Archer-Daniels-Midland Company — Q1 2016 Form 10-Q
Business Context and Reporting Period
ADM procures, transports, stores, processes, and merchandises agricultural commodities globally, operating through Agricultural Services, Corn Processing, Oilseeds Processing, Wild Flavors and Specialty Ingredients, and Other. This unaudited report covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $14.384 billion | $17.506 billion | Down 18% |
| Gross profit | $796 million | $1.102 billion | Down 28% |
| Earnings before income taxes | $306 million | $690 million | Down $384 million |
| Net earnings attributable to controlling interests | $230 million | $493 million | Down 53% |
| Diluted EPS | $0.39 | $0.77 | Down $0.38 |
| Adjusted diluted EPS | $0.42 | $0.78 | Down $0.36 |
| Adjusted EBITDA | $632 million | $983 million | Down $351 million |
| Effective tax rate | 24.8% | 28.6% | Lower by 3.8 points |
| Dividends per share | $0.30 | $0.28 | Increased $0.02 |
Gross margin was approximately 5.5% versus 6.3% in the prior-year quarter. Cash provided by operating activities was $23 million versus $45 million. Investing activities used $448 million, including $180 million of capital expenditures and $84 million for acquisitions. Financing activities provided $221 million, including $697 million of net borrowings under credit lines, offset by $296 million of share repurchases and $177 million of dividends.
At March 31, 2016, cash and cash equivalents were $706 million, short-term marketable securities were $525 million, and total liquidity including those securities was approximately $1.2 billion. Total debt included $783 million of short-term debt, $12 million of current maturities, and $5.851 billion of long-term debt. ADM had $6.1 billion of credit lines, of which $5.4 billion was unused, and had utilized $1.1 billion of a $1.6 billion accounts receivable securitization facility.
Material Changes Versus the Prior Comparable Period
- Revenue declined $3.122 billion, primarily from lower commodity prices and volumes.
- Segment operating profit fell to $573 million from $855 million. Agricultural Services declined $119 million, and Oilseeds Processing declined $209 million. Corn Processing increased $18 million, while Wild Flavors and Specialty Ingredients increased $2 million.
- Agricultural Services was pressured by weak U.S. grain export competitiveness, lower volumes and margins, high water conditions affecting barge operations, and poor global trade desk results.
- Oilseeds Processing was affected by weaker global crush margins, increased Argentine soybean meal exports, reduced U.S. meal exports, lower soft-seed volumes, and slower Brazilian origination.
- Corn Processing benefited from stronger sweeteners and starches results, but bioproducts and ethanol remained under pressure from challenging lysine and ethanol pricing environments.
- Corporate expense increased to $267 million from $165 million, including a $14 million LIFO charge versus a $2 million credit, and a $50 million loss from an equity investee’s updated portfolio valuations versus a $31 million gain.
- ADM recorded $13 million of asset impairment, exit, and restructuring costs, including software impairment and restructuring charges.
- Share repurchases totaled approximately $296 million for 8.8 million shares. Approximately 47.9 million shares remained authorized for repurchase at March 31, 2016.
Guidance, Outlook, Commentary, and Risks
- ADM expected 2016 capital expenditures of approximately $1.0 billion, approximately $0.7 billion of dividends, and $1.0 billion to $1.5 billion of share repurchases, subject to strategic capital requirements.
- Management is reviewing capital intensity and portfolio options, including U.S. corn dry mills and the Brazilian sugarcane ethanol business. ADM did not operate the Brazil sugar ethanol plant during the quarter and announced a potential sale, subject to customary conditions.
- Pending 2016 transactions included expansion of the Olenex joint venture and a proposed acquisition of a corn wet mill in Casablanca, Morocco, subject to regulatory approvals. ADM also completed the acquisition of a 50% interest in Cairo-based Medsofts Group in April 2016.
- ADM acquired 90% of Harvest Innovations for $84 million and agreed to acquire the remaining 10% after two years. ADM also increased its Wilmar ownership from 19% to 20%.
- Key operating risks include commodity price volatility, weather, crop conditions, global demand, foreign exchange, energy prices, export competitiveness, freight conditions, government policies, and derivative and counterparty exposures.
- Brazilian tax assessments related to commodity hedging losses totaled approximately $401 million, and Argentine transfer-pricing assessments totaled $112 million, with potential additional Argentine assessments estimated at approximately $152 million. ADM has not recorded liabilities because it believes it is more likely than not to prevail; ultimate outcomes could result in financial impacts up to the assessed amounts.
- ADM was involved in numerous lawsuits related to Syngenta genetically modified corn products. The filing states that potential liability could not yet be estimated and that no current proceeding was believed likely to have a material adverse effect on financial position, results, or liquidity.
- The company adopted ASU 2016-09, increasing beginning retained earnings by $53 million. Management expected no significant impact from the adoption of amended business-combination guidance and did not expect the future inventory and financial-instruments standards to have a significant impact; the impact of the future revenue and lease standards was not yet fully assessed.
Important Facts for Investors to Verify
- Whether weak agricultural merchandising and global crush margins persist and how quickly export and processing margins recover.
- The performance and strategic outcome of the Brazilian sugarcane ethanol business, U.S. corn dry mills, and pending portfolio transactions.
- The resolution, timing, and potential cash impact of the Brazilian and Argentine tax assessments.
- The sustainability of planned share repurchases and dividends given low operating cash flow and continued capital requirements.
- Exposure to commodity, foreign-exchange, freight, derivative, counterparty, and market-value risks, including Level 3 commodity valuations.
- The renewal or replacement of the U.S. accounts receivable securitization program, which was scheduled to terminate on June 24, 2016 unless extended.