Archer-Daniels-Midland Company — Form 10-Q Summary
Business context and reporting period
ADM procures, transports, stores, processes, and merchandises agricultural commodities and products through Oilseeds Processing, Corn Processing, Agricultural Services, and Other operations. The filing covers the three months ended September 30, 2009, the first quarter of fiscal 2010; comparative amounts are for the three months ended September 30, 2008. The financial statements are unaudited.
Key financial metrics
| Metric | Q1 FY2010 | Q1 FY2009 | Change |
|---|---|---|---|
| Net sales and other operating income | $14.921 billion | $21.160 billion | Down 29% |
| Gross profit | $973 million | $1.867 billion | Down 48% |
| Earnings before income taxes | $717 million | $1.486 billion | Down $769 million |
| Net earnings attributable to controlling interests | $496 million | $1.045 billion | Down $549 million |
| Basic and diluted EPS | $0.77 | $1.62 | Down $0.85 |
| Operating cash flow | $1.992 billion | $4.680 billion | Down $2.688 billion |
Gross margin was approximately 6.5%, compared with 8.8% in the prior-year quarter. Net earnings margin was approximately 3.3%, compared with 4.9%. The effective tax rate increased to 30.7% from 29.6%, primarily because of changes in the geographic mix of pretax earnings.
At September 30, 2009, cash and cash equivalents were $2.390 billion, short-term marketable securities were $408 million, and total cash, cash equivalents, and short-term marketable securities were approximately $2.8 billion. The current ratio was 2.2 to 1. Total assets were $31.861 billion and shareholders’ equity was $14.243 billion.
Short-term debt was $254 million, current maturities of long-term debt were $50 million, and long-term debt was $7.573 billion. Long-term debt represented 35% of total capital, compared with 36% at June 30, 2009. The fair value of long-term debt exceeded its carrying value by $767 million.
ADM had $6.5 billion of credit lines, of which $6.4 billion was unused. The $4.2 billion commercial paper facility had no borrowings outstanding at quarter-end. Capital expenditures were $497 million, cash dividends were $90 million, and financing activities used $228 million.
Material changes versus the prior comparable period
- Sales declined $6.239 billion, driven primarily by lower average selling prices, which accounted for approximately 82% of the decline, and foreign exchange translation, which accounted for approximately 10%. Lower volumes of merchandised grain, sweeteners, starches, and cocoa products also contributed.
- Cost of products sold decreased 28% to $13.948 billion, reflecting lower agricultural commodity, energy, and fuel costs. Selling, general and administrative expenses decreased 13% to $354 million.
- Oilseeds Processing operating profit fell 44% to $284 million, primarily because of limited soybean supply, weaker crushing margins, lower fertilizer demand, lower North American sales volumes, and reduced biodiesel margins.
- Corn Processing operating profit increased 59% to $188 million. Sweeteners and Starches improved substantially because of lower corn and manufacturing costs, while Bioproducts declined because of lower ethanol and lysine prices and startup costs for new facilities.
- Agricultural Services operating profit fell 59% to $175 million because of weaker global demand, lower commodity-market volatility, lower barge freight rates, and reduced barge utilization.
- Other operating profit increased 6% to $127 million. The prior-year period included $12 million from the malt business, which was sold on July 31, 2008.
- Corporate results declined by $367 million. The comparison was affected by LIFO inventory reserve changes, lower interest income, and other corporate items.
- Operating cash flow decreased primarily because of lower working-capital requirements associated with lower agricultural commodity prices. Financing cash usage declined substantially because ADM made fewer repayments of commercial paper borrowings.
Outlook, risks, contingencies, and unusual items
ADM does not provide forward-looking information in its MD&A because results are highly sensitive to energy prices, weather, crop plantings, government programs and policies, global demand, crop production, commodity prices, currencies, and market volatility. Management noted that the global economic downturn reduced short-term demand and that lower gasoline prices reduced ethanol selling prices.
The company had $12 billion of purchase obligations at September 30, 2009, including $11.2 billion expected to be paid within 12 months, principally for agricultural commodity inventories.
A significant tax contingency relates to the planned liquidation of an investment involving Wilmar International. Based on November 5, 2009 market values and other assumptions, completion of the liquidation could result in approximately $560 million of additional income tax expense in the period or periods in which it occurs. The timing and ultimate amount remain uncertain and depend on regulatory approvals, market values, foreign exchange rates, and tax rates.
ADM had substantial derivative exposure: derivative assets were $1.821 billion and derivative liabilities were $2.003 billion at quarter-end for instruments not designated as hedges. Commodity, foreign exchange, interest-rate, counterparty, and freight-market risks may materially affect results. The company had hedged portions of anticipated corn purchases over the following 17 months and natural-gas purchases over the following nine months.
ADM adopted amended accounting guidance for convertible debt, noncontrolling interests, business combinations, earnings per share, and fair value measurements. The convertible-debt guidance was applied retrospectively and increased prior-year interest expense by $9 million, reducing prior-year EPS by $0.01. No material impact was reported from the other adopted guidance. No material subsequent events requiring recognition or disclosure were identified, and management reported effective disclosure controls.
Most important facts to verify
- Whether the potential approximately $560 million tax expense associated with the Wilmar-related liquidation ultimately occurs, and its timing.
- The sustainability of lower commodity prices, reduced market volatility, and weaker ethanol economics.
- Whether segment margins recover, particularly in Oilseeds Processing and Agricultural Services.
- The adequacy of liquidity relative to $11.2 billion of purchase obligations due within 12 months and the company’s commodity-related working-capital needs.
- The effect of commodity, foreign-exchange, interest-rate, counterparty, and freight-market movements on derivative valuations and earnings.
- Completion and ramp-up costs for new dry-grind ethanol plants and other bioproduct facilities.
- The effects of retrospective accounting adjustments and the carrying value versus fair value of outstanding debt.