Archer-Daniels-Midland Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2011; fiscal third quarter of fiscal 2011. The provided metadata identifies “2010 Q3,” but the filing itself reports March 31, 2011 results. Financial amounts are in millions unless otherwise stated.
Business context
ADM procures, transports, stores, processes, and merchandises agricultural commodities in more than 60 countries. Reportable segments are Oilseeds Processing, Corn Processing, and Agricultural Services; remaining wheat, cocoa, and financial activities are classified as Other.
Financial performance and liquidity
| Metric | Three months ended March 31, 2011 | Three months ended March 31, 2010 | Nine months ended March 31, 2011 | Nine months ended March 31, 2010 |
|---|---|---|---|---|
| Net sales and other operating income | $20,077 | $15,145 | $57,806 | $45,979 |
| Gross profit | $1,160 | $891 | $3,202 | $2,917 |
| Earnings before income taxes | $791 | $534 | $2,251 | $2,035 |
| Net earnings attributable to controlling interests | $578 | $421 | $1,655 | $1,484 |
| Diluted EPS | $0.86 | $0.65 | $2.55 | $2.30 |
- Third-quarter sales increased 33%; nine-month sales increased 26%. Higher commodity prices accounted for much of the increase, with higher volumes also contributing.
- Third-quarter gross margin was approximately 5.8%, versus 5.9% in the prior-year quarter. Pretax margin improved to approximately 3.9% from 3.5%; diluted EPS increased 32%.
- Third-quarter segment operating profit increased $310 to $1,006. Oilseeds Processing contributed $512, Corn Processing $204, Agricultural Services $171, and Other $119.
- For nine months, segment operating profit increased $693 to $3,133. Corn Processing increased $362, Agricultural Services increased $239, and Oilseeds Processing increased $104.
- Nine-month cash used in operating activities was $4,749, compared with cash provided of $2,775 in the prior-year period, principally because higher commodity prices increased receivables and inventories.
- Nine-month investing cash use was $1,587, including $913 of capital expenditures and $206 for acquisitions. Financing provided $6,148, principally through increased borrowings.
- At March 31, 2011, cash and cash equivalents were $858; short-term marketable securities were $765; and cash, cash equivalents, and short-term marketable securities totaled approximately $1.6 billion. The current ratio was 1.7 to 1.
- Current liabilities included $5,732 of short-term debt and $176 of current maturities of long-term debt. Long-term debt was $8,350. Lines of credit totaled $8.5 billion, of which $4.1 billion was unused; commercial paper outstanding was $3.5 billion.
- Long-term debt represented 33% of total capital, compared with 32% at June 30, 2010. Total shareholders’ equity was $16,680.
Material changes versus the prior comparable periods
- Net earnings attributable to controlling interests rose $157 in the quarter and $171 for the nine-month period.
- The quarter benefited from a $310 increase in segment operating profit and the absence of $47 after-tax prior-year debt-extinguishment charges. These benefits were partly offset by unfavorable LIFO valuation effects and higher taxes.
- Quarterly LIFO valuation effects were a $43 charge in 2011 versus a $43 credit in 2010. For nine months, LIFO effects were a $420 charge versus a $65 credit.
- The effective tax rate increased to 28.2% for the quarter from 22.1%; the nine-month rate was 27.2% versus 27.6%.
- ADM acquired the remaining interest in Golden Peanut, began consolidating the business in the third quarter, and recognized a $71 pretax revaluation gain in the second quarter. Three acquisitions during the nine months totaled $206.
- A change in estimated machinery and equipment service lives increased after-tax earnings by $31 in the quarter and $55 for nine months, including a $50 quarterly and $89 nine-month reduction in depreciation expense.
- On February 11, 2011, ADM issued $1.5 billion of floating-rate notes due August 2012. The company also remarketed $1.75 billion of Equity Unit debentures into $750 million of 4.479% notes due 2021 and $1.0 billion of 5.765% debentures due 2041.
Outlook, commentary, risks, and contingencies
- Management does not provide forward-looking information in the MD&A because results are highly sensitive to commodity prices, weather, crop yields, government programs, global demand, energy prices, foreign exchange, and competitive crop production.
- During the period, commodity prices and volatility were historically high, while global grain and oilseed demand and merchandising volumes increased. Protein meal demand was weaker in some markets, while biodiesel, sweetener, starch, and ethanol demand was generally supportive.
- Commodity derivatives, inventories, and related contracts create material exposure to price volatility, basis risk, counterparty defaults, and freight-market volatility. A hypothetical 10% adverse commodity-price movement produced estimated market risk of $124 based on the nine-month average net position.
- ADM had $20.3 billion of purchase obligations at March 31, 2011, including $19.0 billion expected within 12 months, principally for agricultural commodity inventories.
- ADM do Brasil is contesting Brazilian tax assessments totaling $631 million before interest and currency effects for 2004, 2006, and 2007. The company has not recorded a liability and believes its tax position is appropriate; additional claims of approximately $110 million could arise for years after 2007.
- On June 1, 2011, ADM expected to issue common stock and receive approximately $1.75 billion under the Equity Unit forward purchase contracts, with proceeds intended partly to repay short-term debt. The filing provides no subsequent confirmation of completion.
- Management reported no material legal proceeding expected to adversely affect financial position, results, or liquidity, no significant change in risk factors, and effective disclosure controls.
Most important facts for investors to verify
- Verify the correct reporting period: the filing is for the quarter ended March 31, 2011, not 2010 Q3.
- Assess whether the strong earnings improvement is sustainable after excluding LIFO effects, the Golden Peanut revaluation gain, derivative mark-to-market impacts, insurance recovery, and the prior-year debt-extinguishment charge.
- Monitor working-capital requirements, commodity prices, inventory and receivable levels, commercial paper balances, and available credit capacity.
- Confirm the June 1, 2011 Equity Unit stock issuance and the resulting share-count dilution and short-term debt repayment.
- Review the Brazilian tax assessments, related interest and penalties, appellate status, and potential additional assessments.
- Evaluate commodity derivative exposures and the sensitivity of earnings and liquidity to price, basis, foreign exchange, interest-rate, and counterparty risks.