Business Context and Reporting Period
Archer-Daniels-Midland Company (ADM) filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2021. ADM operates through Ag Services and Oilseeds, Carbohydrate Solutions, Nutrition, and Other Business. Its results are materially influenced by agricultural commodity prices, volumes, weather, freight, energy costs, foreign exchange, and global demand.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Change |
|---|---|---|---|
| Revenue | $22.926 billion | $16.281 billion | +40.8% |
| Gross profit | $1.463 billion | $1.108 billion | +32.0% |
| Gross margin | 6.4% | 6.8% | Down approximately 0.4 percentage points |
| Net earnings attributable to ADM | $712 million | $469 million | +51.8% |
| Diluted EPS | $1.26 | $0.84 | +$0.42 |
| Adjusted diluted EPS | $1.33 | $0.85 | +$0.48 |
| Segment operating profit | $1.145 billion | $813 million | +40.8% |
| Adjusted EBITDA | $1.207 billion | $890 million | +35.6% |
| Dividends per share | $0.37 | $0.36 | +$0.01 |
For the six months ended June 30, 2021, revenue was $41.819 billion versus $31.251 billion, gross profit was $3.011 billion versus $2.059 billion, net earnings attributable to ADM were $1.401 billion versus $860 million, diluted EPS was $2.48 versus $1.53, adjusted EPS was $2.72 versus $1.49, and adjusted EBITDA was $2.466 billion versus $1.616 billion. Year-to-date gross margin was approximately 7.2% versus 6.6% in the prior-year period.
Segment Performance
- Ag Services and Oilseeds: Q2 operating profit increased 38% to $570 million, supported by North American origination, crushing margins, refined products, and higher Wilmar equity earnings. South American origination and some global trade activities were weaker.
- Carbohydrate Solutions: Q2 operating profit increased 96% to $383 million, benefiting from stronger ethanol margins, improved demand, co-product values, and the resumption of production at two dry mills.
- Nutrition: Q2 operating profit increased 27% to $201 million, supported by flavors, specialty proteins, probiotics, fibers, amino acids, and favorable product mix.
- Other Business: Q2 operating profit declined to $6 million from $38 million, primarily because of captive insurance underwriting losses, partly offset by recoveries in other segments.
Cash Flow, Liquidity, Debt, and Capital Allocation
- Operating cash flow was $3.007 billion for the first six months of 2021, compared with an operating cash outflow of $436 million in the prior-year period.
- Capital expenditures were $427 million; cash dividends were $417 million; and financing activities used $576 million, including $752 million of net repayments under credit lines.
- Cash and cash equivalents were $869 million at June 30, 2021, compared with $666 million at December 31, 2020. Total cash, cash equivalents, restricted cash, and restricted cash equivalents were $6.683 billion.
- Short-term debt was $1.289 billion and long-term debt was $8.432 billion. Long-term debt represented 28% of total capital. Net debt to capital was 29%, down from 32% at year-end 2020.
- ADM had $11.9 billion of total credit lines, of which $8.6 billion was unused. The company had $0.6 billion of commercial paper outstanding against $6.5 billion of supporting capacity.
- Accounts receivable securitization programs provided up to $2.0 billion of funding and were fully utilized at June 30, 2021.
- Management expected 2021 capital expenditures of approximately $0.9 billion to $1.0 billion, dividends of approximately $0.8 billion, and up to $0.5 billion of share repurchases, subject to other strategic uses of capital.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by higher commodity selling prices, which increased revenue by approximately $6.5 billion in Q2 and $10.4 billion year to date, with more modest volume effects.
- Profitability improved across the three reportable operating segments, particularly Carbohydrate Solutions and Ag Services and Oilseeds.
- Q2 included an $82 million non-cash pension settlement charge related to group annuity contracts. It also included a $40 million investment revaluation gain and a $30 million mark-to-market gain on the conversion option of exchangeable bonds.
- Year-to-date 2021 included $82 million of asset impairments and $24 million of restructuring charges, plus $4 million of corporate restructuring charges. The prior-year period benefited from a $91 million LIFO-related credit and a $73 million railroad maintenance tax benefit.
- ADM resumed ethanol production at two previously idled dry mills in April 2021. Q2 processed corn volumes increased, while oilseed volumes declined because of scheduled facility downtime.
- On March 25, 2021, ADM issued €500 million of fixed-to-floating-rate senior notes due September 2022.
Guidance, Outlook, Commentary, and Risks
Management did not provide a specific earnings-per-share forecast in the filing. The stated strategy emphasizes productivity, innovation, digital and technology investment, standardized processes, sustainability, and growth initiatives. ADM announced plans to build a soybean crushing plant and refinery in North Dakota, expected to open in 2023, and subsequently announced an agreement to acquire Sojaprotein, subject to regulatory approvals.
- Management cited strong demand for refined oils, biofuels, flavors, specialty proteins, probiotics, fibers, amino acids, and pet food and livestock nutrition products.
- Key pressures included high ocean freight rates, supply-chain bottlenecks, high commodity and input costs, lower South American farmer selling, COVID-19 effects, labor costs, and reduced Brazilian biodiesel mandates.
- Commodity and derivative results remain sensitive to weather, crop disease, plantings, government and trade policies, global demand, freight markets, basis movements, counterparty performance, and commodity-price volatility.
- Average commodity exposure during the first six months implied approximately $100 million of market risk for a hypothetical 10% adverse price change; the highest weekly exposure implied $143 million of risk.
- ADM faces ongoing tax matters in Argentina and the Netherlands. The filing also describes ethanol-price-manipulation and peanut-farmer antitrust litigation; management believes the ethanol matters will not have a material adverse effect, while outcomes remain uncertain.
- The Argentine tax authorities initiated criminal tax proceedings in the second quarter of 2021. The company has not recorded a liability for the related assessments based on its view that its tax position will prevail.
- The company stated that there were no significant changes to its risk factors, no material changes to off-balance-sheet arrangements, and no legal proceeding currently expected to have a material adverse effect on financial position, results, or liquidity.
Important Facts for Investors to Verify
- Whether elevated commodity prices and favorable merchandising, crushing, ethanol, and nutrition margins remain sustainable after timing benefits reverse.
- The degree to which earnings are affected by unrealized derivative gains and losses, Level 3 valuations, and commodity-market volatility.
- Progress toward the 2021 capital expenditure, dividend, and share-repurchase expectations and the continued utilization of the $2.0 billion receivables program.
- The maturity and refinancing requirements associated with the €500 million notes due September 2022, commercial paper, and other debt.
- Developments in the Argentine and Netherlands tax matters and the pending litigation, including the financial impact of the $45 million peanut antitrust settlement.
- Regulatory approval and purchase accounting implications of the Sojaprotein acquisition.
- The sustainability and operational effects of the planned North Dakota soybean crushing plant and ADM’s broader productivity and transformation initiatives.