Archer-Daniels-Midland Co quarterly report, Q3 FY2018

Archer-Daniels-Midland Company: 2018 Q3 Form 10-Q Summary

Business Context and Reporting Period

ADM procures, transports, stores, processes, and merchandises agricultural commodities and ingredients for food, feed, energy, and industrial markets in more than 170 countries. Reportable segments are Origination, Oilseeds, Carbohydrate Solutions, and Nutrition; remaining activities are classified as Other.

This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared primarily with the corresponding 2017 periods. Segment results were reclassified to reflect ADM’s 2018 operating structure.

Key Financial Metrics

Metric	Three Months 2018	Three Months 2017	Nine Months 2018	Nine Months 2017
Revenue	$15.800 billion	$14.827 billion	$48.394 billion	$44.758 billion
Gross profit	$1.058 billion	$0.812 billion	$3.128 billion	$2.576 billion
Earnings before income taxes	$632 million	$225 million	$1.748 billion	$1.066 billion
Net earnings attributable to controlling interests	$536 million	$192 million	$1.495 billion	$807 million
Diluted EPS	$0.94	$0.34	$2.64	$1.41
Dividends per share	$0.335	$0.320	$1.005	$0.960

Gross margin was approximately 6.7% in the quarter versus 5.5% in the prior-year quarter and approximately 6.5% for the nine months versus 5.8% in the prior-year period. Net margin attributable to controlling interests was approximately 3.4% for the quarter versus 1.3% and 3.1% for the nine months versus 1.8%.

Segment operating profit: $881 million in the quarter, up from $485 million; $2.487 billion year to date, up from $1.803 billion.
Adjusted segment operating profit: $861 million in the quarter versus $541 million; $2.502 billion year to date versus $1.877 billion.
Adjusted EBITDA: $935 million in the quarter versus $642 million; $2.724 billion year to date versus $2.128 billion.
Adjusted diluted EPS: $0.92 in the quarter versus $0.45; $2.62 year to date versus $1.62.
Income taxes: The effective tax rate was 15.2% for the quarter and 14.3% year to date, compared with 13.3% and 24.0%, respectively, in 2017.

Cash Flow, Balance Sheet, Debt, and Liquidity

Cash used in operating activities was $3.680 billion for the nine months, compared with $3.249 billion in 2017. The reported operating cash outflow was significantly affected by receivables securitization and working-capital movements.
Cash provided by investing activities was $4.575 billion, including $8.804 billion of proceeds from retained interests in securitized receivables and $555 million of capital expenditures.
Cash used in financing activities was $104 million, including $568 million of dividends. Share repurchases were insignificant during the period.
Cash, cash equivalents, restricted cash, and restricted cash equivalents totaled $2.649 billion at September 30, 2018, including $915 million of cash and cash equivalents and $1.734 billion of restricted cash within segregated investments.
Total assets were $39.664 billion and shareholders’ equity was $19.000 billion at September 30, 2018.
Short-term debt was $532 million, current maturities of long-term debt were $590 million, and long-term debt was $6.730 billion. Long-term debt represented 26% of total capital, compared with 27% at December 31, 2017.
ADM issued €650 million, or approximately $754 million, of 1.0% notes due 2025 in September 2018.
Credit lines totaled $8.8 billion, of which $6.8 billion was unused. U.S. commercial paper outstanding was $0.4 billion; no European commercial paper was outstanding.
Accounts receivable securitization programs provided up to $1.8 billion of funding, with approximately $1.5 billion utilized and $0.3 billion unused at quarter-end. The programs were scheduled to terminate in the first half of 2019, and management expected to extend them.
The current ratio was 1.7 to 1. ADM expected approximately $0.8 billion of 2018 capital expenditures and approximately $0.8 billion of 2018 dividend cash outlays.

