Archer-Daniels-Midland Company — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. ADM procures, transports, stores, processes, and merchandises agricultural commodities and manufactures food, feed, energy, industrial, flavor, and nutrition products across more than 170 countries. Reportable segments are Ag Services and Oilseeds, Carbohydrate Solutions, Nutrition, and Other.
Effective July 1, 2019, ADM combined its former Origination and Oilseeds businesses into the Ag Services and Oilseeds segment; prior periods were reclassified. The company also completed acquisitions of Neovia, Florida Chemical Company, The Ziegler Group, and the remaining interest in Gleadell for aggregate cash consideration of approximately $2.0 billion.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $16.726 billion | $15.800 billion | $48.327 billion | $48.394 billion |
| Gross profit | $1.078 billion | $1.058 billion | $2.978 billion | $3.128 billion |
| Gross margin | 6.4% | 6.7% | 6.2% | 6.5% |
| Earnings before income taxes | $503 million | $632 million | $1.092 billion | $1.748 billion |
| Net earnings attributable to ADM | $407 million | $536 million | $875 million | $1.495 billion |
| Net margin | 2.4% | 3.4% | 1.8% | 3.1% |
| Diluted EPS | $0.72 | $0.94 | $1.55 | $2.64 |
| Adjusted diluted EPS | $0.77 | $0.92 | $1.83 | $2.62 |
| Adjusted EBITDA | $886 million | $935 million | $2.355 billion | $2.724 billion |
Q3 segment operating profit was $758 million, down from $881 million. Nine-month segment operating profit was $2.014 billion, down from $2.487 billion. Nutrition was the primary growth contributor, while Carbohydrate Solutions and Ag Services and Oilseeds declined.
Cash flow, liquidity, debt, and capital allocation
- Cash used in operating activities was $3.639 billion for the first nine months of 2019, compared with $3.680 billion in 2018. Working-capital movements were heavily affected by receivables securitization and deferred consideration.
- Investing cash flow was $3.251 billion, including $1.946 billion for acquired businesses, $566 million of capital expenditures, and $5.714 billion of increases in deferred consideration offset by $9.527 billion of collections from securitized receivables.
- Financing cash flow was a use of $430 million, including $615 million of long-term debt payments, $960 million of net borrowings under credit lines, $150 million of share repurchases, and $592 million of dividends.
- At September 30, 2019, cash and cash equivalents were $932 million and short-term marketable securities were $26 million. Current assets were $19.178 billion versus current liabilities of $12.020 billion, implying a current ratio of approximately 1.6.
- Short-term debt was $1.242 billion, current maturities of long-term debt were $15 million, and long-term debt was $7.631 billion. ADM had $8.5 billion of credit lines, of which $5.5 billion was unused. Commercial paper outstanding was approximately $1.1 billion.
- Net debt to capital increased to 30% from 25% at year-end 2018; long-term debt to total capital remained 29%.
- Management expected 2019 capital expenditures of approximately $0.8 billion to $0.9 billion, dividends of approximately $0.8 billion, and share repurchases of approximately $150 million. The board extended the repurchase program through December 31, 2024 and authorized an additional 100 million shares.
Material changes versus the prior comparable period
- Q3 revenue increased 6%, but net earnings attributable to ADM declined 24% and diluted EPS declined 23%. Nine-month revenue was essentially flat, while net earnings declined 41% and diluted EPS declined 41%.
- Nutrition revenue increased 58% in Q3 and 48% year to date, principally due to acquisitions; segment operating profit increased 76% in Q3 and 14% year to date.
- Ag Services and Oilseeds operating profit declined 13% in Q3 and 15% year to date. Crushing and Wilmar earnings were weaker in Q3, while year-to-date Crushing benefited from favorable hedge timing effects.
- Carbohydrate Solutions operating profit declined 37% in both Q3 and the first nine months, primarily due to pressured ethanol margins, higher corn costs, and weaker starch, sweetener, and flour margins.
- Corporate charges increased to $255 million in Q3 from $249 million and to $922 million year to date from $739 million, reflecting higher interest expense and restructuring, pension settlement, and remeasurement charges.
- Asset impairment, exit, and restructuring costs increased to $53 million in Q3 and $200 million year to date, compared with $1 million and $41 million, respectively, in the prior-year periods.
- Interest expense increased $10 million in Q3 and $40 million year to date, principally because of borrowings used to fund acquisitions.
- The effective tax rate increased to 18.9% in Q3 and 19.4% year to date, compared with 15.2% and 14.3%, respectively, due largely to prior-year benefits from the retroactive biodiesel tax credit and favorable discrete tax items.
- ADM adopted the new lease standard on January 1, 2019, recording right-of-use assets of $793 million and lease liabilities of $795 million at adoption, without a material earnings or cash-flow impact.
Outlook, management commentary, risks, contingencies, and unusual items
Management emphasized that results are sensitive to commodity prices, weather, crop conditions, trade policies, global demand, energy prices, foreign exchange, government programs, and competitive production. Q3 operations were affected by continuing China trade tensions, delayed North American harvest conditions, high industry ethanol inventories, and African swine fever-related pressure in Asia-Pacific nutrition markets.
ADM reported strong global meal demand and solid refined oil and biodiesel demand, but continued pressure in ethanol margins. The company expects to continue investing in its Nutrition platform, efficiency initiatives, Readiness projects, and a multiyear global ERP implementation. The filing does not provide formal earnings guidance beyond the capital expenditure, dividend, and repurchase expectations noted above.
- Brazilian tax assessments related to commodity-hedging losses totaled approximately $101 million of tax plus $295 million of interest and penalties at September 30, 2019. ADM has not recorded a liability and intends to appeal.
- Argentine transfer-pricing assessments totaled approximately $15 million of tax plus $52 million of interest, with potential additional assessments estimated at approximately $33 million of tax plus $43 million of interest. No liability was recorded.
- A Netherlands transfer-pricing assessment related to a 2009 reorganization totaled approximately $88 million of tax plus $32 million of interest. ADM accrued an amount it believed reflected the likely outcome.
- New or continuing litigation included an ethanol-derivatives price-manipulation class action and a peanut-farmer antitrust class action. ADM denied liability and stated that it could not predict the outcomes, while believing the matters would not materially affect its financial position, results, or liquidity.
- Purchase obligations were $13.0 billion at September 30, 2019, of which $12.1 billion was expected to be paid within twelve months.
- Commodity, foreign-exchange, interest-rate, counterparty, weather, trade, regulatory, environmental, legal, and acquisition-integration risks remain significant. The filing states that there were no significant changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Nutrition acquisition growth, particularly Neovia, translates into sustainable margins after integration and acquisition-related costs.
- The pace of recovery in ethanol and Carbohydrate Solutions margins and the effects of elevated industry production and inventories.
- Future performance of Ag Services and Oilseeds amid China trade conditions, harvest delays, crop volumes, freight constraints, and commodity-price volatility.
- Cash conversion and liquidity after considering receivables securitization, deferred consideration, seasonal working capital, and acquisition spending.
- Debt reduction, commercial paper usage, credit-line availability, and the increase in net debt to capital.
- The ultimate resolution and potential cash impact of the Brazil, Argentina, and Netherlands tax matters and the disclosed litigation.
- The size and recurrence of restructuring, pension settlement, impairment, LIFO, acquisition, and other specified items used in adjusted results.