Archer-Daniels-Midland Co quarterly report, Q2 FY2023

Archer-Daniels-Midland Company — Form 10-Q Summary

Business Context and Reporting Period

ADM is a global agricultural supply chain manager, commodity processor, and provider of human and animal nutrition products. Its reportable segments are Ag Services and Oilseeds, Carbohydrate Solutions, and Nutrition, with additional activities classified as Other Business. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the same periods in 2022.

Key Financial Metrics

Metric	Q2 2023	Q2 2022	Six Months 2023	Six Months 2022
Revenue	$25.19 billion	$27.28 billion	$49.26 billion	$50.93 billion
Gross profit	$1.88 billion	$2.10 billion	$3.96 billion	$4.00 billion
Net earnings attributable to ADM	$927 million	$1.24 billion	$2.10 billion	$2.29 billion
Diluted EPS	$1.70	$2.18	$3.82	$4.03
Adjusted diluted EPS	$1.89	$2.15	$3.98	$4.05
Operating cash flow	Not separately provided	Not separately provided	$899 million	$(675) million
Adjusted EBITDA	$1.63 billion	$1.87 billion	$3.39 billion	$3.51 billion

Q2 gross margin was approximately 7.5%, compared with approximately 7.7% in the prior-year quarter. Six-month gross margin was approximately 8.0%, compared with approximately 7.8% in the prior-year period. Management notes that margins per volume or metric ton are generally more meaningful than revenue-based margins in commodity merchandising operations.

Q2 segment operating profit was $1.53 billion, down from $1.84 billion; adjusted segment operating profit was $1.63 billion, down from $1.85 billion.
Six-month segment operating profit was $3.24 billion, down from $3.38 billion; adjusted segment operating profit was $3.35 billion, down from $3.41 billion.
Q2 income before taxes was $1.13 billion, versus $1.52 billion. The effective tax rate was 18.0%, compared with 18.4%.
Six-month income before taxes was $2.53 billion, versus $2.79 billion. The effective tax rate was 17.0%, compared with 17.4%.
June 30 cash and cash equivalents were $1.43 billion. Total available liquidity was $12.7 billion, including $11.3 billion of unused credit lines.
Total debt consisted of $125 million of short-term debt, $301 million of current maturities, and $8.24 billion of long-term debt.
Long-term debt to total capital was 25%, compared with 24% at December 31, 2022. Net debt to capital was 22%, compared with 25% at year-end.
Capital expenditures were $614 million, dividends were $494 million, and share repurchases were $1.00 billion during the first six months.

Material Changes Versus the Prior Comparable Period

Revenue declined 8% in Q2 and 3% year to date, primarily because of lower commodity sales prices and, in several businesses, lower volumes.
Ag Services and Oilseeds Q2 operating profit declined 6% to $1.05 billion. Lower Crushing and Ag Services results were partly offset by record Refined Products and Other results.
Carbohydrate Solutions Q2 operating profit declined 36% to $303 million, reflecting lower ethanol margins, unplanned corn germ plant downtime, and the absence of a $50 million USDA biofuel recovery payment received in the prior-year quarter.
Nutrition Q2 operating profit declined 23% to $185 million. Human Nutrition was broadly stable, while Animal Nutrition was affected by weaker amino acid margins, softer feed demand, competition, and inventory losses in pet solutions.
Other Business operating profit increased to $86 million from $18 million, primarily due to higher net interest income and improved captive insurance results.
Interest expense increased $107 million in Q2 and $162 million year to date, mainly because of higher short-term interest rates and new debt issuance. Interest and investment income also increased because of higher interest rates.
Q2 included $60 million of asset impairment, exit, and restructuring costs, including $43 million of impairments and $17 million of restructuring charges. Six-month charges were $67 million, compared with immaterial charges in the prior-year period.
Operating cash flow improved to $899 million from a $675 million use of cash, principally because inventory, receivables, and other working-capital balances declined.
ADM issued $500 million of 4.500% notes due 2033 and redeemed €600 million of 1.750% notes due 2023. Its Singapore subsidiary increased a revolving credit facility from $500 million to $750 million.
Share repurchases increased to $1.00 billion from $200 million in the first six months. The company had 74.8 million shares remaining under its repurchase authorization at June 30, 2023.

Guidance, Outlook, Commentary, and Risks

Management expects approximately $1.3 billion of 2023 capital expenditures, approximately $1.0 billion of dividends, and up to approximately $2.0 billion of opportunistic share repurchases, subject to strategic uses of capital, operating cash flow, and working-capital needs.
Management described solid demand and margins in starches, sweeteners, wheat milling, and certain refined products, but cited softer demand in selected human nutrition categories and animal nutrition markets.
Commodity prices, weather, crop yields, energy costs, freight, foreign exchange, interest rates, trade policies, government programs, global demand, and geopolitical developments may materially affect results.
The Russia-Ukraine conflict continues to create supply-chain and agricultural commodity risks. The Black Sea Grain Initiative expired on July 17, 2023. ADM stated that Ukraine and Russia historically represented less than 0.2% of consolidated revenue, and that Ukraine assets were appropriately valued at June 30.
Commodity and derivative valuations include significant Level 3 measurements. ADM reported $3.75 billion of Level 3 fair-value assets and $856 million of Level 3 liabilities at June 30, 2023, exposing results to local basis, transportation, and market-price assumptions.
Accounts receivable securitization programs provide up to $3.0 billion of funding, with $0.9 billion unused at June 30. The First Program terminates May 17, 2024, and the Second Program terminates February 20, 2024, unless extended.
Purchase obligations totaled $14.2 billion, including $13.2 billion expected to be paid within the following twelve months.
ADM faces ongoing tax disputes in Argentina and the Netherlands. The company believes its positions are supportable; it had accrued its best estimate for the likely outcome of the Dutch matter.
ADM is defending ethanol-related class actions alleging market manipulation and antitrust violations. The company believes these matters will not materially affect its financial condition, results of operations, or cash flows, but cannot predict the final outcomes with reasonable certainty.
Management reported effective disclosure controls and no material change in internal control over financial reporting. No significant changes to reported risk factors occurred during the quarter.

Important Facts for Investors to Verify

Whether weaker Crushing, Carbohydrate Solutions, and Animal Nutrition trends persist or reverse as commodity prices, ethanol margins, feed demand, and product inventories change.
The sustainability of operating cash flow after working-capital benefits from lower inventories and receivables.
The effect of higher interest rates on financing costs, customer deposit balances, and future debt refinancing.
Actual 2023 capital expenditures, dividends, share repurchases, and progress against the stated capital-allocation expectations.
Extensions or refinancing of the accounts receivable securitization programs before their stated 2024 termination dates.
Potential earnings volatility from commodity derivatives, Level 3 valuations, mark-to-market timing, foreign exchange, and hedge reclassifications.
Developments in the Ukraine/Russia operating environment, tax disputes, ethanol litigation, and the contingent import-duty provision.
The reconciliation and comparability of non-GAAP measures, including adjusted EPS, adjusted EBITDA, and adjusted segment operating profit, to GAAP results.