Archer-Daniels-Midland Company: FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual Form 10-K rather than a standalone Q4 filing; Q4 2019 results are provided in the quarterly data note. ADM operates through Ag Services and Oilseeds, Carbohydrate Solutions, Nutrition, and Other. Effective July 1, 2019, prior-period segment results were reclassified to reflect the combined Ag Services and Oilseeds segment.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $64.656 billion | $64.341 billion | +$315 million |
| Gross profit | $4.147 billion | $4.181 billion | Down 1% |
| Net earnings attributable to controlling interests | $1.379 billion | $1.810 billion | Down 24% |
| Diluted EPS | $2.44 | $3.19 | Down $0.75 |
| Adjusted diluted EPS | $3.24 | $3.50 | Down $0.26 |
| Segment operating profit | $2.948 billion | $3.273 billion | Down $325 million |
| Adjusted EBITDA | $3.482 billion | $3.634 billion | Down $152 million |
| Cash used in operating activities | $5.452 billion | $4.784 billion | Higher use of $668 million |
Margins: Gross margin was approximately 6.4% in 2019 versus 6.5% in 2018. Management cautions that revenue-based margins are less meaningful for commodity businesses because commodity prices generally affect revenue and product costs together.
Segment results: Ag Services and Oilseeds operating profit was $1.935 billion, down from $2.020 billion. Carbohydrate Solutions fell to $644 million from $945 million, primarily because of weak ethanol margins. Nutrition increased to $418 million from $339 million, supported by acquisitions and demand for flavors, specialty ingredients, and animal nutrition. Other increased to $85 million from $58 million.
Balance sheet and liquidity: Cash and cash equivalents were $852 million, working capital was $7.613 billion, and the current ratio was 1.6. Shareholders’ equity was $19.225 billion. Long-term debt excluding current maturities was $7.672 billion, while short-term debt was $1.202 billion. Total credit lines were $9.0 billion, of which $6.4 billion was unused; commercial paper outstanding was $1.0 billion. Long-term debt represented 29% of total capital, and net debt represented 29% of net debt plus equity, compared with 25% in 2018.
Cash deployment: Capital expenditures were $828 million, acquisitions used $1.946 billion, dividends paid were $789 million, and share repurchases were $150 million. ADM expects 2020 capital expenditures of $0.9 billion to $1.0 billion, approximately $0.8 billion of dividends, and approximately $0.1 billion of share repurchases.
Q4 2019 results
Q4 revenue was $16.329 billion, gross profit was $1.169 billion, net earnings attributable to controlling interests were $504 million, and diluted EPS was $0.90. Q4 2019 included an after-tax loss of $133 million related to the sale of an equity investment, after-tax impairment, restructuring, and pension settlement charges of $93 million, acquisition charges of $2 million, and tax expense adjustments of $46 million.
Material changes versus 2018
- Revenue increased modestly as higher volumes, including acquisition-related volumes, offset lower selling prices.
- Net earnings and adjusted EPS declined despite stable revenue, reflecting lower segment operating profit, higher SG&A, higher interest expense, weaker equity earnings, and unusual items.
- Ag Services and Oilseeds was affected by flooding and high water on the Mississippi river system, delayed North American planting and harvest, trade tensions with China, slower Chinese feed demand related to African swine fever, and weaker farmer selling.
- Carbohydrate Solutions deteriorated materially as ethanol inventories remained high, margins were severely pressured, Chinese ethanol demand ceased during the U.S.-China trade dispute, and weather and production issues disrupted operations.
- Nutrition revenue increased 50% to $5.677 billion, and operating profit increased 23%, largely because of the Neovia, Florida Chemical Company, and Ziegler acquisitions.
- Interest expense increased to $402 million from $364 million, principally because of higher borrowings used to fund acquisitions.
- SG&A increased 15% to $2.493 billion, mainly due to acquisitions, IT, business transformation, growth investments, and Readiness initiatives.
- Asset impairment, exit, and restructuring costs increased to $303 million from $171 million.
Guidance, outlook, risks, and unusual items
Management did not provide a consolidated earnings or revenue guidance target in the filing. Its stated strategy is to optimize the core, drive efficiencies, and expand strategically across taste, nutrition, animal nutrition, health and wellness, and carbohydrates. ADM completed approximately $2.0 billion of 2019 acquisitions and acquired Yerbalatina in January 2020.
- Unusual items: 2019 net earnings included a $124 million after-tax loss related to an equity investment sale, $249 million after-tax of restructuring, pension, and impairment charges, $11 million after-tax of acquisition expenses, and $39 million of tax adjustments. The company also recognized $270 million of biodiesel tax credits for 2018 and 2019 in 2019.
- Commodity and operating risk: Results are sensitive to crop availability, weather, disease, commodity prices, energy costs, transportation, basis and margin volatility, and working-capital swings.
- Trade and regulatory risk: Tariffs, trade disputes, renewable-fuel mandates, environmental rules, carbon pricing, food-safety regulation, sanctions, and agricultural policies may affect demand, costs, and trade flows.
- Financing and liquidity: Accounts receivable securitization programs provided up to $1.9 billion and were utilized at $1.4 billion at year-end. The programs were scheduled to terminate in the first half of 2020, although ADM expected to extend them.
- Contingencies: Tax assessments included Brazil assessments of approximately $104 million in tax plus $307 million in interest and penalties, Argentina assessments of $14 million in tax plus up to $53 million in interest, and potential future Argentina assessments of approximately $43 million in tax plus up to $22 million in interest. A Netherlands assessment was $91 million in tax plus $34 million in interest. ADM had not recorded liabilities for the Brazil and Argentina assessments based on its view that it was more likely than not to prevail.
- Legal proceedings: ADM disclosed putative class actions concerning ethanol derivatives pricing and peanut pricing. Management stated that it could not predict the outcomes but did not believe they would have a material adverse effect.
- Accounting and controls: ADM adopted the new lease standard in 2019, recording right-of-use assets of $793 million and lease liabilities of $795 million at adoption. Management and the auditor reported effective internal control over financial reporting, although Neovia was excluded from management’s assessment for the permitted acquisition-period exception.
Important facts for investors to verify
- Whether Nutrition’s acquisition-driven growth translates into sustainable organic margins and cash generation.
- The pace of recovery in ethanol and other Carbohydrate Solutions margins.
- Operating cash flow excluding the substantial working-capital and receivables-securitization effects.
- Debt reduction, commercial paper usage, and renewal of the receivables securitization programs.
- Exposure to crop conditions, African swine fever, China-related trade developments, freight constraints, and energy prices.
- Ultimate outcomes of the Brazil, Argentina, and Netherlands tax matters and the disclosed litigation.
- The effect of 2019 biodiesel tax credits and other specified items when assessing normalized earnings.
- Integration progress and impairment risk related to Neovia, FCC, Ziegler, and other acquisitions.