Business Context and Reporting Period
Archer-Daniels-Midland Company filed an unaudited Form 10-Q for the three months ended September 30, 2012. Although identified in the request as 2012 Q1, this was the first quarter of the Company’s six-month transition period following its change from a June 30 fiscal year-end to a December 31 year-end. ADM procures, transports, stores, processes, and merchandises agricultural commodities through Oilseeds Processing, Corn Processing, Agricultural Services, and Other segments.
Financial Performance and Liquidity
| Metric | Three Months Ended September 30, 2012 | Comparable 2011 Period |
|---|---|---|
| Net sales and other operating income | $21.808 billion | $21.902 billion |
| Gross profit | $806 million | $1.034 billion |
| Gross margin | Approximately 3.7% | Approximately 4.7% |
| Earnings before income taxes | $295 million | $660 million |
| Net earnings attributable to controlling interests | $182 million | $460 million |
| Net margin | Approximately 0.8% | Approximately 2.1% |
| Diluted earnings per share | $0.28 | $0.68 |
| Operating cash flow | $483 million | $2.087 billion |
| Capital expenditures | $252 million | $443 million |
- Segment operating profit was $498 million, down from $721 million. Oilseeds Processing improved to $336 million from $220 million, while Corn Processing declined to $68 million from $183 million and Agricultural Services declined to $78 million from $323 million.
- Cash and cash equivalents were $1.235 billion; short-term marketable securities were $507 million. Cash, cash equivalents, and short-term marketable securities totaled approximately $1.7 billion.
- Total assets were $44.760 billion and shareholders’ equity was $18.441 billion at September 30, 2012.
- Short-term debt was $3.678 billion, current maturities of long-term debt were $268 million, and long-term debt was $6.547 billion. Long-term debt represented 26% of total capital.
- ADM had $8.6 billion of credit lines, of which $5.3 billion was unused. Commercial paper outstanding was $2.4 billion against a $6.3 billion supporting facility.
- The accounts receivable securitization program provided up to $1.0 billion and was fully utilized. Receivables transferred and derecognized totaled $1.9 billion, with $0.9 billion recorded as deferred consideration.
Material Changes Versus the Prior Comparable Period
- Net earnings attributable to controlling interests fell $278 million, or approximately 60%, primarily because of lower segment operating profit, unfavorable LIFO valuation effects, and a $146 million Gruma impairment charge.
- Revenue decreased only $94 million, as higher average selling prices of $1.5 billion and higher Oilseeds Processing sales largely offset lower volumes of $1.0 billion and unfavorable foreign-exchange effects of $0.8 billion.
- Cost of products sold increased $134 million to $21.002 billion. The quarter included a $53 million LIFO charge versus a $126 million LIFO credit in the prior-year quarter.
- Oilseeds Processing benefited from stronger crushing and origination results, while Corn Processing was pressured by weak ethanol industry margins. Agricultural Services declined because of weaker U.S. merchandising results, reduced barge utilization, and the Gruma impairment.
- Operating cash flow declined by $1.604 billion, primarily because working capital reduced cash by approximately $0.2 billion compared with a $1.3 billion contribution in the prior-year quarter.
- Capital expenditures declined $191 million, reflecting greater emphasis on capital allocation and efficiency.
- Interest expense declined to $106 million from $113 million, while interest income declined to $30 million from $40 million.
Outlook, Commentary, Risks, and Unusual Items
- Management stated that tight corn and soybean supplies and higher commodity prices followed below-average North and South American harvests. Protein meal demand continued to increase but at a declining rate, while demand for corn sweeteners remained solid.
- Weaker U.S. ethanol exports, stronger Brazilian ethanol imports, and slow E15 implementation kept industry ethanol margins negative.
- ADM does not provide forward-looking information in its MD&A because results are highly sensitive to weather, crop yields, commodity prices, energy costs, government policies, global demand, foreign exchange, and economic conditions.
- The $146 million pre-tax Gruma impairment charge reflected the planned divestiture of ADM’s Gruma interests. A non-binding letter of intent was signed after quarter-end and remained subject to approvals and rights of first refusal.
- ADM recorded a 38% effective tax rate, compared with 30% in the prior-year quarter. Excluding discrete tax expense, the Gruma-related valuation allowance, and Brazilian foreign-currency remeasurement effects, the rate would have been approximately 30%.
- ADM disclosed Brazilian tax assessments totaling $574 million, before potential additional claims of approximately $101 million for later years. The Company has not recorded a liability and intends to defend its position.
- The Company completed an internal review of potential anti-corruption compliance matters and began discussions with the Department of Justice and SEC. Potential penalties or disgorgement were not recorded because the amount could not be reasonably estimated.
- After quarter-end, ADM exchanged $568 million of existing debentures for $570 million of 4.016% debentures due 2043 and paid $196 million of debt premiums.
- After quarter-end, ADM announced a 14.9% economic interest in GrainCorp and its potential interest in a cash acquisition, subject to due diligence, regulatory approvals, and other conditions; no agreement had been reached as of the filing date.
- ADM expected a non-cash pre-tax pension charge of approximately $45 million to $65 million in the quarter ending December 31, 2012, depending on participation in a lump-sum pension offer.
- Purchase obligations increased to $26.1 billion, with $24.6 billion expected to be paid within the next twelve months.
Investor Verification Items
- Verify the effect of the $146 million Gruma impairment and any subsequent completion, modification, or termination of the proposed divestiture.
- Monitor ethanol margins, corn and soybean supply conditions, LIFO adjustments, and the sustainability of improved Oilseeds Processing performance.
- Review liquidity exposure from $3.678 billion of short-term debt, $2.4 billion of commercial paper, the fully utilized $1.0 billion receivables program, and the June 2013 program termination.
- Assess the potential financial impact and timing of the Brazilian and Argentine tax assessments and the unresolved anti-corruption matter.
- Confirm the final terms and funding implications of the GrainCorp investment or any subsequent acquisition proposal.
- Evaluate the effect of the fiscal year-end change, including comparability of the transition-period results and the December 31, 2012 transition report.
- Track the expected pension charge and whether the projected $4 million to $5 million annual pre-tax pension expense reduction is realized.