Business Context and Reporting Period
Archer-Daniels-Midland Company (ADM) filed this Form 10-K for the fiscal year ended December 31, 2020, including fourth-quarter results. ADM is a global agricultural origination, processing, human and animal nutrition, and food-ingredient company operating primarily through Ag Services and Oilseeds, Carbohydrate Solutions, Nutrition, and Other Business.
ADM operates in more than 200 countries and has approximately 39,000 employees. Its principal businesses process and merchandise oilseeds, corn, wheat, and other agricultural commodities into food, feed, energy, industrial, and specialty nutrition products.
Financial Results and Key Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $64.4 billion | $64.7 billion | Down $301 million |
| Gross profit | $4.5 billion | $4.1 billion | Up 7% |
| Earnings before income taxes | $1.9 billion | $1.6 billion | Up $295 million |
| Net earnings attributable to controlling interests | $1.8 billion | $1.4 billion | Up 28% |
| Diluted EPS | $3.15 | $2.44 | Up $0.71 |
| Adjusted diluted EPS | $3.59 | $3.24 | Up $0.35 |
| Adjusted EBITDA | $3.7 billion | $3.5 billion | Up $178 million |
| Effective tax rate | 5.4% | 13.2% | Lower |
Gross margin was approximately 6.9% of revenue, compared with approximately 6.4% in 2019. The effective tax rate benefited from geographic earnings mix, foreign currency remeasurement, U.S. tax credits, and adjustments to previously filed returns.
- Ag Services and Oilseeds: Revenue was $49.7 billion, up 2%; segment operating profit was $2.1 billion, up $170 million. Ag Services and Wilmar equity earnings improved, while Crushing and Refined Products and Other declined.
- Carbohydrate Solutions: Revenue was $8.5 billion, down 14%; segment operating profit was $717 million, up $73 million. Starches and Sweeteners remained solid, while Vantage Corn Processors continued to report a loss, although the loss narrowed.
- Nutrition: Revenue was $5.8 billion, up 2%; segment operating profit was $574 million, up 37%. Human and Animal Nutrition benefited from demand for flavors, probiotics, plant-based proteins, pet food, feed, and edible beans.
- Other Business: Segment operating profit was $52 million, down from $85 million, primarily reflecting lower results and loss provisions in the futures commission and brokerage business.
Fourth-quarter revenue was $18.0 billion, gross profit was $1.4 billion, net earnings attributable to controlling interests were $687 million, and diluted EPS was $1.22. Fourth-quarter earnings included debt-related, impairment, acquisition, asset-sale, conversion-option, and discrete tax items.
Cash Flow, Liquidity, Debt, and Capital Allocation
- Cash used in operating activities was $2.4 billion, compared with $5.5 billion used in 2019. Working-capital needs remained significant because inventories increased by $2.4 billion, primarily due to higher commodity prices.
- Cash provided by investing activities was $4.5 billion, including $823 million of capital expenditures and $728 million of proceeds from asset and business sales.
- Cash used in financing activities was $423 million. ADM issued $1.8 billion of long-term debt and repaid $2.1 billion, including debt redemptions and a $665 million tender offer.
- Cash and cash equivalents were $666 million at year-end; including segregated cash and investments, total cash, cash equivalents, and restricted cash were $4.6 billion.
- ADM had $10.2 billion of credit lines, of which $6.6 billion was unused. Accounts receivable securitization programs provided up to $1.8 billion, with $1.6 billion utilized at year-end.
- Short-term debt was $2.0 billion, long-term debt was $7.9 billion, and shareholders’ equity was $20.0 billion. Long-term debt represented 28% of total capital, versus 29% in 2019; net debt represented 32% of capital, versus 29%.
- The current ratio was 1.5, compared with 1.6 in 2019. ADM was in compliance with its debt covenants, and the major rating agencies maintained solid investment-grade ratings with stable outlooks.
- ADM paid $809 million in dividends and repurchased $133 million of common stock in 2020. The company had repurchased approximately 95.5 million shares under its authorized program through year-end.
