Business Context and Reporting Period
Archer-Daniels-Midland Company filed an unaudited Form 10-Q for the quarter ended March 31, 2017. 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 corporate activities classified as Other or Corporate.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $14.988 billion | $14.384 billion | +4% |
| Gross profit | $868 million | $781 million | +11% |
| Earnings before income taxes | $458 million | $306 million | +$152 million |
| Net earnings attributable to controlling interests | $339 million | $230 million | +47% |
| Diluted EPS | $0.59 | $0.39 | +$0.20 |
| Adjusted diluted EPS | $0.60 | $0.42 | +$0.18 |
| Segment operating profit | $676 million | $573 million | +18% |
| Adjusted EBITDA | $761 million | $632 million | +20% |
| Operating cash flow | $409 million | $25 million | +$384 million |
Gross margin was approximately 5.8%, compared with approximately 5.4% in the prior-year quarter. The effective tax rate increased to 25.8% from 24.8%, primarily because U.S. tax credits, including the biodiesel credit, expired at the end of 2016.
- Liquidity: Cash and cash equivalents were $476 million; cash, cash equivalents, and short-term marketable securities totaled approximately $748 million. The current ratio was 1.5 to 1.
- Debt: Short-term debt and current maturities totaled $1.251 billion; long-term debt was $5.956 billion. Long-term debt represented 26% of total capital, versus 27% at December 31, 2016.
- Credit availability: Credit lines, including receivables securitization programs, totaled $6.7 billion, of which $5.1 billion was unused. Commercial paper outstanding was approximately $0.3 billion.
- Cash deployment: Capital expenditures were $200 million, acquisitions used $90 million, additional investment in Wilmar used $185 million, dividends paid were $183 million, and share repurchases were $248 million.
- Shareholder returns: The quarterly dividend was $0.32 per share, compared with $0.30 in the prior-year quarter. ADM repurchased approximately 5.5 million shares during the quarter.
Material Changes Versus the Prior Comparable Period
- All reportable business segments improved operating profit. Agricultural Services increased to $81 million from $75 million; Corn Processing to $177 million from $131 million; Oilseeds Processing to $313 million from $260 million; and Wild Flavors and Specialty Ingredients to $75 million from $70 million.
- Oilseeds processing volumes increased by 538,000 metric tons, while corn processing volumes decreased by 198,000 metric tons, partly because of a water-pipe leak that disrupted one plant.
- Equity in earnings of unconsolidated affiliates increased to $172 million from $65 million, primarily due to improved Wilmar and CIP results. ADM increased its Wilmar ownership from 23.2% to 24.3%.
- Corporate expense improved to a $218 million charge from $267 million, including a $13 million LIFO credit versus a $14 million LIFO charge in the prior-year quarter. Higher business-transformation, information-technology, employee, and interest costs partly offset the improvement.
- Interest expense increased to $81 million from $70 million, primarily due to higher short-term borrowing rates and the mix of debt following the August 2016 issuance of $1 billion of fixed-rate notes.
- Cash from operations increased substantially, supported by lower receivables and inventories and improved working-capital movements.
- ADM acquired Crosswind Industries and an 89% interest in Biopolis SL for aggregate cash consideration of $92 million. The company also continued construction of a feed-premix facility in China and had a pending acquisition of Chamtor in France.
Outlook, Management Commentary, Risks, and Unusual Items
Management described the quarter as benefiting from improved results across all segments. Grain supplies remained large and market volatility low. Corn Processing benefited from solid sweetener and starch demand, strong ethanol demand and exports, and improved lysine margins, although high U.S. ethanol production constrained margins. Oilseeds volumes and margins were solid overall, while soybean margins faced pressure from imported Argentinian meal. Wild Flavors and Specialty Ingredients benefited from demand for flavors, specialty proteins, and edible beans but faced weakness in certain specialty ingredients and the effect of a strong U.S. dollar.
- ADM expected 2017 capital expenditures of up to $1.2 billion, approximately $0.7 billion of dividends, and $1.0 billion to $1.5 billion of share repurchases, subject to strategic capital requirements.
- Purchase obligations were $9.7 billion at March 31, 2017, including $8.7 billion expected to be paid within twelve months.
- The primary receivables securitization program, providing up to $1.2 billion of funding, was scheduled to terminate on June 23, 2017 unless extended. The programs were utilized for approximately $1.2 billion at quarter-end.
- On May 1, 2017, ADM completed the sale of its crop risk services business for $118 million plus approximately $70 million of net working capital.
- Brazilian tax assessments related to commodity-hedging deductions totaled approximately $478 million; Argentine transfer-pricing assessments totaled $133 million, with potential subsequent-year assessments estimated at approximately $218 million; and a Netherlands transfer-pricing assessment totaled $96 million. ADM had not recorded liabilities for the Brazil and Argentina assessments because management believed it was more likely than not to prevail, while it had accrued an amount considered the likely outcome for the Netherlands matter.
- ADM remains exposed to commodity-price, weather, crop, demand, foreign-exchange, interest-rate, counterparty, regulatory, and litigation risks. Derivative and market-value accounting can create earnings volatility; the filing reports $309 million of pre-tax gains from derivatives not designated as hedges in Q1 2017 versus $96 million in Q1 2016.
- Pending accounting changes include revenue recognition under ASC 606, expected to be adopted on a modified retrospective basis beginning January 1, 2018. Management expected expanded disclosures and potential differences principally related to control transfer, but had not completed its impact assessment.
- Management stated that disclosure controls were effective and that the global ERP implementation had not materially affected internal control over financial reporting.
Investor Verification Checklist
- Verify whether the expected $1.2 billion 2017 capital-expenditure ceiling and $1.0 billion to $1.5 billion repurchase plan remained achievable as commodity conditions and strategic priorities changed.
- Assess the sustainability of the Q1 improvement in segment operating profit, particularly the contribution from Wilmar, ethanol, lysine, transportation, and LIFO valuation effects.
- Monitor the renewal or replacement of the receivables securitization program scheduled to terminate in June 2017 and the company’s reliance on commercial paper and other credit facilities.
- Follow developments in the Brazil, Argentina, and Netherlands tax disputes and quantify potential cash-tax, interest, penalty, and earnings exposure.
- Reconcile GAAP EPS of $0.59 to adjusted EPS of $0.60 and evaluate the recurring versus nonrecurring nature of LIFO, restructuring, tax, and derivative effects.
- Review the eventual financial impact of ASC 606 and other pending accounting standards, including leases and financial instruments.