Material Changes Versus the Prior Comparable Period

Quarterly revenue increased 7%, while nine-month revenue increased 8%, driven by higher commodity prices and volumes. Nine-month volume gains were concentrated in oils, soybeans, and corn.
Quarterly net earnings attributable to controlling interests increased $344 million, or 179%; nine-month earnings increased $688 million, or 85%.
Origination operating profit rose to $129 million from $39 million in the quarter and to $363 million from $143 million year to date, reflecting stronger margins, destination marketing, export demand, and transportation results.
Oilseeds operating profit rose to $349 million from $113 million in the quarter and to $1.042 billion from $624 million year to date, supported by stronger crushing margins, global meal demand, soybean volumes, and equity earnings. Peanut results remained pressured by excess inventories.
Carbohydrate Solutions operating profit declined to $288 million from $300 million in the quarter and to $748 million from $793 million year to date, primarily due to weaker ethanol margins, higher costs, production issues, and plant downtime.
Nutrition operating profit was broadly flat in the quarter at $67 million versus $68 million, but increased to $277 million from $239 million year to date. Wild Flavors and Specialty Ingredients improved, while Animal Nutrition faced lower premix margins and lysine production issues.
Asset impairment, exit, and restructuring costs declined to $1 million from $107 million in the quarter and to $41 million from $140 million year to date. The 2017 period included major Peoria ethanol impairment and workforce restructuring charges.
Equity earnings from unconsolidated affiliates increased to $131 million in the quarter and $378 million year to date, benefiting from investments including Wilmar and CIP.
ADM adopted ASC 606 using the modified retrospective method. The cumulative opening retained-earnings effect was less than $1 million; reported nine-month revenue was $124 million lower than it would have been under the prior revenue standard, with a $2 million reduction in net earnings.

Outlook, Management Commentary, Risks, and Unusual Items

No formal earnings guidance was provided in the filing. Management expected 2018 capital expenditures of approximately $0.8 billion and dividends of approximately $0.8 billion.
ADM agreed to acquire Neovia, a global animal-nutrition business, for approximately $1.8 billion, subject to regulatory approvals and customary adjustments. The transaction was expected to close near the end of 2018 and was expected to be funded with operating cash flow and other liquidity sources.
During the nine months, ADM acquired Probiotics International Limited and Rodelle for aggregate cash consideration of $366 million, or $324 million net of cash acquired. ADM also invested in joint ventures with Cargill and Aston Foods.
Commodity margins benefited from strong global meal demand, a smaller Argentine soybean crop, trade-related market dislocations, and favorable origination conditions. Results remain sensitive to weather, crop yields, government policies, trade tariffs, global demand, freight rates, commodity prices, and ethanol economics.
ADM reported a $7 million quarterly LIFO valuation charge and a $14 million year-to-date LIFO valuation credit. Other specified items included gains on asset and business sales, impairment and restructuring charges, settlement charges, and acquisition-related adjustments.
Commodity and foreign-currency derivatives create valuation and counterparty risks. At September 30, 2018, derivative assets were $950 million and derivative liabilities were $1.160 billion for instruments not designated as hedges.
Purchase obligations were $13.0 billion at September 30, 2018, including $11.2 billion expected to be paid within 12 months, primarily for agricultural commodities.
Significant tax contingencies included Brazilian assessments of approximately $400 million for tax, interest, and penalties; Argentine assessments of approximately $71 million plus potential additional assessments; and a Netherlands assessment of approximately $122 million. ADM was defending these matters and had not recorded liabilities for the Brazil and Argentina assessments based on its assessment of the technical merits.
On October 29, 2018, ADM announced GrainBridge, a 50% joint venture with Cargill. ADM also entered into a pension group annuity transaction expected to reduce pension obligations by approximately $0.5 billion and result in an estimated non-cash after-tax settlement charge of approximately $0.1 billion in the fourth quarter of 2018.
Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting. No significant changes to risk factors were reported.

Important Facts for Investors to Verify

Determine whether the exceptional 2018 improvement in Origination and Oilseeds margins is sustainable as commodity markets, tariffs, crop conditions, and freight rates change.
Monitor ethanol margins, production issues, and the performance of Carbohydrate Solutions.
Assess the funding, regulatory approval, closing, and integration risks associated with the proposed $1.8 billion Neovia acquisition.
Reconcile reported operating cash flow with securitized receivables, deferred consideration, inventory, and seasonal working-capital movements.
Review debt maturities, commercial paper reliance, securitization-program extensions, and liquidity after the Neovia transaction.
Evaluate the potential financial exposure from Brazilian, Argentine, and Netherlands tax assessments and the final accounting for the Tax Cuts and Jobs Act.
Consider the effect of ASC 606, the pending ASC 842 lease adoption, derivative valuations, and the fourth-quarter pension settlement charge on future reported results.