Archer-Daniels-Midland Company: Form 10-Q Summary
Reporting period: The provided filing is for the quarter ended March 31, 2010, and the nine months then ended. This conflicts with the request metadata identifying “2009 Q3.” Financial statements are unaudited and presented in millions, except per-share amounts.
Business Context
ADM procures, transports, stores, processes, and merchandises agricultural commodities. Reportable segments are Oilseeds Processing, Corn Processing, Agricultural Services, and Other. Results are sensitive to commodity prices, crop conditions, weather, energy costs, foreign exchange, global demand, and government policies.
Key Financial Metrics
| Metric | Three Months Ended March 31 | Nine Months Ended March 31 |
|---|---|---|
| Net sales and other operating income | $15,145 million vs. $14,842 million | $45,979 million vs. $52,675 million |
| Gross profit | $891 million vs. $649 million | $2,917 million vs. $3,728 million |
| Earnings before income taxes | $534 million vs. $143 million | $2,035 million vs. $2,446 million |
| Net earnings attributable to controlling interests | $421 million vs. $3 million | $1,484 million vs. $1,626 million |
| Basic earnings per share | $0.65 vs. $0.00 | $2.31 vs. $2.53 |
| Diluted earnings per share | $0.65 vs. $0.00 | $2.30 vs. $2.52 |
| Dividends per share | $0.15 vs. $0.14 | $0.43 vs. $0.40 |
Approximate margins were 5.9% gross, 3.5% pretax, and 2.8% net attributable for the quarter; and 6.3% gross, 4.4% pretax, and 3.2% net attributable for the nine-month period.
- Cash flow: Nine-month operating cash flow was $2,775 million, down from $5,851 million. Investing cash outflow was $1,213 million, including $1,230 million of capital expenditures. Financing cash outflow was $958 million.
- Cash and liquidity: Cash and cash equivalents were $1,659 million at March 31, 2010, with short-term marketable securities of $407 million. Cash, cash equivalents, and short-term marketable securities totaled approximately $2.1 billion. The current ratio was 2.1 to 1.
- Debt: Short-term debt was $266 million, current maturities of long-term debt were $245 million, and long-term debt was $6,910 million. The long-term-debt-to-total-capital ratio declined to 32% from 36% at June 30, 2009.
- Credit availability: ADM had $6.0 billion of credit lines, of which $5.9 billion was unused. No borrowings were outstanding under the $4.2 billion commercial-paper facility.
- Balance sheet: Total assets were $32,326 million and shareholders’ equity was $14,769 million at March 31, 2010.
Material Changes Versus Prior Comparable Period
- Quarterly net sales increased 2%, while nine-month sales decreased 13%, primarily reflecting lower commodity prices and lower Agricultural Services volumes.
- Quarterly net earnings attributable to controlling interests increased by $418 million, driven by a $442 million increase in segment operating profit, favorable LIFO valuation effects, and lower income tax expense.
- Nine-month net earnings decreased 9%, primarily because of a $506 million negative impact from LIFO valuation changes and the $47 million after-tax effect of debt extinguishment charges.
- Quarterly segment operating profit increased to $696 million from $254 million. Oilseeds Processing increased $181 million, Corn Processing increased $55 million, Agricultural Services increased $44 million, and Other increased $162 million.
- Nine-month segment operating profit increased $195 million to $2,440 million, but corporate results declined by $606 million, largely because prior-year LIFO benefits did not recur.
- Quarterly Corn Processing performance benefited from improved ethanol margins and demand. Agricultural Services benefited from improved soybean merchandising and handling margins but experienced lower transportation earnings.
- ADM repurchased $500 million principal amount of debentures in March 2010, recording a $75 million pretax charge for early extinguishment of debt.
- The effective tax rate was 22.1% for the quarter and 27.6% for the nine months, compared with 97.9% and 33.4%, respectively. The prior-year quarter included a $97 million deferred tax charge related to the Wilmar holding-company restructuring.
Outlook, Commentary, Risks, and Unusual Items
- Management stated that it does not provide forward-looking information in its MD&A because operating results can vary significantly with commodity prices, weather, crop plantings, government policies, global demand, and production conditions.
- Management reported improved ethanol blending economics, stronger protein-meal demand, and increased North American oilseed crushing and export volumes. Vegetable-oil demand in North America remained weak.
- The Company expects its second new U.S. dry-grind ethanol plant to increase corn processing capacity when completed in summer 2010.
- Finalization of the Wilmar liquidation, anticipated during calendar 2010 and subject to regulatory approvals, could result in approximately $590 million of additional income tax expense based on May 6, 2010 assumptions and market values.
- ADM do Brasil received a $457 million Brazilian tax assessment related to the deductibility of 2004 commodity-hedging losses. Potential assessments for 2005–2009 could total approximately $150 million. ADM has not recorded a tax liability for these matters and intends to appeal and defend its position.
- Commodity derivatives had $1,511 million of fair-value assets and $1,821 million of fair-value liabilities at March 31, 2010. Derivative results are exposed to commodity prices, basis risk, freight markets, foreign exchange, and counterparty defaults.
- Purchase obligations totaled $9.7 billion, of which $8.8 billion were expected to be paid within twelve months, principally for agricultural commodity inventories.
- The filing states that disclosure controls and procedures were effective and that there were no material changes to internal controls over financial reporting during the quarter.
Investor Verification Priorities
- Verify the intended reporting period, because the source filing is for March 31, 2010 rather than 2009 Q3.
- Assess the sustainability of quarterly earnings improvement given the reliance on ethanol margins, commodity spreads, LIFO valuation changes, equity earnings, and favorable tax effects.
- Monitor the potential approximately $590 million Wilmar-related tax expense and the $457 million Brazilian tax assessment plus potential additional assessments.
- Review debt maturities, the convertible senior notes, the equity units due in 2011, and the effect of the $500 million debenture repurchase on future interest expense and liquidity.
- Evaluate operating cash flow, working-capital requirements, commodity inventory exposure, and the $9.7 billion of purchase obligations.
- Review derivative positions and hedge effectiveness, including the $19 million after-tax commodity-hedge loss in accumulated other comprehensive income expected to be recognized within 15 months.