Business Context and Reporting Period
Archer-Daniels-Midland Company (ADM) filed this unaudited Form 10-Q for the three and nine months ended September 30, 2017. ADM procures, transports, stores, processes, and merchandises agricultural commodities through Agricultural Services, Corn Processing, Oilseeds Processing, Wild Flavors and Specialty Ingredients, and Other operations spanning 163 countries.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $14.827 billion | $15.832 billion | $44.758 billion | $45.845 billion |
| Gross profit | $812 million | $1.090 billion | $2.567 billion | $2.608 billion |
| Gross margin | 5.5% | 6.9% | 5.7% | 5.7% |
| Net earnings attributable to ADM | $192 million | $341 million | $807 million | $855 million |
| Diluted EPS | $0.34 | $0.58 | $1.41 | $1.44 |
| Net margin | 1.3% | 2.2% | 1.8% | 1.9% |
| Adjusted EPS | $0.45 | $0.59 | $1.62 | $1.41 |
| Adjusted EBITDA | $642 million | $780 million | $2.128 billion | $2.089 billion |
Cash Flow, Balance Sheet, and Liquidity
- Operating cash flow was $2.155 billion for the first nine months, compared with $1.296 billion in the prior-year period.
- Investing cash outflow was $933 million, including $696 million of capital expenditures, $187 million for acquisitions, and $281 million of investments in or advances to affiliates.
- Financing cash outflow was $989 million, including $676 million of share repurchases and $544 million of dividends.
- Cash, cash equivalents, and short-term marketable securities totaled approximately $779 million at September 30, 2017. Total cash, cash equivalents, restricted cash, and restricted cash equivalents were $1.794 billion.
- Current assets were $19.140 billion and current liabilities were $11.873 billion, producing a reported current ratio of 1.6 to 1. Readily marketable commodity inventories included in working capital were approximately $5.3 billion.
- Long-term debt was $6.595 billion, current maturities of long-term debt were $13 million, and short-term debt was $728 million. Long-term debt represented 27% of total capital.
- Credit lines, including receivables securitization programs, totaled $6.9 billion, of which $4.8 billion was unused. Commercial paper outstanding was $0.6 billion, and $1.4 billion of the $1.7 billion receivables securitization capacity was utilized.
Material Changes Versus Prior Comparable Period
- Third-quarter revenue declined 6.3%, gross profit declined 25.5%, and net earnings attributable to ADM declined 43.7%. The primary drivers were lower volumes, weak U.S. grain export competitiveness, compressed global crush margins, biodiesel uncertainty, risk-management losses, and higher specified charges.
- Adjusted segment operating profit fell to $541 million from $650 million. Agricultural Services operating profit decreased to $87 million from $195 million, while Corn Processing increased to $253 million from $214 million. Oilseeds Processing declined to $119 million from $145 million.
- Corporate expense increased to $260 million from $165 million, partly because the prior-year quarter benefited from an $85 million LIFO valuation credit. Current-quarter corporate charges included restructuring and the early extinguishment of debt.
- For the first nine months, revenue decreased 2.4% and GAAP net earnings declined 5.6%, but adjusted segment operating profit increased to $1.877 billion from $1.796 billion and adjusted EBITDA increased to $2.128 billion from $2.089 billion.
- ADM acquired Crosswind Industries, Biopolis SL, Chamtor SA, and a controlling interest in Industries Centers during the first nine months. ADM also increased its Wilmar ownership from 23.2% to 24.9% and sold its crop risk services business.
- ADM issued $500 million of 3.75% notes due 2047 and redeemed $559 million of 5.45% notes due March 2018, recording an $11 million early-extinguishment charge.
- Share repurchases totaled $676 million during the first nine months, reducing outstanding shares from 573 million at year-end 2016 to 559 million at September 30, 2017.
Guidance, Outlook, Risks, and Unusual Items
- Management expected approximately $1.0 billion of 2017 capital expenditures, approximately $0.7 billion of dividends, and up to $1.0 billion of share repurchases, subject to strategic capital requirements and leverage considerations.
- Management identified continued risks from surplus global grain and oilseed supplies, weather, commodity prices, crop conditions, global demand, foreign exchange, freight markets, ethanol overcapacity, Argentine meal competition, Brazilian farmer selling patterns, and uncertainty over the U.S. biodiesel tax credit.
- Third-quarter asset impairment, exit, and restructuring costs totaled $107 million, including $63 million primarily related to reconfiguring the Peoria, Illinois ethanol complex and $44 million of workforce restructuring. Nine-month charges totaled $140 million.
- The U.S. salaried pension plan and SERP will transition to a cash-balance formula effective January 1, 2022. The related remeasurement reduced 2017 pension expense by $18 million, accumulated other comprehensive loss by $182 million, and the underfunded status by $164 million; the quarterly earnings impact of the estimation-method change was immaterial.
- ADM faced approximately $490 million of Brazilian tax assessments and $128 million of Argentine transfer-pricing assessments, plus potential Argentine assessments estimated at approximately $213 million. The company has not accrued liabilities for these matters because it believes it is more likely than not to prevail. A $106 million Netherlands tax assessment has been appealed, with an amount accrued for the expected litigation outcome.
- ADM continues to face litigation related to Syngenta genetically modified corn products and related screening allegations. The company believes the matter will not materially affect financial condition, results, or cash flows, but cannot predict the final outcome.
- Revenue recognition guidance under ASC 606 was scheduled for adoption on January 1, 2018 using a modified retrospective approach. ADM had identified potential changes involving control transfer, voyage charter revenue, bill-and-hold arrangements, and variable consideration, but had not completed quantification.
- The company stated that its disclosure controls were effective and that there were no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether weak grain export competitiveness, global crush margins, biodiesel policy uncertainty, and ethanol margins improve or continue to pressure segment profitability.
- The ultimate cash-tax exposure and timing of the Brazilian, Argentine, and Netherlands tax proceedings.
- The impact of ASC 606 adoption and subsequent accounting changes on reported revenue and comparability.
- Cash generation after capital expenditures, acquisitions, Wilmar investments, dividends, and share repurchases.
- Utilization, renewal terms, and refinancing risk for the $1.7 billion receivables programs, including maturities in March and June 2018.
- The financial effect of the Peoria ethanol reconfiguration, workforce restructuring, and other impairment or restructuring actions.
- Commodity, foreign-exchange, interest-rate, counterparty, and derivative exposures, including Level 3 valuations and hedge ineffectiveness.