Archer-Daniels-Midland Company: Q3 2015 Form 10-Q Summary
Business context and reporting period
ADM is an agricultural commodities company engaged in procuring, transporting, storing, processing, and merchandising agricultural products in more than 140 countries. Reportable segments are Agricultural Services, Corn Processing, Oilseeds Processing, and Wild Flavors and Specialty Ingredients. The filing covers the three and nine months ended September 30, 2015; results are unaudited and are not necessarily indicative of full-year performance.
ADM established Wild Flavors and Specialty Ingredients as a separate reportable segment in 2015 and reclassified prior-period results for comparability. The segment includes businesses acquired in the fourth quarter of 2014.
Financial performance and key metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $16.565 billion | $18.117 billion | $51.257 billion | $60.307 billion |
| Gross profit | $1.089 billion | $1.470 billion | $3.155 billion | $3.317 billion |
| Gross margin | 6.6% | 8.1% | 6.2% | 5.5% |
| Net earnings attributable to controlling interests | $252 million | $747 million | $1.131 billion | $1.547 billion |
| Net margin | 1.5% | 4.1% | 2.2% | 2.6% |
| Diluted EPS | $0.41 | $1.14 | $1.80 | $2.35 |
| Segment operating profit | $709 million | $1.073 billion | $2.372 billion | $2.652 billion |
| Earnings before income taxes | $367 million | $1.033 billion | $1.583 billion | $2.134 billion |
Revenue declined 9% in the quarter and 15% for the nine months, primarily because of lower agricultural commodity prices and foreign-currency translation, partly offset by higher volumes. ADM stated that commodity price movements generally affect revenue and cost of products sold similarly; margins and segment profit are therefore more informative than revenue alone.
Quarterly segment operating profit declined in Agricultural Services to $149 million, Corn Processing to $131 million, and Other to $24 million. Oilseeds Processing increased to $335 million and Wild Flavors and Specialty Ingredients increased to $70 million. For the nine months, Oilseeds Processing increased to $1.148 billion and Wild Flavors increased to $242 million, while Agricultural Services and Corn Processing declined to $495 million and $448 million, respectively.
- Q3 ethanol margins weakened materially as high industry production and inventory levels pressured prices; Corn Processing profit fell $217 million year over year.
- Agricultural Services was pressured by ample global grain supplies, strong South American competition, reduced North American export competitiveness, and the strong U.S. dollar.
- Oilseeds Processing benefited from strong soybean crushing demand and margins, particularly in North America and Europe, and improved South American origination results.
- Wild Flavors and Specialty Ingredients benefited from the 2014 acquisitions, although some specialty businesses faced weaker emerging-market demand and currency pressure.
Cash flow, balance sheet, debt, and liquidity
| Metric | September 30, 2015 | December 31, 2014 |
|---|---|---|
| Cash and cash equivalents | $720 million | $1.099 billion |
| Short-term marketable securities | $417 million | $515 million |
| Total assets | $40.877 billion | $43.997 billion |
| Short-term debt | $939 million | $108 million |
| Long-term debt | $5.829 billion | $5.528 billion |
| Shareholders’ equity | $17.878 billion | $19.630 billion |
- Operating cash flow was $1.098 billion for the first nine months, down from $4.424 billion in the prior-year period.
- Investing activities used $307 million, including $819 million of capital expenditures.
- Financing activities used $1.170 billion, including $1.788 billion of share repurchases and $520 million of dividends.
- ADM issued €1.1 billion of notes in June 2015 and used the proceeds to repurchase or redeem debt. The transactions produced a $189 million debt-extinguishment charge and increased net long-term debt by approximately $0.3 billion.
- Total credit lines were $5.7 billion, of which $4.8 billion was unused. Commercial paper outstanding was $0.9 billion against a $4.0 billion supporting facility.
- Accounts receivable securitization programs provided up to $1.6 billion of funding; $1.1 billion was utilized at September 30, 2015.
