Archer-Daniels-Midland Company: Q3 2022 Form 10-Q Summary
Business context and reporting period
ADM is a global agricultural origination, processing, merchandising, and human and animal nutrition company operating in more than 70 countries. Its reportable segments are Ag Services and Oilseeds, Carbohydrate Solutions, and Nutrition; remaining operations are classified as Other Business. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $24.683 billion | $20.340 billion | $75.617 billion | $62.159 billion |
| Gross profit | $1.811 billion | $1.326 billion | $5.808 billion | $4.337 billion |
| Gross margin | 7.3% | 6.5% | 7.7% | 7.0% |
| Net earnings attributable to ADM | $1.031 billion | $526 million | $3.321 billion | $1.927 billion |
| Diluted EPS | $1.83 | $0.93 | $5.87 | $3.41 |
| Adjusted diluted EPS | $1.86 | $0.97 | $5.91 | $3.69 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $3.348 billion | $5.853 billion |
| Adjusted EBITDA | $1.639 billion | $1.034 billion | $5.146 billion | $3.500 billion |
Q3 net margin was approximately 4.2%, compared with 2.6% in the prior-year quarter. Nine-month net margin was approximately 4.4%, compared with 3.1% in 2021. Q3 segment operating profit was $1.559 billion, up from $1.000 billion; nine-month segment operating profit was $4.938 billion, up from $3.250 billion.
- Ag Services and Oilseeds: Q3 operating profit was $1.075 billion versus $618 million; nine-month profit was $3.202 billion versus $1.965 billion. Performance benefited from strong global trade, origination, crushing, refined oils, biodiesel, and equity earnings from Wilmar.
- Carbohydrate Solutions: Q3 operating profit was $309 million versus $213 million; nine-month profit was $1.099 billion versus $855 million. Starches and Sweeteners improved, while Vantage Corn Processors declined because of weaker ethanol margins and higher corn costs.
- Nutrition: Q3 operating profit was $177 million versus $176 million; nine-month profit was $605 million versus $531 million. Human Nutrition improved, while Animal Nutrition faced competition, inflation, currency pressure, and softer demand in some markets.
- Other Business: Q3 operating profit was $18 million versus a $5 million loss; nine-month profit was $78 million versus $10 million, primarily reflecting higher short-term interest rates and improved insurance results.
Liquidity, cash flow, debt, and capital allocation
- Cash and cash equivalents were $1.099 billion at September 30, 2022, compared with $943 million at December 31, 2021. Total assets were $58.304 billion and shareholders’ equity was $24.029 billion.
- Operating cash flow declined to $3.348 billion from $5.853 billion, primarily because working capital changes used cash, including increases in segregated cash and investments, trade receivables, and other current assets.
- Capital expenditures were $841 million, compared with $714 million in the prior-year period. Financing cash outflows were $2.364 billion, including $1.200 billion of share repurchases and $677 million of dividends.
- Total debt consisted of $181 million of short-term debt, $888 million of current maturities of long-term debt, and $7.671 billion of long-term debt. Long-term debt represented 24% of total capital, compared with 26% at year-end 2021.
- ADM had $12.2 billion of total credit lines, of which $10.1 billion was unused. Accounts receivable securitization programs provided up to $2.6 billion of funding, with $0.6 billion unused. Total available liquidity was reported at $11.2 billion.
- There was no commercial paper outstanding against the $5.0 billion of credit lines supporting the U.S. and European commercial paper programs.
Material changes versus the prior comparable period
- Revenue increased 21% in Q3 and 22% for the first nine months, driven primarily by higher commodity selling prices and, in Q3, higher sales volumes. Foreign currency translation reduced Q3 revenue by approximately $1.0 billion and nine-month revenue by approximately $2.1 billion.
- Gross profit increased 37% in Q3 and 34% year to date, reflecting stronger Ag Services and Oilseeds, Starches and Sweeteners, and Human Nutrition results.
- Net earnings attributable to ADM increased 96% in Q3 and 72% for the first nine months. The comparison benefited from stronger operating performance and the absence of 2021 debt extinguishment and pension settlement charges.
- Processed volumes declined 11% in Q3 and 4% for the first nine months, mainly because of lower oilseed volumes, drought-related crop impacts, idled facilities in Ukraine and Paraguay, maintenance, and logistical constraints.
- SG&A increased to $818 million in Q3 and $2.461 billion for the first nine months, driven by higher IT and project costs, salaries and benefits, insurance costs, amortization, and bad-debt provisions.
- Share repurchases totaled $1.2 billion during the first nine months, and 90.5 million shares remained available under the repurchase authorization at September 30, 2022.
Guidance, outlook, commentary, risks, and unusual items
- ADM expected approximately $1.3 billion of total 2022 capital expenditures and approximately $0.9 billion of dividends, subject to strategic capital uses, operating cash flow, and working capital requirements.
- Management cited continued volatility in commodity, energy, freight, and currency markets, inflationary pressures, supply-chain constraints, weather, crop conditions, global demand, government policies, and geopolitical developments as material operating variables.
- Most ADM facilities in Ukraine had been idled since February 24, 2022, although some resumed operations during the quarter following the opening of the Black Sea grain export corridor. Russian operations were scaled down to essential food commodities and ingredients. Management concluded that recorded Ukraine-related asset values were appropriate and that any required future adjustments were not expected to be material.
- The Ukraine conflict creates risks related to property damage, inventory losses, business interruption, sanctions, cyberattacks, counterparty defaults, supply availability, logistics, and commodity-price volatility. ADM stated that direct operations in Ukraine and Russia historically represented less than 0.1% of consolidated revenue, but indirect effects may be significant.
- Q3 specified items included $16 million of asset impairments, $12 million of restructuring charges, and $29 million of gains on asset sales. Nine-month other income included a $50 million one-time USDA Biofuel Producer Recovery Program payment.
- ADM issued $750 million of 2.900% sustainability notes due 2032 in February 2022 and redeemed €500 million of notes due 2022 during Q3. A new $500 million Asia-Pacific revolving credit facility was established on September 29, 2022.
- Pending legal and tax matters include ethanol-related antitrust and commodities litigation, Argentine transfer-pricing assessments, and a Dutch transfer-pricing dispute. ADM believes the disclosed litigation will not have a material adverse effect, but outcomes may remain uncertain for extended periods.
- Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether elevated Ag Services and Oilseeds margins and commodity-market benefits remain sustainable as crop flows, spreads, energy prices, and geopolitical conditions normalize.
- The effect of Ukraine and Russia disruptions, including the status of idled assets, Black Sea export conditions, sanctions exposure, and any future impairment or insurance claims.
- Working-capital intensity and cash conversion, particularly the effect of segregated brokerage balances, receivables, inventories, and derivative valuations on operating cash flow.
- Refinancing and renewal of the accounts receivable securitization programs, including the First Program’s November 18, 2022 termination date unless extended.
- Performance of Vantage Corn Processors and Animal Nutrition amid weaker ethanol economics, input-cost inflation, currency movements, and competitive pressure.
- Exposure to commodity, foreign-exchange, interest-rate, counterparty, tax, litigation, and regulatory risks, including the large Level 3 inventory and derivative valuations.
- Whether planned 2022 capital expenditures, dividends, and share repurchases remain consistent with operating cash flow and ADM’s stated liquidity objectives.