Archer-Daniels-Midland Co quarterly report, Q1 FY2011

Archer-Daniels-Midland Company: Q1 Fiscal 2012 Form 10-Q

Reporting period: Three months ended September 30, 2011, compared with the three months ended September 30, 2010. The filing describes this as the first quarter of fiscal 2012. ADM procures, transports, stores, processes, and merchandises agricultural commodities through Oilseeds Processing, Corn Processing, Agricultural Services, and Other operations in more than 75 countries.

Financial performance and position

Metric	Q1 FY2012	Q1 FY2011	Change
Net sales and other operating income	$21.902 billion	$16.799 billion	+30%
Gross profit	$1.034 billion	$808 million	+28%
Gross margin	4.7%	4.8%	Down slightly
Earnings before income taxes	$660 million	$462 million	+43%
Net earnings attributable to controlling interests	$460 million	$345 million	+33%
Basic and diluted EPS	$0.68	$0.54	+26%
Cash provided by operating activities	$2.087 billion	$(871) million	Improved by $2.958 billion

Operating performance benefited materially from a $126 million LIFO valuation credit, compared with a $123 million LIFO charge in the prior-year quarter, as agricultural commodity prices declined. Segment operating profit nevertheless fell to $699 million from $765 million.

Oilseeds Processing: Sales increased 37% to $8.326 billion, while operating profit declined 28% to $221 million because of weak global soybean and European rapeseed crushing margins.
Corn Processing: Sales increased 53% to $3.293 billion, but operating profit declined 48% to $179 million as net corn costs more than doubled and outweighed higher selling prices and volumes.
Agricultural Services: Sales increased 25% to $8.666 billion and operating profit increased 85% to $244 million, driven primarily by stronger global merchandising and handling results.
Other: Sales were broadly flat at $1.617 billion, while operating profit improved to $55 million from a $16 million loss.

Cash flow, liquidity, debt, and capital allocation

Cash and cash equivalents were $1.320 billion at September 30, 2011, compared with $615 million at June 30, 2011. Cash, cash equivalents, and short-term marketable securities totaled approximately $1.8 billion.
Current assets were $27.279 billion and current liabilities were $14.479 billion, producing a current ratio of approximately 1.9 to 1.
Debt consisted of $1.170 billion of short-term debt, $1.649 billion of current maturities of long-term debt, and $6.678 billion of long-term debt. Total reported debt was approximately $9.5 billion.
Long-term debt to total capital declined to 27% from 30% at June 30, 2011.
ADM had $6.9 billion of credit lines, of which $6.0 billion was unused. A $4.6 billion portion supported commercial paper, with no commercial paper outstanding at quarter-end.
A new 364-day accounts receivable securitization facility provides up to $1.0 billion of additional liquidity; no borrowings were outstanding under it.
Capital expenditures were $443 million. Financing uses included $240 million for treasury stock purchases, $107 million for dividends, $85 million of long-term debt repayments, and $32 million of debt exchange premiums.
ADM repurchased 8.6 million shares for approximately $240 million. The quarterly dividend increased to $0.16 per share from $0.15.

Material changes versus the prior comparable period

Revenue rose primarily because of higher average selling prices, including approximately $600 million from foreign-currency effects; sales volumes were lower overall.
Cost of products sold increased 30%, reflecting higher agricultural commodity, manufacturing, energy, chemical, and fuel costs.
Income taxes increased to $199 million from $120 million. The effective tax rate rose to 30% from 26%, primarily because of changes in the geographic mix of pretax earnings.
Corporate results improved to a $39 million loss from a $303 million loss, chiefly because of the LIFO benefit and the absence of $31 million of prior-year interest-rate-swap losses.
ADM exchanged $404 million of existing debt for $528 million of 4.535% senior debentures due 2042 and paid $32 million of exchange premiums.
ADM finalized the sale of a majority interest in Hickory Point Bank and Trust Company. The bank was deconsolidated, with no material effect on quarterly after-tax earnings; the remaining interest will be accounted for under the equity method.
Comprehensive income attributable to controlling interests was a loss of $90 million, compared with income of $869 million in the prior-year quarter, primarily because of a $498 million foreign-currency translation loss.

Outlook, risks, contingencies, and unusual items

ADM does not provide forward-looking information in its MD&A because results are highly sensitive to commodity prices, weather, crop yields, government policies, global demand, energy costs, exchange rates, and general economic conditions. Management cited volatile and generally declining agricultural commodity prices, low U.S. corn and soybean carryover stocks, harvest uncertainty, excess oilseed-crushing capacity, strong sweetener and starch demand, and supportive ethanol demand.

Commodity and foreign-exchange derivatives generated a net $496 million pretax gain in the quarter, compared with a $619 million loss in the prior-year quarter. Derivative and inventory valuations can materially affect reported earnings.
Purchase obligations totaled $19.4 billion, principally for agricultural commodity inventories, with approximately $15 billion expected to be paid within the following 12 months.
ADM do Brasil is contesting Brazilian tax assessments totaling $567 million for 2004, 2006, and 2007, plus potential additional claims of approximately $97 million for years after 2007. No liability was recorded for the assessed amounts; an adverse resolution could result in additional tax, interest, and penalties.
ADM continues an internal review concerning anti-corruption compliance and certain transactions potentially implicating the Foreign Corrupt Practices Act and other laws. The company stated that any resulting penalties, fines, or disgorgement are not expected to materially affect its business or financial condition.
Management reported no significant changes in risk factors, no material changes in critical accounting policies, and effective disclosure controls as of September 30, 2011.

Investor verification priorities

Determine how much of the earnings increase is attributable to the $249 million year-over-year swing in LIFO valuation effects rather than recurring segment performance.
Monitor oilseed-crushing margins, corn input costs, ethanol and sweetener pricing, and agricultural merchandising conditions.
Review the Brazilian tax assessments and the company’s basis for not recording a liability.
Assess commodity, foreign-exchange, and derivative exposures, including Level 3 fair-value measurements and associated valuation sensitivity.
Track the $1.5 billion floating-rate notes due August 2012, other current debt maturities, and the availability of committed credit facilities.
Evaluate the effect of currency translation, which reduced comprehensive income by $498 million in the quarter.
Confirm the ongoing status and potential financial consequences of the anti-corruption review.