- The current ratio was 1.6 to 1. Long-term debt represented 25% of total capital, compared with 22% at December 31, 2014.
Material changes versus the prior comparable period
- Q3 net earnings attributable to controlling interests fell 66% and nine-month earnings fell 27%, primarily due to weaker ethanol profitability, lower North American export margins and volumes, reduced LIFO benefits, and the debt-extinguishment charge.
- Corporate results changed from a $40 million charge in Q3 2014 to a $342 million charge in Q3 2015. The current quarter included the $189 million debt-extinguishment charge and a $75 million LIFO credit, compared with a $315 million LIFO credit in the prior year.
- The prior-year quarter included a $156 million gain from effective dilution of the Pacificor joint venture; the current quarter included a $32 million gain on the sale of the global chocolate business.
- SG&A increased $60 million in Q3 and $258 million for the nine months, mainly from the acquired Wild Flavors and SCI businesses and higher ERP, information technology, and strategic project costs.
- Asset impairment, exit, and restructuring costs increased to $65 million in Q3 and $96 million for the nine months, including impairments related to Brazilian sugar ethanol facilities, international Oilseeds assets, and an international pension settlement.
- Foreign currency translation reduced other comprehensive income by $700 million before tax for the nine months, primarily because of U.S. dollar appreciation against the euro and other currencies.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2015 capital expenditures of $1.1 billion to $1.3 billion, with spending likely toward the lower end of that range. Expected 2015 dividends were approximately $0.7 billion, and expected share repurchases were $1.5 billion to $2.0 billion, with buybacks likely toward the higher end of the range.
- Management highlighted continued pressure from global grain oversupply, strong South American competition, the strong U.S. dollar, high ethanol production and inventories, weaker softseed availability, and uncertain economic conditions in emerging markets.
- The company is exposed to commodity-price, foreign-exchange, interest-rate, weather, crop, government-policy, demand, and counterparty risks. The reported average commodity position implied approximately $89 million of potential market risk from a hypothetical 10% adverse price movement.
- Brazilian tax authorities assessed approximately $347 million, including penalties and interest, relating to the tax deductibility of commodity hedging losses. ADM has not recorded a liability and intends to defend its position. Potential additional Brazilian assessments were estimated at approximately $40 million.
- Argentine tax assessments challenging transfer prices for grain exports totaled approximately $91 million, with potential additional assessments for open years estimated at approximately $286 million. No liability was recorded because management concluded it was more likely than not to prevail.
- A lawsuit involving high-fructose corn syrup labeling included an expert damages report alleging up to $1.6 billion against all defendants, including ADM. The company denied the allegations. The filing stated that no legal proceeding was currently expected to have a material adverse effect on financial position, results, or liquidity.
- The global chocolate business was sold to Cargill for $431 million on July 31, 2015, producing a $32 million gain. The global cocoa business was sold to Olam on October 16, 2015 for approximately $1.2 billion, subject to post-closing adjustments.
- Subsequent events included the $160 million acquisition of Eatem Foods, an approximately $20 million purchase of additional Wilmar shares, and the November 2015 acquisition of the remaining Eaststarch interest for approximately $265 million.
Important facts for investors to verify
- Whether ethanol margins and Corn Processing profitability recover from the substantial 2015 decline.
- The sustainability of Oilseeds Processing gains and the effect of soybean volumes, meal demand, vegetable-oil demand, and softseed availability.
- Cash-flow conversion, particularly the decline in operating cash flow to $1.1 billion and the funding of continued buybacks and dividends.
- Debt levels, commercial paper usage, unused credit capacity, and refinancing requirements for the accounts receivable securitization programs.
- Final proceeds and accounting gains or losses from the cocoa sale and the effect of subsequent acquisitions.
- The ultimate resolution and potential financial exposure from the Brazilian and Argentine tax assessments and the HFCS litigation.
- The impact of foreign-currency movements, commodity-price volatility, hedge timing, and Level 3 fair-value estimates on reported earnings.