Archer-Daniels-Midland Company: Q1 2018 Form 10-Q Summary
Business context and reporting period
ADM procures, transports, stores, processes, and merchandises agricultural commodities and ingredients serving food, feed, energy, and industrial markets in more than 170 countries. The report covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. Reportable segments were Origination, Oilseeds, Carbohydrate Solutions, Nutrition, and Other.
Effective January 1, 2018, ADM changed its segment structure and reclassified prior-period results for comparability. The company also adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective method. The cumulative opening retained-earnings adjustment was less than $1 million.
Financial performance and key metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $15.526 billion | $14.988 billion | +$538 million |
| Gross profit | $889 million | $872 million | +$17 million |
| Earnings before income taxes | $464 million | $458 million | +$6 million |
| Net earnings attributable to controlling interests | $393 million | $339 million | +$54 million |
| Diluted EPS | $0.70 | $0.59 | +$0.11 |
| Adjusted diluted EPS | $0.68 | $0.60 | +$0.08 |
| Adjusted EBITDA | $798 million | $761 million | +$37 million |
| Effective tax rate | 14.7% | 25.8% | Lower by 11.1 percentage points |
| Dividends per share | $0.335 | $0.320 | Higher |
Revenue increased primarily from higher sales volumes, particularly oils, biodiesel, alcohol, and flavors. Foreign currency translation increased both revenue and cost of products sold by approximately $0.5 billion. Gross margin was approximately 5.7% in 2018 versus approximately 5.8% in 2017.
- Origination: Revenue declined 1% to $6.215 billion and operating profit declined to $45 million from $47 million. Stronger global trade results were offset by lower North American grain and transportation performance, including approximately $40 million of negative mark-to-market effects expected to reverse as contracts are executed.
- Oilseeds: Revenue increased 8% to $5.633 billion and operating profit increased 12% to $350 million. Record crush volumes, stronger meal demand, improved South American origination, and approximately $120 million of benefit from the 2017 biodiesel tax credit outweighed more than $100 million of negative forward-hedge timing effects and weaker Asia results.
- Carbohydrate Solutions: Revenue increased 4% to $2.622 billion and operating profit was broadly unchanged at $213 million. Starches and sweeteners improved, while ethanol margins were pressured by high U.S. industry inventories.
- Nutrition: Revenue increased 11% to $950 million and operating profit increased 25% to $96 million, supported by flavor ingredients, vitamins, animal nutrition demand, and favorable ingredient positions.
- Other: Operating profit declined to $13 million from $30 million, primarily due to weaker captive-insurance underwriting and futures-brokerage results.
Asset impairment, exit, and restructuring costs were $16 million, including a $12 million impairment of an equity investment and $4 million of restructuring charges, compared with $10 million in the prior-year quarter. Selling, general, and administrative expense declined slightly to $513 million. Interest expense increased to $91 million because of higher commercial-paper borrowings.
Cash flow, liquidity, debt, and balance sheet
| Metric | March 31, 2018 | December 31, 2017 |
|---|---|---|
| Cash and cash equivalents | $797 million | $804 million |
| Total assets | $41.100 billion | $39.963 billion |
| Short-term debt | $2.330 billion | $857 million |
| Long-term debt | $6.657 billion | $6.623 billion |
| Shareholders’ equity | $18.737 billion | $18.322 billion |
| Current ratio | 1.6 to 1 | Not clearly provided |
- Operating activities used $3.574 billion, compared with $1.489 billion used in the prior-year quarter. Working capital reduced operating cash flow by approximately $4.1 billion, principally because of higher inventories, receivables, and seasonal payments to suppliers.
- Investing activities provided $2.180 billion, including $3.656 billion of proceeds from retained interests in securitized receivables and $1.298 billion of related investments. Capital expenditures were $196 million.
- Financing activities provided $1.277 billion, primarily from $1.474 billion of net borrowings under credit lines. Dividends paid were $190 million; no share repurchases were made under the repurchase program.
- Total cash, cash equivalents, restricted cash, and restricted cash equivalents declined to $1.741 billion from $1.858 billion at year-end.
- ADM had $8.1 billion of total lines of credit, of which $5.1 billion was unused. Commercial-paper borrowings were $1.4 billion against a $5.0 billion facility.
- Accounts receivable securitization programs provided up to $1.7 billion of funding; $1.4 billion was utilized at March 31, 2018. The second program was amended to increase its capacity from $0.4 billion to $0.5 billion.
- Long-term debt represented 26% of long-term debt plus shareholders’ equity, while net debt represented 30% of net debt plus shareholders’ equity.
Guidance, outlook, commentary, and risks
Management expects 2018 capital expenditures of approximately $0.8 billion and cash dividends of approximately $0.8 billion. The filing does not provide formal full-year earnings guidance.
Management cited strong oilseed demand and crush volumes, solid sweetener and starch demand, favorable flavor and animal-nutrition trends, and strong South American biodiesel conditions. Offsetting pressures included high ethanol inventories, competition and large supplies in North American refined oils, margin pressure in certain specialty-ingredient markets, high river conditions, and commodity and hedge mark-to-market timing effects.
- Purchase obligations increased to $13 billion from $9.5 billion at year-end, with $11.6 billion expected to be paid within the next 12 months.
- ADM faces material tax contingencies, including Brazilian assessments totaling approximately $475 million for tax, interest, and penalties; Argentine assessments totaling approximately $122 million, plus potential additional assessments; and a Netherlands assessment totaling approximately $130 million. The company has not recorded liabilities for the Brazil and Argentina assessments and has accrued an amount for the Netherlands matter it believes reflects the likely outcome.
- The Tax Cuts and Jobs Act reduced the effective tax rate, but ADM had not completed its accounting for the Act and noted that future regulatory guidance or tax-law changes could materially affect net income or cash flow.
- The business is exposed to agricultural commodity prices, weather, crop disease, plantings, government programs, trade policy, global demand, foreign exchange, interest rates, counterparty defaults, freight volatility, and derivative valuation risk.
- ASC 842, Leases, is required beginning January 1, 2019. ADM expects a significant increase in recognized right-of-use assets and lease liabilities, primarily from operating leases.
- The company expects to complete its assessment of the lease standard’s financial impact in the third quarter of 2018. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- ADM announced pending or proposed portfolio actions involving its Bolivian oilseeds operations, a Vland Biotech enzyme development agreement, a Cargill soybean-meal and oil joint venture in Egypt, and a proposed 50% stake in Aston Foods’ sweeteners and starches business. These transactions remained subject to approvals or completion conditions.
Most important facts for investors to verify
- Whether oilseed hedge timing effects and North American grain mark-to-market losses reverse as management expects.
- The sustainability of the lower 14.7% effective tax rate and the remaining accounting effects of the Tax Cuts and Jobs Act.
- Cash conversion and working-capital requirements, particularly the $3.6 billion operating cash outflow and $0.6 billion inventory increase.
- Commercial-paper usage, receivables securitization dependence, and the increase in net debt to capital.
- Outcomes and potential cash exposure from the Brazil, Argentina, and Netherlands tax assessments.
- Execution and regulatory approval of announced portfolio transactions and the expected 2019 impact of ASC 842.
- Reported GAAP results versus adjusted measures, including the effects of impairments, restructuring charges, LIFO credits, tax adjustments, and hedge timing.