Archer-Daniels-Midland Company: FY2018 Form 10-K Summary
Business context and reporting period
ADM is a global agribusiness and nutrition company operating in more than 170 countries. Its businesses procure, transport, store, process, and merchandise agricultural commodities and produce food and beverage ingredients, animal nutrition products, biofuels, and industrial products. Reportable segments are Origination, Oilseeds, Carbohydrate Solutions, and Nutrition, with financial services and insurance activities classified as Other.
The filing covers the fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter results. Segment reporting was reorganized effective January 1, 2018, and prior-period segment information was reclassified to conform to the new presentation.
Financial performance and key metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $64.341 billion | $60.828 billion | 6% |
| Gross profit | $4.181 billion | $3.518 billion | 19% |
| Gross margin | 6.5% | 5.8% | Improved |
| Earnings before income taxes | $2.060 billion | $1.609 billion | 28% |
| Net earnings attributable to controlling interests | $1.810 billion | $1.595 billion | 13% |
| Diluted EPS | $3.19 | $2.79 | 14% |
| Net margin | 2.8% | 2.6% | Improved |
| Adjusted EPS | $3.50 | $2.43 | 44% |
| Adjusted EBITDA | $3.634 billion | $3.064 billion | 19% |
| Cash dividends | $758 million | $730 million | 4% |
Revenue growth was driven primarily by higher sales prices and volumes for corn and soybean meal. Oilseeds and Origination were the principal operating contributors. Gross profit benefited from stronger crushing, origination, refined oils, biodiesel, merchandising, and specialty ingredients results, partly offset by weaker ethanol and peanut margins.
- Origination: Revenue increased 4% to $25.060 billion; segment operating profit increased 35% to $546 million.
- Oilseeds: Revenue increased 11% to $24.831 billion; segment operating profit increased 79% to $1.474 billion, supported by strong global crushing margins, meal demand, South American origination, biodiesel, and equity-investment earnings.
- Carbohydrate Solutions: Revenue decreased 1% to $10.279 billion; segment operating profit decreased 12% to $945 million due primarily to lower ethanol margins and Decatur, Illinois production issues.
- Nutrition: Revenue increased 8% to $3.790 billion; segment operating profit increased 9% to $339 million, reflecting stronger flavor, health and wellness, and specialty ingredient performance, partly offset by animal nutrition operating issues.
Cash flow, balance sheet, debt, and liquidity
- Cash used in operating activities was $4.784 billion, compared with $5.966 billion used in 2017. The reported use was heavily affected by changes in deferred consideration related to accounts receivable securitization and working capital.
- Cash provided by investing activities was $6.582 billion, including $7.838 billion of net cash inflows related to retained interests in securitized receivables, $842 million of capital expenditures, and $464 million for acquired businesses.
- Cash provided by financing activities was $187 million. ADM issued approximately $1.762 billion of long-term debt, paid $30 million of long-term debt, repurchased $77 million of shares, and paid $758 million of dividends.
- Cash and cash equivalents were $1.997 billion, and cash, cash equivalents, and short-term marketable securities totaled approximately $2.0 billion at year-end.
- Working capital was $8.812 billion and the current ratio was 1.7. Readily marketable commodity inventories included in working capital were $5.6 billion.
- Long-term debt, excluding current maturities, was $7.698 billion, compared with $6.623 billion in 2017. Long-term debt to total capital was 29%; net debt to capital was 25%.
- Credit lines totaled $10.4 billion, of which $8.9 billion was unused. No commercial paper was outstanding at year-end. The company was in compliance with debt covenants and maintained solid investment-grade credit ratings with stable outlooks.
- Accounts receivable securitization programs provided up to $1.8 billion of funding; $1.5 billion was utilized at year-end. The programs were scheduled to terminate in the first half of 2019, with management expecting extensions.
Material changes versus the prior comparable period
- Net earnings increased 13%, while adjusted segment operating profit increased 26% to $3.362 billion. Segment operating profit increased 29% to $3.273 billion.
