Archer-Daniels-Midland Co quarterly report, Q3 FY2013

Archer-Daniels-Midland Company: 2013 Q3 Form 10-Q Summary

Business context and reporting period

ADM processes, transports, stores, and merchandises agricultural commodities globally through Oilseeds Processing, Corn Processing, Agricultural Services, and Other operations. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. The company operates in more than 75 countries and serves markets in more than 140 countries.

Key financial metrics

Metric	Q3 2013	Q3 2012	9M 2013	9M 2012
Net sales and other operating income	$21.393 billion	$21.808 billion	$65.661 billion	$65.638 billion
Gross profit	$1.156 billion	$806 million	$2.719 billion	$2.627 billion
Earnings before income taxes	$709 million	$295 million	$1.401 billion	$1.279 billion
Net earnings attributable to controlling interests	$476 million	$182 million	$968 million	$865 million
Diluted earnings per share	$0.72	$0.28	$1.46	$1.31
Operating cash flow	Not separately provided	Not separately provided	$4.869 billion	$337 million

Q3 gross margin was approximately 5.4%, versus 3.7% in the prior-year quarter. Nine-month gross margin was approximately 4.1%, versus 4.0%.
Q3 net margin attributable to controlling interests was approximately 2.2%, versus 0.8%. Nine-month net margin was approximately 1.5%, versus 1.3%.
Cash and cash equivalents were $3.252 billion at September 30, 2013, compared with $1.714 billion at December 31, 2012. Cash, cash equivalents, and short-term marketable securities totaled approximately $3.5 billion.
Current assets were $26.090 billion and current liabilities were $13.753 billion, producing a current ratio of approximately 1.9 to 1.
Total debt, including current maturities, was approximately $6.884 billion; long-term debt was $5.364 billion and current maturities were $1.156 billion. Long-term debt represented 22% of total capital, versus 25% at December 31, 2012.
ADM had $9.0 billion of credit lines, of which $8.7 billion was unused. The $6.0 billion commercial paper facility had no commercial paper outstanding at quarter-end.
Capital expenditures were $659 million for the first nine months, compared with $877 million in the prior-year period. Financing activities used $3.157 billion, primarily reflecting reduced borrowings and debt repayments, compared with $784 million of financing inflows in 2012.
Dividends per share increased to $0.190 in Q3 from $0.175; nine-month dividends were $0.570 per share versus $0.525.

Material changes versus the prior comparable period

Q3 net sales declined 2%, while nine-month sales were essentially flat. Lower volumes and commodity prices affected Oilseeds Processing and Agricultural Services; Corn Processing sales increased 9% in Q3 and 15% for the nine months, primarily from higher ethanol volumes and prices.
Q3 segment operating profit increased to $606 million from $498 million. However, excluding the $146 million Gruma impairment recorded in the 2012 quarter, current-quarter segment operating profit was down approximately 6%.
Q3 earnings benefited from a $298 million LIFO inventory valuation credit versus a $53 million charge in the prior-year quarter. For the nine months, the LIFO benefit was $225 million versus a $110 million charge in 2012.
Corn Processing operating profit rose to $159 million from $68 million in Q3 and to $535 million from $275 million for the nine months, driven mainly by improved ethanol and bioproduct margins.
Oilseeds Processing operating profit increased $25 million in Q3 but declined $214 million for the nine months, with weaker crushing and cocoa results partly offset by improved biodiesel, refining, and Asia results.
Agricultural Services operating profit increased $24 million in Q3 but declined $128 million for the nine months. Lower U.S. origination and export volumes and weaker international merchandising margins were significant factors.
Corporate results improved to income of $103 million in Q3 from a loss of $203 million, primarily due to the LIFO benefit. Nine-month corporate losses narrowed to $482 million from $681 million.
Asset impairment, exit, and restructuring costs were $23 million in Q3 and the nine-month period, compared with $146 million and $231 million, respectively, in 2012. Current-year charges included $11 million for an other-than-temporary investment impairment and $12 million for property, plant, and equipment impairments.
The effective tax rate was 32.2% for Q3 and 30.3% for the nine months, compared with 37.6% and 31.0% in the respective 2012 periods. ADM raised its estimated annual effective tax rate to 30%, primarily because of changes in the geographic mix of earnings.

Guidance, outlook, management commentary, risks, and unusual items

ADM does not provide forward-looking information in its MD&A. Management cited volatile agricultural commodity prices, weather, crop conditions, government policies, global demand, foreign exchange, energy costs, and competitive crop production as key operating risks.
Management reported steady global demand for protein meal and vegetable oil, improving ethanol results amid volatile conditions, tight U.S. sweetener capacity, and improved biodiesel margins. Cocoa margins improved later in the period after earlier pressure from excess capacity, lower powder prices, and customer inventory reductions.
The pending GrainCorp acquisition involved an implied transaction value of approximately A$3.4 billion, including GrainCorp net debt. ADM held 19.8% at September 30 and expected to reach approximately 28% after accepted shares and completion conditions. Regulatory approvals from China and Australia’s Foreign Investment Review Board remained outstanding at the report date.
ADM had hedged substantially all of the anticipated U.S.-dollar cost of the GrainCorp acquisition. These hedges produced a $26 million gain in Q3 and a $25 million loss for the nine months. The company’s three major credit-rating agencies had placed its ratings on negative watch, negative outlook, or under review pending confirmation of acquisition funding plans.
ADM was conducting exploratory discussions regarding a possible sale of its cocoa business; no definitive agreement had been reached, and held-for-sale accounting was not applied.
The company recorded a $54 million provision for potential disgorgement, penalties, and fines related to an anti-corruption review involving the DOJ and SEC. ADM stated that it had completed its internal review and was discussing resolution with the agencies.
Brazilian tax authorities had issued assessments totaling approximately $546 million, including interest and penalties, concerning the deductibility of commodity hedging losses. Argentine authorities had issued assessments totaling approximately $48 million concerning grain-export transfer pricing. ADM had not recorded liabilities for these assessments and stated that the ultimate outcomes could require payment of up to the full assessed amounts.
The accounts receivable securitization program provided up to $1.1 billion of funding and was fully utilized at September 30. The program was scheduled to terminate on June 27, 2014 unless extended; $1.6 billion of receivables had been transferred and $487 million of deferred consideration was recorded.
The company’s $1.15 billion of convertible senior notes were due in February 2014. No conversion conditions had been satisfied at September 30, 2013.

Most important facts for investors to verify

Whether the GrainCorp acquisition received the remaining Australian and Chinese approvals, its final funding mix, and any effect on ADM’s credit ratings and leverage.
The ultimate resolution and cash cost of the DOJ/SEC anti-corruption matter and the Brazilian and Argentine tax assessments.
Whether the Q3 earnings improvement is sustainable after excluding the $298 million LIFO benefit, GrainCorp hedge gains, and other unusual items.
Performance of Corn Processing, Agricultural Services merchandising, and Oilseeds Processing crushing and cocoa businesses as commodity supplies and margins normalize.
Renewal or replacement of the $1.1 billion receivables securitization program before its scheduled June 2014 termination.
Repayment or refinancing of the $1.15 billion convertible notes due in February 2014.
Commodity, foreign exchange, interest-rate, weather, crop, and counterparty risks associated with ADM’s inventory and derivative positions.