period
- Third-quarter revenue declined 15% and nine-month revenue declined 8%, primarily because of lower commodity prices and lower unprocessed-commodity sales volumes. Lower revenues were more than offset by improved margins and lower commodity costs.
- Third-quarter segment operating profit increased $467 million to $1.073 billion; nine-month segment operating profit increased $769 million to $2.652 billion.
- Corn Processing operating profit increased $204 million in the quarter and $371 million for the nine months, driven by lower net corn costs, strong ethanol demand, and improved bioproduct margins.
- Agricultural Services operating profit increased $213 million in the quarter and $337 million for the nine months, including a $156 million gain from ADM’s effective dilution of its Pacificor joint venture.
- Oilseeds Processing operating profit was broadly unchanged in the quarter and increased $28 million for the nine months. Improved cocoa, refining, biodiesel, and crushing performance offset weaker South American origination and lower Wilmar-related earnings.
- Corporate results deteriorated to a $40 million charge in the quarter from $103 million of income in 2013, largely because of $102 million of losses on euro foreign-exchange derivatives hedging the planned Wild Flavors acquisition and a $56 million valuation loss related to the CIP equity investment.
- ADM repaid $1.15 billion of convertible senior notes in February 2014, reducing interest expense. It also repurchased approximately 15.9 million shares for $702 million during the first nine months and paid $470 million in dividends.
- The company acquired the remaining 20% interest in Alfred C. Toepfer International for $157 million on June 6, 2014.
Guidance, outlook, commentary, risks, and unusual items
- ADM does not provide forward-looking information in its MD&A because results are highly sensitive to weather, crop production, commodity prices, energy costs, government policies, global demand, foreign exchange, and logistics.
- Management reported steady demand for protein meal, vegetable oil, corn sweeteners, and strong U.S. ethanol demand. South American farmer selling remained slow, while cocoa press margins improved from the prior year.
- Production facilities generally operated at or near capacity. Estimated 2014 capital expenditures were approximately $900 million.
- On October 1, 2014, ADM completed the approximately $3.0 billion enterprise-value acquisition of Wild Flavors, funded with cash and receivables securitization proceeds. Wild Flavors results were to be consolidated beginning October 1, 2014, with a new reporting segment planned for the first quarter of 2015.
- ADM agreed to purchase Specialty Commodities for approximately $170 million, subject to regulatory approval, and acquired Harrell Nut Company assets for approximately $89 million. It also announced planned sales of its Brazil and Paraguay fertilizer blending business and global chocolate business.
- Brazilian tax assessments related to commodity-hedging deductions totaled approximately $527 million, with potential additional post-2008 claims estimated at approximately $60 million. Argentine transfer-pricing assessments totaled $37 million, with potential additional assessments estimated at approximately $367 million. ADM has recorded no liability for these matters and intends to defend its positions.
- Commodity and derivative activities create exposure to price, basis, counterparty, foreign-exchange, and freight-market risks. At September 30, commodity derivatives had fair-value assets of $1.289 billion and liabilities of $1.065 billion; the filing highlights the use of significant Level 3 valuations.
- Purchase obligations totaled $18.1 billion, of which $16.7 billion was expected to be paid within twelve months. Receivables securitization programs terminate in 2015 unless extended.
- Other unusual items included a $315 million third-quarter LIFO valuation credit, $31 million of restructuring and relocation costs for the nine months, and a $229 million nine-month LIFO valuation credit.
Important facts for investors to verify
- Assess the sustainability of earnings gains from Corn Processing and Agricultural Services after excluding the $156 million Pacificor gain, LIFO credits, and hedge-timing effects.
- Monitor the financing, leverage, integration costs, and earnings contribution of the Wild Flavors acquisition and subsequent specialty-ingredient transactions.
- Evaluate potential cash-tax and earnings exposure from the Brazilian and Argentine tax assessments, which were not accrued.
- Review commodity-price, basis, foreign-exchange, derivative, counterparty, and market-value risks, including Level 3 exposures.
- Verify liquidity after the Wild Flavors acquisition, share repurchases, debt repayment, and planned acquisitions, including reliance on receivables securitization facilities.
- Track planned portfolio divestitures, regulatory approvals, the formation of the Wild Flavors and Specialty Ingredients segment, and the effect of lower commodity prices on revenue and LIFO accounting.
- Confirm that management’s disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.