Business Context and Reporting Period
Archer-Daniels-Midland Company (ADM) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. ADM is a global agricultural origination, processing, transportation, and nutrition company operating through Ag Services and Oilseeds, Carbohydrate Solutions, Nutrition, and Other Business.
Results benefited from elevated commodity prices, strong global demand, tight oilseed supplies, favorable crushing and biofuel margins, and higher contributions from affiliates and acquisitions. Operations in Ukraine were largely idled after February 24, 2022, while Russian operations were scaled back to essential food commodities and ingredients.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |
|---|---|---|---|---|
| Revenue | $27.3 billion | $22.9 billion | $50.9 billion | $41.8 billion |
| Gross profit | $2.1 billion | $1.5 billion | $4.0 billion | $3.0 billion |
| Earnings before income taxes | $1.5 billion | $0.8 billion | $2.8 billion | $1.6 billion |
| Net earnings attributable to controlling interests | $1.2 billion | $0.7 billion | $2.3 billion | $1.4 billion |
| Diluted EPS | $2.18 | $1.26 | $4.03 | $2.48 |
| Dividends per share | $0.40 | $0.37 | $0.80 | $0.74 |
| Adjusted diluted EPS | $2.15 | $1.33 | $4.05 | $2.72 |
| Adjusted EBITDA | $1.9 billion | $1.2 billion | $3.5 billion | $2.5 billion |
Revenue increased 19% year over year in the quarter and 22% year to date, primarily from higher selling prices. Gross margin was approximately 7.7% in the quarter versus 6.4% in the prior-year quarter, and approximately 7.8% for the first six months versus 7.2% in the prior-year period. Net margin attributable to controlling interests was approximately 4.5% in the quarter versus 3.1%, and 4.5% year to date versus 3.3%.
- Segment operating profit: $1.8 billion in the quarter versus $1.1 billion; $3.4 billion year to date versus $2.3 billion.
- Quarterly segment performance: Ag Services and Oilseeds $1.1 billion, Carbohydrate Solutions $473 million, Nutrition $239 million, and Other Business $18 million.
- Year-to-date segment performance: Ag Services and Oilseeds $2.1 billion, Carbohydrate Solutions $790 million, Nutrition $428 million, and Other Business $60 million.
- Operating cash flow: $(675) million for the first six months, compared with $3.0 billion provided in the prior-year period.
- Capital expenditures: $500 million year to date, compared with $427 million in the prior-year period.
- Cash and liquidity: Cash and cash equivalents were $906 million. Total available liquidity was reported at $11.5 billion, including cash and unused credit lines.
- Debt: Short-term debt was $2.4 billion, current maturities of long-term debt were $1.1 billion, and long-term debt was $8.1 billion. Long-term debt represented 25% of total capital, while net debt represented 30% of net debt plus equity.
- Balance sheet: Total assets were $61.8 billion and shareholders’ equity was $24.4 billion at June 30, 2022.
Material Changes Versus the Prior Comparable Period
- Ag Services and Oilseeds operating profit increased 96% in the quarter and 58% year to date, driven by stronger global trade, crushing margins, destination marketing, ocean freight, and equity earnings from Wilmar.
- Carbohydrate Solutions operating profit increased 23% in the quarter and 23% year to date. Starches and Sweeteners improved, while Vantage Corn Processors was slightly higher in the quarter but lower year to date.
- Nutrition operating profit increased 19% in the quarter and 21% year to date, supported by demand for flavors, alternative proteins, probiotics, fibers, and amino acids. Results were partially offset by higher energy and raw-material costs and currency effects.
- Cost of products sold increased 17% in the quarter and 21% year to date, principally due to higher commodity costs. Selling, general, and administrative expenses increased 10% in the quarter and 10% year to date.
- The effective tax rate increased to 18.4% in the quarter and 17.4% year to date, versus 13.7% and 14.8%, respectively, primarily due to geographic earnings mix and discrete tax items.
- Operating cash flow declined substantially because working capital absorbed cash. Segregated cash and investments, trade receivables, other current assets, and inventories increased, partly offset by higher brokerage customer payables.
- ADM issued $750 million of 2.900% sustainability notes due March 2032 and expanded its U.S. and European commercial paper programs from $5.0 billion to $6.5 billion.
- ADM repurchased approximately $200 million of shares during the first six months and paid $453 million of dividends.
Outlook, Commentary, Risks, and Unusual Items
Management did not provide a specific full-year earnings outlook in the filing. For 2022, ADM expected capital expenditures of approximately $1.3 billion, dividends of approximately $0.9 billion, and up to $1.2 billion of share repurchases, subject to strategic uses of capital, operating cash flow, and working capital requirements.
- Management highlighted continued productivity and innovation initiatives, including the 1ADM transformation, procurement and supply-chain efficiencies, technology and automation, research and development, sustainability, and targeted growth investments.
- Planned or announced investments included expansions in Mainz, Germany; Decatur, Illinois; Marshall, Minnesota; and other nutrition, protein, and starch-related capabilities.
- A $50 million one-time payment from the USDA Biofuel Producer Recovery Program contributed to other income and supported Carbohydrate Solutions results.
- Current-period asset impairment, exit, and restructuring charges were immaterial, compared with $82 million in the quarter and $82 million year to date in the prior-year period primarily related to prior-year impairments, restructuring, and a pension settlement.
- Ukraine-related charges were immaterial through June 30, 2022, and management concluded that Ukraine receivables were collectible and temporarily idled property was not impaired. Future effects remain uncertain.
- Key risks include commodity-price and volume volatility, weather and crop conditions, energy and input costs, inflation, logistics constraints, foreign exchange, interest rates, counterparty and credit risk, sanctions, cyber risk, and geopolitical disruption related to Ukraine and Russia.
- Accounts receivable securitization programs provided up to $2.6 billion of funding, with $0.9 billion of unused capacity at June 30, 2022. The first program was scheduled to terminate November 18, 2022 unless extended, and the second February 16, 2023 unless extended.
- Purchase obligations totaled $19.7 billion, including $18.4 billion expected within the following twelve months, primarily for agricultural commodities at higher prices.
- ADM disclosed ongoing tax disputes in Argentina and the Netherlands. The company had accrued its best estimate for the Netherlands matter and believed it would prevail in the Argentine matters.
- ADM is defending class-action and other litigation alleging manipulation of ethanol derivative benchmarks. The company stated that it cannot predict the outcome but believes the matters will not materially adversely affect its financial condition, results, or cash flows.
Important Facts for Investors to Verify
- Whether elevated commodity prices, tight oilseed supplies, and strong crushing and biofuel margins persist or normalize.
- Whether working-capital demands continue to generate negative operating cash flow despite higher earnings.
- The availability and renewal terms of commercial paper, credit lines, and accounts receivable securitization programs.
- The ultimate operational, asset-valuation, supply-chain, sanctions, and litigation effects of the Ukraine and Russia situation.
- Whether the announced 2022 capital expenditure, dividend, and share-repurchase plans remain consistent with cash generation and working-capital needs.
- The sustainability of reported earnings after considering the $50 million USDA payment, derivative valuation effects, favorable timing effects, and other specified items.
- Progress and costs associated with the 1ADM, ERP, productivity, innovation, sustainability, and facility-expansion initiatives.