Archer-Daniels-Midland Co quarterly report, Q2 FY2018

Archer-Daniels-Midland Company — Form 10-Q Summary

Business context and reporting period

ADM is a global agricultural commodity company engaged in procuring, transporting, storing, processing, and merchandising crops and ingredients for food, feed, energy, and industrial markets. Reportable segments are Origination, Oilseeds, Carbohydrate Solutions, and Nutrition, with remaining financial and insurance activities classified as Other. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared primarily with the corresponding 2017 periods.

ADM changed its segment structure effective January 1, 2018; prior-period segment information was reclassified for comparability. The company adopted ASC 606 using the modified retrospective method, with an opening retained-earnings impact of less than $1 million.

Financial performance and key metrics

Metric	Q2 2018	Q2 2017	Six months 2018	Six months 2017
Revenue	$17.068 billion	$14.943 billion	$32.594 billion	$29.931 billion
Gross profit	$1.181 billion	$892 million	$2.070 billion	$1.764 billion
Gross margin	6.9%	6.0%	6.4%	5.9%
Net earnings attributable to controlling interests	$566 million	$276 million	$959 million	$615 million
Diluted EPS	$1.00	$0.48	$1.70	$1.07
Adjusted diluted EPS	$1.02	$0.57	$1.70	$1.17
Adjusted EBITDA	$991 million	$725 million	$1.789 billion	$1.486 billion

Q2 revenue increased 14%, driven by higher volumes and commodity prices. Six-month revenue increased 9%.
Q2 earnings attributable to controlling interests more than doubled, while six-month earnings increased 56%.
Q2 segment operating profit increased to $902 million from $642 million; adjusted segment operating profit increased to $924 million from $658 million.
Six-month segment operating profit increased to $1.606 billion from $1.318 billion; adjusted segment operating profit increased to $1.641 billion from $1.336 billion.
The effective tax rate declined to 13.2% in Q2 and 13.8% for the six months, versus 28.2% and 26.9%, respectively, primarily reflecting the Tax Cuts and Jobs Act, the retroactive 2017 biodiesel tax credit, and a favorable $39 million Brazilian tax item.
Dividends increased to $0.335 per share in Q2 from $0.320; six-month dividends were $0.670 per share.

Segment performance and material changes

Origination: Q2 operating profit rose to $189 million from $57 million, supported by stronger global demand, export competitiveness, higher volumes and margins, and improved transportation results.
Oilseeds: Q2 operating profit increased to $341 million from $201 million, benefiting from record crush volumes, strong soybean meal demand, improved South American origination, and favorable crush margins. Six-month profit increased to $691 million from $514 million.
Carbohydrate Solutions: Q2 operating profit declined to $249 million from $279 million, and six-month profit declined to $462 million from $490 million. Ethanol margins, lower production volumes, and production issues at the Decatur, Illinois corn complex were adverse factors.
Nutrition: Q2 operating profit increased to $114 million from $94 million, supported by demand and margin improvement in flavor, specialty ingredient, and animal nutrition businesses. Six-month profit increased to $210 million from $171 million.
Processed oilseed volumes increased, while corn volumes declined due partly to the Peoria ethanol complex reconfiguration and Decatur production issues.
Q2 selling, general, and administrative expense increased to $560 million, principally because of higher performance-related compensation accruals. Asset impairment, exit, and restructuring costs were $24 million in Q2 and $40 million for the six months.

Cash flow, balance sheet, debt, and liquidity

Six-month operating cash flow was negative $3.179 billion, compared with negative $2.080 billion in 2017. Working-capital changes reduced cash by approximately $4.3 billion, principally reflecting seasonal payments for grain purchases and changes in receivables and payables.
Investing cash flow was positive $3.548 billion, including $6.212 billion of proceeds from retained interests in securitized receivables and $2.184 billion invested in such retained interests. The company reclassified these securitization cash flows from operating to investing under amended cash-flow guidance.
Capital expenditures were $379 million for the six months. Financing cash flow was negative $176 million, including $379 million of dividends; there were no significant open-market share repurchases.
Cash, cash equivalents, and short-term marketable securities totaled approximately $0.9 billion at June 30, 2018. Including restricted cash and restricted cash equivalents, total cash and related balances were $2.051 billion.
Total debt included $1.047 billion of short-term debt, $595 million of current maturities of long-term debt, and $5.981 billion of long-term debt. Long-term debt to total capital was 24%, compared with 27% at December 31, 2017; net debt to capital was 27% at both dates.
Credit lines totaled $8.4 billion, of which $6.1 billion was unused. Commercial paper outstanding was approximately $0.7 billion against a $5.0 billion supporting facility.
Accounts receivable securitization programs provided up to $1.8 billion of funding; $1.3 billion was utilized at June 30, 2018. The programs mature in the first half of 2019, and ADM expected to seek extensions.
The current ratio was 1.6 to 1. Purchase obligations increased to $12.4 billion, with $11.2 billion expected to be paid within the following twelve months.

Guidance, outlook, risks, contingencies, and unusual items

ADM expected approximately $0.8 billion of 2018 capital expenditures and approximately $0.8 billion of dividend cash outlays. Management stated that pending acquisitions would be funded with operating cash flow and debt.
Management cited volatile agricultural markets, weather, crop conditions, commodity prices, global demand, foreign exchange, trade policy, and escalating U.S.-China trade tensions as important variables. Commodity price changes can materially affect reported revenue and cost of products sold without proportionate changes in margins.
Forward hedge and mark-to-market timing effects materially affected results. Management expected most of certain negative hedge timing impacts to reverse as contracts were executed, but future results remain sensitive to commodity and freight-market volatility.
Subsequent to quarter-end, ADM announced proposed acquisitions of Probiotics International Limited for $243 million, Neovia for $1.8 billion, and Rodelle Inc.; the transactions were subject to regulatory approval and expected to close in the second half of 2018. ADM also completed the sale of its Bolivian oilseeds operations.
ADM had not completed its accounting for all effects of the Tax Cuts and Jobs Act. Future tax guidance or international legislative changes could materially affect net income or cash flow.
Brazilian tax assessments related to commodity-hedging deductions totaled approximately $412 million in tax, interest, and penalties. Argentine assessments totaled approximately $98 million, with potential additional assessments estimated at approximately $122 million for later years. ADM had not recorded liabilities for these matters because it believed it was more likely than not to prevail.
A Netherlands transfer-pricing assessment totaled approximately $124 million in tax and interest; ADM had accrued an amount it believed represented the likely litigation outcome. Final outcomes of these tax matters could result in additional payments and expense.
ADM expected adoption of ASC 842 leases on January 1, 2019 to significantly increase recognized right-of-use assets and lease liabilities, primarily for operating leases.
Management stated that disclosure controls were effective, there were no significant changes to risk factors, and no legal proceeding was believed likely to have a material adverse effect on financial position, results of operations, or liquidity.

Important facts for investors to verify

Whether stronger Origination and Oilseeds margins persist as trade policy, crop conditions, and commodity markets evolve.
The sustainability of the unusually low effective tax rate and the final accounting for the Tax Cuts and Jobs Act.
The cash-flow impact of seasonal working capital, receivables securitization, and the classification changes that make operating cash flow appear significantly negative.
Funding, leverage, and closing conditions for the announced acquisitions, particularly the proposed Neovia transaction.
Resolution and potential cash exposure from the Brazilian, Argentine, and Netherlands tax assessments.
Operational recovery in Carbohydrate Solutions, including ethanol margins and the Decatur production issues.
Timing and magnitude of hedge mark-to-market reversals, commodity derivative exposures, and Level 3 fair-value measurements.