Archer-Daniels-Midland Company — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2010, representing fiscal 2011 second quarter and first six months. The filing is unaudited. ADM procures, transports, stores, processes, and merchandises agricultural commodities through Oilseeds Processing, Corn Processing, Agricultural Services, and Other operations.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2010 | Three months ended Dec. 31, 2009 | Six months ended Dec. 31, 2010 | Six months ended Dec. 31, 2009 |
|---|
| Net sales and other operating income | $20.930 billion | $15.913 billion | $37.729 billion | $30.834 billion |
| Gross profit | $1.234 billion | $1.053 billion | $2.042 billion | $2.026 billion |
| Earnings before income taxes | $998 million | $784 million | $1.460 billion | $1.501 billion |
| Net earnings attributable to controlling interests | $732 million | $567 million | $1.077 billion | $1.063 billion |
| Diluted earnings per share | $1.14 | $0.88 | $1.68 | $1.65 |
| Dividends per share | $0.15 | $0.14 | $0.30 | $0.28 |
- Quarterly gross margin was approximately 5.9%, compared with 6.6% in the prior-year quarter; six-month gross margin was approximately 5.4%, compared with 6.6%.
- Quarterly net margin attributable to controlling interests was approximately 3.5%, compared with 3.6%; six-month net margin was approximately 2.9%, compared with 3.4%.
- Quarterly segment operating profit increased to $1.362 billion from $970 million. Six-month segment operating profit increased to $2.127 billion from $1.744 billion.
- The effective tax rate declined to 27.0% for the quarter and 26.6% for the six months, from 28.4% and 29.5%, respectively, primarily because of geographic earnings mix.
Segment Performance and Material Changes
| Segment operating profit | Q2 2010 | Q2 2009 | Change |
|---|
| Oilseeds Processing | $325 million | $352 million | $(27) million |
| Corn Processing | $399 million | $290 million | $109 million |
| Agricultural Services | $426 million | $150 million | $276 million |
| Other | $212 million | $178 million | $34 million |
- Quarterly sales increased 32%, primarily from higher commodity prices, stronger volumes, and robust global demand.
- Agricultural Services benefited from a large North American harvest, record U.S. grain exports, strong international demand, and improved merchandising margins.
- Corn Processing benefited from improved ethanol and lysine margins and higher ethanol volumes from two new dry mills; sweeteners and starches declined because of lower selling prices and higher corn costs.
- Oilseeds Processing declined despite higher crushing and origination results, mainly because of weaker Asian equity-investee earnings and mark-to-market losses on derivatives in Europe.
- Corporate results deteriorated to a $364 million loss from a $186 million loss, primarily due to a $254 million LIFO charge versus a $54 million charge in the prior-year quarter.
- For the six months, earnings before taxes declined to $1.460 billion from $1.501 billion despite higher segment profit, mainly because the LIFO impact shifted from a $22 million credit to a $377 million charge.
Cash Flow, Liquidity, and Debt
- Six-month operating cash flow was negative $4.083 billion, compared with positive $1.380 billion in the prior-year period. The primary drivers were increases of $4.025 billion in receivables and $4.620 billion in inventories, reflecting higher commodity prices and harvest-related inventory levels.
- Investing cash flow was negative $1.141 billion, including $645 million of capital expenditures and $163 million for acquired businesses.
- Financing cash flow was positive $4.704 billion, principally from $5.179 billion of net borrowings under credit lines. Cash and cash equivalents declined to $526 million from $1.046 billion at June 30, 2010.
- At December 31, 2010, cash, cash equivalents, and short-term marketable securities totaled approximately $1.2 billion, and the current ratio was 1.6 to 1.
- Short-term debt was $5.632 billion, current maturities of long-term debt were $205 million, and long-term debt was $6.848 billion. Shareholders’ equity was $15.904 billion.
- ADM had $8.4 billion of credit lines, of which $3.3 billion was unused. Credit lines supporting commercial paper totaled $6.5 billion, against which $4.3 billion of commercial paper was outstanding.
- The company expanded short-term credit facilities by $2.3 billion during the quarter. Management was evaluating additional and diversified funding sources, including debt remarketing associated with $1.75 billion of Equity Units.
- Purchase obligations totaled $20.5 billion, with $19.5 billion expected to be paid within twelve months, principally for agricultural commodity inventories.
Guidance, Outlook, Risks, and Unusual Items
- ADM does not provide forward-looking information in its MD&A because results can vary significantly with commodity prices, weather, crop plantings, government policies, global demand, energy prices, exchange rates, and competitive crop production.
- Management reported favorable current conditions, including strong global demand, tighter supplies, higher export volumes, favorable ethanol economics, and continued biodiesel demand supported by government mandates; these conditions are subject to substantial volatility.
- ADM acquired the remaining interest in Golden Peanut Company, obtaining 100% ownership. A $71 million pretax gain resulted from revaluing its previously held investment. Golden Peanut results were expected to be consolidated beginning in the third quarter of fiscal 2011.
- A change in machinery and equipment service-life estimates reduced current-quarter depreciation expense by $39 million and increased after-tax earnings by $24 million, or $0.04 per diluted share.
- Interest-rate swap gains included in other income were $55 million for the quarter and $24 million for the six months. These gains were not representative of recurring operating performance.
- The six-month results included a $67 million insurance recovery related to the Destrehan, Louisiana facility explosion and business-interruption claim.
- ADM do Brasil faced Brazilian tax assessments of $503 million for 2004 and $105 million for 2006–2007, plus potential interest and currency effects. The company has appealed, has not recorded a liability for the assessments, and estimates potential additional claims of approximately $104 million for later years.
- The company is exposed to commodity, foreign-exchange, interest-rate, counterparty, and derivative valuation risks. Its estimated market risk from a hypothetical 10% adverse commodity-price movement was $124 million based on the average six-month net commodity position.
- Management stated that disclosure controls were effective and that there were no significant changes in risk factors or material adverse legal proceedings during the period.
Investor Verification Items
- Verify whether the large working-capital build and negative operating cash flow normalize as commodity inventories are sold and receivables are collected.
- Assess the sustainability of segment gains, particularly Agricultural Services and Corn Processing, excluding favorable commodity-market conditions and unusual items.
- Monitor LIFO charges or credits, derivative mark-to-market volatility, and the effect of commodity-price changes on reported margins.
- Review Golden Peanut’s post-acquisition contribution beginning in the third quarter of fiscal 2011.
- Evaluate short-term borrowing, commercial paper maturities, unused credit capacity, and the planned settlement of the Equity Units by June 1, 2011.
- Track the Brazilian tax appeals and any future assessments, interest, penalties, or required financial-statement reserves.
- Confirm the effect of the machinery service-life change on future depreciation expense and earnings comparability.
