Filing Scope and Business Context
This Form 10-K covers Archer-Daniels-Midland Company for the fiscal year ended June 30, 2012, with comparative fiscal years 2011 and 2010. The request identifies “2011 Q4,” but the filing is an FY2012 annual report; the filing provides unaudited quarterly data for the fourth quarter ended June 30, 2011 and the fourth quarter ended June 30, 2012.
ADM is a global agricultural processor, merchandiser, storage operator, and transportation provider serving food, feed, fuel, and industrial markets. Reportable segments are Oilseeds Processing, Corn Processing, and Agricultural Services; remaining financial and insurance activities are classified as Other.
Financial Results and Key Metrics
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Net sales and other operating income | $89.0 billion | $80.7 billion | +$8.4 billion |
| Gross profit | $3.7 billion | $4.3 billion | -$0.6 billion |
| Gross margin | 4.1% | 5.3% | Down approximately 1.2 points |
| Net earnings attributable to controlling interests | $1.223 billion | $2.036 billion | -$813 million |
| Basic EPS | $1.84 | $3.17 | Down $1.33 |
| Diluted EPS | $1.84 | $3.13 | Down $1.29 |
| Cash provided by operating activities | $2.895 billion | $(2.340) billion | Improved by $5.235 billion |
| Capital expenditures | $1.477 billion | $1.247 billion | +$230 million |
| Long-term debt, excluding current maturities | $6.535 billion | $8.266 billion | -$1.731 billion |
| Shareholders’ equity | $18.169 billion | $18.838 billion | -$669 million |
FY2012 earnings included $437 million of asset impairment, exit, and restructuring costs, or $274 million after tax, equal to $0.41 per share. Excluding these charges, reported earnings were still pressured by weaker operating conditions.
Segment operating profit declined to $2.525 billion from $4.131 billion. Oilseeds Processing contributed $1.302 billion, Corn Processing $261 million, Agricultural Services $947 million, and Other $15 million. Corporate expense was $760 million, including $71 million related to workforce reductions.
- Oilseeds Processing: Revenue increased 16% to $34.7 billion, while operating profit fell $388 million. Weak European and North American softseed results, lower biodiesel margins, and $100 million of cocoa mark-to-market losses were significant factors.
- Corn Processing: Revenue increased 22% to $12.1 billion, but operating profit fell $818 million to $261 million. Bioproducts recorded a $74 million loss, reflecting weak ethanol margins and $349 million of impairment and exit costs.
- Agricultural Services: Revenue increased 3% to $42.1 billion, while operating profit declined $376 million to $947 million. Lower U.S. export volumes, reduced merchandising results, and increased loss provisions, including an unfavorable arbitration award, weighed on performance.
Liquidity, Debt, and Capital Resources
At June 30, 2012, ADM reported cash, cash equivalents, and short-term marketable securities of approximately $1.5 billion, working capital of $12.3 billion, and a current ratio of 1.8. Credit lines totaled $6.5 billion, of which $4.4 billion was unused. Commercial paper outstanding was $1.3 billion under a $4.3 billion supporting facility.
Long-term debt to total capital declined to 26% from 30%. A $1.4 billion floating-rate note maturity due August 13, 2012 was repaid in August 2012 using short-term borrowings. ADM also had $1.15 billion of convertible senior notes outstanding; no conversion conditions had been met at year-end.
ADM amended a receivables securitization program providing up to $1.0 billion of funding. At year-end, $1.6 billion of receivables had been transferred and derecognized, cash funding was $1.0 billion, and deferred consideration was approximately $629 million. The program terminates June 28, 2013.
Financing activities used $1.1 billion in FY2012, including $527 million of share repurchases and $455 million of dividends. The company repurchased approximately 18.4 million shares during the year and had authorization to repurchase approximately 68.4 million additional shares through December 31, 2014.
Material Changes Versus the Prior Comparable Period
- Revenue rose 10%, primarily from higher commodity-related selling prices and increased volumes, but gross profit and earnings declined as margins compressed.
