01—Abstract
Summary
Summary of the 10-K filed August 26, 2009. Cited figures are marked; the original filing is the authoritative source.
Archer-Daniels-Midland (ADM) reported fiscal 2009 (year ended June 30, 2009) net earnings of $1.707 billiona, or $2.65 per diluted share, down about 5% from $1.802 billion ($2.79) in fiscal 2008.
Net sales and other operating income were essentially flat at $69.2 billionb versus $69.8 billion, as higher average selling prices and volumes in Oilseeds Processing were offset by lower Agricultural Services merchandising sales, currency translation (about $2.0 billion negative), and lower volumes. The earnings picture was more mixed than the top line suggests: segment operating profit fell to $2.45 billion from $3.44 billion, with Corn Processing (ethanol and lysine margins squeezed by high corn costs) down 81%, while Oilseeds Processing rose 23% to $1.3 billion. Corporate results improved sharply because of a $517 million LIFO credit, versus a $569 million LIFO charge in 2008, which flatters reported earnings.
Earnings were also reduced by a $275 millionc non-cash charge tied to currency derivative losses at equity investee Gruma and a $158 million tax charge from restructuring its Wilmar International holding structure. Balance sheet and liquidity remained solid. Inventories fell to $7.8 billion from $10.2 billion and operating cash flow swung to $5.3 billion from a $3.2 billion outflow, which allowed the company to repay $2.9 billion under credit lines and hold net worth at $13.5 billion.
Long-term debt to total capital was 37%, and the company had $1.6 billiond in cash and short-term securities plus $6.5 billion of unused credit lines. Capital spending continues at a high level, with roughly $1.7 billion of approved projects over the next five years and new ethanol, PHA, propylene/ethylene glycol, cocoa and cogeneration facilities under construction. Management noted that the company does not provide forward-looking information in MD&A, so investors should weigh the outlook qualitatively.
Investors should focus on the quality of earnings and the sensitivity of the business to agricultural commodity prices, ethanol and biodiesel economics, and currency. The LIFO credit, equity-investee losses, and the Wilmar tax item (with a further estimated tax exposure of about $560 million on the eventual liquidation) all affect comparability. The company also disclosed heavy reliance on derivative and merchandising positions, with a 10% adverse price move implying up to $134 million of loss in the net commodity position at the low point of the year.
02—Key points
Key Highlights
- Net sales and other operating income of $69.2 billion, down 1% from $69.8 billion; net earnings of $1.707 billion ($2.65 diluted EPS), down about 5% from $1.802 billion ($2.79).
- Segment operating profit fell 29% to $2.45 billion; Oilseeds Processing rose 23% to $1.3 billion, while Corn Processing fell 81% to $185 million on higher corn costs and weaker ethanol and lysine margins.
- Corporate results were boosted by a $517 million LIFO inventory valuation credit (versus a $569 million charge in 2008), which materially flatters reported earnings.
- Earnings absorbed a $275 million non-cash currency derivative loss at equity investee Gruma and a $158 million tax charge tied to restructuring the Wilmar International holding structure; further Wilmar liquidation tax of roughly $560 million is possible.
- Operating cash flow reversed to +$5.3 billion from a $3.2 billion outflow as working capital released; inventories fell to $7.8 billion from $10.2 billion, enabling $2.9 billion of credit line repayments.
- Balance sheet remains conservative: net worth of $13.5 billion, long-term debt to capital of 37%, $1.6 billion of cash and short-term securities, and $6.5 billion of $6.6 billion credit lines unused.
- Capital program is elevated: about $1.6–1.7 billion of approved projects through 2010, including two dry corn mills adding 550 million gallons of ethanol capacity, PHA plastics, propylene/ethylene glycol, cocoa and coal cogeneration facilities.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed August 26, 2009Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $69.21B$69.82B | −0.9% |
| Cost of Revenue | $65.12B$65.97B | −1.3% |
| Gross Profit | $4.09B$3.84B | +6.4% |
| R&D Expenses | $50.00M$49.00M | +2.0% |
| SG&A Expenses | $1.41B$1.42B | −0.5% |
| Interest Expense | $469.00M$513.00M | −8.6% |
| Net Income | $1.68B$1.78B | −5.4% |
| EPS (Basic) | $2.62$2.76 | −5.1% |
| EPS (Diluted) | $2.62$2.75 | −4.7% |
| Shares Outstanding (Basic) | 643.00M644.00M | −0.2% |
| Shares Outstanding (Diluted) | 644.00M646.00M | −0.3% |
05—Questions
Frequently Asked Questions
Why did net earnings decline when the company's LIFO accounting produced a large credit?
Underlying operations weakened. Corn Processing profit collapsed because high corn costs compressed ethanol and lysine margins, and Agricultural Services merchandising volumes and margins softened with the global downturn. The LIFO credit of $517 million (versus a $569 million charge in 2008) and the lower tax and investment items did not fully offset these declines, so reported earnings fell about 5% despite the favorable LIFO swing.
How much of 2009 earnings were affected by one-time or non-operating items?
Several items mattered. The LIFO inventory valuation swing added about $517 million pre-tax in 2009 versus a $569 million charge in 2008. Negative items included a $275 million pre-tax ($171 million after tax, $0.27 per share) Gruma currency derivative loss, a $158 million ($0.24 per share) Wilmar holding-company tax charge, and losses on managed fund investments. Investors should consider these when assessing run-rate earnings.
What is the risk from the Wilmar International investment and its tax consequences?
ADM holds a 16.1% interest in Wilmar, accounted for under the equity method. The 2009 liquidation of a holding company triggered deemed-distribution U.S. tax; about $158 million was expensed in 2009. The finalization process could take up to 15 months, and based on the August 26, 2009 WIL share price, further income tax expense of roughly $560 million could be recognized when it occurs. Share price moves in Wilmar also affect the carrying value of the investment.
How exposed is ADM to commodity price and currency movements?
Substantially all raw materials are agricultural commodities, and the company hedges with exchange-traded futures, options and OTC contracts. Its net commodity position's fair value ranged from a $1.26 billion long position in 2008 to a $1.34 billion short position in 2009, with a hypothetical 10% adverse price move implying a $134 million potential loss at the low point. Currency exposure is mainly to the Euro, British pound and Canadian dollar; a 10% adverse move in exchange rates would reduce the fair value of permanently invested foreign net assets by $664 million, though the company states its net currency position risk is not material. Management emphasizes that hedges may not fully protect against these exposures.
Is ADM's balance sheet and dividend capacity strong enough to fund growth and shareholder returns?
Yes, by the company's measures. Net worth was $13.5 billion, long-term debt to total capital was 37%, the commercial paper rating was A-1/P-1/F1, and long-term debt was rated A/A2/A. Liquidity included $1.6 billion of cash and short-term securities and $6.5 billion of unused credit lines. Quarterly dividends rose to $0.14 in fiscal 2009 from $0.13 and $0.115 earlier in fiscal 2008, with dividends totaling $0.54 per share. The company also has $1.15 billion of convertible notes and $1.75 billion of equity units that could create future dilution, with call options and warrants intended to offset part of the convertible dilution.
06—Continue