Archer-Daniels-Midland Company (ADM) — Q1 2023 Form 10-Q Summary
Business context and reporting period
ADM is a global agricultural supply chain manager, processor, and provider of human and animal nutrition products, operating in more than 190 countries. Its reportable segments are Ag Services and Oilseeds, Carbohydrate Solutions, and Nutrition, with remaining activities classified as Other Business. The filing covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. Financial statements are unaudited interim statements prepared under U.S. GAAP.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $24.072 billion | $23.650 billion | +2% |
| Gross profit | $2.080 billion | $1.897 billion | +10% |
| Gross margin | 8.6% | 8.0% | +0.6 percentage points |
| Earnings before income taxes | $1.397 billion | $1.271 billion | +10% |
| Net earnings attributable to controlling interests | $1.170 billion | $1.054 billion | +11% |
| Diluted EPS | $2.12 | $1.86 | +$0.26 |
| Adjusted diluted EPS | $2.09 | $1.90 | +$0.19 |
| Adjusted EBITDA | $1.762 billion | $1.641 billion | +7% |
| Operating cash flow | $(1.610) billion | $(1.206) billion | Higher use of cash |
| Capital expenditures | $327 million | $217 million | +$110 million |
Net earnings attributable to controlling interests represented a net margin of approximately 4.9%, compared with 4.5% in the prior-year quarter. The effective tax rate was 16.1%, compared with 16.3%.
Segment performance
| Segment operating profit | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Ag Services and Oilseeds | $1.210 billion | $1.008 billion | +$202 million |
| Carbohydrate Solutions | $273 million | $317 million | $(44) million |
| Nutrition | $145 million | $189 million | $(44) million |
| Other Business | $97 million | $42 million | +$55 million |
| Total segment operating profit | $1.719 billion | $1.539 billion | +$180 million |
Ag Services and Oilseeds benefited from stronger South American and North American origination results, strong export demand, effective risk management, favorable soybean crush margins, and higher biodiesel margins. Carbohydrate Solutions declined because of weaker ethanol margins and lower Vantage Corn Processors results, despite solid starches, sweeteners, and wheat milling performance. Nutrition declined as softer food and beverage demand, destocking, lower animal feed demand, competition, and weaker amino acid margins pressured results.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $899 million at March 31, 2023, compared with $1.037 billion at December 31, 2022.
- Total available liquidity was approximately $9.8 billion, consisting of cash and unused credit facilities.
- Total lines of credit were $13.3 billion, of which $8.9 billion was unused. Commercial paper outstanding was $0.8 billion against $5.0 billion of supporting capacity.
- Accounts receivable securitization programs provided up to $2.9 billion of funding, with $0.3 billion of unused capacity.
- Short-term debt was $1.809 billion, current maturities of long-term debt were $952 million, and long-term debt was $7.745 billion at March 31, 2023.
- The long-term debt-to-total-capital ratio was 24%, unchanged from December 31, 2022. Net debt-to-capital increased to 28% from 25%.
- Operating cash flow was negative $1.610 billion, primarily reflecting working-capital uses, including increases in segregated investments and reductions in trade payables, brokerage payables, and accrued liabilities.
- Financing activities provided $598 million, including $1.306 billion of net borrowings under credit agreements, offset by $351 million of share repurchases and $248 million of dividends.
- ADM expects approximately $1.3 billion of 2023 capital expenditures, approximately $1.0 billion of dividends, and approximately $1.0 billion of opportunistic share repurchases, subject to strategic uses of capital, operating cash flow, and working-capital needs.
- On April 3, 2023, ADM issued $500 million of 4.500% notes due August 15, 2033, generating $493 million of net proceeds before expenses.
Material changes versus the prior comparable period
- Revenue increased $422 million, driven by higher sales prices of approximately $1.3 billion, partly offset by approximately $0.9 billion of lower sales volumes.
- Gross profit increased $183 million, primarily due to improved Ag Services and Oilseeds results.
- SG&A increased $52 million to $881 million, principally because of higher salaries, benefits, and financing fees.
- Interest expense increased $55 million to $147 million because of higher short-term interest rates and customer deposit balances.
- Equity earnings from unconsolidated affiliates decreased $30 million, primarily due to lower earnings from Wilmar and Almidones Mexicanos.
- Share repurchases totaled $351 million, compared with none in the prior-year quarter. Approximately 83.4 million shares remained authorized for repurchase at March 31, 2023.
- Processed oilseed volumes increased by 136,000 metric tons, while corn volumes decreased by 418,000 metric tons, partly because of downtime related to a fire at the Cedar Rapids, Iowa dry mill facility.
- Asset impairment, exit, and restructuring costs were $7 million, compared with immaterial charges in the prior-year quarter. The current-quarter charges included $3 million of impairments and $4 million of restructuring costs.
Outlook, risks, contingencies, and unusual items
- Management stated that results are exposed to agricultural commodity prices, weather, crop disease, crop plantings, energy costs, government and trade policies, global demand, foreign exchange, geopolitical developments, and changing customer preferences.
- The Russia-Ukraine conflict continues to create supply-chain and commodity-market uncertainty. Most temporarily idled Ukrainian facilities were brought back online by March 31, 2023. Ukrainian and Russian operations historically represented less than 1% of consolidated revenue, and management concluded that related assets were appropriately valued at quarter-end.
- Nutrition faced softer demand, inflation-related customer behavior, destocking, animal disease impacts, and increased competition. Ethanol inventories remained elevated, pressuring margins in Carbohydrate Solutions.
- ADM’s commodity merchandising and processing results can be significantly affected by derivative valuation, basis risk, freight volatility, counterparty defaults, and the correlation between futures and physical commodity prices.
- The company had $14.5 billion of purchase obligations at March 31, 2023, including $13.7 billion expected to be paid within the following 12 months.
- ADM faces ongoing tax disputes in Argentina and the Netherlands. The filing reports Argentine assessments of $4 million in tax and up to $22 million in interest, and a Dutch assessment of $88 million in tax and $32 million in interest. ADM has accrued its best estimate for the Dutch matter and disputes the Argentine assessments.
- ADM is defending ethanol-related antitrust and commodities-law litigation. Plaintiffs have alleged aggregate damages ranging from approximately $500 million to more than $2.0 billion, but management believes the proceedings will not have a material adverse effect on financial condition, results of operations, or cash flows.
- Management reported no significant changes to risk factors, no material changes to critical accounting policies, and effective disclosure controls as of March 31, 2023.
Important facts investors should verify
- Whether strong Ag Services and Oilseeds performance is sustainable as crop flows, commodity prices, crush margins, biodiesel economics, and geopolitical conditions change.
- The effect of elevated interest rates and working-capital requirements on operating cash flow, short-term borrowing, and net debt.
- Progress against the stated 2023 capital expenditure, dividend, and share-repurchase plans.
- Whether weaker Nutrition demand, animal nutrition margins, and ethanol profitability continue to pressure earnings.
- The renewal or replacement of the first accounts receivable securitization program, which was scheduled to terminate on May 18, 2023 unless extended.
- Developments in the Ukraine conflict, related operating assets, and global agricultural supply chains.
- Outcomes of the Argentine and Dutch tax matters and the ethanol-related litigation.
- The impact of commodity derivatives, Level 3 fair-value measurements, hedging activity, and basis assumptions on reported earnings and accumulated other comprehensive income.