Archer-Daniels-Midland Co quarterly report, Q2 FY2009

Archer-Daniels-Midland Company — Form 10-Q Summary

Business context and reporting period

ADM procures, transports, stores, processes, and merchandises agricultural commodities through Oilseeds Processing, Corn Processing, Agricultural Services, and Other businesses. This unaudited filing covers the quarter and six months ended December 31, 2009, the second quarter of fiscal 2010, with comparisons to the corresponding 2008 periods.

Financial performance and condition

Metric	Three months ended Dec. 31, 2009	Three months ended Dec. 31, 2008	Six months ended Dec. 31, 2009	Six months ended Dec. 31, 2008
Net sales and other operating income	$15.913 billion	$16.673 billion	$30.834 billion	$37.833 billion
Gross profit	$1.053 billion	$1.212 billion	$2.026 billion	$3.079 billion
Earnings before income taxes	$784 million	$817 million	$1.501 billion	$2.303 billion
Net earnings attributable to controlling interests	$567 million	$578 million	$1.063 billion	$1.623 billion
Diluted EPS	$0.88	$0.90	$1.65	$2.52
Operating cash flow	Not provided for the quarter	Not provided for the quarter	$1.380 billion	$5.865 billion

Quarterly gross margin was approximately 6.6%, compared with 7.3% in the prior-year quarter. Six-month gross margin was approximately 6.6%, compared with 8.1%. Quarterly pretax margin was approximately 4.9% in both periods; six-month pretax margin declined to approximately 4.9% from 6.1%. The effective tax rate was 28.4% for the quarter and 29.5% for the six months.

Quarterly segment operating profit increased to $970 million from $815 million, led by Corn Processing, Other, and Oilseeds Processing. Agricultural Services declined sharply.
Corn Processing quarterly operating profit rose to $290 million from $29 million, primarily from improved ethanol margins and volumes, lower corn and manufacturing costs, and improved gasoline-blending economics.
Agricultural Services quarterly operating profit fell to $150 million from $462 million as prior-year commodity volatility, tight credit, and related trading opportunities did not recur; transportation also suffered from lower barge rates and utilization.
Six-month segment operating profit decreased to $1.744 billion from $1.991 billion. Corporate results declined to a $243 million loss from $312 million of income, principally because of a $554 million unfavorable change in LIFO inventory valuations.
At December 31, 2009, cash and cash equivalents were $1.317 billion, short-term marketable securities were $317 million, and total cash, cash equivalents, and short-term marketable securities were approximately $1.6 billion. The current ratio was 2.1 to 1.
Total assets were $33.529 billion and shareholders’ equity was $14.795 billion. Long-term debt was $7.398 billion, current maturities of long-term debt were $246 million, and short-term debt was $221 million.
ADM had $6.3 billion of credit lines, of which $6.2 billion was unused. A $4.2 billion commercial paper facility had no borrowings at quarter-end. Long-term debt represented 33% of total capital, compared with 36% at June 30, 2009.
Capital expenditures were $939 million for the six months. Cash used in investing activities was $780 million and cash used in financing activities was $338 million. The company paid $180 million of dividends during the six months.

Material changes versus the prior comparable period

Quarterly sales declined 5% and six-month sales declined 18%, primarily because lower commodity prices reduced average selling prices. Six-month net earnings attributable to controlling interests declined 35%.
Quarterly corporate results decreased $188 million, including a $177 million unfavorable LIFO valuation change, higher corporate costs, and higher net corporate interest expense.
Oilseeds Processing operating profit increased 10% for the quarter but decreased 23% for the six months, reflecting weaker crushing margins and lower European biodiesel results, partly offset by stronger Asian affiliate earnings.
Other operating profit increased $173 million for the quarter and $180 million for the six months, including improved Gruma-related equity earnings, wheat milling and cocoa results, and financial operations. The quarter and six months included mark-to-market gains of $46 million and $63 million, respectively, on certain forward sales commitments.
Operating cash flow fell substantially from the prior year because the prior-year period benefited from unusually favorable working-capital changes as commodity prices declined. Inventories increased to $9.126 billion from $7.782 billion at June 30, 2009.
ADM adopted amended accounting guidance for convertible debt, noncontrolling interests, business combinations, EPS, and fair value measurements. The convertible-debt and noncontrolling-interest changes resulted in retrospective presentation or measurement adjustments; management reported no material effect from most other adoptions.

Guidance, outlook, commentary, risks, 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 policies, global demand, crop production, commodity prices, foreign exchange rates, and economic conditions. Management cited an improved global crop outlook, lower commodity-price volatility, a late and extended U.S. harvest, lower energy and manufacturing costs, and improved ethanol economics.

The planned liquidation of an investment structure involving Wilmar International was expected to be completed during calendar 2010, subject to regulatory approvals. Based on assumptions disclosed in the filing, completion could generate approximately $530 million of additional income tax expense.
ADM do Brasil received a $457 million Brazilian tax assessment, subject to currency changes, related to the deductibility of 2004 commodity-hedging losses. Potential assessments for 2005–2009 could total approximately $150 million. ADM has not recorded a tax liability for these matters and is appealing the assessment.
Purchase obligations totaled $12.6 billion at December 31, 2009, with $11.2 billion expected to be paid within twelve months, principally for agricultural commodity inventories.
ADM had $1.15 billion principal amount of convertible senior notes due 2014 and $1.75 billion principal amount of Equity Units due 2011. The forward purchase contracts associated with the Equity Units were not dilutive at quarter-end.
Commodity derivatives and inventories expose ADM to substantial market, counterparty, freight, foreign-exchange, and basis risks. A hypothetical 10% adverse commodity-price change implied market risk of $22 million at the highest position, $67 million at the lowest position, and $23 million at the average position for the six months.
The filing states that there were no material changes in critical accounting policies, no significant changes in risk factors, no material subsequent events requiring disclosure, and no material changes in internal controls.

Important facts for investors to verify

Whether the potential $530 million tax expense associated with the Wilmar-related liquidation was ultimately incurred and its timing.
The outcome and financial exposure from the Brazilian tax assessment and possible additional assessments.
The sustainability of Corn Processing and ethanol margins after the favorable cost and gasoline-blending conditions described in the filing.
Whether Agricultural Services can recover from the loss of prior-year commodity-volatility and credit-market opportunities.
Changes in commodity prices, crop conditions, working capital, LIFO valuations, and related cash-flow volatility.
Execution of the company’s capital program, including $12.6 billion of purchase obligations and the 2011 Equity Units settlement requirements.