Archer-Daniels-Midland Company: Fiscal 2016 Form 10-K Summary
Business context and reporting period
ADM reported for the fiscal year ended December 31, 2016, including fourth-quarter results. The company is a global processor, merchandiser, and transporter of agricultural commodities, with reportable segments in Agricultural Services, Corn Processing, Oilseeds Processing, and Wild Flavors and Specialty Ingredients. Operations reach 163 countries and include commodity origination, processing, storage, logistics, food ingredients, animal feed, biofuels, and financial services.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $62.3 billion | $67.7 billion | Down 8% |
| Gross profit | $3.684 billion | $4.020 billion | Down 8% |
| Gross margin | 5.9% | 5.9% | Approximately flat |
| Earnings before income taxes | $1.822 billion | $2.284 billion | Down 20% |
| Net earnings attributable to controlling interests | $1.279 billion | $1.849 billion | Down 31% |
| Diluted EPS | $2.16 | $2.98 | Down 28% |
| Operating cash flow | $1.475 billion | $2.470 billion | Down 40% |
| Adjusted EBITDA | $3.004 billion | $3.389 billion | Down 11% |
- Net margin was approximately 2.1%, compared with 2.7% in 2015.
- Segment operating profit was $2.704 billion, down from $3.272 billion. Corn Processing improved to $811 million from $648 million, while Oilseeds Processing declined to $871 million from $1.574 billion and Agricultural Services declined to $602 million from $714 million. WFSI was broadly stable at $286 million.
- Revenue declines primarily reflected lower agricultural commodity prices, foreign-currency translation, lower volumes, and the prior sale of the cocoa and chocolate businesses.
- Inventories increased to $8.831 billion from $8.243 billion, including $5.8 billion of readily marketable commodity inventories.
- Working capital was $7.872 billion, and the current ratio was 1.6.
- Long-term debt, excluding current maturities, was $6.504 billion, compared with $5.779 billion. ADM issued $1.0 billion of 2.5% notes due 2026.
- Long-term debt represented 27% of total capital, versus 24% in 2015; net debt represented 26% of net capital, versus 20%.
- Cash, cash equivalents, and short-term marketable securities totaled approximately $0.9 billion. Credit lines totaled $6.9 billion, of which $5.8 billion was unused. No commercial paper was outstanding at year-end.
- ADM paid $701 million in dividends and repurchased $1.0 billion of stock during 2016. The quarterly dividend increased to $0.30 per share from $0.28 in 2015.
Material changes versus the prior comparable period
- Agricultural Services weakened in the first half because of poor U.S. grain export competitiveness and limited global merchandising opportunities, although results improved in the third quarter.
- Corn Processing benefited from stronger sweetener and starch demand, improved European raw-material costs, and better ethanol margins late in the year. Industry ethanol production remained high, limiting margins overall.
- Oilseeds Processing declined substantially because of weaker global soybean-crush margins, increased Argentine soybean-meal supply, lower South American origination results, and the absence of prior-year cocoa-business gains.
- WFSI benefited from demand for flavors, specialty proteins, health and nutrition products, and polyols, but faced weakness in non-flavor ingredients, a strong U.S. dollar, and specialty-commodities operating issues.
- ADM acquired Harvest Innovations, Medsofts Group, the remaining interest in Amazon Flavors, a Morocco corn wet mill, and Caterina Foods. It sold its Brazilian sugarcane ethanol operations and its 19.8% interest in GrainCorp.
- Cash flow declined primarily because working capital used $0.6 billion, compared with providing $0.2 billion in 2015, and inventories increased.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2017 capital expenditures of approximately $1.3 billion, dividends of approximately $0.7 billion, and share repurchases of $1.0 billion to $1.5 billion, subject to strategic capital requirements.
- ADM expected no significant revenue contribution from new products in 2017. The company continued to emphasize portfolio optimization, capital discipline, value-added ingredients, global expansion, and operational efficiency.
- 2016 earnings included approximately $100 million after-tax, or $0.17 per share, of gains primarily related to the Brazilian sugar ethanol sale, Gruma contingent consideration, and Amazon Flavors revaluation. It also included approximately $77 million after-tax of impairment, legal, settlement, and restructuring charges, a $24 million after-tax retiree medical curtailment gain, and $24 million of discrete tax adjustments.
- The effective tax rate increased to 29.3% from 19.2%, primarily because 2015 included significant gains taxed at relatively low rates and a prior-year valuation-allowance benefit.
- Material risks include agricultural commodity prices and availability, weather and crop disease, energy costs, foreign exchange, transportation disruption, global economic and political conditions, trade restrictions, renewable-fuel regulation, food safety, environmental compliance, cybersecurity, counterparty and joint-venture exposure, and access to credit markets.
- ADM disclosed tax assessments of approximately $463 million in Brazil, $126 million in Argentina, and $95 million in the Netherlands. The company has not recorded liabilities for the Brazil and Argentina assessments because it believes its positions are more likely than not to prevail; the ultimate outcomes could result in payments up to the assessment amounts.
- Outstanding letters of credit and surety bonds were $1.1 billion. Contractual obligations totaled $23.2 billion, including $6.8 billion of long-term debt, $4.7 billion of estimated interest, and $10.6 billion of purchase obligations.
- Subsequent events included an increase in ADM's Wilmar ownership to 23.9%, the announced sale of crop risk services subject to regulatory approval, and the February 2017 acquisition of Crosswind Industries for $81 million, subject to working-capital adjustments.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded disclosure controls and internal controls were effective.
Most important facts for investors to verify
- Whether soybean-crush margins, South American origination, and Agricultural Services merchandising results recover after the 2016 decline.
- The sustainability of improved Corn Processing and ethanol profitability amid high industry production and changing fuel mandates.
- Progress and returns from the WFSI acquisitions and other portfolio investments, including Wilmar and Olenex.
- Working-capital requirements and liquidity sensitivity to commodity-price volatility, inventory levels, and margin requirements.
- Debt maturities, refinancing needs, credit ratings, and the continued availability of commercial-paper and receivables-securitization facilities.
- Resolution of the Brazil, Argentina, and Netherlands tax assessments and other legal contingencies.
- Execution of planned 2017 capital expenditures, dividends, and share repurchases relative to operating cash flow.