Archer-Daniels-Midland Company: Q2 2020 Form 10-Q Summary
Business context and reporting period
ADM is a global agricultural origination, merchandising, transportation, processing, and human and animal nutrition company operating in more than 190 countries. Reported segments are Ag Services and Oilseeds, Carbohydrate Solutions, Nutrition, and Other Business. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared primarily with the corresponding 2019 periods.
ADM created the Vantage Corn Processors sub-segment effective January 1, 2020 and reclassified prior periods. It also completed the January 2020 acquisition of Yerbalatina and announced a 30% PlantPlus Foods joint venture with Marfrig in May 2020.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $16.281 billion | $16.297 billion | $31.251 billion | $31.601 billion |
| Gross profit | $1.108 billion | $972 million | $2.059 billion | $1.900 billion |
| Gross margin | 6.8% | 6.0% | 6.6% | 6.0% |
| Net earnings attributable to controlling interests | $469 million | $235 million | $860 million | $468 million |
| Diluted EPS | $0.84 | $0.42 | $1.53 | $0.83 |
| Adjusted diluted EPS | $0.85 | $0.60 | $1.49 | $1.06 |
| Adjusted EBITDA | $890 million | $794 million | $1.616 billion | $1.469 billion |
- Q2 revenue was essentially flat year over year, while net earnings attributable to controlling interests doubled. Six-month revenue declined 1%, while net earnings increased 84%.
- Q2 segment operating profit rose to $813 million from $645 million; adjusted segment operating profit increased to $804 million from $682 million. Six-month segment operating profit increased to $1.412 billion from $1.256 billion.
- Q2 performance benefited from stronger Ag Services, Nutrition, Vantage Corn Processors, and Other Business results. Six-month performance also benefited from Ag Services, Nutrition, and higher Wilmar equity earnings.
- Cash used in operating activities was $436 million for the six months, compared with $2.713 billion used in the prior-year period. Investing activities provided $2.173 billion, principally reflecting receivables securitization cash flows, while financing activities used $228 million.
- Cash, cash equivalents, and short-term marketable securities totaled approximately $1.2 billion at June 30, 2020. Total cash, cash equivalents, restricted cash, and restricted cash equivalents were $4.499 billion.
- Current assets were $22.011 billion and current liabilities were $12.809 billion, producing a current ratio of 1.7 to 1.
- Long-term debt was $8.632 billion, up from $7.672 billion at December 31, 2019. Long-term debt to total capital increased to 31% from 29%; net debt to capital remained 29%.
- ADM had $10.9 billion of total credit lines, of which $9.7 billion was unused. The $5.0 billion commercial paper facilities had no commercial paper outstanding at quarter-end.
- Capital expenditures were approximately $0.4 billion, dividends were $0.4 billion, and share repurchases were $0.1 billion during the first six months. Management expected approximately $0.8 billion of 2020 capital expenditures, $0.8 billion of dividends, and $0.1 billion of share repurchases.
Material changes versus the prior comparable period
- Ag Services and Oilseeds: Q2 revenue increased 4% to $12.741 billion and operating profit increased 14% to $413 million. Results benefited from record South American origination and export volumes, strong farmer selling in Brazil, global trade activity, and improved biodiesel performance. Crushing results declined because of COVID-19-related demand effects and lower margins.
- Carbohydrate Solutions: Q2 revenue declined 17% to $2.014 billion, while operating profit increased slightly to $195 million. Starches and Sweeteners weakened because of lower food-service demand, while Vantage Corn Processors improved from a prior-year loss. ADM temporarily idled two dry-mill ethanol facilities and reduced ethanol production in response to market conditions.
- Nutrition: Q2 revenue declined 6% to $1.437 billion, but operating profit rose 35% to $158 million. Improved margins, plant-based protein and specialty ingredient demand, probiotics, fiber, pet food, and feed products supported results, partly offset by lower food-service and aqua-feed demand.
