Archer-Daniels-Midland Company: 2013 First-Quarter 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 commodities and products in more than 140 countries. Reportable segments are Oilseeds Processing, Corn Processing, and Agricultural Services, with remaining activities classified as Other. This unaudited Form 10-Q covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012.
Financial performance and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales and other operating income | $21.727 billion | $21.155 billion | Up 3% |
| Gross profit | $756 million | $1.008 billion | Down $252 million |
| Earnings before income taxes | $375 million | $568 million | Down 34% |
| Net earnings attributable to controlling interests | $269 million | $399 million | Down 33% |
| Diluted earnings per share | $0.41 | $0.60 | Down $0.19 |
| Cash provided by operating activities | $357 million | $(783) million | Improved $1.140 billion |
| Capital expenditures | $248 million | $341 million | Down $93 million |
Gross margin was approximately 3.5% in Q1 2013 versus 4.8% in Q1 2012. Net margin attributable to controlling interests was approximately 1.2% versus 1.9%. The effective tax rate was 28.0%, compared with 28.7%.
Segment operating profit declined to $630 million from $918 million. Oilseeds Processing profit fell to $313 million from $542 million, primarily because of weaker crushing and origination results and a $181 million year-over-year decline in Cocoa and Other, which included prior-year cocoa mark-to-market gains. Agricultural Services profit declined to $151 million from $261 million because of lower U.S. origination and export volumes, weaker international merchandising margins, and reduced barge utilization. Corn Processing profit increased to $153 million from $133 million, supported by improved ethanol margins.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $1.448 billion at March 31, 2013, compared with $1.714 billion at December 31, 2012. Cash and short-term marketable securities totaled approximately $1.6 billion.
- Current assets were $27.865 billion and current liabilities were $16.142 billion, producing a reported current ratio of 1.7 to 1.
- Short-term debt was $2.358 billion, current maturities of long-term debt were $1.131 billion, and long-term debt was $5.374 billion.
- The company had $8.6 billion of credit lines, of which $6.3 billion was unused. A $6.0 billion portion supported commercial paper, with $1.5 billion outstanding.
- The accounts receivable securitization program provided up to $1.0 billion and was fully utilized at quarter-end. The program terminates June 29, 2013 unless extended; ADM stated that it intends to renew it.
- Long-term debt-to-total-capital was 22%, compared with 25% at December 31, 2012. The company also had $1.15 billion of convertible senior notes due February 2014.
- Financing activities used $792 million of cash, including $250 million of long-term debt payments, $441 million of net repayments under credit lines, and $125 million of dividends.
Material changes versus the prior comparable period
- Revenue increased 3%, but gross profit decreased 25% and net earnings attributable to controlling interests decreased 33%.
- Segment operating profit declined 31%, driven mainly by Oilseeds Processing and Agricultural Services.
- Q1 2013 included no significant asset impairment, exit, or restructuring costs, compared with $85 million in Q1 2012, including workforce-reduction and facility-exit costs.
- Corporate results improved to a $255 million loss from a $350 million loss, primarily because prior-year workforce-reduction costs were absent and the LIFO charge declined to $34 million from $107 million.
- SG&A increased $34 million to $436 million, including a $25 million provision related to the anti-corruption investigation.
- Equity earnings from unconsolidated affiliates increased to $137 million from $115 million, primarily due to higher earnings from Wilmar, partly offset by the absence of earnings from the former Gruma investment.
- Operating cash flow improved substantially because working-capital changes were broadly flat, compared with a $1.3 billion cash use in the prior-year quarter.
- Accumulated other comprehensive loss increased to $591 million from $450 million, largely reflecting a $151 million after-tax foreign-currency translation loss.
Outlook, commentary, risks, and unusual items
ADM did not provide forward-looking information in its MD&A, citing significant uncertainty from commodity prices, weather, crop yields, government programs, global demand, energy prices, foreign exchange, and competitive crop production.
- Commodity supplies were tight following the below-average 2012 North American harvest. Drought-related lower U.S. crop availability reduced Agricultural Services volumes.
- Lower ethanol production and imports improved ethanol margins, while European biodiesel margins remained weak. The U.S. biodiesel blender’s credit contributed approximately $20 million of benefit in Q1 2013.
- ADM recognized $25 million for potential disgorgement, penalties, or fines related to its long-running anti-corruption review. Discussions with the Department of Justice and SEC were ongoing, and the final settlement could exceed the provision.
- ADM reported Brazilian tax assessments totaling $591 million, plus an estimated potential $104 million for later years, and Argentine assessments totaling $60 million. No liability was recorded for these assessments; the ultimate outcomes could require payment and expense of up to the assessed amounts.
- ADM held a 19.8% interest in GrainCorp and subsequently agreed to pursue a cash offer at A$12.20 per share, implying a transaction value of approximately A$3.4 billion including GrainCorp net debt. The transaction was subject to regulatory and shareholder-acceptance conditions. Credit-rating agencies placed ADM’s ratings on negative watch, negative outlook, or under review pending funding plans.
- ADM completed implementation of a new consolidation accounting system on January 1, 2013, representing a material change in internal control over financial reporting. Management concluded disclosure controls were effective.
- Effective January 1, 2013, ADM adopted expanded comprehensive-income disclosures without an impact on results. The filing states that 2014 accounting changes concerning foreign-currency matters are not expected to affect results; the impact of the joint-and-several-liability standard had not been determined.
Most important facts for investors to verify
- Whether Oilseeds Processing and Agricultural Services margins recover from tight supplies, weak export demand, and lower origination volumes.
- The timing and amount of any final settlement related to the anti-corruption investigation, including whether it exceeds the $25 million provision.
- The outcome and potential financial exposure of the Brazilian and Argentine tax assessments.
- Renewal of the $1.0 billion receivables securitization program before its June 29, 2013 termination date.
- Funding, regulatory approval, shareholder acceptance, and credit-rating effects associated with the proposed GrainCorp acquisition.
- Refinancing or repayment plans for the $1.15 billion of convertible senior notes due February 2014.
- The effect of agricultural commodity prices, weather, crop availability, foreign exchange, derivative valuation, and LIFO adjustments on future earnings and cash flow.