Business Context and Reporting Period
Archer-Daniels-Midland Company filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2019. ADM procures, transports, stores, processes, and merchandises agricultural commodities and manufactures food, feed, energy, industrial, and specialty nutrition ingredients. Reportable segments were Origination, Oilseeds, Carbohydrate Solutions, and Nutrition, with remaining activities classified as Other.
Effective July 1, 2019, ADM combined Origination and Oilseeds into a new Ag Services & Oilseeds business unit. During the first half of 2019, ADM acquired Neovia, Florida Chemical Company, Ziegler Group, and the remaining 50% interest in Gleadell Agriculture for aggregate cash consideration of approximately $2.0 billion.
Key Financial Metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $16.297 billion | $17.068 billion | $31.601 billion | $32.594 billion |
| Gross profit | $972 million | $1.181 billion | $1.900 billion | $2.070 billion |
| Gross margin | 6.0% | 6.9% | 6.0% | 6.4% |
| Net earnings attributable to controlling interests | $235 million | $566 million | $468 million | $959 million |
| Diluted EPS | $0.42 | $1.00 | $0.83 | $1.70 |
| Adjusted diluted EPS | $0.60 | $1.02 | $1.06 | $1.70 |
| Adjusted EBITDA | $794 million | $991 million | $1.469 billion | $1.789 billion |
Quarterly earnings before income taxes were $274 million versus $652 million in the prior-year quarter. The effective tax rate was 13.1% for the quarter and 19.9% for the six months, compared with 13.2% and 13.8%, respectively, in the comparable 2018 periods.
Six-month cash flow from operating activities was negative $2.713 billion, compared with negative $3.179 billion in 2018. Investing activities provided $1.346 billion, including $1.944 billion of cash used for acquisitions and $6.203 billion of proceeds from retained interests in securitized receivables. Financing activities provided $273 million, principally reflecting $1.413 billion of net borrowings under credit lines, partly offset by $611 million of long-term debt payments, $395 million of dividends, and $94 million of share repurchases.
At June 30, 2019, cash and cash equivalents were $849 million, short-term marketable securities were $4 million, and segregated cash and investments were $4.381 billion. Current assets were $19.548 billion against current liabilities of $12.602 billion, producing a current ratio of 1.6 to 1. Total debt, including short-term debt, current maturities, and long-term debt, was approximately $9.412 billion. ADM had $8.9 billion of total credit lines, of which $5.8 billion was unused, and $1.5 billion of commercial paper outstanding.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined 5% and six-month revenue declined 3%, primarily because of lower commodity prices and lower volumes.
- Quarterly net earnings attributable to controlling interests fell 58% to $235 million; six-month earnings fell 51% to $468 million.
- Quarterly segment operating profit declined $257 million to $645 million. Origination declined $120 million, Oilseeds declined $50 million, and Carbohydrate Solutions declined $55 million; Nutrition increased $3 million.
- Six-month segment operating profit declined $350 million to $1.256 billion. Carbohydrate Solutions declined $172 million, Origination declined $90 million, Oilseeds declined $58 million, and Nutrition declined $12 million.
- Nutrition revenue increased 50% in the quarter and 43% for the six months, primarily from acquisitions. Animal Nutrition revenue increased substantially following the Neovia acquisition.
- Quarterly selling, general, and administrative expense increased $42 million to $602 million; six-month expense increased 18% to $1.261 billion, primarily due to acquisitions, information technology, growth investments, and the Readiness program.
- Quarterly asset impairment, exit, and restructuring costs increased to $136 million from $24 million. The current quarter included $101 million of restructuring and pension remeasurement charges and $35 million of long-lived asset impairments.
- Corporate results were a net charge of $371 million in the quarter and $667 million for the six months, compared with $250 million and $490 million, respectively, in 2018. Current-period charges included unfavorable LIFO valuation effects and restructuring costs.
Outlook, Management Commentary, Risks, and Unusual Items
Management cited high water conditions on the Mississippi river system, severe North American weather, global trade tensions with China, softer Chinese soybean demand, and slower South American farmer selling as material operating headwinds. Ethanol margins remained pressured by high industry inventories and limited U.S. exports to China. By contrast, global meal demand, crushing volumes, refined oil and biodiesel demand, and demand for flavors and specialty ingredients were described as supportive.
ADM provided 2019 spending expectations of approximately $0.8 billion to $0.9 billion for capital expenditures, $0.8 billion for dividends, and approximately $0.1 billion to $0.2 billion for share repurchases. The company had 9.7 million shares remaining under its repurchase authorization through December 31, 2019.
Purchase obligations increased to $13.4 billion at June 30, 2019, including $12.5 billion expected to be paid within twelve months. Operating lease liabilities totaled $857 million, including $189 million current and $668 million non-current. ADM adopted the new lease standard on January 1, 2019, recording approximately $793 million of right-of-use assets and $795 million of lease liabilities at adoption.
Significant tax contingencies include Brazilian assessments totaling approximately $427 million for tax, interest, and penalties; Argentine assessments totaling approximately $89 million, plus potential additional assessments; and a Netherlands assessment totaling approximately $125 million. ADM has not recorded liabilities for the Brazil and Argentina assessments because management believes it is more likely than not to prevail, while an amount believed to represent the likely outcome has been accrued for the Netherlands matter.
Commodity prices, weather, crop conditions, government and trade policies, global demand, foreign exchange, interest rates, counterparty performance, and agricultural production remain key risks. Commodity derivatives and market-value inventory produced significant earnings volatility. Management stated that disclosure controls were effective and that there were no significant changes to reported risk factors.
Facts an Investor Should Verify
- Whether acquisitions, particularly Neovia, generate expected revenue, margins, synergies, and cash flow sufficient to offset integration costs and increased debt.
- The sustainability of earnings in Oilseeds and Origination after weather disruptions, trade tensions, and weaker Chinese demand.
- The duration and financial effect of depressed ethanol margins and production disruptions in Carbohydrate Solutions.
- Whether negative operating cash flow and increased net debt remain temporary working-capital effects or indicate persistent liquidity pressure.
- The ultimate outcomes and potential cash exposure from the Brazil, Argentina, and Netherlands tax disputes.
- Progress toward the stated 2019 capital expenditure, dividend, and share-repurchase plans and the July 2019 Ag Services & Oilseeds organizational change.