Archer-Daniels-Midland Co quarterly report, Q3 FY2016

Archer-Daniels-Midland Company — 2016 Q3 Form 10-Q Summary

Business context and reporting period

Unaudited results cover the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. ADM procures, transports, stores, processes, and merchandises agricultural commodities in 165 countries through Agricultural Services, Corn Processing, Oilseeds Processing, Wild Flavors and Specialty Ingredients, and Other.

During 2016, ADM acquired interests in Harvest Innovations, Medsofts Group, Amazon Flavors, a Morocco corn wet mill, and Caterina Foods; increased its Wilmar ownership to 23%; and sold its Brazilian Limeira do Oeste sugarcane ethanol operations.

Financial performance and liquidity

Metric	Q3 2016	Q3 2015	9M 2016	9M 2015
Revenue	$15.832 billion	$16.565 billion	$45.845 billion	$51.257 billion
Gross profit	$1.105 billion	$1.089 billion	$2.658 billion	$3.155 billion
Earnings before taxes	$480 million	$367 million	$1.193 billion	$1.583 billion
Net earnings attributable to ADM	$341 million	$252 million	$855 million	$1.131 billion
Diluted EPS	$0.58	$0.41	$1.44	$1.80
Operating cash flow	Not separately provided	Not separately provided	$1.156 billion	$1.098 billion

Q3 gross margin was approximately 7.0%, compared with 6.6% in the prior-year quarter; nine-month gross margin was approximately 5.8%, compared with 6.2%. Q3 net margin was approximately 2.2%, compared with 1.5%; nine-month net margin was approximately 1.9%, compared with 2.2%.

• Q3 revenue declined 4%, primarily from lower commodity prices, partially offset by higher volumes. Gross profit was broadly stable, while net earnings rose 35%.
• Nine-month revenue declined 11% and gross profit declined 16%. Net earnings attributable to ADM declined 24%, reflecting weaker segment performance.
• Q3 segment operating profit fell $64 million to $645 million. Agricultural Services rose $44 million and Corn Processing rose $81 million, while Oilseeds Processing fell $191 million.
• Nine-month segment operating profit fell $474 million to $1.898 billion, led by a $510 million decline in Oilseeds Processing and a $130 million decline in Agricultural Services. Corn Processing increased $114 million.
• Adjusted EPS was $0.59 in Q3 versus $0.60 and $1.41 for nine months versus $1.97. Adjusted EBITDA was $780 million in Q3 versus $800 million and $2.089 billion for nine months versus $2.606 billion.
• Cash and cash equivalents were $701 million at September 30, 2016, versus $910 million at December 31, 2015. Cash plus short-term marketable securities was approximately $1.0 billion.
• Current assets were $20.543 billion and current liabilities were $12.737 billion, producing a reported current ratio of 1.6 to 1. Inventories were $7.228 billion, including approximately $4.5 billion of readily marketable commodity inventories.
• Long-term debt was $6.594 billion, current maturities were $272 million, and short-term debt was $207 million. Long-term debt-to-total-capital increased to 27% from 24% at year-end 2015.
• ADM issued $1.0 billion of 2.5% notes due 2026 in August 2016. Credit facilities totaled $7.0 billion, of which $6.1 billion was unused; no commercial paper was outstanding.
• Capital expenditures were $621 million, acquisitions used $136 million, additional Wilmar investments used $628 million, dividends used $528 million, and treasury-stock purchases used $754 million during the first nine months.

Material changes versus the prior comparable period

• Q3 earnings benefited from the absence of the $189 million prior-year debt-extinguishment loss and from lower impairment, exit, and restructuring charges of $11 million versus $65 million.
• Q3 results included an $85 million LIFO valuation credit, compared with a $75 million credit in the prior-year quarter. The nine-month period included a $17 million LIFO charge versus a $16 million credit in 2015.
• Oilseeds Processing was pressured by lower soy crush margins, weaker Brazilian origination volumes, and a $48 million equity loss from Wilmar, compared with $36 million of equity earnings in the prior-year quarter.
• Corn Processing benefited from stronger sweeteners and starches performance, improved operating results, and the absence of prior-year Brazilian sugar-ethanol impairment charges.
• Q3 SG&A increased $42 million to $561 million, primarily from legal settlements, costs, and fees.
• Share count declined: diluted weighted-average shares were 589 million in Q3 and 593 million for nine months, compared with 615 million and 627 million, respectively.

Outlook, commentary, risks, and unusual items

Management stated that U.S. grain export competitiveness improved in Q3, supporting Agricultural Services volumes. Sweeteners and starches demand remained solid, ethanol remained competitive, and global oilseed demand was firm, although Brazilian origination was affected by adverse weather. Wild Flavors and Specialty Ingredients continued to benefit from demand for innovative, healthy, and nutritious products.

Management is reviewing the capital intensity of operations and portfolio to reduce and redeploy capital. It expected approximately $1.0 billion of 2016 capital expenditures, approximately $0.7 billion of dividends, and approximately $1.0 billion of share repurchases, subject to strategic capital requirements.

• Commodity prices, weather, crop conditions, government policies, global demand, freight markets, foreign exchange, and energy prices can materially affect results.
• Purchase obligations increased to $12.7 billion from $9.7 billion at year-end; $11.9 billion was expected to be paid within 12 months.
• Brazilian tax assessments related to hedging-loss deductions totaled approximately $455 million; ADM has not accrued a liability and intends to continue defending its position.
• Argentine transfer-pricing assessments totaled $113 million, with potential subsequent assessments estimated at approximately $159 million. ADM has not accrued a liability.
• A Netherlands transfer-pricing assessment was approximately $100 million; ADM had accrued an amount it considered appropriate for potential resolution.
• ADM settled a Missouri farmer litigation matter in August 2016 without admitting wrongdoing. The settlement and related costs were recorded in Q3, but the amount was not disclosed.
• ADM faces other litigation involving genetically modified corn products but stated that it does not expect the matters to have a material adverse effect, while noting that outcomes cannot be predicted with certainty.
• The filing provides no specific earnings guidance beyond the stated 2016 capital allocation expectations. Interim results are not necessarily indicative of full-year results.

Important facts for investors to verify

• Whether weak Oilseeds Processing margins and Wilmar losses persist or normalize.
• The sustainability of Q3 earnings after excluding the $85 million LIFO credit and other unusual items.
• Progress toward the $1.0 billion capital expenditure and share-repurchase plans and their effect on leverage and liquidity.
• Resolution, accrual status, and potential cash exposure from the Brazil, Argentina, and Netherlands tax assessments.
• Utilization and renewal of the $1.5 billion accounts-receivable securitization programs, including their scheduled 2017 termination dates.
• Execution and returns from recent acquisitions, Wilmar investments, and the company’s capital-intensity review.
• Commodity, weather, foreign-exchange, freight, and derivative exposures, including the effect of Level 3 valuations and hedge timing.