01—Abstract
Summary
Summary of the 10-K filed September 11, 2006. Cited figures are marked; the original filing is the authoritative source.
Archer-Daniels-Midland (ADM) reported fiscal 2006 (year ended June 30, 2006) net earnings of $1.31 billiona, or $2.00 diluted EPS, up roughly 26% from $1.04 billion ($1.59) in fiscal 2005.
Net sales and other operating income rose 2% to $36.6 billionb. The improvement was driven mainly by Oilseeds Processing and Corn Processing, where segment operating profit rose 73% and 65%, respectively. Corn Processing benefited from ethanol demand as refiners replaced MTBE with ethanol, while Oilseeds Processing benefited from strong European biodiesel demand and abundant North American oilseed supplies.
Pretax results also included a $36 millionc tax credit, a $46 million Brazilian tax credit, and a range of asset write-downs and one-time charges. The balance sheet strengthened. Shareholders' equity rose to $9.8 billion from $8.4 billion, and the ratio of long-term debt to total capital fell to 29%.
Working capital was $5.7 billiond with a 1.9 current ratio, and the company had $1.1 billion in cash and short-term marketable securities. Operating cash flow fell to $1.4 billion from $2.1 billion, mainly because of higher inventories of agricultural raw materials and a $186 million increase in pension contributions. Management also flagged a substantial capital program, with about $3.1 billion planned over the next four years, including two dry corn mills adding 550 million gallons of ethanol capacity, a PHA plastics plant, a cocoa facility, and a biodiesel plant.
Key risks for investors remain tied to commodity prices, weather, energy costs, and government farm and biofuel policy. Competition is intense, and the company's business is globally diversified and highly capital-intensive. The filing also shows that the company does not provide forward-looking guidance in its MD&A, so investors must rely on the stated capital plans and the commodity and energy drivers described in the report.
02—Key points
Key Highlights
- Net earnings rose 26% to $1.31 billion ($2.00 diluted EPS) from $1.04 billion ($1.59) in fiscal 2005.
- Net sales and other operating income increased 2% to $36.6 billion, with Agricultural Services up 2% to $15.4 billion.
- Corn Processing operating profit rose 65% to $877 million on strong ethanol demand from the MTBE-to-ethanol shift and solid sweetener demand.
- Oilseeds Processing operating profit rose 74% to $598 million, helped by European biodiesel demand and improved North American crush margins.
- Shareholders' equity grew to $9.8 billion, and the long-term debt-to-capital ratio improved to 29% from 30%.
- Operating cash flow fell to $1.4 billion from $2.1 billion because of higher inventories and a $186 million increase in pension contributions.
- Planned capital spending of about $3.1 billion over four years includes 550 million gallons of new ethanol capacity and other growth projects.
03—Questions
Frequently Asked Questions
What drove the increase in ADM's fiscal 2006 earnings?
Most of the gain came from Oilseeds Processing and Corn Processing. Corn Processing benefited from higher ethanol prices and volumes as refiners replaced MTBE with ethanol, along with lower net corn costs. Oilseeds Processing benefited from strong European biodiesel demand, abundant rapeseed and North American oilseed supplies, and improved South American origination. The results also include a $36 million tax credit, though they are partly offset by asset write-downs and other one-time charges.
Why did operating cash flow decline even though earnings rose?
Operating cash flow fell to $1.4 billion from $2.1 billion mainly because working capital absorbed cash. Inventories of agricultural raw materials increased, and pension contributions rose by $186 million. Investors should watch whether this working capital build reverses in future periods.
What are the company's main growth plans?
ADM plans to spend about $3.1 billion over the next four years on approved capital projects and acquisitions. Major projects include two dry corn milling plants that add 550 million gallons of ethanol capacity, a PHA natural plastics facility through a joint venture with Metabolix, a U.S. cocoa processing facility, and a U.S. biodiesel plant.
How strong is ADM's balance sheet and liquidity?
The balance sheet is strong. Working capital was $5.7 billion with a current ratio of 1.9 to 1, and the company had $1.1 billion of cash and short-term marketable securities. Long-term debt was $4.1 billion, the long-term debt-to-total-capital ratio was 29%, and the company had $3.6 billion of commercial paper and bank lines available, of which $2.4 billion is committed. Standard & Poor's rates the long-term debt A+ and Moody's rates it A2.
What are the main risks facing ADM?
The main risks are agricultural commodity price volatility driven by weather, disease, and government farm policy; energy costs for processing and transportation; and the link between ethanol and biodiesel prices and gasoline and diesel prices. Other risks include global economic and political instability, transportation disruptions such as the 2005 gulf coast hurricanes, intense competition, and food and feed safety issues such as avian influenza and mad cow disease.
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