Archer-Daniels-Midland Company — 2015 Q2 Form 10-Q Summary
Business context and reporting period
ADM procures, transports, stores, processes, and merchandises agricultural commodities and related products globally. Its reportable segments are Agricultural Services, Corn Processing, Oilseeds Processing, and Wild Flavors and Specialty Ingredients. This unaudited Form 10-Q covers the three and six months ended June 30, 2015, compared primarily with the corresponding 2014 periods. Prior-period segment results were reclassified to reflect the new Wild Flavors and Specialty Ingredients segment.
Financial performance and key metrics
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $17.186 billion | $21.494 billion | $34.692 billion | $42.190 billion |
| Gross profit | $964 million | $1.172 billion | $2.066 billion | $1.847 billion |
| Gross margin | 5.6% | 5.5% | 6.0% | 4.4% |
| Net earnings attributable to controlling interests | $386 million | $533 million | $879 million | $800 million |
| Diluted EPS | $0.62 | $0.81 | $1.39 | $1.21 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $407 million | $983 million |
Second-quarter earnings before income taxes were $526 million, versus $735 million in the prior-year quarter. The effective tax rate was 27.2%, compared with 27.6%. Six-month pretax earnings were $1.216 billion and the effective tax rate was 28.0%, compared with 27.3%.
Second-quarter segment operating profit declined to $808 million from $888 million. Six-month segment operating profit increased to $1.663 billion from $1.579 billion. Six-month results benefited from strong soybean crushing and origination performance and the addition of Wild Flavors and Specialty Commodities, while ethanol margins weakened materially.
At June 30, 2015, ADM had $867 million of cash and cash equivalents, $309 million of short-term marketable securities, and $1.2 billion of cash, cash equivalents, and short-term marketable securities combined. The current ratio was 1.8 to 1. Long-term debt was $5.965 billion, current maturities of long-term debt were $801 million, and short-term debt was $157 million. Total debt, including current maturities, was approximately $6.8 billion.
Credit availability totaled $5.8 billion, of which $5.6 billion was unused. The company had no commercial paper outstanding under its $4.0 billion commercial paper facility. Accounts receivable securitization programs provided up to $1.6 billion of funding, of which $1.3 billion was utilized at quarter-end.
Six-month investing cash outflows were $407 million, including $540 million of capital expenditures. Financing cash outflows were $232 million, including $1.164 billion of treasury stock purchases and $350 million of dividends. Cash declined from $1.099 billion at December 31, 2014 to $867 million at June 30, 2015.
Material changes versus the prior comparable period
- Revenue fell 20% in the second quarter and 18% for the first six months, primarily because of lower agricultural commodity prices, lower volumes in certain businesses, and foreign currency translation effects.
- Second-quarter net earnings declined 28% and diluted EPS declined from $0.81 to $0.62. In contrast, six-month net earnings increased 10% and diluted EPS increased from $1.21 to $1.39.
- Agricultural Services second-quarter operating profit decreased $32 million because of weaker global trade and North American export margins and volumes. Six-month operating profit nevertheless increased $20 million.
- Corn Processing second-quarter operating profit decreased $134 million and six-month operating profit decreased $207 million, primarily because of lower ethanol margins and adverse hedge-timing effects.
- Oilseeds Processing operating profit increased $64 million in the quarter and $236 million year to date, driven by strong soybean crushing volumes and margins and improved South American origination results.
- Wild Flavors and Specialty Ingredients contributed $104 million of second-quarter operating profit and $172 million for the first six months, reflecting the acquisitions completed in late 2014.
- Corporate expense increased to $282 million in the second quarter from $153 million. The current quarter included a $61 million LIFO inventory valuation charge, compared with a $73 million credit in the prior-year quarter.
- Other income was $89 million in the second quarter, including a $68 million gain on the sale of a 50% interest in the Barcarena export terminal, a $27 million revaluation gain related to North Star Shipping and Minmetal, and a $6 million gain on the sale of the lactic acid business.
Guidance, outlook, risks, contingencies, and unusual items
Management projected 2015 capital expenditures of $1.1 billion to $1.3 billion, approximately $700 million of dividends, and $1.5 billion to $2.0 billion of share repurchases, subject to strategic capital requirements. The filing does not provide formal earnings guidance.
Management cited continued pressure from large global grain supplies, a strong U.S. dollar, competitive ethanol production, softseed availability, biodiesel demand, weather, crop yields, government policies, global demand, energy prices, and foreign currency movements. Wild Flavors was reported to be ahead of schedule on revenue and cost synergies, with demand for specialty, healthy, and nutritious food ingredients remaining strong.
ADM issued €1.1 billion of debt on June 24, 2015, consisting of €500 million of floating-rate notes due 2019 and €600 million of 1.75% notes due 2023. On July 1, 2015, it purchased $794 million of debentures for $961 million and expects an approximately $172 million debt extinguishment charge in the third quarter.
The global chocolate business sale to Cargill for approximately $440 million closed on July 31, 2015. The planned $1.3 billion sale of the global cocoa business to Olam was expected to close in the fourth quarter of 2015, subject to customary conditions.
ADM disclosed Brazilian tax assessments totaling approximately $436 million and Argentine transfer-pricing assessments totaling $92 million, plus potential additional Argentine assessments estimated at approximately $284 million and potential additional Brazilian assessments of approximately $50 million. No liability was recorded because management believes it is more likely than not to prevail, but the ultimate outcomes could result in financial impacts up to the assessed amounts.
The company remains exposed to commodity-price, derivative, foreign-exchange, interest-rate, counterparty, and basis risk. Its average commodity position during the six months was short with a fair value of $(1.017) billion; the estimated market risk from a hypothetical 10% adverse price change was $(102) million. A high-fructose corn syrup litigation matter included plaintiffs’ expert damages allegations of up to $1.6 billion against all defendants; trial was scheduled for November 2015. ADM stated that it was not then party to a proceeding it believed would have a material adverse effect on its financial position, results, or liquidity.
Most important facts for an investor to verify
- Whether soybean crushing strength and Wild Flavors synergies offset persistent ethanol, Agricultural Services, and commodity-market weakness.
- The timing and proceeds of the cocoa sale and the completed chocolate sale, including post-closing adjustments.
- The third-quarter impact of the approximately $172 million debt extinguishment charge.
- The ultimate resolution and potential cash-tax exposure from the Brazilian and Argentine tax assessments.
- Execution of the $1.1 billion to $1.3 billion capital expenditure plan and the planned $1.5 billion to $2.0 billion share repurchases.
- Liquidity after debt tender activity, seasonal working-capital requirements, and continued use of the $1.6 billion receivables securitization facilities.
- Commodity derivative valuations, LIFO adjustments, hedge-timing effects, and the sensitivity of reported earnings to agricultural prices and foreign exchange.