- Corporate and specified items: Q2 corporate charges declined to $261 million from $371 million. The prior-year period included $101 million of restructuring and pension remeasurement charges and a $25 million LIFO charge. The current period included $14 million of early debt repayment expenses and $23 million of asset-sale gains.
- ADM changed certain agricultural commodity inventory accounting from LIFO to market value effective January 1, 2020. The change reduced cost of products sold by $91 million, or $69 million after tax, in the first quarter and had a $91 million favorable pretax effect for the six months. Management stated that the change was not expected to materially affect full-year 2020 results.
- ADM adopted the expected-credit-loss standard, recording an $8 million reduction to retained earnings at January 1, 2020.
- ADM issued $500 million of 2.75% notes due 2025 and $1.0 billion of 3.25% notes due 2030 in March 2020. It redeemed $495 million of 4.479% debentures in June 2020 and recorded $14 million of early repayment expense.
Guidance, outlook, commentary, risks, and unusual items
- The filing does not provide formal earnings guidance. Management expected 2020 capital expenditures of approximately $0.8 billion, dividends of $0.8 billion, and share repurchases of $0.1 billion.
- COVID-19 reduced demand for food-service ingredients, ethanol, biodiesel in certain regions, meal and oil, and aqua feed. ADM indicated that the pandemic had not significantly affected its capital and financial resources as of quarter-end, but warned that prolonged or renewed outbreaks could materially affect demand, operations, costs, supply chains, and contract performance.
- ADM used diversified liquidity sources and was accepted into the Federal Reserve Commercial Paper Financing Facility and the Bank of England Covid Corporate Financing Facility, but had not used those facilities as of June 30, 2020.
- Accounts receivable securitization programs provided up to $1.8 billion of funding; $0.6 billion was utilized at quarter-end. The First Program, with a $1.2 billion facility, was scheduled to terminate on September 18, 2020 unless extended. The Second Program, with funding capacity of approximately $0.6 billion, was scheduled to terminate on March 12, 2021 unless extended.
- Purchase obligations were $13.2 billion at June 30, 2020, including $12.2 billion expected to be paid within the following 12 months.
- Significant market risks include agricultural commodity prices, weather, crop disease, government and trade policies, global demand, foreign exchange, interest rates, counterparty performance, and freight-market volatility. The average commodity position during the first six months was a $185 million short position, with estimated market risk of $19 million for a hypothetical 10% adverse price movement.
- ADM disclosed ongoing ethanol-pricing and peanut-farmer antitrust class actions. The company denied liability and stated that it believed the matters would not have a material adverse effect, although outcomes could not be predicted with reasonable certainty.
- Brazilian tax litigation involving approximately $305 million of tax, interest, and penalties was favorably resolved during the quarter without tax due. Other tax matters remain outstanding, including Argentine assessments and a Netherlands transfer-pricing assessment; ADM has accrued its best estimate for the likely Netherlands outcome.
Most important facts for investors to verify
- Whether COVID-19-related weakness in ethanol, biodiesel, food-service, and certain feed markets persisted or intensified after June 30, 2020.
- The sustainability of improved Ag Services, Nutrition, and Vantage Corn Processors margins and the recovery of Crushing and Starches and Sweeteners.
- The effect of commodity prices, foreign exchange, basis risk, and Level 3 fair-value estimates on earnings and book value.
- Availability and renewal terms for the receivables securitization programs, particularly the First Program termination date.
- Debt maturity requirements, refinancing access, and the impact of increased long-term debt on leverage and interest costs.
- Whether expected 2020 capital expenditures, dividends, and share repurchases remained consistent with management’s stated plans.
- Developments in the ethanol-pricing and peanut antitrust cases and the unresolved Argentina and Netherlands tax matters.
- The extent to which reported earnings benefited from the $91 million LIFO accounting effect, tax credits, asset-sale gains, and other specified or unusual items.