Archer-Daniels-Midland Company: FY2015 Form 10-K Summary
Business context and reporting period
ADM filed its annual report for the fiscal year ended December 31, 2015. The company is a global processor, merchandiser, transporter and storage provider for agricultural commodities, operating across 165 countries. Its reportable segments are Agricultural Services, Corn Processing, Oilseeds Processing, and Wild Flavors and Specialty Ingredients, plus Other financial operations.
Effective January 1, 2015, ADM created the Wild Flavors and Specialty Ingredients segment and reclassified prior-period results to conform to the new presentation. The filing is an annual report, not a quarterly filing; fourth-quarter results are presented in the unaudited quarterly data.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $67.7 billion | $81.2 billion | Down 17% |
| Gross profit | $4.02 billion | $4.77 billion | Down 16% |
| Gross margin | Approximately 5.9% | Approximately 5.9% | Broadly stable |
| Earnings before income taxes | $2.28 billion | $3.13 billion | Down $846 million |
| Net earnings attributable to controlling interests | $1.85 billion | $2.25 billion | Down 18% |
| Diluted EPS | $2.98 | $3.43 | Down 13% |
| Adjusted diluted EPS | $2.60 | $3.20 | Down 19% |
| Operating cash flow | $2.48 billion | $4.96 billion | Down $2.48 billion |
| Adjusted EBITDA | $3.39 billion | $4.11 billion | Down 18% |
Revenue declined primarily because of lower agricultural commodity prices, lower volumes and approximately $5.8 billion of unfavorable foreign-currency translation from the stronger U.S. dollar. Cost of products sold declined to $63.7 billion, but gross profit fell because of weaker ethanol margins and foreign-exchange effects. The effective tax rate decreased to 19.2% from 28.0%, largely due to one-time gains taxed at lower rates, discrete tax benefits and a $66 million release of a deferred-tax valuation allowance.
Fourth-quarter 2015 revenue was $16.4 billion and net earnings attributable to controlling interests were $718 million, or $1.19 diluted EPS. Fourth-quarter earnings included significant gains from the chocolate and cocoa divestitures and the Eaststarch revaluation, together with impairments, restructuring charges, loss provisions, a valuation-allowance release and debt-extinguishment costs.
Segment performance
| Segment | 2015 operating profit | 2014 | Key driver |
|---|---|---|---|
| Agricultural Services | $714 million | $1.04 billion | Lower merchandising opportunities, export volumes and margins amid ample global grain supplies and a strong U.S. dollar |
| Corn Processing | $648 million | $1.15 billion | Sharp decline in ethanol margins, partly offset by stronger sweeteners and starches |
| Oilseeds Processing | $1.57 billion | $1.44 billion | Stronger oilseed volumes and margins, gains on asset sales, and cocoa-related items |
| Wild Flavors and Specialty Ingredients | $280 million | $205 million | Full-year contribution from Wild Flavors and SCI acquisitions |
Total segment operating profit decreased 16% to $3.27 billion. Oilseed processed volumes reached a record 33.8 million metric tons, while corn volumes declined to 23.1 million metric tons as high industry ethanol production pressured margins and inventories.
Liquidity, debt and capital allocation
- Cash provided by operating activities was $2.48 billion; cash used in investing activities was $21 million and cash used in financing activities was $2.65 billion.
- Cash, cash equivalents and short-term marketable securities totaled approximately $1.35 billion at year-end; the current ratio was 1.6.
- Long-term debt excluding current maturities was $5.78 billion, compared with $5.53 billion in 2014. Long-term debt to total capital was 24%, versus 22% in 2014.
- Credit lines totaled $5.7 billion, of which $5.6 billion was unused. No commercial paper was outstanding against the $4.0 billion commercial-paper facility.
- ADM utilized $1.2 billion of its $1.6 billion accounts-receivable securitization capacity.
- The company issued €1.1 billion of notes in June 2015 and used the proceeds to repurchase or redeem debt. The transactions generated a $189 million debt-extinguishment loss.
- Capital expenditures were $1.13 billion in cash-flow terms, while gross additions to property, plant and equipment were $1.35 billion.
- ADM paid $687 million in dividends and repurchased $2.04 billion of treasury stock during 2015. Management expected approximately $1.0 billion of 2016 capital expenditures, $0.7 billion of dividends and $1.0 billion to $1.5 billion of share repurchases, subject to strategic capital requirements.
Material changes, outlook and unusual items
- ADM sold its global chocolate business to Cargill for $431 million and its global cocoa business to Olam for approximately $1.2 billion, recording aggregate gains on the transactions.
- The company acquired Eatem Foods, the remaining interest in Eaststarch C.V., the remaining interests in North Star Shipping and Minmetal, and Belgian oil bottler AOR N.V. It also increased its Wilmar ownership from 17.3% to 19.0%.
- 2015 net earnings included approximately $530 million of pre-tax gains primarily from divestitures, asset revaluations and the sale of a Brazilian export-terminal interest.
- Asset impairment, exit and restructuring costs totaled $200 million, including $129 million of impairments and $71 million of restructuring and exit charges. Brazilian sugar-ethanol assets were a significant area of concern; management stated it did not expect to operate the plant after the next seasonal shutdown.
- Management identified a strategic review of U.S. corn dry mills and options for the Brazilian sugarcane ethanol business as part of an effort to reduce capital intensity and redeploy capital.
- Approved 2016 projects included new feed and ingredient facilities, a Brazilian soy-protein complex and Argentine export-facility expansion. Pending acquisitions of Harvest Innovations, Medsofts Group and a Morocco corn wet mill were expected to close in 2016, subject to regulatory approvals.
- Principal risks include agricultural commodity supply and price volatility, ethanol and energy prices, foreign-exchange movements, global economic and political conditions, government mandates and trade restrictions, food safety and product liability, environmental regulation, transportation disruption, cyber risk, access to financing, derivative risk and limited control over joint ventures.
- ADM disclosed tax assessments of approximately $361 million in Brazil and $123 million in Argentina, plus potential Argentine assessments estimated at approximately $165 million for later periods. The company had not recorded liabilities for these assessments because management believed its tax positions were more likely than not to prevail.
- The company was named in numerous lawsuits related to genetically modified corn products; the filing states that the matters were in pretrial proceedings and that potential liability could not yet be estimated.
Most important facts for investors to verify
- Whether ethanol margins, global grain export volumes and commodity-processing spreads recover after the 2015 decline.
- The earnings contribution, integration progress and impairment risk associated with Wild Flavors, SCI, Eatem Foods and Eaststarch.
- ADM’s ability to fund planned capital expenditures, dividends, repurchases and acquisitions while maintaining investment-grade credit ratings.
- The outcome and potential cash-tax exposure from the Brazilian and Argentine tax assessments.
- The future of the Brazilian sugar-ethanol operations and the strategic review of U.S. corn dry mills.
- Exposure from accounts-receivable securitization, derivative positions, commodity inventories, joint ventures and contingent legal claims.
- The extent to which 2015 reported earnings benefited from divestiture gains, revaluations and tax items; adjusted EPS of $2.60 provides a more normalized comparison than reported diluted EPS of $2.98.