Business Context and Reporting Period
Archer-Daniels-Midland Company (ADM) filed this Form 10-K for the fiscal year ended June 30, 2010. The supplied metadata references “2009 Q4,” but the filing is an annual fiscal 2010 report, not a standalone fourth-quarter filing. ADM processes and merchandises oilseeds, corn, wheat, cocoa, and other agricultural commodities through three reportable segments: Oilseeds Processing, Corn Processing, and Agricultural Services; wheat, cocoa, and financial activities are classified as Other.
ADM operates in more than 60 countries and had approximately 29,300 full-time employees at June 30, 2010. Its products include vegetable oils, protein meal, sweeteners, starches, ethanol, biodiesel, flour, cocoa products, and other food, feed, fuel, and industrial ingredients.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales and other operating income | $61.682 billion | $69.207 billion | Down 11% |
| Gross profit | $3.843 billion | $4.089 billion | Down 6% |
| Earnings before income taxes | $2.585 billion | $2.500 billion | Up 3% |
| Net earnings attributable to controlling interests | $1.930 billion | $1.684 billion | Up 15% |
| Diluted earnings per share | $3.00 | $2.62 | Up $0.38 |
| Cash flow from operating activities | $2.684 billion | $5.341 billion | Down $2.657 billion |
| Capital expenditures | $1.607 billion | $1.898 billion | Down $291 million |
| Long-term debt, excluding current maturities | $6.830 billion | $7.592 billion | Down $762 million |
| Shareholders’ equity | $14.631 billion | $13.653 billion | Up $978 million |
Gross margin was approximately 6.2% in 2010 versus 5.9% in 2009. Net earnings margin was approximately 3.1% versus 2.4%. The effective income tax rate declined to 25.8% from 32.5%; excluding the 2009 Wilmar-related tax charge, the 2009 rate was 26.2%.
At June 30, 2010, ADM reported $1.046 billion of cash and cash equivalents, $394 million of short-term marketable securities, and approximately $1.4 billion of cash, cash equivalents, and short-term marketable securities combined. Working capital was $9.561 billion and the current ratio was 2.1 to 1. Lines of credit totaled $6.0 billion, of which $5.7 billion was unused; there were no borrowings under the $4.2 billion commercial paper facility.
Segment Performance and Material Changes
| Segment | 2010 Sales | 2010 Operating Profit | Change in Operating Profit |
|---|---|---|---|
| Oilseeds Processing | $23.058 billion | $1.400 billion | Up $120 million |
| Corn Processing | $7.942 billion | $722 million | Up $537 million |
| Agricultural Services | $25.440 billion | $668 million | Down $326 million |
| Other | $5.242 billion | $449 million | Up $455 million |
- Lower commodity prices reduced reported sales, particularly in Agricultural Services and Oilseeds Processing, while generally reducing raw-material costs.
- Corn Processing improved substantially, driven by higher ethanol volumes, improved ethanol blending economics, increased merchandising activity, lower corn and manufacturing costs, and stronger lysine results.
- Agricultural Services declined because the unusually favorable commodity-market volatility, tight-credit conditions, and margin opportunities of 2009 did not recur. Transportation also weakened because of lower barge freight rates and utilization.
- Oilseeds Processing benefited from stronger North American soybean crushing margins, South American biodiesel results, improved European margins, and higher equity earnings from Wilmar.
- Other benefited from improved Gruma equity earnings, better wheat milling margins, improved cocoa results, and the absence of prior-year managed-fund and captive-insurance losses.
- Corporate results fell from a $47 million benefit in 2009 to a $654 million charge in 2010, primarily because the LIFO credit declined to $42 million from $517 million, combined with $75 million of debt-extinguishment costs and $59 million of unrealized interest-rate-swap losses.
Liquidity, Debt, Capital Allocation, and Unusual Items
- ADM repurchased $500 million principal amount of debentures in 2010, recognizing a $75 million pretax loss on extinguishment of debt.
- Total long-term debt including current maturities was $7.174 billion, and the long-term-debt-to-total-capital ratio improved to 32% from 36%.
- ADM had $1.15 billion principal amount of convertible senior notes outstanding; no conversion conditions had been satisfied at June 30, 2010.
- The $1.75 billion of debentures issued with Equity Units is scheduled to be remarketed in 2011. The related purchase contracts require holders to purchase ADM common shares no later than June 1, 2011, subject to contractual pricing formulas.
- ADM expects to spend approximately $1.5 billion through calendar year 2013 to complete facilities under construction and other approved capital projects.
- New or expanding facilities included ethanol capacity additions, a PHA bioplastic facility, a Brazilian sugarcane ethanol facility, a cocoa facility, and a propylene/ethylene glycol facility expected to be fully operational in the fourth quarter of calendar 2010.
- Fiscal 2010 earnings included $110 million of pretax start-up costs for significant greenfield plants, or $68 million after tax. The filing also reports a $15 million other-than-temporary impairment of an available-for-sale equity security.
Outlook, Risks, Contingencies, and Management Commentary
ADM does not provide forward-looking financial information in its MD&A because operating results are highly dependent on unpredictable commodity prices, weather, crop plantings, government programs, global demand, energy prices, and competitive conditions.
- Primary risks include agricultural commodity availability and price volatility, weather and crop disease, energy and transportation costs, ethanol and biodiesel economics, competition, foreign exchange, interest rates, global economic and political conditions, and changes in agricultural, trade, environmental, renewable-fuel, and greenhouse-gas regulations.
- ADM uses futures, options, foreign-exchange contracts, and interest-rate instruments to manage exposures, but hedging may not fully offset market movements, basis risk, counterparty defaults, or freight volatility.
- ADM do Brasil received a $456 million Brazilian tax assessment relating to the deductibility of 2004 commodity-hedging losses. The company appealed and recorded no liability, stating that it believes the deductions are appropriate. Potential additional claims of approximately $160 million could arise for open tax years 2005–2010.
- Contractual obligations totaled $27.863 billion, including $10.856 billion of purchase obligations, $7.174 billion of long-term debt, $7.928 billion of estimated interest payments, and $1.381 billion of operating leases.
- Contingent obligations, primarily guarantees related to equity-method investees, totaled approximately $131 million; amounts outstanding for the primary entities were $74 million.
- Pension and postretirement plans were underfunded by approximately $802 million in aggregate at June 30, 2010, consisting of $578 million for pension benefits and $224 million for postretirement benefits.
- Environmental compliance spending was $90 million in 2010. The company reported no environmental or legal proceeding expected to have a material adverse effect on financial position, results, or liquidity.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective.
Most Important Facts to Verify
- Confirm the applicable period: this filing covers the fiscal year ended June 30, 2010, despite the request metadata identifying 2009 Q4.
- Reconcile the 15% increase in reported net earnings with the material 2010 items, including greenfield start-up costs, debt-extinguishment costs, interest-rate-swap losses, and the reduced LIFO benefit.
- Assess the sustainability of the $537 million improvement in Corn Processing operating profit, particularly ethanol margins, corn costs, mandates, and industry capacity.
- Evaluate the sharp decline in operating cash flow to $2.684 billion and the company’s ability to fund approximately $1.5 billion of approved future capital projects while meeting debt and purchase obligations.
- Review the 2011 Equity Unit remarketing and mandatory stock-purchase provisions for refinancing, interest-rate, and potential dilution implications.
- Monitor the Brazilian tax assessment and possible additional claims, as well as the company’s unrecognized tax benefits of $84 million.
- Assess exposure to commodity prices, weather, energy costs, foreign currency, transportation disruptions, environmental regulation, and counterparty risk.