Business Context and Reporting Period
Archer-Daniels-Midland Company’s unaudited Form 10-Q covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. ADM procures, transports, stores, processes, and merchandises agricultural commodities globally. Its reportable segments are Agricultural Services, Corn Processing, Oilseeds Processing, and Wild Flavors and Specialty Ingredients; prior-period segment information was reclassified for the new segment structure.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $17.506 billion | $20.696 billion | Down 15% |
| Gross profit | $1.102 billion | $675 million | Up $427 million |
| Gross margin | 6.3% | 3.3% | Up approximately 3.0 percentage points |
| Earnings before income taxes | $690 million | $366 million | Up $324 million |
| Net earnings attributable to controlling interests | $493 million | $267 million | Up 85% |
| Diluted EPS | $0.77 | $0.40 | Up $0.37 |
| Net margin | 2.8% | 1.3% | Up approximately 1.5 percentage points |
| Segment operating profit | $855 million | $691 million | Up $164 million |
| Operating cash flow | $45 million | $(358) million | Improved $403 million |
Revenue declined primarily because of lower commodity prices and approximately $1.3 billion of foreign-currency translation effects, with lower average volumes also contributing. Cost of products sold fell to $16.404 billion from $20.021 billion. Selling, general, and administrative expense increased to $498 million from $393 million, primarily due to Wild Flavors and Specialty Commodities integration, enterprise resource planning, information technology, and other project costs.
Income taxes were $197 million, and the effective tax rate increased to 28.6% from 26.8%, primarily because of changes in the expected geographic mix of pretax earnings. Dividends increased to $0.28 per share from $0.24.
At March 31, 2015, cash and cash equivalents were $890 million, short-term marketable securities were $406 million, and total current assets were $23.896 billion against current liabilities of $14.235 billion, producing a current ratio of approximately 1.7 to 1. Total assets were $41.715 billion and shareholders’ equity was $18.757 billion.
Short-term debt was $848 million, current maturities of long-term debt were $18 million, and long-term debt was $5.575 billion. ADM had $6.3 billion of credit lines, of which $5.5 billion was unused; $0.7 billion of commercial paper was outstanding. Accounts receivable securitization programs provided up to $1.5 billion of funding, of which $1.3 billion was utilized at quarter-end. Long-term debt represented approximately 23% of total capital.
Cash used in investing activities was $261 million, including $244 million of capital expenditures. Financing activities provided $7 million, reflecting $566 million of share repurchases, $177 million of dividends, and $742 million of net borrowings under credit lines. Cash decreased by $209 million during the quarter.
Material Changes Versus the Prior Comparable Period
- Oilseeds Processing operating profit increased $172 million to $469 million, led by strong soybean crushing margins, record volumes in Europe and North America, improved global meal demand, and better South American origination results.
- Agricultural Services operating profit increased $52 million to $194 million, primarily from improved international merchandising and stronger milling, grain, and feed margins.
- Corn Processing operating profit decreased $73 million to $113 million, primarily because of lower ethanol production volumes and weaker industry ethanol margins.
- Wild Flavors and Specialty Ingredients contributed $68 million of operating profit versus $58 million in the reclassified prior period, reflecting the fourth-quarter 2014 acquisitions of Wild Flavors and Specialty Commodities.
- Corporate expense improved to $165 million from $325 million. The comparison benefited from a $2 million LIFO valuation credit in 2015 versus a $159 million charge in 2014, partly offset by higher unallocated costs.
- Processed volumes decreased to 15.901 million metric tons from 16.211 million, with oilseeds volumes up 160,000 metric tons and corn volumes down 447,000 metric tons.
- Comprehensive loss attributable to controlling interests was $145 million, compared with comprehensive income of $166 million in the prior year, mainly because of a $670 million after-tax foreign-currency translation loss associated primarily with U.S. dollar appreciation.
- ADM repurchased approximately 11.9 million shares for $566 million during the quarter. Shares outstanding declined from approximately 637 million at December 31, 2014 to 625 million at March 31, 2015.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management’s outlook was generally constructive but remained dependent on volatile agricultural commodity markets. Management cited strong Oilseeds performance, improving international merchandising, and initial Wild Flavors synergies, while noting that lower ethanol margins and the strong U.S. dollar constrained results. Ethanol margins were described as improving toward the end of March.
- 2015 capital expenditures were estimated at approximately $1.1 billion to $1.3 billion.
- Management expected approximately $0.7 billion of 2015 dividends and targeted $1.5 billion to $2.0 billion of share repurchases, subject to strategic capital requirements.
- Purchase obligations totaled $11.7 billion at March 31, 2015, with $11.0 billion expected to be paid within twelve months.
- ADM’s Brazil subsidiary faced tax assessments totaling approximately $415 million related to the deductibility of commodity hedging losses. The company expects to pursue further administrative and court appeals and has not recorded a liability.
- Argentine subsidiaries faced transfer-pricing tax assessments totaling $93 million and estimated potential additional assessments of approximately $329 million for later years. ADM has not recorded a liability and believes it is more likely than not to prevail.
- A pending high-fructose corn syrup lawsuit includes an expert damages allegation of up to $1.6 billion against all defendants, including ADM. The company denies the allegations. ADM stated that no current legal or environmental proceeding was expected to have a material adverse effect on its financial position, results of operations, or liquidity.
- Global chocolate and cocoa businesses, with announced sale prices of $440 million and $1.3 billion, respectively, remained classified as held for sale. The transactions were expected to close in 2015 and were not classified as discontinued operations.
- ADM signed an agreement to acquire certain Eaststarch assets for €240 million, subject to regulatory approval, and subsequently announced additional portfolio actions, including feed-plant investments, joint-venture acquisitions, and the sale of its lactic acid business.
- Commodity derivatives generated a net $166 million gain in earnings in Q1 2015 versus an $883 million loss in Q1 2014. Results remain exposed to commodity prices, basis risk, hedge timing, counterparty performance, freight markets, foreign exchange, weather, crop yields, government policies, and global demand.
- The company expects to adopt several accounting standards beginning in 2016 and 2017, including revenue recognition guidance under ASC 606. The filing states that the impact of most 2016 standards is not expected to be significant; the ASC 606 impact had not yet been assessed.
Investor Verification Points
- Verify whether Oilseeds Processing’s unusually strong margins and crushing results are sustainable as commodity spreads, meal demand, and global crop conditions change.
- Track ethanol margins, production volumes, and hedge-timing effects in Corn Processing.
- Assess the cash-flow impact of planned capital expenditures, dividends, share repurchases, acquisitions, and portfolio divestitures.
- Review liquidity availability, commercial paper usage, receivables securitization renewal terms, and debt maturities.
- Monitor the Brazil and Argentina tax assessments, the HFCS litigation, and any related changes in reserves or cash exposure.
- Evaluate the effect of currency translation, particularly the strong U.S. dollar, on reported revenue, equity, and international operating results.
- Confirm closing dates, proceeds, regulatory approvals, and final gains or losses for the chocolate, cocoa, Eaststarch, and other announced portfolio transactions.