Business Context and Reporting Period
Archer-Daniels-Midland Company is an agricultural commodities processor and merchandiser operating in more than 60 countries. Its reportable segments are Oilseeds Processing, Corn Processing, and Agricultural Services; remaining wheat, cocoa, financial, and related activities are classified as Other.
This unaudited Form 10-Q covers the three months ended September 30, 2010, the first quarter of fiscal 2011, compared with the quarter ended September 30, 2009. Results are not necessarily indicative of the full fiscal year.
Key Financial Metrics
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Net sales and other operating income | $16.799 billion | $14.921 billion | +$1.878 billion, 13% |
| Gross profit | $808 million | $973 million | -$165 million |
| Earnings before income taxes | $462 million | $717 million | -$255 million, 36% |
| Net earnings attributable to controlling interests | $345 million | $496 million | -$151 million, 30% |
| Diluted earnings per share | $0.54 | $0.77 | -$0.23 |
| Dividends per share | $0.15 | $0.14 | +$0.01 |
| Cash flow from operating activities | $(871) million | $1.992 billion | -$2.863 billion |
Gross margin declined to approximately 4.8% from 6.5%, while net earnings attributable to controlling interests as a percentage of sales declined to approximately 2.1% from 3.3%. The effective tax rate declined to 26.0% from 30.7%, primarily because of changes in the geographic mix of pretax earnings.
Segment Performance
| Segment operating profit | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Oilseeds Processing | $308 million | $284 million | +$24 million |
| Corn Processing | $341 million | $188 million | +$153 million |
| Agricultural Services | $132 million | $175 million | -$43 million |
| Other | $(16) million | $127 million | -$143 million |
| Total segment operating profit | $765 million | $774 million | -$9 million |
Corn Processing benefited from improved ethanol margins, higher ethanol volumes, strong lysine margins, and a favorable corn ownership position. Oilseeds Processing improved primarily because of higher crushing volumes and stronger margins. Agricultural Services declined because of weather- and government-related crop supply disruptions early in the quarter. Other was adversely affected by cocoa derivative mark-to-market losses and lower equity earnings.
Liquidity, Cash Flow, Debt, and Balance Sheet
- Cash and cash equivalents were $862 million; short-term marketable securities were $508 million. Management reported $1.4 billion of cash, cash equivalents, and short-term marketable securities.
- Current assets were $22.086 billion and current liabilities were $12.235 billion, producing a current ratio of 1.8 to 1.
- Receivables increased to $8.174 billion from $6.122 billion at June 30, 2010, and inventories increased to $9.024 billion from $7.611 billion, reflecting higher commodity prices and working-capital requirements.
- Total debt, including short-term debt, current maturities, and long-term debt, was approximately $8.903 billion at September 30, 2010. Long-term debt was $6.834 billion and short-term debt was $1.721 billion.
- Net worth was $15.4 billion. Long-term debt represented 31% of total capital, compared with 32% at June 30, 2010.
- Credit lines totaled $6.1 billion, of which $4.6 billion was unused. Commercial paper borrowings were approximately $1.2 billion. In October 2010, the company renewed a credit facility and increased overall commercial paper capacity by $400 million.
- Operating cash flow was negative $871 million, primarily because of increases in receivables, inventories, and segregated cash and investments. Investing cash flow was negative $502 million, including $335 million of capital expenditures. Financing cash flow was positive $1.189 billion, principally from net borrowings under lines of credit.
Material Changes, Unusual Items, and Outlook
- The principal earnings headwind was a $123 million LIFO charge in the current quarter versus a $76 million LIFO credit in the prior-year quarter, driven by rising agricultural commodity prices.
- Corporate results declined to a $303 million loss from a $57 million loss, reflecting the LIFO change, higher unallocated interest expense, and $31 million of unrealized losses on interest rate swaps.
- Other operations included $59 million of unrealized mark-to-market losses on certain cocoa forward purchase and sales commitments accounted for as derivatives.
- New plant start-up costs were $32 million versus $10 million in the prior-year quarter, primarily related to new dry-grind ethanol, bioplastic, and glycol plants.
- Agricultural Services included a $67 million insurance recovery related to the prior-year Destrehan, Louisiana facility explosion, while related captive-insurance loss provisions reduced financial operating results.
- Management cited strong global agricultural demand, higher commodity-price volatility, favorable ethanol blending economics, stronger corn sweetener export demand, and improving merchandising opportunities from an early North American harvest. The company does not provide forward-looking information in MD&A.
- Commodity prices, weather, crop yields, government export restrictions and programs, energy costs, foreign exchange rates, global demand, counterparty performance, and freight-market volatility remain material risks.
- The company received a $490 million Brazilian tax assessment, plus interest and currency effects, related to the deductibility of 2004 commodity-hedging losses. It estimates potential additional claims of approximately $170 million for tax years 2005–2010 if similar challenges are made. No liability was recorded for the assessment, and the company intends to defend its position.
- Purchase obligations totaled $18.5 billion, with $17.5 billion expected to be paid within twelve months, principally for agricultural commodity inventories.
- The company adopted amended variable-interest-entity consolidation guidance with no material effect and deconsolidated one VIE. The filing states that no material changes occurred in critical accounting policies, legal proceedings, risk factors, or internal controls.
Important Facts for Investors to Verify
- Whether the LIFO charge, commodity-price volatility, and working-capital investment persist or reverse in subsequent quarters.
- The sustainability of Corn Processing margins, particularly ethanol and bioproduct margins, and the effect of ongoing plant start-up costs.
- The resolution and potential cash exposure from the Brazilian tax assessment and related future-year examinations.
- The company’s ability to fund substantial commodity purchase obligations while operating cash flow remains negative and commercial paper borrowings rise.
- The economic impact of derivative positions, including the $31 million interest-rate-swap loss, cocoa mark-to-market losses, and commodity and foreign-exchange exposures.
- The timing and dilution implications of the $1.75 billion Equity Units’ forward purchase contracts, which are scheduled to settle no later than June 1, 2011.