Archer-Daniels-Midland Co quarterly report, Q3 FY2011

Business Context and Reporting Period

Archer-Daniels-Midland Company (ADM) filed this unaudited Form 10-Q for the quarter and nine months ended March 31, 2012, within its fiscal year ending June 30, 2012. ADM procures, transports, stores, processes, and merchandises agricultural commodities through Oilseeds Processing, Corn Processing, Agricultural Services, and Other operations.

The filing indicates that ADM will transition to a calendar-year fiscal year beginning January 1, 2013, with a required six-month transition period from July 1 through December 31, 2012.

Key Financial Metrics

Metric	Three months ended March 31, 2012	Three months ended March 31, 2011	Nine months ended March 31, 2012	Nine months ended March 31, 2011
Net sales and other operating income	$21.155 billion	$20.077 billion	$66.363 billion	$57.806 billion
Gross profit	$1.008 billion	$1.160 billion	$2.855 billion	$3.202 billion
Earnings before income taxes	$568 million	$791 million	$1.349 billion	$2.251 billion
Net earnings attributable to controlling interests	$399 million	$578 million	$939 million	$1.655 billion
Diluted EPS	$0.60	$0.86	$1.41	$2.55
Operating cash flow	Not separately provided	Not separately provided	$2.258 billion	$(4.749) billion

Gross margin was approximately 4.8% in the quarter versus 5.8% in the prior-year quarter, and approximately 4.3% for the nine-month period versus 5.5% previously. Net margin attributable to controlling interests was approximately 1.9% for the quarter versus 2.9%, and 1.4% for the nine-month period versus 2.9%.

Cash and cash equivalents were $818 million at March 31, 2012, compared with $615 million at June 30, 2011.
Cash, cash equivalents, and short-term marketable securities totaled approximately $1.2 billion. The current ratio was 1.8 to 1.
Total debt, including short-term debt, current maturities, and long-term debt, was approximately $10.3 billion at March 31, 2012. Long-term debt to total capital was 26%, versus 30% at June 30, 2011.
ADM had $6.7 billion of credit lines, of which $4.7 billion was unused. The filing states that $1.2 billion of commercial paper was outstanding; one MD&A reference appears to state “$1.2 million,” which should be verified against the debt note.
Capital expenditures were $1.193 billion for the nine months, and acquisitions used $239 million of cash.
Dividends were $0.175 per share for the quarter and $0.51 per share for the nine-month period, compared with $0.160 and $0.46, respectively, in the prior comparable periods.

Material Changes Versus Prior Comparable Period

Quarterly revenue increased 5%, but net earnings attributable to controlling interests declined 31% to $399 million. Nine-month revenue increased 15%, while net earnings declined 43% to $939 million.
Quarterly segment operating profit fell 12% to $887 million. Oilseeds Processing declined $117 million to $395 million, and Corn Processing declined $74 million to $130 million. Agricultural Services increased $8 million to $179 million, while Other increased $64 million to $183 million.
Nine-month segment operating profit declined $1.238 billion to $1.895 billion. Corn Processing declined $768 million, Oilseeds Processing declined $276 million, and Agricultural Services declined $148 million.
Quarterly corporate results worsened to a $319 million loss from a $215 million loss, principally because of a $107 million LIFO charge versus $43 million and $74 million of workforce-reduction-related costs.
Nine-month results benefited from a lower LIFO charge of $40 million versus $420 million in the prior year, but this benefit was more than offset by weaker operating performance, $437 million of impairment, exit, and restructuring costs, and the absence of prior-year gains.
Asset impairment, exit, and restructuring costs totaled $85 million in the quarter and $437 million year to date. These included $349 million related to the Clinton, Iowa bioplastics business, $14 million related to closure of the Walhalla, North Dakota ethanol facility, and $71 million of employee-related costs.
Cash flow from operations improved substantially, from a $4.749 billion use to $2.258 billion provided, primarily reflecting lower working-capital requirements and the accounts receivable securitization program.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

ADM does not provide forward-looking information in MD&A because results are highly sensitive to weather, crop production, commodity prices, energy costs, government policies, global demand, foreign exchange, and economic conditions.
Management reported excess oilseed-crushing capacity, pressured oilseed margins, weak biodiesel margins in certain markets, and excess ethanol production that adversely affected ethanol margins. Low projected U.S. corn and soybean carryover stocks and a smaller-than-expected South American harvest could affect future commodity availability and prices.
ADM announced a plan to eliminate more than 1,200 positions. Management expects the actions, together with other cost reductions, to reduce annual pretax expenses by approximately $150 million when fully implemented.
The $1.0 billion accounts receivable securitization facility was fully utilized at March 31, 2012 and was scheduled to terminate June 29, 2012 unless extended. ADM stated that it intended to renew the facility.
Floating-rate notes with principal of $1.4 billion were due August 13, 2012. The stated interest rate at March 31, 2012 was 0.67%.
Purchase obligations totaled $19.4 billion, including $18.5 billion expected to be paid within the next twelve months.
ADM disclosed ongoing Brazilian tax assessments totaling $587 million related to the deductibility of commodity-hedging losses, plus potential additional claims estimated at approximately $101 million for later years. The company has not recorded a liability for these assessments and intends to appeal and defend its position.
Argentine subsidiaries received transfer-pricing tax assessments totaling $11 million before interest. ADM has not recorded a liability.
ADM continued an internal review concerning possible anti-corruption and Foreign Corrupt Practices Act issues involving the company, affiliates, and joint ventures. Government penalties, fines, or disgorgement remain possible, although management stated the matter is not expected to have a material impact on business or financial condition.
Commodity and derivative valuations are exposed to significant market volatility. Level 3 assets measured at fair value totaled $1.957 billion and Level 3 liabilities totaled $321 million at March 31, 2012.
ADM adopted fair-value disclosure amendments during the period without an earnings impact. It expects upcoming comprehensive-income and goodwill-accounting changes to affect presentation or disclosures, not financial results.

Most Important Facts for Investors to Verify

Whether the $1.4 billion floating-rate notes due August 2012 and the $1.0 billion receivables facility were refinanced or renewed after the reporting date.
The consistency of the filing’s commercial-paper balance references, which state $1.2 billion in the debt note and appear as $1.2 million in one MD&A passage.
The ultimate resolution and potential cash impact of the Brazilian and Argentine tax assessments.
The timing and realized savings from the workforce reduction plan and whether additional restructuring charges will be recorded.
Whether oilseed, ethanol, biodiesel, sweetener, and agricultural merchandising margins recover from the conditions described in the filing.
The effect of derivative mark-to-market volatility, LIFO inventory adjustments, commodity prices, and Level 3 valuation assumptions on reported earnings and cash flow.
The impact of the announced management reorganization and the planned reassignment of cocoa and wheat operations among reportable segments.