Archer-Daniels-Midland Co quarterly report, Q2 FY2014

Archer-Daniels-Midland Company: 2014 Q2 Form 10-Q Summary

Business context and reporting period

Unaudited results cover the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. ADM procures, transports, stores, processes, and merchandises agricultural commodities in more than 140 countries. Reportable segments are Oilseeds Processing, Corn Processing, and Agricultural Services; remaining operations are classified as Other.

Key financial metrics

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Revenue	$21.494 billion	$22.541 billion	$42.190 billion	$44.268 billion
Gross profit	$1.172 billion	$807 million	$1.847 billion	$1.563 billion
Earnings before income taxes	$735 million	$317 million	$1.101 billion	$692 million
Net earnings attributable to controlling interests	$533 million	$223 million	$800 million	$492 million
Diluted EPS	$0.81	$0.34	$1.21	$0.74
Dividends per share	$0.24	$0.19	$0.48	$0.38

Q2 gross margin was approximately 5.5%, versus 3.6% in the prior-year quarter. Pretax margin was approximately 3.4%, versus 1.4%, and net margin attributable to controlling interests was approximately 2.5%, versus 1.0%. Six-month gross margin was approximately 4.4%, versus 3.5%.

Segment operating profit increased 37% to $888 million in Q2 and increased 24% to $1.579 billion for the six months.
Q2 segment operating profit was led by Corn Processing at $347 million, Agricultural Services at $203 million, and Oilseeds Processing at $327 million.
The effective tax rate declined to 27.6% in Q2 and 27.3% for the six months, from 28.7% and 28.3%, respectively.
Cash provided by operating activities was $983 million for the six months, down from $2.348 billion in 2013.
Capital expenditures were $398 million. Investing activities used $257 million and financing activities used $2.217 billion.
Cash and cash equivalents declined to $1.630 billion at June 30, 2014, from $3.121 billion at December 31, 2013. Cash, cash equivalents, and short-term marketable securities totaled approximately $2.0 billion.
Long-term debt was $5.369 billion, current maturities were $20 million, and short-term debt was $233 million. The company repaid $1.15 billion of convertible notes in February 2014.
Credit lines totaled $6.9 billion, of which $6.7 billion was unused. The company had no commercial paper outstanding and had used $0.4 billion of its $1.6 billion accounts-receivable securitization capacity.
The current ratio was 2.1 to 1, and long-term debt represented 21% of total capital.

Material changes versus the prior comparable period

Revenue declined 5% in both the quarter and first half, primarily because of lower commodity selling prices, partly offset by higher volumes.
Profitability improved substantially from stronger ethanol, merchandising, handling, transportation, and cocoa results, together with lower commodity costs and favorable LIFO effects in Q2.
Corn Processing operating profit rose $124 million in Q2 and $167 million for the six months, benefiting from strong ethanol demand, lower net corn costs, and favorable hedge timing effects.
Agricultural Services operating profit rose $122 million in Q2 and $124 million for the six months, reflecting stronger U.S. exports, international merchandising, and barge utilization.
Oilseeds Processing operating profit increased modestly, with improved refining, packaged oils, and cocoa results partly offset by weaker South American origination and lower Asian equity earnings.
Corporate charges fell to $153 million from $330 million in Q2 and to $478 million from $585 million for the six months. The improvement reflected favorable LIFO effects, lower interest expense, and the absence of prior-year FCPA and Australian currency-hedge losses.
Q2 included approximately $70 million of net hedge timing gains, compared with approximately $26 million in the prior year. These effects are subject to reversal and may not represent recurring operating performance.
ADM acquired the remaining 20% interest in Alfred C. Toepfer International for $157 million on June 6, 2014, eliminating the related minority-interest earnings adjustment.
The company repurchased approximately 11.5 million shares for $493 million during the first six months and had 54.1 million shares remaining under its repurchase authorization at June 30.

Guidance, outlook, management commentary, risks, and unusual items

ADM does not provide forward-looking information in its MD&A because results can vary materially with commodity prices, weather, crop conditions, government policies, global demand, energy costs, logistics, foreign exchange, and competitive production. Management reported strong demand for protein meal, vegetable oils, North American corn exports, and ethanol, while noting slower South American farmer selling, seasonal shifts in export volumes, inverted corn and wheat futures, and challenging ethanol logistics.

On July 7, 2014, ADM announced the planned acquisition of WILD Flavors GmbH for approximately €2.3 billion of enterprise value, including €2.2 billion payable to shareholders and approximately €0.1 billion of assumed net debt. Closing was subject to regulatory approval and expected by December 31, 2014. ADM planned to use operating cash flow and debt financing.
Following the WILD announcement, ADM reduced its 2014 capital-expenditure target from $1.4 billion to $900 million. The filing does not provide broader earnings guidance.
Q2 asset impairment, exit, and restructuring costs totaled $31 million, including $16 million for headquarters relocation and $15 million for Toepfer integration and other restructuring.
ADM is pursuing the sale of fertilizer blending assets in Brazil and Paraguay and plans to pursue the sale of chocolate-processing assets while retaining most cocoa press operations. The fertilizer transaction remained subject to regulatory approval and was not classified as held for sale at June 30.
Brazilian tax assessments related to commodity-hedging deductions totaled approximately $577 million, with potential additional claims of approximately $38 million. Argentine transfer-pricing assessments totaled $37 million, with potential additional assessments estimated at approximately $466 million. ADM recorded no uncertain tax liability for these matters and intends to defend its positions.
Purchase obligations totaled $17.2 billion at June 30, including expected payments of $15.7 billion within the next 12 months.
ADM expects to recognize all $32 million of after-tax commodity hedge losses in accumulated other comprehensive income during the next 12 months.
A proposed pension lump-sum program announced after quarter-end could produce a non-cash pretax charge of approximately $45 million to $90 million in the fourth quarter of 2014, depending on participation.
Key market risks include commodity-price volatility, basis and hedge ineffectiveness, weather and crop conditions, foreign exchange, energy prices, logistics disruptions, counterparty performance, and changes in global demand.

Important facts an investor should verify

Whether the substantial Q2 earnings increase is sustainable after removing approximately $70 million of hedge timing gains, favorable LIFO effects, and the absence of prior-year unusual charges.
The funding structure, leverage impact, regulatory status, and closing assumptions for the WILD Flavors acquisition.
The ultimate resolution and potential cash-tax exposure from the Brazilian and Argentine tax assessments.
The effect of lower cash balances, reduced receivables-securitization usage, debt repayment, share repurchases, and the company’s large purchase obligations on liquidity.
The timing and financial impact of the fertilizer and chocolate asset-sale initiatives and headquarters relocation.
The sensitivity of segment results to ethanol margins, commodity prices, crop availability, export logistics, LIFO accounting, and hedge timing.