Business Context and Reporting Period
Archer-Daniels-Midland Company (ADM) filed this unaudited Form 10-Q for the three months ended March 31, 2022. ADM originates, transports, processes, and markets agricultural commodities and produces ingredients and solutions for food, feed, energy, and industrial applications. Reportable segments are Ag Services and Oilseeds, Carbohydrate Solutions, and Nutrition, with remaining activities classified as Other Business.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $23.650 billion | $18.893 billion | +$4.757 billion, 25% |
| Gross profit | $1.897 billion | $1.548 billion | +$349 million, 23% |
| Gross margin | 8.0% | 8.2% | Lower by approximately 20 basis points |
| Net earnings attributable to controlling interests | $1.054 billion | $689 million | +$365 million, 53% |
| Diluted EPS | $1.86 | $1.22 | +$0.64 |
| Adjusted diluted EPS | $1.90 | $1.39 | +$0.51 |
| Adjusted EBITDA | $1.641 billion | $1.259 billion | +$382 million, 30% |
| Operating cash flow | $(1.206) billion | $298 million | Decrease of $1.504 billion |
| Capital expenditures | $217 million | $174 million | +$43 million |
Revenue growth was driven primarily by higher commodity prices and, to a lesser extent, higher volumes. Cost of products sold increased to $21.753 billion, principally because of higher average commodity costs. The effective tax rate was 16.3%, compared with 15.9% in the prior-year quarter.
Segment operating profit was $1.539 billion, compared with $1.105 billion. Ag Services and Oilseeds contributed $1.008 billion, Carbohydrate Solutions $317 million, Nutrition $189 million, and Other Business $42 million. Corporate was a net charge of $268 million.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $1.079 billion at March 31, 2022, compared with $943 million at December 31, 2021.
- Total current assets were $40.453 billion and current liabilities were $28.523 billion, producing a current ratio of approximately 1.4 to 1.
- Short-term debt was $3.777 billion, current maturities of long-term debt were $543 million, and long-term debt was $8.752 billion.
- Long-term debt to total capital was 27%, compared with 26% at year-end 2021. Net debt to capital was 34%, compared with 28%.
- ADM had $14.3 billion of total credit lines, of which $8.2 billion was unused, and reported total available liquidity of $9.3 billion.
- ADM issued $750 million of 2.900% sustainability notes due March 1, 2032. It also expanded its commercial paper programs to $6.5 billion, with $0.7 billion outstanding at quarter-end.
- Cash used in operating activities reflected substantial working-capital investment, including increases of approximately $2.9 billion in inventories, $0.9 billion in trade receivables, and $2.1 billion in other current assets.
Material Changes Versus the Prior Comparable Period
- Ag Services and Oilseeds operating profit increased 30% to $1.008 billion, supported by tight global supplies, strong demand, favorable global trade and ocean freight conditions, stronger oilseed crushing margins, and improved refined products results.
- Carbohydrate Solutions operating profit increased 22% to $317 million. Starches and Sweeteners improved, while Vantage Corn Processors declined because of ethanol inventory position losses and the absence of prior-year industrial alcohol volumes from the divested Peoria facility.
- Nutrition operating profit increased 23% to $189 million, supported by strong demand, the Sojaprotein and Deerland acquisitions, and improved amino acid markets.
- Asset impairment, exit, and restructuring costs fell to $1 million from $59 million. The prior-year period included long-lived asset impairments, restructuring charges, and a legal settlement.
- Equity in earnings of unconsolidated affiliates increased to $204 million from $125 million, while investment income increased to $59 million from $13 million, including a $34 million investment revaluation gain.
- Operating cash flow shifted from a $298 million inflow to a $1.206 billion outflow, primarily because of higher commodity prices and working-capital requirements.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- For 2022, management expected capital expenditures of approximately $1.3 billion, dividends of approximately $0.9 billion, and share repurchases of up to $150 million, subject to strategic capital needs, operating cash flow, and working capital.
- Management cited tight global agricultural supplies, strong demand, elevated commodity and energy prices, inflation, and volatile markets as important operating factors. It noted that agricultural commodity price changes can increase both revenue and cost of products sold, making margins more informative than revenue growth in certain businesses.
- Most ADM facilities in Ukraine had been temporarily idled since February 24, 2022. Operations in Russia were scaled down to essential food commodities and ingredients. Ukraine and Russia historically represented less than 0.1% of consolidated revenue, but the conflict may cause supply-chain disruption, commodity and energy volatility, sanctions exposure, cyber risk, inventory losses, business interruption, and higher working-capital needs.
- ADM recorded immaterial charges related to Ukraine assets and concluded that receivables were collectible and temporarily idled property, plant, and equipment was not impaired as of March 31, 2022. Management stated that future adjustments were not expected to be material, but continued monitoring was planned.
- Purchase obligations increased to $22.9 billion from $18.6 billion, primarily because agricultural commodities were purchased at higher prices; $21.8 billion was expected to be paid within 12 months.
- ADM disclosed ongoing tax disputes in Argentina and the Netherlands. The company had accrued its best estimate for the Netherlands matter but had not recorded a liability for the Argentine assessments because it believed its position was more likely than not to prevail.
- ADM faces putative class actions alleging manipulation of ethanol derivative benchmark prices. The company denies liability and stated that, based on current information, the matters were not expected to have a material adverse effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether elevated commodity prices and volatility continue to support segment margins or instead intensify working-capital requirements and liquidity needs.
- The timing and financial effects of the Ukraine conflict, including facility shutdowns, sanctions, supply-chain disruption, inventory valuation, and potential impacts on joint ventures.
- The conversion of the $1.206 billion quarterly operating cash outflow into full-year cash generation, given the planned capital expenditures, dividends, and potential repurchases.
- Commercial paper and other short-term borrowing levels, the availability of the $14.3 billion credit facilities, and the February 2022 sustainability bond proceeds.
- The outcome and potential exposure from the Argentine and Netherlands tax matters and the ethanol-related litigation.
- The sustainability of earnings gains in Ag Services and Oilseeds, Carbohydrate Solutions, and Nutrition after excluding specified items and acquisition-related effects.