- Operating performance deteriorated across all reportable segments, particularly Corn Processing and Agricultural Services.
- ADM exited its Clinton, Iowa bioplastics facility and Walhalla, North Dakota ethanol dry mill, and ended its commercial alliance with Metabolix. The Clinton bioplastics facility accounted for most of the related impairment charge.
- ADM announced a global workforce reduction involving more than 1,200 positions. Management expected annual pretax savings of approximately $150 million when fully implemented by March 2013, with a significant portion realized by fiscal year-end.
- ADM sold a majority interest in Hickory Point Bank and deconsolidated it, with no material effect on earnings.
- The company reorganized segment reporting: cocoa moved into Oilseeds Processing, wheat moved into Agricultural Services, and prior periods were reclassified.
- ADM changed its fiscal year from July-June to calendar year beginning January 1, 2013. A six-month transition period ended December 31, 2012 was to be reported separately.
Fourth-Quarter Information Relevant to the Request
| Quarter ended June 30 | Net sales | Net earnings attributable to controlling interests | Basic EPS |
|---|---|---|---|
| 2012 | $22.675 billion | $284 million | $0.43 |
| 2011 | $22.870 billion | $381 million | $0.59 |
Fourth-quarter FY2012 results were affected by the fiscal-year impairment, exit, restructuring, and workforce-reduction charges. Fourth-quarter FY2011 results included after-tax startup costs of $11 million, a $9 million after-tax debt buyback cost, and a $49 million after-tax gain related to Gruma’s sale of bank securities.
Outlook, Commentary, Risks, and Unusual Items
ADM did not provide formal forward-looking operating guidance in MD&A, citing unpredictability in commodity prices, weather, energy prices, government policies, global demand, and crop production. It expected capital expenditures of approximately $500 million to $600 million for the six-month period ending December 31, 2012.
- Management reported tightening crop supplies and drought-related concerns affecting U.S. corn and soybean production, which could increase commodity prices and working-capital requirements.
- Excess ethanol industry capacity, reduced export demand, biodiesel inventory levels, and weak processing margins were major operating concerns.
- Principal risks include crop availability and pricing volatility, energy and freight costs, competition, foreign exchange, global economic and political conditions, regulation of agricultural and renewable-fuel markets, environmental rules, food safety, transportation disruptions, cybersecurity, and access to credit markets.
- ADM had approximately $3.4 billion invested in or advanced to joint ventures and affiliates over which it had limited control; sales to unconsolidated affiliates were $7.7 billion in FY2012.
- An anti-corruption review involving potential Foreign Corrupt Practices Act and other legal violations remained ongoing. Management stated that related proceedings were not expected to have a material effect, but civil penalties, criminal fines, or disgorgement remained possible.
- Brazilian tax authorities assessed approximately $570 million, including tax, interest, and penalties, related to the deductibility of commodity hedging losses. ADM disputed the assessments and had not recorded a liability for them.
- Pension and postretirement obligations increased materially, with funded status deficits of $859 million and $305 million, respectively, at June 30, 2012.
Investor Verification Priorities
- Verify the sustainability of earnings after removing the $437 million of FY2012 impairment, exit, and restructuring charges.
- Assess recovery prospects for ethanol, biodiesel, oilseed, cocoa, and grain-merchandising margins.
- Review the impact of drought, crop inventories, commodity prices, and working-capital needs on future cash flow and borrowing.
- Confirm repayment and refinancing treatment for the $1.4 billion floating-rate notes and the status of commercial paper borrowings.
- Evaluate reliance on the $1.0 billion receivables securitization program, including its June 2013 termination date and $629 million deferred-consideration balance.
- Monitor the Brazilian tax assessments, anti-corruption review, arbitration matters, letters of credit, surety bonds, and other contingencies.
- Reconcile future segment performance using the revised reporting structure and the subsequent calendar-year reporting transition.