Archer-Daniels-Midland Company: Q1 2019 Form 10-Q
Business context and reporting period
ADM is a global agricultural commodities, ingredients, processing, transportation, and merchandising company operating through Origination, Oilseeds, Carbohydrate Solutions, Nutrition, and Other. The unaudited filing covers the three months ended March 31, 2019, compared with the same period in 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $15.304 billion | $15.526 billion | Down $222 million |
| Gross profit | $928 million | $889 million | Up $39 million |
| Gross margin | 6.1% | 5.7% | Up approximately 40 bps |
| Net earnings attributable to controlling interests | $233 million | $393 million | Down $160 million |
| Diluted EPS | $0.41 | $0.70 | Down $0.29 |
| Net margin | 1.5% | 2.5% | Down approximately 100 bps |
| Adjusted EPS | $0.46 | $0.68 | Down $0.22 |
| Adjusted EBITDA | $675 million | $798 million | Down $123 million |
| Operating cash flow | $(2.035) billion | $(3.574) billion | Improved by $1.539 billion |
| Capital expenditures | $198 million | $196 million | Broadly unchanged |
Segment operating profit was $611 million versus $704 million. Carbohydrate Solutions declined to $96 million from $213 million, while Origination increased to $76 million from $46 million. Oilseeds was $341 million versus $349 million, and Nutrition was $81 million versus $96 million.
Debt, liquidity, and balance sheet
- Cash and cash equivalents were $926 million at March 31, 2019, compared with $1.997 billion at December 31, 2018.
- Total cash, cash equivalents, restricted cash, and restricted cash equivalents were $2.602 billion at quarter-end.
- Short-term debt was $1.595 billion, current maturities of long-term debt were $614 million, and long-term debt was $7.675 billion.
- ADM had $9.0 billion of total credit lines, including receivables securitization programs, with $6.2 billion unused. U.S. commercial paper outstanding was $1.3 billion.
- The current ratio was 1.5 to 1. Long-term debt to total capital was 29%; net debt to capital increased to 32% from 25% at year-end 2018.
- Dividends paid were $198 million, or $0.35 per share. Management expects approximately $0.8 billion of dividends and $0.8 billion to $0.9 billion of capital expenditures for 2019.
Material changes versus the prior comparable period
- Revenue decreased primarily because of lower commodity selling prices and lower volumes in Origination, Oilseeds, and Carbohydrate Solutions. Nutrition revenue increased 35%, primarily from acquisitions.
- Net earnings declined substantially because of the absence of the prior-year biodiesel tax credit, weaker Carbohydrate Solutions and Animal Nutrition results, lower Wilmar equity earnings, higher corporate costs, and a higher tax rate.
- SG&A increased $146 million to $659 million, reflecting acquisitions, higher performance-related and stock compensation expense, and increased IT and growth-project spending.
- The effective tax rate increased to 25.7% from 14.7%, primarily because the first quarter of 2018 included a biodiesel tax credit and the current quarter included unfavorable discrete tax items related primarily to U.S. tax reform transition tax adjustments.
- ADM acquired Neovia, Florida Chemical Company, and the remaining 50% interest in Gleadell for aggregate cash consideration of approximately $1.953 billion, including $1.876 billion net of cash acquired. The acquisitions added approximately $884 million of preliminary goodwill and $606 million of intangible assets.
- Adoption of the new lease standard resulted in approximately $793 million of right-of-use assets and $795 million of lease liabilities at January 1, 2019, with no material earnings or cash-flow impact.
Outlook, management commentary, risks, and unusual items
Management did not provide formal full-year earnings guidance in the filing. ADM expects 2019 capital expenditures of approximately $0.8 billion to $0.9 billion and dividends of approximately $0.8 billion.
- Severe weather affected U.S. grain movement, corn production, and Carbohydrate Solutions operations. Ethanol margins were pressured by high industry production and inventories.
- Global trade tensions with China, softer Chinese demand, slower South American farmer selling, commodity-price volatility, weather, crop conditions, government policies, foreign exchange, and global demand remain significant operating risks.
- Commodity and foreign-currency derivatives create exposure to market volatility, basis risk, counterparty defaults, and freight-market volatility. Average commodity-position market risk under a hypothetical 10% adverse price move was approximately $20 million during the quarter.
- ADM announced organizational and efficiency actions, including centralization, productivity initiatives, acquisition-synergy acceleration, and enhanced early retirement. It expects a second-quarter 2019 pension remeasurement charge of $55 million to $75 million; a further pension settlement charge of up to $50 million could occur in late 2019 or early 2020.
- Brazilian tax assessments totaled approximately $108 million of tax plus $309 million of interest and penalties. Argentine assessments totaled approximately $15 million of tax plus $55 million of interest and penalties, with potential additional assessments estimated at approximately $52 million of tax and $58 million of interest. ADM has not accrued liabilities for these matters and intends to defend its positions.
- A Netherlands transfer-pricing assessment totaled approximately $91 million of tax plus $31 million of interest. ADM has accrued an amount it believes represents the likely litigation outcome; further financial impacts could reach the full assessment.
- The U.S. accounts receivable securitization program providing up to $1.2 billion was scheduled to terminate on June 20, 2019 unless extended. The programs provided up to $1.8 billion in total funding and were utilized by $1.4 billion at quarter-end.
Most important facts for investors to verify
- Whether the acquired Neovia and Florida Chemical businesses deliver the expected revenue, margin, and synergy benefits, including the effect of acquisition-related costs and inventory revaluation.
- Whether Carbohydrate Solutions and ethanol margins recover from weather-related disruptions and weak industry conditions.
- The sustainability of improved Origination and Oilseeds crushing margins amid trade tensions, Chinese demand changes, and commodity-price volatility.
- The effect of higher corporate expenses, debt-funded acquisitions, interest expense, and the increase in net debt to capital.
- The outcome and potential cash exposure from the Brazilian, Argentine, and Netherlands tax matters.
- The amount and timing of the announced pension remeasurement and potential settlement charges.
- Renewal or replacement of the U.S. receivables securitization program and ADM’s ability to maintain liquidity while funding seasonal working capital and acquisitions.