Archer-Daniels-Midland Company: Q1 2014 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 commodities and products in more than 140 countries. Reportable segments are Oilseeds Processing, Corn Processing, and Agricultural Services, with remaining activities classified as Other. The filing covers the unaudited three months ended March 31, 2014, compared with the three months ended March 31, 2013.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $20.696 billion | $21.727 billion | Down 5% |
| Gross profit | $675 million | $756 million | Down $81 million |
| Earnings before taxes | $366 million | $375 million | Down $9 million |
| Net earnings attributable to controlling interests | $267 million | $269 million | Down $2 million |
| Basic and diluted EPS | $0.40 | $0.41 | Down $0.01 |
| Dividends per share | $0.24 | $0.19 | Up $0.05 |
| Operating cash flow | $(358) million | $357 million | Decrease of $715 million |
Approximate margins were 3.3% gross, 1.8% pretax, and 1.3% net attributable to controlling interests in Q1 2014, compared with approximately 3.5%, 1.7%, and 1.2%, respectively, in Q1 2013.
- Segment operating profit increased to $691 million from $630 million. Oilseeds Processing increased $21 million to $334 million, Corn Processing increased $43 million to $196 million, and Agricultural Services increased $2 million to $153 million.
- Corporate charges increased to $325 million from $255 million, primarily because the LIFO inventory valuation charge rose to $159 million from $34 million.
- The effective tax rate declined to 26.8% from 28.0%, primarily because of changes in the forecast geographic mix of pretax earnings.
- Cash, cash equivalents, and short-term marketable securities totaled approximately $1.5 billion at March 31, 2014. The current ratio was 1.9 to 1.
- Total debt included $300 million of short-term debt, $20 million of current maturities of long-term debt, and $5.353 billion of long-term debt. Long-term debt represented 21% of total capital.
- ADM had $6.9 billion of credit lines, of which $6.6 billion was unused. No commercial paper was outstanding under the $4.0 billion commercial paper facility.
- Capital expenditures were $188 million. Financing cash outflows included $1.154 billion of long-term debt payments, $175 million of treasury stock purchases, and $158 million of dividends.
Material changes versus the prior comparable period
- Revenue declined $1.031 billion, principally because of lower average commodity selling prices, partly offset by higher volumes.
- Cost of products sold declined $950 million, but manufacturing costs increased $86 million because of higher energy and maintenance costs, including severe-winter-related natural gas volatility.
- Segment results benefited from improved ethanol margins, higher cocoa press margins, stronger soybean crushing results, and transportation recovery after winter disruptions.
- Results were pressured by inverted corn and wheat markets, logistics challenges, lower sweetener prices, weaker Wilmar earnings, and approximately $90 million of current-quarter unrealized hedge timing losses versus approximately $40 million in the prior-year quarter.
- Interest expense declined $13 million following repayment of $1.15 billion of convertible senior notes on February 18, 2014.
- Other income included $23 million of gains on asset disposals and deconsolidation of individually insignificant assets, compared with $3 million of other expense in Q1 2013.
- Cash declined by $2.038 billion during the quarter to $1.083 billion, primarily reflecting debt repayment, share repurchases, dividends, and working-capital cash usage.
Guidance, outlook, commentary, risks, and unusual items
ADM stated that it does not provide forward-looking information in its MD&A because results can vary significantly with commodity prices, weather, crop conditions, government policies, global demand, energy prices, exchange rates, and production levels. Management described protein-meal and vegetable-oil demand as strong and steady and reported record ethanol margins late in the quarter, but also highlighted continuing logistics, storage, merchandising, and market-structure pressures.
- Commodity derivatives generated a pre-tax loss of $883 million in Q1 2014, compared with a $95 million gain in Q1 2013, principally from commodity contracts. The filing indicates that hedge timing and mark-to-market effects materially affected reported results.
- After-tax commodity hedge losses of $80 million remained in accumulated other comprehensive income at March 31, 2014, and ADM expected to recognize all of them in earnings over the following 12 months.
- ADM entered a second receivables securitization program in March 2014, providing up to $0.4 billion of additional funding. Together, the programs provide up to $1.5 billion; substantially all of the facility was utilized at quarter-end.
- Purchase obligations increased to $19.6 billion from $16.6 billion at year-end, with $17.9 billion expected to be paid within 12 months. The increase reflected seasonal commodity purchases and higher prices.
- Brazilian tax assessments related to commodity-hedging deductions totaled approximately $554 million, and Argentine transfer-pricing assessments totaled $37 million. Potential additional assessments were estimated at approximately $37 million in Brazil and $450 million in Argentina. ADM recorded no liability for these matters, believing it was more likely than not to prevail, but acknowledged that ultimate payments and expense could be substantial.
- On April 15, 2014, ADM announced an agreement to sell its Brazil and Paraguay fertilizer blending business, plans to pursue a sale of its chocolate processing assets while retaining most cocoa press operations, and plans to acquire the remaining 20% of Toepfer. The transactions were subject to customary regulatory approvals.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing stated there were no significant changes to reported risk factors or material legal proceedings.
Important facts for investors to verify
- Whether ethanol margins and improved oilseed and cocoa performance persist after the quarter’s unusually favorable market conditions.
- The effect of LIFO valuation changes, hedge timing, derivative mark-to-market volatility, and commodity prices on future earnings and cash flow.
- Liquidity after the $1.15 billion debt repayment, including continued use and renewal of the receivables securitization programs.
- The outcome and potential financial exposure of the Brazilian and Argentine tax assessments.
- Regulatory approval, timing, valuation, and strategic impact of the announced portfolio transactions involving fertilizer, chocolate processing, and Toepfer.
- Seasonal purchase obligations of $19.6 billion and the resulting working-capital requirements.