Inventory valuation changes lift ADM earnings

by Josh Sosland
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DECATUR, ILL. — Net income of Archer Daniels Midland Co. in the second quarter ended Dec. 31 was $585 million, equal to 91c per share on the common stock, up 24% from $473 million, or 73c per share in the second quarter of fiscal 2008. Net sales were $16,673 million, up 1%.

The company attributed the higher net income "principally to the positive impact on corporate results of the changes in LIFO (last in/first out) inventory valuations." Operating income was down during the quarter.

"Our insight into market dynamics and our core competencies in risk and cost management enabled our team to deliver strong results for the quarter as we saw a weakening global demand and margin environment," said Patricia Woertz, chairman, president and chief executive officer. "Our balance sheet is strong, and we are focused on managing our business in these challenging markets while continuing to execute our strategy of building long-term shareholder value through strengthening and growing our value chain."

While overall operating income was lower during the second quarter, the company’s Oilseeds Processing and Agricultural Services segments enjoyed strong results.

Operating profits of Oilseeds Processing were $319 million in the second quarter, up 46% from $219 million in the same period in fiscal 2008. The company said profit was up in all geographic regions except South America. The gains reflected improved crushing and original margins, offset by lower fertilizer profitability. Refining, packaging and biodiesel results were up. For the six months ended Dec. 31, operating earnings were $829 million, up 94%.

Corn Processing operating earnings in the second quarter plunged to $29 million, down 89% from $275 million in the second quarter last year. The decline reflected weaker ethanol operating conditions. For the six months, operating profits were $147 million in Corn Processing, down 72%.

Agricultural Services operating profit was $462 million, up 47% from $315 million a year earlier. The gain was due to improved merchandising and handling results. Year-to-date operating profit was $890 million, up 64%.

Profitability nearly evaporated in the ADM Other segment with $5 million in operating earnings, down 97% from $146 million in the second quarter last year. Operating profits were $125 million in the first six months of the year, down 50% from $252 million last year.

Factoring large in the decline in the Other business was the effect of lower equity earnings from the company’s investment in Gruma S.A.B. de C.V. Gruma was hit hard by foreign currency derivative losses. Shoring up the Other segment results were improved wheat and cocoa margins.

In detailing the LIFO accounting, ADM said a $123 gain was booked in the second quarter, versus a $225 million loss in the second quarter last year. For the first half of fiscal 2008, the LIFO credit was $576 million, versus a $307 loss the year before.

Net income in the first six months of fiscal 2009 was $1,635 million, or $2.54 per share, up 79% from $913 million, or $1.41, during the first half last year. Sales were $37,833 million, up 29%.

In a Feb. 3 conference call, Ms. Woertz elaborated on quarterly results, including the difficulties faced by ADM’s Corn Processing segment.

"We saw losses in our ethanol business as we experienced declining market prices, declining demand, and we wrote down our ethanol inventories," Ms. Woertz said. "The ethanol business is still challenging. While we did foresee the overbuilding of some supply a while ago, we did not foresee the depth of this current economic crisis or the decline in gasoline demand. Incremental blending, which in the past above the mandate had been increasing nicely, substantially stopped. We do have good reason to believe in the longer term opportunities for ethanol as we work our way through this oversupply situation.""

Steven R. Mills, chief financial officer and executive vice-president, estimated that the LIFO accounting resulted in a positive earnings swing of 34c per share (a positive 12c this year versus a negative 22c last year).

Discussing the Oilseeds Processing business, Mr. Mills said ADM benefited from having "a good bit of business booked forward with good margins." On the other hand he warned that crushing margins narrowed as the quarter proceeded and demand diminished.

Turning to Corn Processing, Mr. Mills said that while ethanol margins "collapsed" during the quarter, stronger results were achieved in the market for its edible products.

"We were able to generally maintain profitable (margins) for sweeteners and starches as higher selling prices and results of our international joint ventures compensated for the higher net corn costs," he said.

In wheat flour milling, "we see steady demand, and the large North American wheat crop has provided ample milling quality wheat for the industry," Mr. Mills said.

Cocoa demand has "flattened out a bit" and customers are more reticent, he said.

In New York Stock Exchange trading after ADM announced earnings, shares surged at the open but then fell back. After initially climbing as high as $28.75 (up 5%), the shares reversed course and were trading at about $26.50 (down 3%) an hour later.

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