- Oilseeds performance improved substantially, while Carbohydrate Solutions declined because of ethanol margin pressure and production disruptions.
- Corporate expense increased to a $1.213 billion charge from $927 million, including a $117 million non-cash pension settlement charge, a $49 million discontinued software project charge, and $24 million of restructuring charges related primarily to IT services.
- Interest expense increased to $364 million from $330 million because of higher rates and borrowings.
- The effective tax rate increased to 11.9% from 0.4%. The 2017 rate was unusually low because of $379 million of favorable Tax Cuts and Jobs Act-related adjustments. ADM recorded a $29 million fourth-quarter 2018 tax benefit while finalizing its transition-tax calculation.
- Capital expenditures declined to $842 million from $1.049 billion, while share repurchases declined to $77 million from $750 million.
- ADM adopted ASC 606 and amended cash-flow guidance in 2018. The cash-flow change reclassified approximately $7.8 billion of receivables-related inflows from operating to investing activities; the adoption of ASC 606 had an immaterial cumulative effect on opening equity.
Guidance, outlook, commentary, risks, and unusual items
Management expects 2019 capital expenditures of approximately $0.9 billion to $1.0 billion and cash dividend outlays of approximately $0.8 billion. ADM expects to continue its strategy of optimizing the core business, driving efficiencies, and expanding strategically across Taste, Nutrition, Animal Nutrition, Health and Wellness, and Carbohydrates.
- In January 2019, ADM completed the $1.8 billion acquisition of Neovia, a global value-added animal nutrition company with 72 facilities in 25 countries.
- ADM announced agreements to acquire Florida Chemical Company for $175 million, subject to regulatory approval, and the remaining 50% of Gleadell Agriculture, also subject to approval.
- Fourth-quarter 2018 included after-tax charges of approximately $196 million, primarily for the pension settlement, discontinued software, asset impairments, restructuring, and settlement items. Fourth-quarter results also included approximately $29 million of tax benefits.
- Key risks include agricultural commodity price and supply volatility, weather and climate conditions, energy costs, ethanol and biodiesel market conditions, tariffs and trade restrictions, foreign exchange, economic and political instability, competition, food and product safety, environmental regulation, cybersecurity, transportation disruptions, counterparty and joint-venture exposure, acquisition integration, and access to external financing.
- Material contingencies include tax assessments in Brazil, Argentina, and the Netherlands. The filing states that the potential financial impact could be substantial, although ADM believes its positions are supportable and has accrued an amount considered probable for the Netherlands matter.
- ADM had approximately $27.052 billion of contractual obligations, including $8.280 billion of long-term debt, $5.684 billion of estimated interest payments, $11.829 billion of purchase obligations, and $1.7 billion of outstanding letters of credit and surety bonds.
- The company expects adoption of lease accounting guidance on January 1, 2019 to add approximately $0.7 billion to $0.8 billion of right-of-use assets and corresponding lease liabilities.
Important facts for investors to verify
- Confirm the sustainability of 2018’s exceptionally strong Oilseeds results and the effect of commodity spreads, soybean meal demand, trade policy, and biodiesel credits.
- Assess whether ethanol margins and Decatur operating issues continue to pressure Carbohydrate Solutions.
- Review the cash-flow presentation and reliance on receivables securitization, including the scheduled 2019 program terminations and extensions.
- Evaluate leverage and refinancing needs following the 2018 debt issuances and the $1.8 billion Neovia acquisition.
- Track integration costs, synergies, and goodwill or intangible-asset impairment risk from Neovia and other Nutrition acquisitions.
- Monitor the Brazil, Argentina, and Netherlands tax assessments, as well as pending tax regulations and the remaining transition-tax effects.
- Separate reported GAAP earnings from adjusted metrics, particularly the $117 million pension settlement, $49 million software charge, restructuring costs, and tax adjustments.
- Review quarterly seasonality and fourth-quarter earnings volatility, including the decline in reported fourth-quarter net earnings to $315 million from $788 million in the prior-year quarter.