Business Context and Reporting Period
Archer-Daniels-Midland Company’s unaudited Form 10-Q covers the three months ended March 31, 2020. ADM operates globally in agricultural origination, merchandising, transportation, processing, human and animal nutrition, biofuels, and related financial services across Ag Services and Oilseeds, Carbohydrate Solutions, Nutrition, and Other Business.
The quarter included the initial effects of COVID-19, particularly weaker ethanol demand. ADM also reorganized reporting of its dry-mill ethanol business into the Vantage Corn Processors sub-segment and adopted changes to credit-loss and inventory accounting.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $14.970 billion | $15.304 billion | Down $334 million |
| Gross profit | $951 million | $928 million | Up $23 million |
| Gross margin | 6.4% | 6.1% | Up approximately 28 bps |
| Earnings before income taxes | $375 million | $315 million | Up $60 million |
| Net earnings attributable to ADM | $391 million | $233 million | Up $158 million |
| Diluted EPS | $0.69 | $0.41 | Up $0.28 |
| Adjusted diluted EPS | $0.64 | $0.46 | Up $0.18 |
| Adjusted EBITDA | $726 million | $675 million | Up $51 million |
| Operating cash flow | $(655) million | $(2.035) billion | Improved by $1.380 billion |
Revenue declined primarily from lower sales volumes and prices. Ag Services and Oilseeds revenue fell 4% to $11.079 billion, Carbohydrate Solutions revenue fell 4% to $2.316 billion, and Nutrition revenue rose 15% to $1.471 billion.
Segment operating profit was $599 million versus $611 million. Excluding specified items, adjusted segment operating profit increased to $643 million from $608 million. Nutrition operating profit rose 75% to $142 million, Ag Services and Oilseeds increased slightly to $422 million, while Carbohydrate Solutions declined 29% to $68 million.
Liquidity, Debt, and Capital Resources
- Cash and cash equivalents were $4.734 billion at March 31, 2020, compared with $852 million at December 31, 2019.
- Total cash, cash equivalents, restricted cash, and restricted cash equivalents were $7.530 billion at quarter-end.
- Total debt, including short-term debt, current maturities, and long-term debt, was approximately $12.5 billion, versus approximately $8.9 billion at year-end 2019.
- ADM issued $500 million of 2.75% notes due 2025 and $1.0 billion of 3.25% notes due 2030 on March 27, 2020.
- Credit lines totaled $10.7 billion, of which $5.9 billion was unused. Commercial paper outstanding was $2.2 billion.
- The current ratio was 1.5 to 1. Long-term debt to total capital increased to 31% from 29% at December 31, 2019.
- Capital expenditures were approximately $194 million, dividends paid were $203 million, and share repurchases were $112 million.
Management expected approximately $800 million of 2020 capital expenditures, $800 million of dividends, and $100 million of share repurchases. ADM stated that COVID-19 had not significantly affected its capital and financial resources and that it had been accepted into the Federal Reserve’s Commercial Paper Financing Facility, although it had not used that facility as of the filing date.
Material Changes Versus the Prior Comparable Period
- Net earnings increased substantially, helped by a lower effective tax rate, stronger Nutrition results, higher Wilmar earnings, lower interest expense, and lower corporate charges.
- The effective tax rate was a 4.3% benefit versus a 25.7% expense in Q1 2019. The current quarter included a $73 million discrete benefit related to U.S. railroad tax credits.
- Gross profit benefited by $91 million from changing certain agricultural commodity inventories from LIFO to market value. The after-tax benefit was $69 million, or $0.12 per diluted share.
- Asset impairment, exit, and restructuring costs increased to $41 million from $11 million.
- Adjusted EBITDA increased despite lower reported segment operating profit, reflecting the LIFO accounting benefit and exclusion of specified items.
- Operating cash flow remained negative, primarily because of deferred consideration associated with receivables securitization and seasonal working-capital movements.
- Accumulated other comprehensive loss increased to $2.764 billion from $2.405 billion, principally because of foreign-currency translation losses.
Guidance, Outlook, Commentary, Risks, and Unusual Items
ADM did not provide formal earnings guidance in the filing. Management reported solid demand and performance in Nutrition, stronger Brazilian origination activity, and improved results in certain agricultural and specialty businesses. Ethanol margins were severely pressured by excess industry production, high inventories, and COVID-19-related demand reductions.
On April 23, 2020, ADM announced that it was temporarily idling ethanol production at dry-mill facilities in Cedar Rapids, Iowa, and Columbus, Nebraska, for approximately four months subject to market conditions. It also reduced ethanol grind at wet mills and shifted production toward industrial alcohol for hand sanitizer and industrial starches.
- COVID-19 could disrupt ADM’s workforce, facilities, supply chain, customer demand, contracts, and costs; management stated that the longer-term impact could be material.
- Commodity prices, weather, crop yields, energy prices, trade policies, foreign exchange, global demand, and market volatility remain significant operating risks.
- ADM had Brazilian tax assessments totaling approximately $320 million for tax, interest, and penalties, and Argentine assessments totaling approximately $64 million, excluding potential additional Argentine assessments. ADM had not recorded liabilities for these matters based on its assessment that it was more likely than not to prevail.
- A Dutch transfer-pricing assessment totaled approximately $123 million as of March 31, 2020. On April 23, 2020, a court issued an unfavorable ruling and directed the parties to explore settlement; ADM had accrued its best estimate of the likely outcome.
- Purchase obligations were $13.5 billion at March 31, 2020, including $12.6 billion expected to be paid within the following twelve months.
- Accounts receivable securitization programs provided up to $1.9 billion of funding, with $1.4 billion utilized. The U.S. program was scheduled to terminate June 18, 2020 unless extended.
- Reported results were affected by commodity derivatives, foreign exchange movements, fair-value changes, impairment charges, the LIFO accounting change, tax credits, and other specified items.
Most Important Facts for Investors to Verify
- Whether COVID-19-related ethanol shutdowns and demand weakness persist and affect Carbohydrate Solutions earnings.
- The sustainability of Nutrition’s 2020 growth and the recovery of Ag Services and Oilseeds margins.
- The recurring cash-generation profile after excluding receivables-securitization and other working-capital effects.
- Debt maturities, commercial paper usage, unused credit capacity, and the availability of receivables-financing programs.
- The ultimate resolution and potential cash impact of the Brazilian, Argentine, and Dutch tax matters.
- The effect of the LIFO-to-market inventory accounting change and tax credits on comparisons with future periods.
- Whether the planned 2020 capital expenditures, dividends, and share repurchases remain appropriate under changing market conditions.