Archer-Daniels-Midland Company: Q2 2017 Form 10-Q Summary
Business context and reporting period
ADM procures, transports, stores, processes, and merchandises agricultural commodities and products across 163 countries. Reportable segments are Agricultural Services, Corn Processing, Oilseeds Processing, and Wild Flavors and Specialty Ingredients, with remaining financial and other activities classified as Other. This unaudited Form 10-Q covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $14.943 billion | $15.629 billion | $29.931 billion | $30.013 billion |
| Gross profit | $887 million | $737 million | $1.755 billion | $1.518 billion |
| Gross margin | 5.9% | 4.7% | 5.9% | 5.1% |
| Earnings before income taxes | $383 million | $407 million | $841 million | $713 million |
| Net earnings attributable to controlling interests | $276 million | $284 million | $615 million | $514 million |
| Diluted EPS | $0.48 | $0.48 | $1.07 | $0.87 |
| Adjusted diluted EPS | $0.57 | $0.41 | $1.17 | $0.83 |
| Adjusted EBITDA | $725 million | $677 million | $1.486 billion | $1.309 billion |
Six-month operating cash flow was $1.314 billion, compared with a use of $369 million in 2016. Investing cash flow was an outflow of $566 million, including $452 million of capital expenditures and $180 million of net cash paid for acquisitions. Financing cash flow was an outflow of $939 million, including $511 million of share repurchases and $364 million of dividends.
At June 30, 2017, cash and cash equivalents were $433 million and short-term marketable securities were $237 million. Total lines of credit, including receivables securitization programs, were $6.7 billion, of which $5.1 billion was unused. The company had $353 million of short-term debt, $571 million of current maturities of long-term debt, and $6.056 billion of long-term debt. Long-term debt-to-total-capital was 26%, compared with 27% at December 31, 2016. The current ratio was 1.6 to 1.
The company declared dividends of $0.32 per share in the quarter and $0.64 per share for the six-month period. It repurchased approximately 11.7 million shares during the first six months for $511 million and had approximately 19.6 million shares remaining under its authorization at June 30, 2017.
Material changes versus the prior comparable period
- Second-quarter revenue declined 4% because of lower commodity prices and foreign-currency effects, while gross profit increased 20% to $887 million. Six-month revenue was broadly stable, while gross profit increased 16%.
- Second-quarter net earnings attributable to controlling interests decreased 3% to $276 million, but six-month earnings increased 20% to $615 million.
- Second-quarter adjusted segment operating profit increased $85 million to $658 million, despite reported segment operating profit declining $38 million to $642 million. The difference primarily reflects a $107 million gain from prior-year asset and business sales that did not recur.
- For the six months, adjusted segment operating profit increased $190 million to $1.336 billion. Agricultural Services and Corn Processing improved materially, while Oilseeds Processing benefited from Wilmar and other businesses but continued to experience weaker soybean crushing and South American origination results.
- Q2 segment operating profit increased in Agricultural Services to $109 million from $57 million and Corn Processing to $224 million from $163 million, but decreased in Oilseeds Processing to $206 million from $235 million. Wild Flavors and Specialty Ingredients was broadly stable at $92 million.
- Processed volumes increased 6% in the quarter to 14.358 million metric tons, including oilseeds volumes of 8.518 million metric tons and corn volumes of 5.840 million metric tons.
- Interest expense increased to $86 million in Q2 and $167 million for the six months, primarily due to higher short-term rates and debt issued in August 2016, partly offset by retirement of a $261 million bond in April 2017.
- Equity earnings from unconsolidated affiliates increased to $109 million in Q2 and $281 million for the six months, principally due to improved Wilmar results and ADM’s increased Wilmar ownership from 23.2% to 24.3%.
Guidance, outlook, management commentary, risks, and unusual items
Management expects approximately $1.0 billion of capital expenditures, $0.7 billion of dividends, and $1.0 billion of share repurchases during 2017, subject to strategic capital requirements. The filing does not provide formal earnings guidance.
Management cited weak U.S. grain export competitiveness, low global commodity-market volatility, pressured soybean crushing margins, slow Brazilian farmer selling, and challenging ethanol margins due to high U.S. production. Offsetting factors included strong global merchandising results, solid sweetener and starch demand, improved ethanol and biodiesel performance, strong refined-oil demand, and demand for flavor ingredients and specialty products.
In July 2017, ADM announced a reconfiguration of its Peoria, Illinois ethanol complex and workforce reductions under Project Readiness. It expects approximately $80 million to $100 million of pretax restructuring and impairment charges in the third quarter of 2017. ADM also announced a pension-plan amendment that will freeze accrued benefits under its traditional formula effective December 31, 2021; a plan remeasurement is expected in the third quarter of 2017.
Material unusual items included LIFO valuation effects, asset impairments, restructuring and settlement charges, gains on business and asset sales, and hedge timing effects. Q2 2017 included a $9 million LIFO charge versus an $88 million charge in Q2 2016. The company completed acquisitions of Crosswind Industries, Biopolis SL, and Chamtor SA for aggregate net cash consideration of $180 million during the first six months.
Significant contingencies include Brazilian tax assessments of approximately $464 million, Argentine transfer-pricing assessments of $130 million plus potential subsequent assessments estimated at approximately $210 million, and a $103 million Netherlands tax assessment. ADM has not recorded liabilities for the Brazil and Argentina assessments because it believes it is more likely than not to prevail; it has accrued an amount believed to represent the likely outcome of the Netherlands matter. Final outcomes may take years and could result in financial impacts up to the full assessment amounts.
Key risks include commodity-price, weather, crop, demand, foreign-exchange, interest-rate, freight, counterparty, regulatory, tax, litigation, and credit-market risks. Management stated that disclosure controls were effective and that there were no significant changes to risk factors during the quarter.
Important facts for investors to verify
- Reconcile reported EPS with adjusted EPS and assess the recurring versus nonrecurring effects of LIFO, asset sales, impairments, restructuring, settlements, and hedge timing.
- Monitor soybean-crush margins, South American origination conditions, ethanol profitability, global commodity volatility, and Wilmar’s contribution.
- Evaluate liquidity after planned capital expenditures, dividends, share repurchases, acquisitions, and the $1.2 billion utilized under receivables securitization programs.
- Review debt maturities, refinancing needs, commercial-paper usage, and the impact of higher interest rates.
- Assess the potential financial exposure from the Brazil, Argentina, and Netherlands tax disputes and other legal proceedings.
- Verify the expected third-quarter restructuring and impairment charges of $80 million to $100 million and the effect of the pension-plan remeasurement.
- Consider the effect of pending accounting standards, particularly revenue recognition and leases, on future disclosures and balance-sheet presentation.