Material Changes Versus the Prior Comparable Period
- Profitability improved despite slightly lower revenue. Higher Ag Services, Nutrition, Vantage Corn Processors, and Wilmar results more than offset weaker Crushing, Refined Products and Other, and Other Business results.
- COVID-19 reduced food-service demand, affected flavors and textured plant-based protein volumes, pressured ethanol demand, and reduced certain feed and amino-acid markets. ADM temporarily idled two dry-mill ethanol facilities in April 2020.
- Corn processed declined by 4.2 million metric tons, while oilseeds processed increased by 0.3 million metric tons.
- ADM adopted a market-value inventory method for certain agricultural commodity inventories previously accounted for under LIFO. The change reduced 2020 cost of products sold by $91 million, or $69 million after tax, equal to $0.12 per diluted share.
- Corporate results worsened to a $1.6 billion net charge from a $1.4 billion charge in 2019, primarily because of a $409 million loss on early debt extinguishment, a $17 million exchangeable-bond conversion-option loss, higher compensation, and ERP-related costs.
- Equity earnings from unconsolidated affiliates increased to $579 million from $454 million, principally because of higher Wilmar earnings.
- ADM sold part of its Wilmar stake, reducing ownership from 24.8% to 22.2%, and issued $300 million of zero-coupon bonds exchangeable into Wilmar shares.
- ADM acquired Yerbalatina and the remaining interest in Anco Animal Nutrition for aggregate cash consideration of $15 million and launched PlantPlus Foods, a 30% joint venture with Marfrig.
Guidance, Outlook, Commentary, Risks, and Unusual Items
ADM expects 2021 capital expenditures of $900 million to $1.0 billion, approximately $800 million of dividend payments, and up to $500 million of share repurchases, subject to strategic capital uses. The company expects temporarily idled ethanol facilities to restart as demand improves within the following 12 months. No specific earnings guidance was provided in the filing.
- Management cited strong demand and margins in global agricultural origination, solid biodiesel demand, resilient starches and sweeteners margins, and continued growth in Nutrition.
- Key risks include COVID-19, commodity-price and basis volatility, weather and crop conditions, energy and transportation costs, foreign exchange, trade policy, agricultural regulation, ethanol and biodiesel mandates, cyberattacks, food safety, environmental obligations, and disruptions to global logistics.
- ADM has approximately $4.9 billion invested in or advanced to joint ventures and other investments over which it has limited control. Net sales to unconsolidated affiliates were $4.7 billion in 2020.
- Accounts receivable securitization programs were restructured from deferred-purchase-price arrangements to pledge structures during 2020. The programs were scheduled to terminate in March and May 2021 unless extended.
- Legal matters include putative class actions concerning alleged ethanol derivatives manipulation and alleged peanut-price fixing. ADM denies liability and stated that it could not predict outcomes, while believing the matters would not materially affect financial condition, results, or cash flows.
- Tax contingencies include assessments in Argentina and the Netherlands. Unrecognized tax benefits were $151 million at year-end, and the company had $164 million of remaining transition-tax liability payable through 2025.
- Environmental, pension, commodity fair-value, derivative, and tax measurements involve significant estimates. The auditor identified fair-value measurement of market-priced inventories and commodity derivatives as a critical audit matter.
Important Facts for Investors to Verify
- Reconcile GAAP diluted EPS of $3.15 with adjusted EPS of $3.59, particularly the $409 million debt-extinguishment charge and the $91 million LIFO accounting credit.
- Assess whether operating cash flow can normalize after the $2.4 billion 2020 use and whether inventory and receivables financing remain sustainable as commodity prices change.
- Review ethanol capacity utilization, Vantage Corn Processors profitability, and the timing of restarting the idled facilities.
- Monitor Nutrition growth and margins, including the contribution from Neovia, Yerbalatina, PlantPlus Foods, and other strategic initiatives.
- Evaluate leverage, debt maturities, credit-line availability, commercial paper exposure, and the effects of future interest-rate changes.
- Review Wilmar ownership, valuation, equity earnings, and the terms and potential dilution or settlement effects of the exchangeable bonds.
- Track COVID-19 effects, commodity and freight volatility, crop conditions, trade restrictions, environmental regulation, and pending litigation and tax assessments.